<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SERVICEWARE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 7372 25-1647861
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
333 ALLEGHENY AVENUE
OAKMONT, PENNSYLVANIA 15139
(412) 826-1158
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARK TAPLING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SERVICEWARE.COM, INC.
333 ALLEGHENY AVENUE
OAKMONT, PENNSYLVANIA 15139
(412) 826-1158
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
EDUARDO VIDAL MARIE CENSOPLANO
NIKOS BUXEDA PAUL, HASTINGS, JANOFSKY & WALKER LLP
DAVID WEXLER 399 PARK AVENUE
MORGAN, LEWIS & BOCKIUS LLP NEW YORK, NEW YORK 10022
101 PARK AVENUE (212) 318-6000
NEW YORK, NEW YORK 10178
(212) 309-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value per share..... $86,250,000 $22,770
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
SUCH OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED [ ], 2000
PROSPECTUS
SHARES
[SERVICEWARE.COM LOGO]
COMMON STOCK
------------------------
This is the initial public offering of ServiceWare.com, Inc. We are selling all
of the shares of common stock offered under this prospectus. We anticipate that
the initial public offering price will be between $ and $ per share.
There is currently no public market for our shares. We have applied to have our
common stock approved for listing on the Nasdaq National Market under the symbol
"SVCW".
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
-------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Total proceeds, before expenses, to us...................... $ $
</TABLE>
------------------------
The underwriters may purchase up to an additional shares of common
stock from us at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares in New York, New York on or about
[ ], 2000.
------------------------
BEAR, STEARNS & CO. INC. SG COWEN
WIT SOUNDVIEW
C.E. UNTERBERG, TOWBIN
The date of this prospectus is , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Summary Consolidated Financial Information.................. 3
Risk Factors................................................ 4
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Dilution.................................................... 19
Capitalization.............................................. 20
Selected Historical Financial Data.......................... 21
Unaudited Pro Forma Condensed Consolidated Financial Data... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 30
Management.................................................. 41
Certain Transactions........................................ 49
Principal Stockholders...................................... 52
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 57
Underwriting................................................ 60
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find Additional Information................... 62
Index to Consolidated Financial Statements.................. F-1
</TABLE>
An electronic version of this prospectus is available on the regular Web
site (http://www.witcapital.com) being maintained by Wit SoundView Corporation,
which is acting as a co-manager in this initial public offering. An electronic
version of this prospectus is also available on our Web site
(http://www.serviceware.com). Other than the electronic version of this
prospectus, the information on our Web site and Wit SoundView Corporation's Web
site is not a part of this prospectus.
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. This summary is not complete and does not contain all the
information that you should consider before investing in our common stock. To
understand this offering fully, you should read carefully the entire prospectus,
including the risk factors and the financial statements. In this prospectus,
"we", "us" and "our" refer to ServiceWare.com, Inc. and its subsidiaries unless
the context requires otherwise.
OUR BUSINESS
We are a leading provider of software and content solutions that businesses
use to provide an Internet-based e-service platform to their customers,
partners, suppliers and employees. We develop and market a comprehensive service
solution to meet the needs of these end-users who, together, form an extended
enterprise. Our eService Suite(TM) includes licensed and subscription-based
software and content products that enable businesses to capture enterprise
knowledge, solve their end-users' problems, reuse solutions and share captured
knowledge through the Internet. Additionally, our patented Cognitive
Processor(TM) contained in the eService Suite continually learns at each
request, keeping knowledge up-to-date and accurate and providing end-users with
relevant and useful answers to their questions. Our customers include Andersen
Consulting, Clarify, Compaq, Hewlett-Packard, Marconi Communications, Merrill
Lynch, Pfizer and Texas Instruments.
Despite the urgent need for comprehensive service solutions, current
service offerings have not kept pace with the rapid evolution of e-commerce and
traditional commerce. Traditional service solutions, such as call centers and
help desks, have proven to be neither scalable nor cost-effective for the
enterprise. Despite attempts to streamline these operations, companies have been
unable to eliminate the inefficiencies of these solutions due to labor-intensive
and time-consuming customer interactions and the high turnover rates of service
professionals. Customers are becoming increasingly dissatisfied with current
service solutions because the limitations of these systems result in
unacceptable levels of service. The increasing dissatisfaction with current
customer service and the heightened expectations resulting from the growth of
the Internet require a solution which includes intelligent application software
and content.
Using our eService Suite, our customers can develop and manage a knowledge
base of service-related support information and disseminate that knowledge
through multiple communication channels, such as telephone support, e-mail, chat
and Web-based self-service. Additionally, our Internet-based knowledge portal,
RightAnswers.com(TM), enables our customers to access a continuously updated
knowledge base of content obtained from leading technology companies, including
Microsoft, Apple, Novell and 3Com, as well as our internally produced knowledge
content. We also offer integration, training and consulting services that enable
our customers to realize the benefits of our eService Suite.
We have established distribution alliances with leading providers of
complementary Internet software technologies who resell or co-market our
solutions. We currently have strategic distribution and marketing alliances with
several vendors, including Clarify, Kana Communications, Oracle, Peregrine
Systems, Remedy, Siebel Systems and Tivoli.
Our products enable our customers to provide e-service solutions that are
intelligent in that they are interactive, adaptable, and have the capability to
update themselves automatically. Customers can use our software and content
products separately or as an integrated solution to reduce the cost and improve
the quality of customer service. We believe that our solutions provide our
customers with a number of key benefits, including:
- Strengthened Relationships with End-Users. Our solutions allow
enterprises to provide their customers and other end-users with
easy-to-use, intuitive, timely, and accurate service. By providing a
better and more user-friendly experience, our solutions increase the
likelihood that a business' customers will complete specific transactions
and that an enterprise will be able to attract and retain its customers.
1
<PAGE> 5
- Decreased Operating Costs. By enabling end-users to access customer
service online and aiding customer service agents to more effectively
handle user requests, our solutions provide cost savings and improve
employee productivity.
- Improved Dissemination of Enterprise Knowledge. Our eService Suite
enables our customers to develop a common knowledge base of intellectual
capital and make it available throughout the extended enterprise.
Additionally, our eService Suite provides a self-learning capability that
continually learns at each request keeping responses up-to-date and
accurate.
- Seamless Integration with Existing Solutions. By integrating with
existing call center and help desk products, workflow tools, knowledge
bases and other applications, our software helps customers preserve their
investments in legacy systems.
Our objective is to leverage our Internet-based platform to become the
leading worldwide provider of e-service solutions. To achieve our goal, we
intend to enhance our technology and product leadership, broaden our content
solutions to new vertical markets, expand our Internet-based delivery model,
continue to build brand awareness, strengthen strategic alliances and increase
our international presence.
CORPORATE INFORMATION
We were first incorporated as a Pennsylvania corporation in January 1991 as
ServiceWare, Inc. In March 2000, we changed our name to ServiceWare.com, Inc. We
plan to reincorporate as a Delaware corporation on or before the effective date
of this offering and simultaneously approve new by-laws, a new stock incentive
plan and a new employee stock purchase plan. For purposes of this prospectus,
the information described herein describes our company as it will be constituted
upon our reincorporation as a Delaware corporation and, unless otherwise
indicated, also assumes the occurrence of a 3-for-2 stock split that we intend
to effect on or before the effective date of this offering. Our executive
offices are located at 333 Allegheny Avenue, Oakmont, Pennsylvania 15139. Our
telephone number is (412) 826-1158. Our Web site is http://www.serviceware.com.
The information on our Web site is not part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................................. shares
Common Stock to be Outstanding After this Offering... shares
Use of Proceeds...................................... We intend to use the net proceeds from this
offering for general corporate purposes,
including the repayment of our term loan,
expanding our software development staff and
our sales and marketing capabilities,
international expansion, possible strategic
acquisitions or investments and working
capital requirements.
Proposed Nasdaq National Market Symbol............... SVCW
</TABLE>
The outstanding share information is as of February 29, 2000. This
information excludes shares of common stock issuable upon exercise of
options outstanding as of February 29, 2000, with a weighted average exercise
price of $ per share and shares of common stock issuable upon
exercise of outstanding warrants with a weighted average exercise price of
$ per share.
Unless otherwise indicated, all information contained in this prospectus:
- assumes conversion of all outstanding convertible preferred stock into
common stock upon the closing of this offering; and
- assumes the underwriters' over-allotment option is not exercised.
2
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the financial data for our business. The
summary financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $2,906 $ 5,037 $ 9,686 $12,923 $ 17,652
Operating loss............................... (70) (995) (1,548) (3,803) (9,889)
Net loss..................................... (40) (948) (1,508) (3,816) (10,062)
Net loss applicable to common shareholders... $ (91) $(1,004) $(1,568) $(3,940) $(10,157)
Basic and diluted net loss per share(1)...... $(0.01) $ (0.14) $ (0.23) $ (0.57) $ (1.25)
Weighted average shares outstanding used in
computing basic and diluted net loss per
share(1)................................... 7,900 7,107 6,914 6,933 8,102
Pro forma net loss per share from continuing
operations(1).............................. (0.46)
Shares used in computing pro forma basic and
diluted net loss per share(1).............. 22,064
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 6,623 $ 6,623
Working capital (deficit).............................. (2,762) (2,762)
Total assets........................................... 26,734 26,734
Outstanding debt including capital leases.............. 4,402 4,402
Stockholders' equity (capital deficiency).............. 10,661 10,661
</TABLE>
- ---------------
(1) See notes 2 and 12 of "Notes to Consolidated Financial Statements" for an
explanation of the determination of the number of shares used in computing
per share data before adjustment for our 3-for-2 stock split.
(2) The pro forma amounts reflect the automatic conversion of our Series A, B,
C, D and E convertible preferred stock into our common stock, which will
occur upon the closing of this offering.
(3) Pro forma as adjusted amounts reflect the pro forma adjustments as well as
the sale of shares of our common stock in this offering at the
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
3
<PAGE> 7
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. In this case, the trading price of our common stock could
decline, and you may lose all or part of your investment. The risks and
uncertainties described below may not be the only ones we will face. Additional
risks and uncertainties not presently known to us or that we currently deem not
material may also impair our business operations.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY IN OUR CURRENT LINE OF BUSINESS UPON WHICH
YOU MAY EVALUATE US.
We have undergone a number of changes in our business model. We began in
1991 as a provider of consulting services, and later developed and sold content
relating to technology products for use by customer service operations. In July
1999, we acquired the Molloy Group and its complementary software product suite.
Recently, we integrated our product offerings with those of the Molloy Group and
launched a suite of software and content products targeted at businesses. These
products are intended to form the basis of their e-service solutions. As a
result, we have a limited operating history in our current line of business upon
which an investor may evaluate the merits of investing in our common stock. Our
prospects are subject to the risks, expenses and uncertainties encountered by
companies in the new and rapidly evolving markets for e-service solutions. These
risks include:
- the failure to continue to develop and extend our online service brands
and software products;
- the rejection of our content and software products by our customers and
their end-users;
- our inability to maintain and increase traffic on our Internet-based
knowledge portal, RightAnswers.com;
- the entrance of new competitors into our market; and
- the inability to attract and retain qualified personnel.
If we fail to address successfully these risks, our business, financial
condition or results of operations could be materially adversely affected.
ALTHOUGH WE HAVE ACHIEVED RECENT REVENUE GROWTH, WE HAVE A HISTORY OF LOSSES,
ANTICIPATE THAT WE WILL CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE 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. Therefore, our recent annual
revenue growth should not be an indicator of the rate of revenue growth, if any,
we can expect in the future.
As of December 31, 1999, we had an accumulated deficit of $17.2 million.
Although our revenue has grown in recent periods, we cannot assure investors
that our revenues will continue at their current level or increase in the
future. We have not achieved profitability on a quarterly or annual basis to
date. We anticipate that we will continue to incur net losses for the
foreseeable future. In 1997, we incurred net losses of $1.5 million, while in
1998, we incurred net losses of $3.8 million, and in 1999, we incurred net
losses of $10.1 million. We currently expect to increase our operating expenses
significantly, expand our software development staff and our sales and marketing
expenditures, and continue to develop and extend our knowledge portal,
RightAnswers.com. If these expenses precede or are not followed by increased
revenues, our business, results of operations and financial condition could be
materially adversely affected.
4
<PAGE> 8
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, SO IT
IS DIFFICULT TO DRAW CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR PAST
PERFORMANCE.
Our quarterly operating results have varied significantly in the past due
to factors such as the size and timing of orders, the level of price and product
competition, the demand for our products, changes in pricing policies by us or
our competitors and the number, timing and significance of product enhancements
and new product announcements by our competitors and us. As a result of these
and other factors, it is likely that in one or more future quarters our
operating results will be below the expectations of public market analysts and
investors. In this event, the price of our common stock would likely be
adversely affected.
In addition, our quarterly operating results depend on factors such as:
- our ability to develop, introduce and market new and enhanced versions of
our services and products on a timely basis;
- the budgeting cycles of our customers;
- subscriptions or maintenance agreements;
- investments in research and development;
- the expansion of marketing and sales and distribution channels;
- product life cycles, software bugs and other product quality problems;
- changes in our strategy;
- changes in the level of operating expenses; and
- general domestic and international economic conditions.
Our projected expense levels are based on our expectations regarding future
revenue and are relatively fixed in the short term. If revenue levels are below
expectations in a particular quarter, operating results and net income are
likely to be disproportionately adversely affected because our fixed expenses
are greater than our variable expenses. A significant percentage of our revenues
is typically derived from non-recurring sales to a limited number of customers.
Since we recognize licenses 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 cause quarterly revenue and, to a greater degree, results
of operations to fall substantially short of anticipated levels. We often
recognize revenues for existing customers shortly after an order is received
because installation and training can generally be completed in significantly
less time than for new customers. We may miss recognizing revenues at the end of
a quarter due to delays in the receipt of expected orders by existing customers.
Delays in recognizing revenues may also occur as a result of delayed reporting
by our distributors.
Because of these and other factors, revenues in any one quarter are not
indicative of revenues in any future period 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 E-SERVICE SOLUTIONS MARKET IS NEW AND EVOLVING AND, IF IT DOES NOT GROW
RAPIDLY, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
The e-service 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 eService Suite 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
5
<PAGE> 9
their customer service over the Internet rather than by telephone. Our success
will depend on the broad commercial acceptance of, and demand for, these
e-service solutions.
WE ARE CURRENTLY IN THE PROCESS OF RE-BRANDING AND EXPANDING OUR PRODUCT LINES
AND INTEGRATING OUR PRODUCTS WITH RIGHTANSWERS.COM. CUSTOMERS MAY NOT ACCEPT OR
DESIRE THESE CHANGES.
Our future financial performance will depend, in significant part, on
customer acceptance of our eService Suite software product line and
RightAnswers.com, both of which became widely available to customers in December
1999. Since 1996, we have been selling technology-related content products on
CD-ROMs under the brand name Knowledge-Pak Desktop Suite(TM). These content
products form the basis of the newly released RightAnswers.com product offering
in both its Web and CD-ROM versions. In 1997, we began selling the companion
Knowledge-Pak Architect(TM) and Knowledge-Pak Viewer(TM) software applications,
which allow our customers to modify our content products or develop their own
knowledge bases for customer service and support. In 1999, we acquired a
complementary software product suite from the Molloy Group. The eService Suite
integrates Knowledge-Pak Architect(TM) and Knowledge-Pak Viewer(TM) under a
different brand name, adds the self-learning capability acquired from the Molloy
Group to the software and connects our customers' knowledge base to
RightAnswers.com. We cannot be sure that this product line will provide the
benefits described in this prospectus, gain broad commercial acceptance or
compete successfully against products from other vendors.
OUR CONTENT PARTNERSHIPS MAY BE TERMINATED OR NOT RENEWED.
We currently have content partnerships with Microsoft, Apple, Novell and
3Com. These partnerships provide our RightAnswers.com product offering with
content for the knowledge base. If these partnerships are terminated or not
renewed, our business may be adversely affected.
OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE WILL IMPEDE OUR GROWTH.
Our ability to achieve significant growth in the future will largely depend
on our success in recruiting and training a sufficient number of direct sales
personnel. Our products and services require a sophisticated sales effort
targeted at the senior management of our prospective customers. New hires
require training and take time to achieve full productivity. Our recent hires
and planned new hires may not become as productive as necessary, and we may be
unable to hire sufficient numbers of qualified individuals in the future. If we
fail to expand our direct sales force, our revenue may not grow or it may
decline.
OUR FAILURE TO DEVELOP NEW RELATIONSHIPS AND ENHANCE EXISTING RELATIONSHIPS WITH
THIRD-PARTY DISTRIBUTORS, SOFTWARE VENDORS AND VALUE-ADDED RESELLERS THAT HELP
SELL OUR SERVICES AND PRODUCTS MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS.
We derive a significant portion of our product revenues from third-party
software distributors, vendors and value-added resellers. Our ability to achieve
revenue growth in the future will depend on our success in continuing to develop
new relationships and enhance existing relationships with these software
distributor, vendors and value-added resellers. Additionally, the loss of a
third-party distributor could significantly adversely affect our financial
results. In 1999, sales to one distributor accounted for 17% of our recognized
revenues. At times, we rely on these third parties to recommend and sell our
products to their customers, and to install and support our products for their
customers. Because of our reliance, we face the risk that these software
distributors, vendors and value-added resellers may:
- choose not to recommend, install or sell our products;
- develop, market or recommend software applications that compete with our
products;
- fail to implement their products and/or our e-service solutions and
services on the schedule required by the customers;
- encounter their own financial or operational problems;
6
<PAGE> 10
- change their business strategy;
- terminate their business relationships with us; or
- be acquired by companies who choose to limit or discontinue relationships
with us.
If any of these risks occur, our business, financial condition and results
of operations are likely to be materially adversely affected.
WE HAVE RELATIVELY FEW CUSTOMERS, AND THE LOSS OF ONE OR MORE OF OUR PRINCIPAL
CUSTOMERS WOULD HARM OUR FINANCIAL RESULTS.
Our results of operations in any given period have depended to a
significant extent upon sales to a small number of customers. Our loss of one or
more of our major customers could have a material adverse effect on our
business, financial condition and results of operations. Further, in the event
of any downturn in any existing or potential customer's business or general
economic conditions, licenses and subscriptions for our products and services
may be deferred or terminated, resulting in a material adverse effect on our
business, financial condition and results of operations.
DUE TO THE LENGTHY SALES CYCLES OF OUR PRODUCTS AND SERVICES, THE TIMING OF OUR
SALES ARE 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, effective
use 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 if a greater
proportion of our total revenues, as we anticipate, is derived from our eService
Suite, which has a high average contract size. 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 18 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. Because of the lengthy sales cycle for our products and
services, we may not realize forecasted revenues from a specific customer in the
quarter in which we expend these significant resources.
WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, AND, IF WE DO, WE
FACE RISKS RELATING TO INTERNATIONAL OPERATIONS.
A component of our strategy is our planned increase in efforts to attract
more international customers. We are currently exploring business opportunities
in Europe. To date, we have only limited experience in providing our products
and services internationally. We cannot assure you that we will be able to
market our services and products successfully in international markets. In
addition, by doing business in international markets, we face risks, such as
unexpected changes in tariffs and other trade barriers, fluctuations in currency
exchange rates, difficulties in staffing and managing foreign operations,
political instability, reduced protection for intellectual property rights in
some countries, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, and potentially adverse
tax consequences, any of which could adversely impact our international
operations.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE OR UPDATE OUR
CONTENT IN A COST-EFFECTIVE MANNER.
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. Our content
products are comprised of a large amount of information that needs to be updated
frequently, requiring us to continue to invest substantial resources in order to
maintain the accuracy and utility of our content. Also, we rely upon some of our
customers and other third parties to provide data
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and other support for the ongoing updating of these products. Our customers or
third parties, which may have significantly greater financial and marketing
resources than we do, may compete with us in the future and could discontinue
their relationships with us. Our future success will depend, in part, on our
ability to enhance our existing services and products. We must also develop new
technologies, services and products that address the increasingly sophisticated
and varied needs of our customers and prospective customers. We must respond to
technological advances and evolving industry standards and practices on a timely
and cost-effective basis.
The development and enhancement of products and services to keep pace with
these changes entails significant technical and financial risks. We may not be
able to use new technologies effectively, adapt products and services to
evolving industry standards or develop, introduce and market new products and
services. In addition, we may experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products
and services, and our new product and service enhancements may not achieve
market acceptance.
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 our products
until equivalent technology, if available, is identified, licensed and
integrated. In addition, any defects in the technology we license or 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 and a loss of product
differentiation.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO HIRE AND RETAIN KEY PERSONNEL.
Our business requires the employment of highly skilled personnel. The
recruitment and retention of experienced content and software developers and
proficient technologists are particularly important to our performance and
success. The loss of the services of any of our key personnel or the inability
to recruit and retain experienced content and software developers and other
proficient technologists in the future could have a material adverse effect on
our business, financial condition and operating results. Even though we expect
further growth in the number of our personnel, competition for this type of
personnel is intense. In particular, we have experienced difficulty in hiring
and retaining sales personnel, product managers, software developers and
professional services employees. Our continued ability to compete effectively in
our business depends on our ability to attract and retain the quality personnel
our operations and development require.
PROBLEMS ARISING FROM THE USE OR INTEGRATION 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 customers' 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.
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 customer-
relationship-management software sold by Clarify, Kana Communications, Oracle,
Peregrine Systems,
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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 and could delay or
prevent our products' integration with future systems.
WE FACE A NUMBER OF INTEGRATION RISKS AND SIGNIFICANT GOODWILL COSTS RELATED TO
THE RECENT ACQUISITION OF THE MOLLOY GROUP.
We face integration risks and significant goodwill costs as a result of our
acquisition of the Molloy Group in July 1999. In addition, we may not achieve
value from the acquisition of the Molloy Group commensurate with the purchase
price we paid. Although the integration of the Molloy Group is substantially
complete, this integration may continue to place a significant burden on our
management team. If we are unable to integrate the Molloy Group into our
operations and its products into our products, our business, financial condition
or results of operations may suffer.
As a result of the Molloy Group acquisition, we have recorded a significant
amount of goodwill that will adversely affect our operating results for the
foreseeable future. As of December 31, 1999, we had goodwill and other purchased
intangible assets of approximately $14.2 million, which we expect to amortize
over two to four years from the date of the acquisition. If the amount of
recorded goodwill or other intangible assets is increased or we have future
losses and are unable to demonstrate our ability to recover the amount of the
goodwill, the amount of amortization could be increased, or the period of
amortization could be shortened. This would increase annual amortization charges
or result in the write-off of goodwill in a one-time, non-cash charge, which
could be significant and would likely harm our operating results.
IF WE ACQUIRE OTHER COMPANIES, WE MAY NOT BE ABLE TO INTEGRATE THEIR OPERATIONS
EFFECTIVELY.
Our industry is marked by intense competition and consolidation. As a
result, we may find it necessary to expand through the acquisition of other
companies providing services or having technologies and operations which are
complementary to ours. Acquisitions entail numerous risks, including:
- difficulties in the assimilation of acquired operations and products;
- diversion of management's attention from other business concerns;
- assumption of unknown material liabilities of acquired companies;
- amortization of acquired intangible assets, which would reduce future
reported earnings; and
- potential loss of clients or key employees of acquired companies.
We cannot assure investors that we will be able to successfully integrate
any operations, personnel, services or products that might be acquired in the
future, and our failure to do so could adversely affect our financial results
and the value of our common stock.
THE INTENSIFYING COMPETITION WE FACE FROM BOTH ESTABLISHED AND RECENTLY FORMED
ENTITIES MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
We compete in the emerging market for e-service solutions. We face
competition from many firms offering a variety of products and services. In
addition, we face competition from many free or low cost sources of information
generally available via the Internet. Portions of our content products provided
to us by our content providers may be the same as content offered by those
content providers as part of their Internet-based service offerings. Large
software vendors may choose to sell (or provide at low cost or no cost) content
products addressing problems encountered by users of their software. 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 e-service market. In particular, our current distributors or strategic
partners may enter our market with competitive products. Many of these potential
competitors have well-
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established relationships with our current and potential customers, extensive
knowledge of the e-service service industry, better name recognition,
significantly greater financial, technical, sales, marketing and other resources
and the capacity to offer single vendor solutions. 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. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products. Greater competition may
result in price erosion for our products and services, which may significantly
affect our future operating margins.
CONTENT AND SOFTWARE PRODUCTS ARE PRONE TO ERRORS OR FAILURES.
Content and 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 inaccurate content,
and discovered software errors in certain new versions of existing products and
new products after their introduction. In the event that the information
contained in our content products is inaccurate or perceived to be incomplete or
out-of-date, our business, financial condition and results of operations could
be materially adversely affected. Our products are typically intended for use in
applications that may be critical to a customer's business. As a result, we
expect that our customers and potential customers have a great sensitivity to
product defects. We could, in the future, lose significant revenue as a result
of software errors or defects, including inaccurate content.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS.
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.
WE COULD INCUR ADDITIONAL NON-CASH CHARGES ASSOCIATED WITH STOCK-BASED
COMPENSATION ARRANGEMENTS.
Our operating results may be impacted if we incur significant non-cash
charges associated with stock-based compensation arrangements with employees and
non-employees. We have issued options to employees and non-employees which are
subject to various vesting schedules of up to 48 months. These expenses may
result in us incurring net losses or increased net losses for a given period and
this could seriously harm our operating results and stock price.
OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR RESOURCES, AND IF WE FAIL TO MANAGE
OUR FUTURE GROWTH, OUR BUSINESS COULD SUFFER.
We recently began to expand our operations rapidly and intend to continue
this expansion. The number of our full-time employees increased from 153 as of
January 1, 1999 to 209 as of February 29, 2000. This expansion has placed, and
is expected to continue to place, a significant strain on our managerial,
operational and financial resources. To manage any further growth, we will need
to improve or replace our existing operational, customer service and financial
systems, procedures and controls. Our failure to manage properly these system
and procedural transitions could impair our ability to attract and service
customers, and could cause us to incur higher operating costs and delays in the
execution of our business plan. We will also need to continue the expansion of
our recruiting efforts. Our management may not be able to hire, train, retain
and manage required personnel. In addition, our management may not be able to
successfully identify, manage and exploit existing and potential market
opportunities.
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INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL MAY STRAIN OUR OPERATIONS
AND OUR NEW MANAGEMENT TEAM MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Five members of our senior management team have joined us since January 1,
1999. A significant reduction of employees occurred in conjunction with our
acquisition of the Molloy Group in July 1999. Our new employees include a number
of key managerial, sales, marketing, planning, technical and operations
personnel who have not yet been fully integrated into our organization. In
addition, our current senior management has limited experience working together
in the management of a rapidly growing enterprise. If we are unable to integrate
our new employees or if senior management fails to manage our growth
effectively, our business, financial condition or results of operations may be
adversely affected.
WE MAY NOT BE ABLE TO UPGRADE OUR SYSTEMS AND RIGHTANSWERS.COM TO ACCOMMODATE
GROWTH IN THE E-SERVICE MARKET.
We face risks related to the ability of RightAnswers.com to operate
effectively with increased usage while maintaining the expected quality of
performance. As the volume and complexity of e-service solutions increase, we
will need to expand our systems and our network infrastructure hosted by third
parties. The expansion and adaptation of our network infrastructure will require
substantial financial, operational and management resources. Our ability to
connect and manage a substantially larger number of customers is unknown.
Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and network systems. Our network may be
vulnerable to disruptions due to electronic attacks. Because the techniques used
by computer hackers sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these
techniques. Although we have not experienced any act of sabotage by a third
party of our internal network to date, if an actual or perceived breach of
Internet security occurs in our internal systems or those of our customers, it
could adversely affect the market perception of our products and services. In
addition, a substantial number of our computer and communications systems are
located in Oakmont, Pennsylvania. Our systems and operations are vulnerable to
damage or interruption from fire, power loss, telecommunications failure and
similar events. We have entered into service agreements with some of our
customers that require minimum performance standards, including standards
regarding the availability and response time of our remote content services. If
we fail to meet these standards, our customers could terminate their
relationships with us and we could be subject to contractual monetary penalties.
Any unplanned interruption of services may harm our ability to attract and
retain customers.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over the Internet. Users of our
products transmit their and their customers' confidential information over the
Internet. In our license agreements with our customers, we 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 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.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services such as installation and training, consulting,
customer support and maintenance contracts have lower gross margins than
revenues from licenses and subscriptions. Therefore, any increase in the
percentage of revenues generated from services as compared to revenues from
licenses and subscriptions will lower our overall gross margins. In addition, an
increase in the cost of revenues from services as a percentage of revenues could
have a negative impact on overall gross margins. In the future,
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we may also choose to outsource a portion of our services business. This may
further contribute to erosion of our gross margins.
Although margins related to revenues from services are lower than margins
related to revenues from licenses and subscriptions, our services organization
currently generates gross profits, and we are seeking to expand our services
capability and our revenues from services.
Revenues from services depend in part on renewals of technical support
contracts by our customers, some of which may not renew their technical support
contracts. Our ability to increase revenues from services will depend in large
part on our ability to increase the scale of our services organization,
including our ability to recruit and train a sufficient number of qualified
services personnel successfully. We may not be able to do so.
To meet our expansion goals, we expect to hire additional services
personnel. If demand for our services does not increase in proportion to the
number of additional personnel we hire, gross profits could fall, or we may
incur losses from our services activities. In addition, the costs of delivering
services could increase, and any material increase in these costs could reduce
or eliminate the profitability of our service activities.
CHANGES IN OUR PRODUCT MIX MAY AFFECT OUR FUTURE OPERATING RESULTS.
In the future, we may begin to offer licensing arrangements in which our
customer purchases a license for a fixed or indefinite term. We plan to
recognize revenues from these arrangements ratably over the life of the
contract. If customer demand for these arrangements increases, we may have lower
revenues in the short term than we otherwise would, because revenues for
licenses sold under these arrangements will be recognized over time rather than
upon installation and training.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE
US TO INCUR SIGNIFICANT COSTS.
Our business is dependent on proprietary technology and other intellectual
property rights. We rely primarily on patent, copyright, trade secret and
trademark law to protect our technology. We currently have two patents. One of
these patents pertains to certain proprietary data structures and the other
pertains to our Cognitive Processor. Our patents may not survive a legal
challenge to their validity or provide meaningful protection to us. In addition,
effective trademark protection may not be available for our trademarks.
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 data transmitted. 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.
In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. This type of litigation could result in
substantial costs and diversions of resources, either of which could have a
material adverse effect on our business, financial condition and operating
results.
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WE MAY BECOME SUBJECT TO CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT, WHICH
COULD RESULT IN SIGNIFICANT COSTS, LOSS OF SIGNIFICANT RIGHTS AND HARM TO OUR
REPUTATION.
Third parties may claim that we have infringed their patent, copyright,
trademark and other intellectual property rights. This risk may increase as the
number of entrants in our market increases and the functionality of our products
is enhanced and overlaps with the products of other companies. Any claims,
whether or not valid, could:
- be time-consuming;
- result in costly litigation;
- divert the efforts of our technical and management personnel;
- cause product shipment delays;
- require us to develop non-infringing technology; or
- disrupt our relationships with our customers or require us to enter into
royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all. In the event a claim against us is successful and
we cannot obtain a license to the relevant technology, we would be forced to
redesign our products or cease selling, incorporating or using products or
services that incorporate the challenged intellectual property.
CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and later
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9, which is effective for
us for transactions entered into beginning January 1, 2000. The adoption of this
pronouncement for fiscal year 2000 is not expected to materially affect our
revenue recognition policies. In December 1999, the Staff of the Securities and
Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition," to provide guidance on the recognition, presentation and
disclosure of revenues in financial statements. We believe our revenue
recognition practices are in conformity with SAB No. 101.
Accounting standard setters, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, are also reviewing the
accounting standards related to business combinations and stock-based
compensation. Any changes to these accounting standards or any other accounting
standards or the way these standards are interpreted or applied could require us
to change the manner in which we recognize revenue or the way we account for
stock compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
FACTORS OUTSIDE OUR CONTROL MAY MAKE OUR PRODUCTS LESS USEFUL.
The effectiveness of our eService Suite 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. The knowledge base depends in
part on solutions generated by customer service personnel and, sometimes, on the
importation of a user's 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. Some of our users 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.
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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 eService
Suite to our users will be impaired. Thus, successful deployment and broad
acceptance of our eService Suite will depend in part on whether our users
effectively roll-out and use our software products and the quality of the users'
existing knowledge base of solutions, each of which are outside our control.
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. These customers may
choose not to purchase additional licenses or subscriptions to expand their use
of our products. These customers have not yet developed or deployed initial
applications based on our products. If these customers do not successfully
develop and deploy such initial applications, they may choose not to purchase
deployment licenses or additional development licenses. The effectiveness of our
e-service solutions depends in part on the widespread adoption and use of our
products by customer service personnel. 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. Our business model depends on the
expanded use of our products within our customers' organizations.
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. 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 and subscriptions that we have previously sold, any downturn in our
software licenses and subscriptions revenue would negatively impact our future
services revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenues could be significantly adversely affected.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR BUSINESS DEPENDS ON THE GROWTH OF THE INTERNET, THE CAPACITY AND VIABILITY
OF THE INTERNET INFRASTRUCTURE AND OUR ABILITY TO ADAPT IN A RAPIDLY CHANGING
INDUSTRY.
Our products address a new and emerging market for e-service solutions to
businesses' customer service needs. Therefore, our future success depends
substantially upon the widespread adoption of the Internet as a significant
medium for commerce and business applications. If this market fails to develop
or develops more slowly than expected, demand for our products and services will
be reduced. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies or
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased usage and bandwidth requirements.
Moreover, critical issues like security, reliability, cost, accessibility and
quality of service remain unresolved and may negatively affect the
attractiveness of conducting commerce and business transactions over the
Internet. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our products and services to changing or emerging
technologies.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS.
As e-commerce, e-service 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
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and services. If enacted, these laws and regulations could limit the market for
e-commerce and e-service and, therefore, the market for our products and
services.
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 could
expose companies involved in e-commerce to liability, which could limit the
growth of e-commerce generally. This new legislation and the Communications
Decency Act could dampen the growth of Internet usage and decrease its
acceptance as a communications and commercial medium. In addition, similar or
more restrictive laws in other countries could have a similar effect and hamper
our plans to expand overseas.
THE IMPOSITION OF SALES TAX AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS
OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND THE DEMAND
FOR OUR PRODUCTS AND SERVICES.
The imposition of new sales taxes or other taxes could limit the growth of
Internet commerce generally and, as a result, the demand for our products and
services. Recent federal legislation limits the imposition of state and local
taxes on Internet-related sales. Congress may choose not to renew this
legislation in 2001, in which case state and local governments would be free to
impose additional taxes on electronically purchased goods.
We believe that most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they are not physically present. However, one
or more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in
e-commerce. A successful assertion by one or more states or foreign countries
that companies that engage in e-commerce should collect sales or other taxes on
the sale of their products over the Internet, even though not physically in the
state or country, could indirectly reduce demand for our products.
PRIVACY CONCERNS RELATING TO THE INTERNET ARE INCREASING, WHICH COULD RESULT IN
LEGISLATION THAT ADVERSELY AFFECTS OUR BUSINESS AND/OR REDUCES SALES OF OUR
PRODUCTS.
Businesses use our software capture information regarding their customers
when those customers contact them online with customer service inquiries.
Privacy concerns may cause visitors to resist providing the personal data
necessary to allow our customers to use our software products most effectively.
More importantly, even the perception of privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of our products. Recently, a
high-profile public company faced adverse and widely disseminated publicity
regarding its handling of customer information. In addition, legislative or
regulatory requirements may heighten these concerns if businesses must notify
Web site users that the data captured after visiting certain Web sites may be
used by marketing entities to unilaterally direct product promotion and
advertising to that user. While we are not aware of any legislation or
regulatory requirements of this type currently in effect in the United States,
other countries and political entities, like the European Union, have adopted
this kind of legislation or regulatory requirements and the United States may do
so as well. If consumer privacy concerns are not adequately addressed, our
business could be harmed.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, WE MAY INCUR SIGNIFICANT COSTS
AND OUR BUSINESS COULD SUFFER.
We are unaware of any problems that have arisen with respect to year 2000
issues in our current software products, our internal computer systems or in the
computer systems of our vendors and partners.
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Prior to January 1, 2000, we conducted a review of the potential impact that the
change in the date to the year 2000 would have on our current products and
computer systems. Based on this review, we determined that all of our current
products and major computer systems are able to recognize and appropriately
process dates commencing in the year 2000. Our historical costs to assess our
year 2000 readiness have not been significant. Given the lack of any problems
related to the year 2000 since the year change, we do not anticipate that we
will experience any material problems related to the year 2000 in the future. As
a result, we do not expect costs associated with these problems to have an
adverse effect on our business and financial results. Nevertheless, the customer
networks that incorporate our products and our own internal networks could fail
as a result of the inability of our products and systems to correctly recognize
dates after the year 2000. If we or our customers fail to remedy any year 2000
issues we could incur material costs or lost revenue.
RISKS RELATED TO THIS OFFERING AND OUR CAPITAL STRUCTURE
WE MAY NOT BE ABLE TO OBTAIN FINANCING IF WE NEED IT IN THE FUTURE.
We may require additional financing beyond the proceeds of this offering to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. We can give investors no
assurance that, when needed, additional financing will be available on favorable
terms, if at all.
WE MAY NEED ADDITIONAL CAPITAL, AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING STOCKHOLDERS.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may choose to, or be
required to, raise additional funds due to unforeseen circumstances. If our
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. This financing may not be
available in sufficient amounts or on terms acceptable to us and may be dilutive
to existing stockholders.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING.
We intend to use the net proceeds from the sale of the shares of common
stock offered through this prospectus for general corporate purposes, including
expanding our software development staff and our sales and marketing
capabilities, making strategic acquisitions, expanding internationally and
meeting working capital requirements. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. The
failure of our management to apply these funds effectively could have a material
adverse effect on our business, results of operations and financial condition.
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED SO WE CANNOT PREDICT THE EXTENT
TO WHICH A MARKET WILL DEVELOP FOR OUR COMMON STOCK OR HOW VOLATILE THAT MARKET
WILL BE.
Prior to this offering, there has been no market for our common stock. The
initial public offering price of our common stock will be determined by
negotiations between us and Bear, Stearns & Co. Inc. and SG Cowen, our co-lead
underwriters. The price of our common stock after this offering may fluctuate
widely. The reasons for these fluctuations may include the business community's
perception of our prospects and of the e-service industry in general.
Differences between our actual operating results and those expected by investors
and analysts and changes in analysts' recommendations or projections could also
affect the price of our common stock. Other factors potentially causing
volatility in the price for our common stock may include changes in general
economic or market conditions and broad market fluctuations, particularly those
affecting the prices of the common stocks of companies engaged in commerce
related to the Internet. We will apply to include our common stock for quotation
on the Nasdaq National Market. Inclusion in the Nasdaq National Market does not,
however, guarantee that an active and liquid trading market for our common stock
will develop.
16
<PAGE> 20
WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.
The stock market has from time to time experienced significant price and
volume fluctuations that have affected the market price for the common stocks of
technology companies, particularly Internet companies. 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.
SUBSEQUENT TO THIS OFFERING, OUR OFFICERS AND DIRECTORS WILL STILL BE ABLE TO
EXERT SIGNIFICANT CONTROL OVER OUR FUTURE DIRECTION AND OPERATIONS.
Upon completion of this offering, our officers, directors and persons and
entities affiliated with them, will beneficially own, in the aggregate,
approximately % of the outstanding shares of our common stock
( % if the underwriters' over-allotment option is exercised in full).
As a result, these stockholders, if acting together, would be able to control
matters requiring stockholder approval, including the election of directors and
the approval of a merger, consolidation or sale of all or substantially all of
our assets.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public
market after this offering or after the expiration of lock-up or holding periods
could cause the market price of our common stock to decline. After this offering
we will have approximately shares of common stock outstanding. All the
shares sold in this offering will be freely tradable. The remaining
shares of common stock are deemed "restricted securities", as defined in Rule
144 under the Securities Act. Of the restricted securities, approximately
shares of common stock, which are not subject to the 180-day lock-up
agreements with the underwriters, will be eligible for immediate sale in the
public market pursuant to Rule 144(k) under the Securities Act. Approximately
additional shares of common stock, which are not subject to lock-up
agreements, will be eligible for sale in the public market in accordance with
Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
effective date of the registration statement. Upon expiration of the lock-up
agreements 180 days after the date of this prospectus, approximately
additional shares of common stock will be available for sale in the public
market, subject to the provisions of Rule 144 under the Securities Act. The
future sale of these shares by our current stockholders may adversely affect our
stock price.
THIS OFFERING WILL CAUSE IMMEDIATE DILUTION.
Investors in this offering will experience immediate and substantial
dilution in the net tangible book value of $ per share based on the assumed
initial public offering price of $ .
WE DO NOT ANTICIPATE PAYING DIVIDENDS.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE IT
DIFFICULT FOR A THIRD-PARTY TO ACQUIRE US.
Certain provisions of the Delaware General Corporation Law may delay,
discourage or prevent a change in control. These provisions may discourage bids
for our common stock at a premium over the market price and may adversely affect
the market price and the voting and other rights of the holders of our common
stock. In addition, upon consummation of this offering, our governing documents
will provide for a staggered Board of Directors and authorize the issuance of up
to five million shares of preferred
17
<PAGE> 21
stock. This preferred stock, which will be issuable without stockholder
approval, could grant its holders rights and powers that would tend to
discourage changes in control.
CAUTIONARY NOTE ON FORWARD LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including among
other things:
- implementing our business strategy;
- developing and introducing new services and products;
- obtaining and expanding market acceptance of the services and products we
offer;
- meeting our requirements with customers; and
- competition in providing customer service solutions over the Internet.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. A
description of some risks that could cause our results to vary appears under the
caption "Risk Factors" and elsewhere in this prospectus. In light of these
assumptions, risks and uncertainties, the forward-looking events discussed in
this prospectus might not occur.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the shares
of our common stock in this offering of $ million, based on an initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that our net proceeds
will be $ million.
We intend to use the net proceeds from this offering for general corporate
purposes, including the repayment of our term loan, expanding our software
development staff and our sales and marketing capabilities, international
expansion, possible strategic acquisitions or investments and working capital
requirements. We evaluate potential strategic acquisitions or investments, but
at the present time we have no understandings, commitments or agreements with
respect to any such acquisition or investment. Pending such uses, we intend to
invest the net proceeds from this offering in United States government
securities and investment-grade, interest-bearing instruments. We have made no
material commitments or allocations for the net proceeds, and the use of the
proceeds will depend upon developments and opportunities in our business and the
Internet industry in general.
The foregoing represents our present intentions based upon our present
plans and business conditions. The occurrence of unforeseen events or changed
business conditions, however, could result in the application of the proceeds of
this offering in a manner other than described in this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividend on our common stock and do
not expect to do so in the foreseeable future. We currently intend to retain any
earnings to finance the expansion and development of our business. Any future
payment of dividends will be made at the discretion of our Board of Directors
based upon conditions then existing, including our earnings, financial condition
and capital requirements, as well as such economic and other conditions as our
Board of Directors may deem relevant.
18
<PAGE> 22
DILUTION
The pro forma net tangible book value of our common stock, as of December
31, 1999, after giving effect to the conversion of all outstanding preferred
stock to common stock immediately prior to this offering, was $(3.6) million or
$(0.15) per share of common stock. Net tangible book value per share is equal to
our total tangible assets minus total liabilities divided by the number of
shares of common stock outstanding. After giving effect to our sale of
shares of common stock offered through this prospectus at the assumed initial
public offering price of $ per share (the mid-point of the filing range),
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our net tangible book value as adjusted as of December 31, 1999
would have been $ million, or $ per share of common stock. This
represents an immediate increase in net tangible book value as adjusted of
$ per share to existing stockholders, and an immediate dilution in net
tangible book value as adjusted of $ per share to new investors purchasing
shares of common stock in this offering. Dilution is determined by subtracting
pro forma net tangible book value per share after this offering from the amount
of cash paid by a new investor for a share of common stock.
The following table illustrates the dilution per share as described above:
<TABLE>
<S> <C>
Assumed initial public offering price....................... $
Pro forma net tangible book value as of December 31, 1999
(after giving effect to the conversion of all
outstanding preferred stock immediately prior to this
offering)..............................................
Increase in net tangible book value attributable to new
investors..............................................
Pro forma net tangible book value after this offering....... $(0.15)
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table sets forth on a pro forma as adjusted basis, as of
December 31, 1999, after giving effect to the conversion of all outstanding
preferred stock immediately prior to this offering, the number of shares of
common stock purchased from us, the total cash consideration paid and the
average price per share paid by the existing stockholders and by new investors
purchasing shares of common stock in this offering, assuming an initial public
offering price of $ per share before deducting estimated underwriting
discounts and commissions and estimated expenses payable by us:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ----------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ % $
New investors.........................
------ ----- ------ ----- ------
Total....................... 100.0% 100.0%
====== ===== ====== ===== ======
</TABLE>
The foregoing tables assume no exercise of the underwriters' over-allotment
option. If the underwriters' over-allotment is exercised in full, the pro forma
net tangible book value per share of common stock as of December 31, 1999, as
adjusted, would have been $ per share, which would result in dilution to the
new investors of $ per share, and the number of shares held by the new
investors would increase to , or % of the total number of shares to
be outstanding after this offering, and the number of shares held by the
existing stockholders would be shares, or % of the total number of
shares to be outstanding after this offering. As of February 29, 2000, there
were outstanding options and warrants to purchase an aggregate of shares
of common stock with a weighted average exercise price of per share,
of which were then exercisable. We have also reserved up to an additional
, and shares of common stock for issuance upon the exercise
of options which had not yet been granted under our 1996 stock option plan, our
2000 stock incentive plan and our 2000 employee stock purchase plan. To the
extent options or warrants are exercised, there will be further dilution to new
investors.
19
<PAGE> 23
CAPITALIZATION
The following table shows our capitalization as of December 31, 1999:
- On an actual basis;
- On a pro forma basis to give effect to: (1) the conversion of all
outstanding preferred stock into common stock upon consummation of this
offering and (2) the increase in the number of authorized shares of
common stock; and
- On a pro forma as adjusted basis to reflect the pro forma adjustment, as
well as the sale of shares of common stock in this offering after
deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt including capital leases
(excluding current portion).............................. $ 2,949 $ 2,949 $
------- ------- -------
Stockholders' equity (capital deficiency)..................
Convertible preferred stock, no par value, authorized;
none issued and outstanding, pro forma and pro forma
as adjusted........................................... 21,930 --
Common stock and additional paid-in capital, no par
value, 37,500,000 shares authorized, actual; 9,583,070
shares issued and outstanding, actual; 100,000,000
shares authorized, pro forma and pro forma as
adjusted; 23,544,679 shares issued and outstanding,
pro forma and shares issued and outstanding, pro
forma as adjusted..................................... 5,264 27,194
Warrants................................................. 857 857
Note receivable from common stockholders................. (200) (200)
------- ------- -------
Accumulated deficit...................................... (17,190) (17,190)
Total stockholders' equity (capital deficiency)....... 10,661 10,661
------- ------- -------
Total capitalization.................................. $13,610 $13,610 $
======= ======= =======
</TABLE>
The information in this table does not include the following:
- shares of common stock issuable upon exercise of outstanding
options as of February 29, 2000 with a weighted average price of $
per share.
- shares of common stock reserved for issuance upon the exercise
of options which have not yet been granted under our 1996 stock option
plan, our 2000 stock incentive plan and our 2000 employee stock purchase
plan as of February 29, 2000.
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto included elsewhere in
this prospectus.
20
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA
Our results for the year ended December 31, 1999 reflect the July 23, 1999
acquisition of the Molloy Group, which was accounted for using the purchase
method. Accordingly, the results of operations of the Molloy Group are included
in our results from the applicable closing date. Since the date of the
acquisition of the Molloy Group was completed in 1999, the effects of this
transaction are reflected in the balance sheet, dated as of December 31, 1999.
The following selected financial data are derived from our consolidated
financial statements, which have been audited by Ernst & Young LLP, independent
auditors. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included elsewhere in
this prospectus. Our historical results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Licenses and subscriptions............................... $1,799 $ 4,106 $ 9,250 $11,284 $ 13,311
Services................................................. 1,107 931 436 1,639 4,341
------ ------- ------- ------- --------
Total revenues............................................. 2,906 5,037 9,686 12,923 17,652
COST OF REVENUES
Cost of licenses and subscriptions....................... 82 250 126 372 982
Cost of services......................................... 704 720 502 1,057 3,506
------ ------- ------- ------- --------
Total cost of revenues..................................... 786 970 628 1,429 4,488
------ ------- ------- ------- --------
GROSS MARGIN............................................... 2,120 4,067 9,058 11,494 13,164
OPERATING EXPENSES
Sales and marketing...................................... 738 1,960 4,326 7,198 11,582
Research and development................................. 842 2,005 4,400 5,298 6,849
General and administrative............................... 610 1,097 1,881 2,801 2,418
Intangible assets amortization........................... -- -- -- -- 2,204
------ ------- ------- ------- --------
Total operating expenses................................... 2,190 5,062 10,607 15,297 23,053
------ ------- ------- ------- --------
LOSS FROM OPERATIONS....................................... (70) (995) (1,549) (3,803) (9,889)
Other income (expense), net................................ 27 47 40 (13) (173)
------ ------- ------- ------- --------
Loss before income taxes................................... (43) (948) (1,509) (3,816) (10,062)
Income tax benefit......................................... (3) -- -- -- --
------ ------- ------- ------- --------
NET LOSS................................................... $ (40) $ (948) $(1,509) $(3,816) $(10,062)
Less preferred dividend amounts............................ (51) (56) (59) (124) (95)
------ ------- ------- ------- --------
Net loss applicable to common stock........................ $ (91) $(1,004) $(1,568) $(3,940) $(10,157)
====== ======= ======= ======= ========
Net loss per common share, basic and diluted............... $(0.01) $ (0.14) $ (0.23) $ (0.57) $ (1.25)
====== ======= ======= ======= ========
Shares used in computing per share amounts................. 7,900 7,107 6,914 6,933 8,102
====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 462 $2,132 $1,955 $ 891 $ 6,623
Working capital (deficit)............................. 1,165 2,128 415 (3,819) (2,762)
Total assets.......................................... 2,053 4,523 6,706 6,357 26,734
Long-term debt including capital leases............... -- 129 416 1,968 4,402
Stockholders' equity (capital deficiency)............. 1,472 2,999 1,498 (2,301) 10,661
</TABLE>
21
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial information for the year ended December 31, 1999. The pro forma
information reflects our acquisition of the Molloy Group using the purchase
method of accounting and the effects of that acquisition. We have presented this
pro forma information to give a better understanding of what our business might
have looked like had we owned this acquired company since January 1, 1999. This
company may have performed differently if it had actually been consolidated with
our operations during the year ended December 31, 1999. Reliance should not be
placed on the unaudited pro forma information as indicative of the historical
results that would have had or the future results that will be experienced after
the acquisition. A pro forma consolidated balance sheet as of December 31, 1999
is not presented as the effects of the acquisition are included in the
historical consolidated balance sheet data as of December 31, 1999 presented in
"Selected Historical Financial Data -- Balance Sheet Data."
Our year ended December 31, 1999 column includes data for the June 23, 1999
Molloy Group acquisition beginning on July 24, 1999 through the end of the year.
The pro forma amounts give effect to the acquisition as if it had occurred on
January 1, 1999.
<TABLE>
<CAPTION>
SERVICEWARE.COM, INC. MOLLOY GROUP, INC.
YEAR ENDED 7 MONTHS ENDED ACQUISITION
DECEMBER 31, 1999 JULY 23, 1999 ADJUSTMENTS PRO FORMA
--------------------- ------------------ ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Licenses and subscriptions.................. $ 13,311 $ 1,596 $ -- $ 14,907
Services.................................... 4,341 1,058 -- 5,399
-------- ------- ------- --------
Total revenues................................ 17,652 2,654 -- 20,306
COST OF REVENUES
Cost of licenses and subscriptions.......... 982 10 333(1) 1,325
Cost of services............................ 3,506 628 -- 4,134
-------- ------- ------- --------
Total cost of revenues........................ 4,488 638 333 5,459
-------- ------- ------- --------
GROSS MARGIN.................................. 13,164 2,016 (333) 14,847
OPERATING EXPENSES
Sales and marketing......................... 11,582 1,083 -- 12,665
Research and development.................... 6,849 870 -- 7,719
General and administrative.................. 2,418 1,212 -- 3,630
-------- ------- ------- --------
Intangible assets amortization.............. 2,204 -- 2,806(2) 5,010
Total operating expenses...................... 23,053 3,165 2,806 29,024
-------- ------- ------- --------
LOSS FROM OPERATIONS.......................... (9,889) (1,149) (3,139) (14,177)
Other income (expense), net................... (173) (180) 193(3) (160)
-------- ------- ------- --------
NET LOSS...................................... $(10,062) $(1,329) $(2,946) $(14,337)
Less preferred dividend amounts............... (95) -- -- (95)
-------- ------- ------- --------
Net loss applicable to common stock........... $(10,157) -- -- $(14,432)
======== ======= ======= ========
Net loss per common share, basic and
diluted..................................... $ (1.25) $ -- $ -- $ (1.54)
======== ======= ======= ========
Shares used in computing per share amounts.... 8,102 -- -- 9,370
======== ======= ======= ========
</TABLE>
- ---------------
(1) Represents amortization of $1.8 million in purchased technology associated
with the acquisition as if it had occurred on January 1, 1999. Amortization
is calculated using the straight line method over three years.
(2) Represents amortization of $14.8 million in intangible assets associated
with the acquisition as if it had occurred on January 1, 1999. Amortization
is calculated using the straight line method over two to four years.
(3) Represents interest expense that would not have been paid if the acquisition
occurred on January 1, 1999 due to the conversion of subordinated
convertible notes of various shareholders of the Molloy Group.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our financial statements and
the related notes and other financial information included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including but not limited to those listed under "Risk Factors" and included in
other portions of this prospectus.
OVERVIEW
We were founded in 1991 as a provider of consulting services focused on
helping businesses better incorporate knowledge into their customer service and
support offerings. In March 1993, we pioneered the industry's first
technical-support knowledge bases, called Knowledge-Paks, containing answers and
solutions to commonly asked questions about the use of personal computers. In
June 1996, we combined all of our existing Knowledge-Paks into a single
knowledge content product called the Knowledge-Pak Desktop Suite. In August
1997, we began marketing the Knowledge-Pak Architect and the Knowledge-Pak
Viewer software applications for knowledge management, which enable companies to
modify our content products and develop their own knowledge bases for customer
service and support.
In July 1999, we acquired the Molloy Group in a stock transaction, which
resulted in the Molloy Group's stockholders acquiring approximately 24% of our
common stock. The Molloy Group's software products and technologies were
complementary to our own existing products. Additionally, the Molloy Group
provided us with experienced software developers and its patented Cognitive
Processor technology, which has become the foundation of our self-learning
solution. In December 1999, all of our existing software products and the
newly-acquired Molloy Group's Knowledge Bridge and Knowledge Kiosk software
products were integrated and offered to our customers as our eService Suite.
In the first quarter of 2000, we combined significant new content from
Microsoft, Apple, Novell and 3Com with our existing Knowledge-Pak Desktop Suite
and Knowledge-Pak SAP R/3 Suite to create RightAnswers.com, an Internet-based
knowledge portal which enables our customers to access a continuously updated
database of technology-related content.
We market and sell our products in North America through both our direct
sales force and indirectly through software vendors and value-added resellers.
Internationally, we market products primarily through value-added resellers,
software vendors and system integrators. International revenues historically
have not been a significant percentage of total revenues.
We derive our revenues from licenses and subscriptions for software and
content products and from providing related services, including installation and
training, consulting, customer support and maintenance contracts. Licenses and
subscriptions revenues include fees for both perpetual licenses and for periodic
subscription access. Services revenues contain variable fees for installation,
training and consulting, as well as fixed fees for customer support and
maintenance contracts. We recognize revenues on license fees after a
non-cancelable license agreement has been signed, the product has been
delivered, the fee is fixed, determinable and collectable, and there is
vendor-specific objective evidence to support the allocation of the total fee to
elements of a multiple-element arrangement. We recognize revenues on periodic
subscription licenses over the subscription term. We recognize revenues on
installation, training and consulting on a time-and-material basis, and customer
support and maintenance contracts are recognized over the life of the contract.
Cost of licenses and subscriptions revenues consists primarily of the
expenses related to royalties, the cost of media on which our product is
delivered, product fulfillment costs, amortization of purchased technology and
salaries, benefits, direct expenses and allocated overhead costs related to
product fulfillment and the costs associated with maintaining our
RightAnswers.com Web site. Cost of services revenues consists of the salaries,
benefits, direct expenses and allocated overhead costs of customer support and
23
<PAGE> 27
services personnel, fees for sub-contractors and the costs associated with
maintaining our customer support site.
We classify our 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. We allocate the total
costs for overhead and facilities, based upon headcount, to each of the
functional areas that use these services. These 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, content and other
technologies. These expenses include employee compensation for software
developers, content developers and quality assurance personnel and for
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 of the
amortization of intangible assets acquired through our acquisition of the Molloy
Group. These assets are amortized on a straight line basis over their respective
estimated useful lives.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Licenses and subscriptions................................ 95.5% 87.3% 75.4%
Services.................................................. 4.5 12.7 24.6
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
COST OF REVENUES
Cost of licenses and subscriptions........................ 1.3 2.9 5.5
Cost of services.......................................... 5.2 8.2 19.9
----- ----- -----
Total cost of revenues...................................... 6.5 11.1 25.4
----- ----- -----
GROSS MARGIN................................................ 93.5 88.9 74.6
OPERATING EXPENSES
Sales and marketing....................................... 44.7 55.7 65.6
Research and development.................................. 45.4 41.0 38.8
General and administrative................................ 19.4 21.7 13.7
Intangible assets amortization............................ 0.0 0.0 12.5
----- ----- -----
Total operating expenses.................................... 109.5 118.4 130.6
----- ----- -----
LOSS FROM OPERATIONS........................................ (16.0) (29.4) (56.0)
Other income (expense), net................................. 0.4 (0.1) (1.0)
----- ----- -----
Net loss.................................................... (15.6)% (29.5)% (57.0)%
Preferred dividends......................................... (0.5) (1.0) (0.5)
----- ----- -----
Net loss applicable to common stock......................... (16.1)% (30.5)% (57.5)%
===== ===== =====
</TABLE>
24
<PAGE> 28
FISCAL YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenues
Total revenues were $9.7 million, $12.9 million and $17.7 million in 1997,
1998 and 1999, representing increases of $3.2 million, or 33%, from 1997 to
1998, and $4.8 million, or 37%, from 1998 to 1999. Licenses and subscriptions
revenues increased from $9.2 million in 1997 by $2.1 million, or 23%, to $11.3
million in 1998, and by $2.0 million, or 18%, to $13.3 million in 1999. The
increase in licenses and subscriptions revenues from 1997 to 1999 was
attributable to an increased number of new customers and an increase in the
average contract size. Service revenues increased from $0.4 million in 1997 by
$1.2 million or 275% to $1.6 million in 1998, and by $2.7 million, or 165%, to
$4.3 million in 1999. The increase in services revenues from 1997 through 1999
is primarily attributable to an increased number of new customers and a
significant increase in the size of service contracts.
Cost of Revenues
Cost of revenues increased from $0.6 million in 1997 to $1.4 million in
1998 and to $4.5 million in 1999. Cost of revenues as a percentage of revenues
increased from 6% in 1997 to 11% in 1998 and to 25% in 1999. Cost of licenses
and subscriptions revenues increased from $0.12 million in 1997 to $0.37 million
in 1998 and to $0.98 million in 1999. Cost of licenses and subscriptions
revenues as a percentage of revenues increased from 1.3% in 1997 to 2.9% in 1998
to 5.6% in 1999. The increase in the cost of licenses and subscriptions revenues
was primarily attributable to the overall growth in the number of customers.
Cost of services revenues increased from $0.5 million in 1997 to $1.0 million in
1998 and to $3.5 million in 1999. Cost of services revenues as a percentage of
revenues increased from 5.2% in 1997 to 8.2% in 1998 to 19.9% in 1999. The
increase in the cost of service revenues was primarily attributable to an
increase in the size of service staff.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $4.3
million in 1997 to $7.2 million in 1998 and to $11.6 million in 1999. Sales and
marketing expenses as a percentage of revenues increased from 44.7% in 1997 to
55.7% in 1998 and to 65.6% in 1999. The increase from 1997 to 1999 and the
increase as a percentage of revenues resulted primarily from increases in
additional staffing and investments in sales and marketing activities.
Research and Development. Research and development expenses increased from
$4.4 million, or 45.4% of revenues, in 1997, to $5.3 million, or 41.0% of
revenues, in 1998, and increased to $6.8 million, or 38.8% of revenues, in 1999.
The increase in research and development expenses from 1997 to 1999 was
primarily attributable to the increase in the number of software developers
hired, and the decrease in research and development expenses as a percentage of
revenues was primarily attributable to the pace of revenue growth exceeding the
rate of growth in research and development expenses.
General and Administrative. General and administrative expenses increased
from $1.9 million in 1997 to $2.8 million in 1998 and decreased to $2.4 million
in 1999. As a percentage of revenues, general and administrative expenses were
19.4% in 1997, 21.7% in 1998, and 13.7% in 1999. The increase from 1997 to 1998
resulted primarily from the addition of finance, human resources and executive
and administrative personnel. The decrease from 1998 to 1999 was due to one time
costs related to financing activities in 1998.
Intangible Assets Amortization. Intangible assets amortization consists of
the consideration in excess of the fair value of assets acquired and liabilities
assumed in the acquisition of the Molloy Group in July 1999.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income received
from the investment of proceeds from our financing activities, offset by
interest expense and other fees related to our bank
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<PAGE> 29
borrowings. Other income (expense), net decreased from $40,125 in 1997 to
$(12,978) in 1998 and to $(173,213) in 1999. The decreases were a result of
interest paid on outstanding loans.
QUARTERLY OPERATING RESULTS
The following tables set forth our unaudited quarterly results of
operations data for our eight most recent quarters, as well as the percentage of
revenues represented by each item. You should read these tables along with our
consolidated financial statements and related notes. We have prepared this
unaudited information on the same basis as our audited financial statements, and
it includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position and
operating results for the quarters presented.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Licenses and subscriptions....... $ 2,239 $ 2,664 $3,102 $ 3,279 $ 2,733 $ 2,767 $ 3,137 $ 4,674
Services......................... 279 305 567 488 747 872 1,223 1,499
------- ------- ------ ------- ------- ------- ------- -------
Total revenues..................... 2,518 2,969 3,669 3,767 3,480 3,639 4,360 6,173
COST OF REVENUES
Cost of licenses and
subscriptions.................. 29 49 97 197 119 118 277 468
Cost of services................. 167 203 352 335 693 697 1,010 1,106
------- ------- ------ ------- ------- ------- ------- -------
Total cost of revenues............. 196 252 449 532 812 815 1,287 1,574
------- ------- ------ ------- ------- ------- ------- -------
GROSS MARGIN....................... 2,322 2,717 3,220 3,235 2,668 2,824 3,073 4,599
OPERATING EXPENSES
Sales and marketing.............. 1,526 1,833 1,733 2,106 2,513 2,846 3,271 2,952
Research and development......... 1,307 1,443 1,179 1,369 1,550 1,514 1,932 1,853
General and administrative....... 533 912 639 717 412 452 661 893
Intangible assets amortization... -- -- -- -- -- -- 943 1,261
------- ------- ------ ------- ------- ------- ------- -------
Total operating expenses........... 3,366 4,188 3,551 4,192 4,475 4,812 6,807 6,959
------- ------- ------ ------- ------- ------- ------- -------
LOSS FROM OPERATIONS............... (1,044) (1,471) (331) (957) (1,807) (1,988) (3,734) (2,360)
Other income (expense), net........ 16 20 (18) (31) (36) (68) (29) (40)
------- ------- ------ ------- ------- ------- ------- -------
Net loss........................... $(1,028) $(1,451) $ (349) $ (988) $(1,843) $(2,056) $(3,763) $(2,400)
Preferred dividends................ (16) (16) (46) (46) (47) (48) -- --
------- ------- ------ ------- ------- ------- ------- -------
Net loss applicable to common
stock............................ $(1,044) $(1,467) $ (395) $(1,034) $(1,890) $(2,104) $(3,763) $(2,400)
======= ======= ====== ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
-----------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Licenses and subscriptions........ 88.9% 89.7% 84.5% 87.0% 78.5% 76.0% 71.9% 75.7%
Services.......................... 11.1 10.3 15.5 13.0 21.5 24.0 28.1 24.3
------- ------- ------ ------ ------- ------- ------- -------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
COST OF REVENUES
Cost of licenses and
subscriptions................... 1.2 1.7 2.6 5.2 3.4 3.2 6.3 7.6
Cost of services.................. 6.6 6.8 9.6 8.9 19.9 19.2 23.2 17.9
------- ------- ------ ------ ------- ------- ------- -------
Total cost of revenues.............. 7.8 8.5 12.2 14.1 23.3 22.4 29.5 25.5
------- ------- ------ ------ ------- ------- ------- -------
GROSS MARGIN........................ 92.2 91.5 87.8 85.9 76.7 77.6 70.5 74.5
OPERATING EXPENSES
Sales and marketing............... 60.6 61.8 47.3 55.9 72.3 78.2 75.0 47.9
Research and development.......... 51.9 48.6 32.1 36.4 44.5 41.6 44.3 30.0
General and administrative........ 21.2 30.7 17.4 19.0 11.8 12.4 15.2 14.4
Intangible assets amortization.... 0.0 0.0 0.0 0.0 0.0 0.0 21.6 20.4
------- ------- ------ ------ ------- ------- ------- -------
Total operating expenses............ 133.7 141.1 96.8 111.3 128.6 132.2 156.1 112.7
------- ------- ------ ------ ------- ------- ------- -------
LOSS FROM OPERATIONS................ (41.5) (49.6) (9.0) (25.4) (51.9) (54.6) (85.6) (38.2)
Other income (expense), net......... 0.5 0.7 (0.5) (0.8) (1.0) (1.9) (0.7) (0.7)
------- ------- ------ ------ ------- ------- ------- -------
Net loss............................ (40.8)% (48.9)% (9.5)% (26.2)% (53.0)% (56.5)% (86.3)% (38.9)%
Preferred dividends................. (0.7) (0.5) (1.3) (1.2) (1.3) (1.3) -- --
------- ------- ------ ------ ------- ------- ------- -------
Net loss applicable to common
stock............................. (41.5)% (49.4)% (10.8)% (27.4)% (54.3)% (57.8)% (86.3)% (39.9)%
======= ======= ====== ====== ======= ======= ======= =======
</TABLE>
The increase in comparable quarterly licenses and subscriptions revenues
for the 1998 and 1999 fiscal years primarily resulted from the growth in the
number of customers and increases in the average contract size. The quarterly
increases in revenues within each fiscal year are the result of the timing of
installations and the results of sales promotions rather than an underlying
seasonality. The increases in services revenues are the result of the increasing
size of services engagements and increase in revenue from maintenance contracts.
The increases in cost of revenues between comparable quarters are primarily
the result of increases in the size of the service staff.
The increases in operating costs over the periods presented primarily
resulted from the growth in the size of the operating departments. The costs of
intangible assets amortization reflect the amortization of the assets acquired
in the acquisition of the Molloy Group.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our cash requirements primarily through
private placements of convertible preferred stock and common stock. As of
December 31, 1999, we had $6.6 million in cash and cash equivalents. We believe
that the cash proceeds from this offering, together with our existing cash
balances, will be sufficient to meet anticipated cash requirements for at least
the 12 months following the date of this prospectus. We may, nonetheless, seek
additional financing to support our activities during the next twelve months or
thereafter. There can be no assurance, however, that additional capital will be
available to us on reasonable terms, if at all, when needed or desired.
Net cash used in operating activities was $1.4 million for 1998 and $3.1
million for 1999. Cash used in operating activities for 1998 and 1999 resulted
primarily from the net losses in those periods.
Net cash used in investing activities of $1.1 million for 1998 and $1.5
million for 1999 was primarily attributable to property and equipment
acquisitions.
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<PAGE> 31
Net cash provided by financing activities was $1.5 million for 1998 and
primarily consisted of proceeds from borrowings under our revolving line of
credit and equipment loan. Net cash provided by financing activities was $10.4
million for 1999 and primarily consisted of net proceeds from the issuance of
Series D preferred stock and our term loan.
We have a secured credit facility with PNC bank. This facility consists of
three sub-facilities: a revolving credit loan facility, a convertible equipment
loan and a term loan.
The revolving credit facility provides for $7.5 million of availability
less the principal outstanding on the term loan and matures on December 10,
2001. Any amounts drawn under this facility bear interest at the Base Rate plus
0.50%. "Base Rate" is defined as the lesser of the bank's prime rate or the
Federal Funds Effective Rate plus 2%. The availability of credit is based on a
percentage of eligible accounts receivable. At December 31, 1999, $1.5 million
was available for use and $1.25 million was outstanding on the revolving credit
facility.
The convertible equipment loan is for $0.75 million. On June 8, 2000,
outstanding amounts under this loan will be converted to a single term loan
which matures on June 1, 2003. Any amounts drawn under this facility bear
interest at the Base Rate plus 0.75%. The availability of advances on this line
is based on a percentage of invoice amounts for equipment acquisitions. At
December 31, 1999, nothing had been drawn within the year, and $0.5 million was
outstanding on the equipment loan from the previous equipment line. Principal
repayments of this loan are required to be made upon conversion of the loan into
the term loan in 36 equal installments beginning July 1, 2000.
The term loan is for $2.5 million and is due in two equal installments on
June 10, 2001 and December 10, 2001. However, upon the completion of this
offering, the term loan must be repaid. Any amounts drawn under this facility
bear interest at the Base Rate plus 2.25%. No amounts were outstanding under the
term loan on December 10, 1999. At December 31, 1999, $2.5 million was
outstanding on the term loan.
In addition, as part of the consideration for this credit facility, we
issued to PNC Bank warrants to purchase 120,000 shares of our common stock.
These warrants need not be exercised at the offering and are entitled to certain
registration rights. We also issued to PNC Bank warrants to purchase 10,221
shares of our common stock as part of the consideration for a bridge loan in the
amount of $0.75 million which was repaid with the proceeds from the sale of our
Series D convertible preferred stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in the United States. We sell our products
globally, through our direct sales force and independent distributors. As a
result, our financial results are affected by factors such as changes in foreign
currency exchange rates and weak economic conditions in foreign markets. In the
future, we expect to increase our international operations in our existing
markets and in geographic locations where we do not currently have any
operations.
We collect a portion of our revenue and pay a portion of our operating
expenses in foreign currencies. As a result, changes in currency exchange rates
from time to time may affect our operating results. Currently, we do not engage
in hedging transactions to reduce our exposure to changes in currency exchange
rates, although we may do so in the future. We cannot assure you, however, that
any efforts we may make in the future to hedge our exposure to currency exchange
rate changes will be successful.
YEAR 2000 ISSUES
We are unaware of any problems that have arisen with respect to year 2000
issues in our current software products, our internal computer systems or in the
computer systems of our vendors. Prior to January 1, 2000, we conducted a review
of the potential impact that the change in the date to the year 2000 would have
on our current products and computer systems. Based on this review, we
determined that all of our current products and major computer systems are able
to recognize and appropriately process dates commencing in the year 2000. Our
historical costs to assess our year 2000 readiness have not been
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<PAGE> 32
significant. Given the lack of any problems related to the year 2000 since the
year change, we do not anticipate that we will experience any material problems
related to the year 2000 in the future. As a result, we do not expect costs
associated with these problems to have a material adverse effect on our business
and financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. The adoption
of this pronouncement for fiscal year 2000 is not expected to materially affect
our revenue recognition policies.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe our revenue recognition practices are in
conformity with SAB No. 101.
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<PAGE> 33
BUSINESS
OVERVIEW
We are a leading provider of software and content solutions that businesses
use to provide an Internet-based e-service platform to their customers,
partners, suppliers and employees. We develop and market a comprehensive service
solution to meet the needs of these end-users who, together, form an extended
enterprise. Our eService Suite includes licensed and subscription-based software
and content products that enable businesses to capture enterprise knowledge,
solve their end-users' problems, reuse solutions and share captured knowledge
through the Internet. Additionally, our patented Cognitive Processor contained
in the eService Suite continually learns at each request, keeping knowledge
up-to-date and accurate and providing end-users with relevant and useful answers
to their questions.
Our eService Suite includes software and content products which enable our
customers to develop and manage a knowledge base of service-related information.
Our solutions also permit the dissemination of knowledge through multiple
communication channels, such as telephone support, e-mail, chat and Web-based
self-service. Additionally, our Internet-based knowledge portal,
RightAnswers.com, enables our customers to access a continuously updated
knowledge base of content obtained from leading technology companies, including
Microsoft, Apple, Novell and 3Com, as well as our internally produced knowledge
content. We also offer integration, training and consulting services that enable
our customers to realize the benefits of our eService Suite. Our customers
include Andersen Consulting, Clarify, Compaq, Hewlett-Packard, Marconi
Communications, Merrill Lynch, Pfizer and Texas Instruments.
INDUSTRY BACKGROUND
Evolution of e-Commerce and Impact on Customer Service
The rapid growth in the number of users on the Internet has forced
companies and other organizations to adjust to new ways of conducting business
both online and offline. International Data Corporation projects that the number
of Internet users worldwide will grow from 196 million in 1999 to 502 million in
2003. With this growth, e-commerce has rapidly evolved from businesses
delivering predominantly static information about products and services to
online commerce sites that provide transactional capabilities linking businesses
to their customers. Today, e-commerce and traditional commerce are further
evolving to link, via the Internet, all entities involved in producing,
marketing, selling and servicing products.
This evolution in e-commerce and traditional commerce has resulted in a
growing need for improved service for end-users. The increased speed of online
transactions in conjunction with the always-on nature of the Internet has
resulted in end-users requiring information and service instantaneously on a
twenty-four hours a day, seven days a week basis. The market for supplying
products and services to businesses which allow them to provide online
self-service alone is estimated by IDC to grow from $3 billion in 1999 to over
$14 billion in 2003. Additionally, the increasingly complex nature of products
and services has resulted in a tremendous increase in the volume of information
which needs to be accessed by end-users.
The e-Service Multiplier Effect
Another important factor driving the growing need for effective online
service is that e-commerce results in an e-service multiplier effect. This means
that a single e-commerce transaction can generate multiple e-service
interactions. These e-service interactions are not limited to the resolution of
post-transaction problems, but in fact occur before, during and after an
e-commerce transaction has been completed. According to Forrester Research, for
example, in the business-to-consumer market, 19% of Internet purchasers need
assistance during the shopping experience, 58% check on order status and 19%
have questions immediately upon the receipt of shipped goods. Therefore, the
ability to provide efficient, accurate e-service is becoming a vital part of the
entire online and offline transaction experience.
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As a result of the e-service multiplier effect, superior e-service is
increasingly the key to competitive differentiation for enterprises that
formerly used price and selection as a means to attract and retain customers.
Competition is increasingly driven by customer demand for prompt, accurate and
personalized resolution of inquiries and problems. By successfully responding to
these demands, companies are able to develop closer contacts and create
long-term satisfaction and loyalty among their customers, partners, suppliers
and employees. In turn, companies have the opportunity to increase their
profitability per customer and reduce the need for continuous, substantial
expenditures on marketing and other intensive customer acquisition and retention
efforts.
Existing Service Solutions are Inadequate
Despite the urgent need for comprehensive service solutions, current
service offerings have not kept pace with the rapid evolution of e-commerce and
traditional commerce. These solutions fail to meet the expectations and demands
of the extended enterprise. Traditional service solutions, such as call centers
and help desks, are neither scalable nor cost-effective because of
labor-intensive and time-consuming customer interactions and the high turnover
rates of service professionals. Despite attempts to streamline certain segments
of the service continuum, companies have been unable to eliminate the
inefficiencies of these solutions. Additionally, alternatives to telephone
support, such as online chat or automated e-mail response applications, have
been used to augment existing service solutions. However, these applications
have proven insufficient to answer questions or solve problems in a way that
fully satisfies the service needs of the extended enterprise.
In addition, current customer service software applications, which are used
to provide information to call centers and help desks, are rarely customized or
personalized to a company's preferences. This results, among other problems, in
lengthy service cycles for even the simplest service inquiries. These problems
are particularly acute for online businesses. For example, a Jupiter
Communications survey discovered that approximately 50% of the Web sites
surveyed took five or more days to respond, never responded or failed to post an
e-mail address on their Web site to address customer service e-mail requests.
Further, the inability of customer service systems to transfer information
across existing service solutions often results in end-users having to describe
their problem at each stage of the service process as they switch from one
communication channel to another or escalate to increasing levels of assisted
service. Increased call center volumes often overwhelm call centers and lead to
inaccurate and delayed responses. Therefore, the optional e-service solution
must provide intelligent self-service and must support the agents who provide
assisted service to end-users.
Requirements of a Comprehensive e-Service Solution
The increasing dissatisfaction with current customer service and the
heightened expectations resulting from the growth of the Internet requires a
solution which includes intelligent application software and content. In order
to enable businesses to provide superior e-service, a comprehensive solution
needs to:
- provide the option for a personalized self-service experience;
- provide the end-user with the ability to escalate to assisted service and
seamlessly transfer information across all communication channels,
including e-mail, telephone, fax or chat, at any stage of interaction;
- consolidate the knowledge base and intellectual capital throughout the
organization and make it available throughout the extended enterprise;
- learn through cumulative customer feedback and rapidly develop solutions
to allow the enterprise to provide proactive service to its end-users;
- offer the flexibility necessary to integrate with existing solutions and
enable enterprises to rapidly deploy the technology; and
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- scale cost-effectively as the organization's service needs grow.
An effective solution will enable anyone in the extended enterprise to
address any question from any source via any communication channel at any time.
THE SERVICEWARE SOLUTION
We are a leading provider of e-service solutions that enterprises use to
strengthen relationships with their customers, partners, suppliers and
employees. We license software and content products to enterprises that form the
basis of their e-service solutions. Our solutions enable businesses to capture
enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. Our solutions also enable
the extended enterprise to access this knowledge online. In addition, through
the self-learning features of our patented Cognitive Processor, the solutions
generated by our products are intelligent in that they are interactive,
adaptable and have the capability automatically to update themselves. Customers
can use our software and content products separately or as an integrated
solution to reduce the cost and improve the quality of their customer service.
We believe our solutions provide our customers with a number of key benefits,
including:
Strengthened Relationships with their End-Users. Our solutions allow
enterprises to provide their customers and other end-users with improved, timely
and accurate service. Enterprises realize that the service function provides
them with their closest contact with their customers, and, by providing superior
self or assisted service, they can create long-term customer satisfaction and
loyalty. By providing better and more user-friendly service, our solutions
increase the likelihood that a business' customers will complete specific
transactions and that the enterprise will be able to attract and retain its
customers.
Decreased Operating Costs. By enabling end-users to access customer
service online and by aiding customers service agents to more effectively handle
user requests, our solutions often provide cost savings and improve employee
productivity. For example, IDC states that the cost of providing live telephone
support is $30 to $50 per call as compared to only $0.45 for providing Internet
self-service. These savings and increased productivity are a result of reduced
telephone call volume, the ability to process more end-user interactions per
employee and reduced levels of employee training.
Improved Dissemination of Enterprise Knowledge. Our eService Suite enables
our customers to develop a common knowledge base of intellectual capital, which
is collected from their business systems and experts throughout their
organization, and makes it available throughout the extended enterprise. All
communications from a business to its customers, partners, suppliers or
employees, whether through telephone support, self-service, e-mail or chat, draw
from this knowledge base. Additionally, the patented Cognitive Processor
contained in our eService Suite provides a self-learning capability that
continually learns at each request, which keeps responses up to date and
accurate and provides end-users with relevant and useful answers to their
questions.
Seamless Integration with Existing Solutions. Our products are designed
for rapid deployment, typically in eight to 12 weeks, and some of our customers
have implemented our solutions in as little as three weeks. Our software helps
our customers to preserve their investments in, and deployments of, call center
and help desk products, workflow tools, knowledge bases and other applications.
Our solution enhances these capabilities and integrates them into a cohesive and
automated Internet service infrastructure by integrating with applications from
leading companies such as Clarify, Kana Communications, Oracle, Peregrine
Systems, Remedy and Siebel Systems. As a result, this enables our customers to
deploy best of breed applications configured to suit their particular e-service
needs.
Access to Our Existing Knowledge Base. We provide our customers with
immediate and user-friendly access to RightAnswers.com, our Internet-based
knowledge portal. Through natural language queries, all end-users can access and
draw from our extensive and continuously growing knowledge base of technology-
focused information. By accessing this knowledge base, an enterprise can
cost-effectively and efficiently acquire the technical expertise necessary to
resolve frequently asked inquiries.
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Consistent Service Across Communication Channels. Our solution allows
access to knowledge from a wide variety of communication channels. Our
proprietary software enables end-users to transfer inquiries easily from
self-help to e-mail responses to live interaction. Escalation of customer
inquiries helps ensure that our customers efficiently apply the appropriate
level of resources toward their customers' satisfaction while reducing the risk
of losing a customer because of perceived unresponsiveness.
Scalability for Large and Growing Enterprises. The architecture of the
eService Suite allows both large and growing organizations to maintain a
consistent level of service as the volume of traffic across their communication
channels increases. By adding additional servers, providing replication features
between servers and capitalizing on the capabilities of our Java-based
architecture, our products provide consistent responsiveness to end-user
interactions despite rising volumes of traffic.
STRATEGY
Our solutions enable enterprises to provide an Internet-based e-service
platform for their customers, partners, suppliers and employees to access and
manage business critical knowledge. Our objective is to leverage this platform
to become the leading worldwide provider of e-service solutions. To achieve our
goal, we intend to:
Enhance Technology and Product Leadership.
We intend to broaden our leadership position in the e-service solutions
market by continuing to increase the depth of content, performance,
functionality and scalability of RightAnswers.com and our eService Suite. We
plan to continue to design our products to be highly scalable throughout the
extended enterprise, easily configurable and able to integrate with both
front-end best of breed applications and existing enterprise systems. We plan to
continue to devote substantial resources to the development of new and
innovative technologies, including our patented Cognitive Processor, to increase
efficiencies, offer real time answers and minimize service response time. We
will expand the current eService Suite offering to incorporate advances in
wireless and handheld technology for mobile users which will allow us to add
value to existing customer implementations, leverage the capabilities of the
technologies we deploy and extend our reach within the enterprise.
Broaden Content Solutions to New Vertical Markets.
We intend to broaden the reach of our content offerings into new vertical
markets. Our customers currently use our knowledge content to access
technology-focused information. Our alliances with leading technology content
providers have provided us with a deep knowledge of end-user service demands as
well as industry knowledge. Initially, we plan to extend our content to include
other vertical markets with similar characteristics to technology-related
industries, including financial services, health care, entertainment,
telecommunications and industrial products. These industries market and sell
complex products and require strong customer service or support. We intend to
enter these new vertical markets by developing alliance relationships with
existing customers and other content providers in those vertical markets.
Expand Internet-Based Delivery Model.
We have recently introduced RightAnswers.com, our Internet-based knowledge
portal. We also plan to expand our software offerings to businesses by deploying
a hosted Web-based delivery model for our eService Suite. By offering a
traditional license model and a new Web-based subscription model, our customers
will have the flexibility to choose how to roll out our products and determine
their preferences in terms of price, speed of implementation, depth and
customization of knowledge base and complexity of the user interface. This will
minimize our customers' upfront investment in hardware, software, content and
services. To facilitate this Web-based delivery model, we are planning to
partner with leading application service providers to host our eService Suite.
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Continue to Build Brand Awareness.
To enhance public awareness of our e-service offerings, we are pursuing an
aggressive brand development strategy by increasing mass market and targeted
advertising, continuing visible presence at industry/partner events, and
maintaining relationships with recognized industry analysts and the public. We
believe that our marketing programs will highlight the advantages of our
eService Suite relative to our competitors. We also believe that enhancing our
brand will increase opportunities with corporate customers.
Expand Strategic Alliances.
In order to broaden our market presence, enter new geographic and vertical
markets, and increase adoption of our solutions, we plan to strengthen existing
and pursue additional strategic alliances. Our strategic alliances are with
consultants, systems integrators, value-added resellers and independent software
vendors of complementary products. We intend to use these partners to increase
our sales by leveraging our partners' industry expertise, business relationships
and sales and marketing resources. Currently, we have strategic alliances with
Clarify, Kana Communications, Oracle, Peregrine Systems, Remedy, Siebel Systems
and Tivoli. Additionally, we plan to increase our service capabilities by
pursuing strategic relationships with leading systems integrators and
consultants.
Expand International Presence.
To expand our sales to both new and existing customers, we intend to
increase our worldwide sales effort by adding direct sales personnel and new
office locations to complement our existing international operations in the
United Kingdom. In addition, to capitalize on international opportunities for
our knowledge service solutions, we intend to commence product localization
efforts, initially concentrating on Europe and then later expanding to other
international markets. Furthermore, we will expand our international presence by
establishing additional overseas offices, adding direct sales personnel and
increasing our relationships with local distributors.
PRODUCTS AND SERVICES
Our eService Suite is a software and content solution allowing our
customers to provide personalized, automated e-service tailored to the needs of
their end-users. Our eService Suite includes our eService Site, eService
Architect and eService Professional software products and RightAnswers.com. In
addition to our products, we offer integration, training, consulting and
maintenance services related to our eService Suite. Customers usually purchase
our entire suite of products along with various services. Additionally,
RightAnswers.com is frequently licensed as an independent content product. The
following diagram depicts the eService Suite:
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[Flow Chart depicting the components of our products and services and the manner
in which they are accessed by end-users]
eService Site. The eService Site allows our customers to provide Web-based
self-service to their end-users. End-users can access the eService Site through
an Internet or corporate intranet connection. This Web-based e-service solution
allows self-help users to access the knowledge base at any time, using a simple,
easy-to-use, intuitive interface via a natural language query. The eService Site
can be customized to conform to the look and feel of a customer's Web site.
Finally, eService Site provides access to our customers' knowledge sources, as
well as those of RightAnswers.com.
eService Professional. The eService Professional provides a Web-based
application interface for customer service professionals to more easily navigate
through the knowledge base, view various components of the knowledge base as
well as capture and revise additional knowledge. eService Professional
integrates with many of our partners' customer relationship applications to
provide a seamless interface for a customer service professional.
eService Architect. The eService Architect provides a robust set of
knowledge tools that allows customers' subject matter experts and system
administrators to administer, design, manage and maintain knowledge bases. The
eService Architect provides knowledge authoring and editing capabilities as well
as administrative tools for all necessary product suite functions.
RightAnswers.com. RightAnswers.com is an Internet-based knowledge portal
that enables our customers to access a continuously updated database of
currently over 350,000 problem-solution pairs in a cost effective and timely
manner. RightAnswers.com enables customer support organizations and end-users
to have direct access to solutions to the most commonly asked technology-related
questions. Through RightAnswers.com, customers can simply go to our Web site,
type a natural language query and receive
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back a single, unified list of probable answers from our licensed knowledge
bases. We currently offer multi-vendor support content obtained from leading
technology companies, including Microsoft, Apple, Novell and 3Com. In addition
to the technology content supplied by our partners, RightAnswers.com includes
technology content that we produce in-house for common desktop, network and SAP
R/3 applications. RightAnswers.com is primarily distributed on a subscription
basis. A CD-ROM version of this product, previously marketed as Knowledge-Pak
Desktop Suite, is also available.
Professional Services and Customer Support. Our professional services
organization provides our customers with implementation and integration services
which allows them to deploy our e-service solutions effectively. In addition,
our professional services organization offers education and training to enable
our customers' internal team to support the implementation and maintenance of
our solutions. All customers under a maintenance agreement have access to our
technical support engineers via telephone, fax or e-mail. In addition, we
provide self-service support to our customers on a twenty-four hours a day,
seven days a week basis through our RightAnswers.com Web site.
TECHNOLOGY AND ARCHITECTURE
Our eService Suite employs industry-standard technologies to create an
object-based open architecture for all our applications. The suite is based on
an n-tiered architecture which permits the use of multiple servers for
scalability and a clear division of responsibility between our software
programs. This division provides flexibility and scalability.
At the core of our technology is our Cognitive Processor, which provides
self-learning capability to our eService Suite. The Cognitive Processor uses
patented algorithm technology based on neural network and Bayesian statistical
principles. Through these algorithms, the Cognitive Processor is capable of
learning from past transactions. Access to the Cognitive Processor is provided
via our knowledge server, which performs the role of an application server. The
knowledge server, written in the C++ programming language, performs session
management, thread management, spooling, caching and access management to the
Cognitive Processor. The replication capability of the server was designed to
update multiple databases worldwide on a distributed network by using any
leading database application. This permits our customers to locate servers in
various locations close to their end-user base.
We refer to the architecture of our family of Web-based products as Java
Knowledge Management Architecture, or JKMA. The JKMA is a framework built using
Java and XML that includes components specifically designed to take advantage of
each element of the modern Web environment. This enables an extremely
configurable, extensible application to be delivered based on current Internet
standards. New tools and products based on the JKMA framework can be built at an
accelerated pace as standard system functionality is already available in the
core framework.
The core technology for RightAnswers.com is based on industry standard
commercial software. All servers are based on Microsoft Windows NT and Microsoft
Internet Information Server. Server components are written in C++. Client
interfaces are implemented with HTML, Java and XML. The core search engine is
Verity's K2 architecture. RightAnswers.com is hosted by GTB Internetworking who
provides tier 1 Internet services including load balancing, security,
communications and hardware services.
CUSTOMERS
To date, we have licensed our eService Suite to over 200 customers and
licensed our Knowledge-Pak Desktop Suite to over 4,000 customers. We have
traditionally targeted our products and services to a wide range of industry
groups.
The following is a representative list of our customers and the industries
which they serve.
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<TABLE>
<S> <C>
SERVICES CONSUMER
ADP Kimberly Clark
Andersen Consulting The Disney Store
DecisionOne Yamaha Corporation of America
Fourth Shift
Marriott TECHNOLOGY/COMMUNICATIONS
Stream International Canon
CDW
FINANCIAL SERVICES Clarify Direct
Bear Stearns Compaq
First Union National Bank Data General
Fleet Services Hewlett-Packard
Merrill Lynch Ingram Micro
Transamerica Occidental Life Insurance Jamcracker
Lucent Technologies
EDUCATION/GOVERNMENT Marconi Communications
Gelco Government Services National Computer Systems
U.S. Air Force Sharp Electronics
U.S. Navy Texas Instruments
U.S. Patent & Trademark Office United Messaging
University of Utah U.S. Cellular Wireless Communications
Wake Forest University
INDUSTRIAL
HEALTH CARE Eaton Cutler-Hammer
Allina Health Systems Grumman Systems Support
Amgen Hughes Supply
Hoechst HiServ Johnson Controls
McKesson -- HBOC
Pfizer
</TABLE>
The following case studies illustrate the issues encountered by our
customers in providing e-service and the benefits achieved through utilization
of our products and services.
Stream International
Stream International provides customer care and technical support services
for many of the world's premier technology businesses. With over 7,000
employees, innovative technologies and the commitment to continuously exceed the
expectations of its clients, Stream has a global reputation for enhancing the
customer experience. On a twenty-four hours a day, seven days a week basis and
in 13 languages, Stream harnesses its knowledge resources to resolve over 20
million customer and technical issues annually in its eleven contact center
locations in the United States, Europe and a joint venture in Japan.
To manage these complex inquiries and improve responsiveness to customers,
Stream wanted to put a knowledge management infrastructure in place that would
leverage best practices throughout the organization. Using our solutions, Stream
can now gather, document and refine knowledge, and make that knowledge available
through several mechanisms to internal employees. Stream selected our solution
for its technically advanced knowledge engine, its ability to be integrated with
other information technology systems and our expertise in the knowledge
industry. For Stream's agents using Knowledge Bridge to support their clients,
information that is captured from a customer interaction, whether via telephone,
email or chat, is channeled by Knowledge Bridge into Stream's knowledge base.
Additionally, this knowledge is exported and made available as a self-service
option to Stream's customers via the Web. After installing Knowledge Bridge,
Stream became more effective in their ability to solve and report customer
problems. Support agents have decreased call escalations and improved the
consistency and quality of answers.
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Marconi Communications
Marconi Communications is one of the world's fastest growing communications
and information technology companies. Before becoming Marconi Communications on
November 30, 1999, the company was known as GEC (The General Electric Company,
p.l.c.). Today, the company is comprised of a wide range of organizations,
including companies recently purchased by Marconi Communications such as Fore
Systems, RELTEC, Picker Medical, Positron Fibre and others. It is a
global-leader in smart broadband optical networks, ATM backbone switches,
telephony products, wireless products, medical imaging and more.
A team of internal analysts and a worldwide network of field-service
personnel provide customer service, installation and trouble-shooting for
Marconi's constantly expanding product line. In a two-pronged effort to provide
consistent and high quality information while reducing the training necessary to
prepare analysts and field personnel, Marconi turned to us for the foundation of
a consolidated online knowledge management system and self-service Web site. As
the program continues to roll out across Marconi's worldwide enterprise, it will
be integrated with the Remedy call management software and an email management
package.
With its internal analysts fully trained in the use of our knowledge
management software, expert knowledge is now available to even the most junior
analyst. Marconi is already experiencing a 25 percent reduction in the time it
takes to train new hires and anticipates this reduction to reach 40 percent
improvement as the program is deployed to its worldwide field-service network.
Marconi anticipates a soon-to-be-launched, Web-based self-help feature will
further reduce incoming calls to the Marconi help desk, and provide improved
time-to-resolution for the company's customer base.
Yamaha Corporation of America
With an inventory that includes a wide range of music-making devices, from
pianos and synthesizers to electric guitars, sound equipment and CD recorders,
the Product Information Department at Yamaha Corporation of America supports
over 1,700 products, including newly-added new lines to its U.S. product
offerings and all products carrying the Yamaha name, even if they have been
discontinued. With the interactive Yamaha Solutions Network(TM) located on the
Service & Support section of its Web site, Yamaha has made its knowledge
directly available to its customers via the Web and, in the process, improved
customer satisfaction.
Based upon our eService Suite, the Yamaha Solutions Network features a
constantly evolving knowledge base that provides the answers that customers need
when they need them. Since its deployment, Yamaha has experienced a decrease in
its time-to-resolution as well as in the number of calls to Yamaha's support
center, while improving customer satisfaction significantly. In addition,
because the product information is categorized and managed by our software,
Yamaha has been able to partially outsource the support related to one of its
new high-tech products. Yamaha has recently been awarded the prestigious WebStar
award by the Software Support Professionals Association, which recognizes
companies that utilize the Web to excel at meeting their customer service
expectations.
SALES AND MARKETING
We market our solutions through a direct sales force and indirect sales
channels. We sell our eService Suite primarily through our direct sales force.
The CD-ROM version of RightAnswers.com, which was previously marketed as
Knowledge-Pak Desktop Suite, is sold primarily through indirect distribution
channels consisting of software vendors and value-added resellers. The online
version of RightAnswers.com is being sold both directly and through software
vendors and value-added resellers.
As of February 29, 2000, our sales team consisted of 32 sales
representatives and managers. We have sales personnel throughout North America
and, internationally, in the United Kingdom.
To increase the effectiveness of our direct selling efforts and our
penetration of the e-service market, we build brand awareness of ServiceWare.com
and our solutions through numerous marketing programs.
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These programs include print and Internet advertisements, direct mailings,
public relationship activities, trade shows, seminars and other major
industry/partner events, market research and our Web site.
Our marketing organization creates materials to support the sales process,
including brochures, data sheets, case histories, return-on-investment analyses,
presentations, white papers and demonstrations. In addition, our marketing group
helps identify and develop key partnership opportunities and channel
distribution relationships. As of February 29, 2000, our marketing team
consisted of 12 full-time employees. In May 2000, we plan to initiate a major
marketing program to promote the new release of our eService Suite, as well as
significantly increase our brand recognition.
STRATEGIC ALLIANCES
We have established strategic alliances with leading providers of Internet
software technologies. These alliances augment our sales and marketing
organization by enabling us to increase both market awareness, distribution and
market penetration of our products and services, as well as to extend the
technical and functional application of our e-service solutions.
Distribution Alliances
We have established distribution alliances with leading providers of
complementary e-commerce technologies who resell or co-market our solutions. We
benefit from the lead generation and established marketing capabilities of these
firms. In turn, our partners benefit from being able to offer a more
comprehensive solution in their product offerings and thereby increase their
customers' satisfaction. We currently have strategic distribution and marketing
alliances with several vendors, including Clarify, Kana Communications, Oracle,
Peregrine Systems, Remedy, Siebel Systems and Tivoli. In 1999, sales to Tivoli
accounted for 17% of our total revenue.
Content Alliances
We have established content alliances with leading technology vendors. Our
relationships with these content providers help us offer customers a diverse
range of technical information and problem-solving techniques. We currently have
content partnerships with Microsoft, Apple, Novell and 3Com.
RESEARCH AND DEVELOPMENT
We develop most enhancements to our existing and new products internally.
We plan to continue to evaluate externally developed technologies for
integration into our product line as well. In 1999, we directed the majority of
our research and development expenditure towards fully integrating the
technology acquired from the Molloy Group and towards making platform changes
that provided us with the capability of building new applications and expanding
into new markets.
Our research and development expenditures for fiscal 1997, 1998 and 1999
were approximately $4.4 million, $5.3 million and $6.8 million. In order to keep
pace with the rapidly changing technology environment, we expect to continue to
devote significant resources toward research and development.
COMPETITION
We compete in the emerging market of e-service. Competition in this market
is rapidly evolving and intense, and we expect competition to intensify further
in the future as current competitors expand their product offerings and new
competitors enter the market. Current competitors include in-house developed
applications and providers of commercially available e-service solutions,
including Ask Jeeves, Inference (which recently announced its acquisition by
eGain Communications), Peregrine Systems, Primus Knowledge Solutions, Quintus
and Servicesoft Technologies. In addition, we face competition in our content
product solutions from firms such as EarthWeb. We also face competition from
many free or low cost sources of information generally available via the
Internet, including portions of our content products provided to us by software
developers, who may choose to provide this content as part of their Internet-
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based support offerings. As there are relatively low barriers to entry in the
software industry, we expect to experience additional competition from new
entrants in our markets.
We believe that the principal competitive factors affecting our market
include referenceable customers, the breadth and depth of a given solution,
product quality and performance, core technology, product scalability and
reliability, product features and the ability to implement solutions and respond
timely to customer needs.
Although we believe that we currently compete favorably with respect to the
principal competitive factors in our market, we may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources. It is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of industry consolidations.
INTELLECTUAL PROPERTY
Our success and ability to compete effectively depends, in part, upon our
proprietary rights. We rely on a combination of patent, copyright, trade secret
and trademark laws, confidentiality procedures and contractual provisions to
establish and protect our proprietary rights in our software, documentation and
other written materials. These legal protections afford only limited protections
for our proprietary rights and may not prevent misappropriation of our
technology or deter third parties from developing similar or competing
technologies.
We have two patents, one pertaining to certain proprietary data structures
and the other pertaining to our Cognitive Processor. We also have one trademark
registration and one pending trademark application in the United States.
We seek to avoid disclosure of our intellectual property by generally
entering into confidentiality or license agreements with our employees,
consultants and alliance partners, and generally control access to, and
distribution of, our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology or to
develop products with the same functionality as our products.
Policing unauthorized use of our proprietary information is difficult, and
we may be unable to determine the extent of unauthorized copying or use of our
products or technology. Further, third parties which have been granted certain
limited contractual rights to use proprietary information may improperly use or
disclose such proprietary information. In addition, certain of our products
require us to have licenses from third parties for use. These licenses may be
subject to cancellation or non-renewal. In this event, we will be required to
obtain new licenses for use of these products, which may not be available on
commercially reasonable terms, if at all, and could result in product shipment
delays and unanticipated product development costs.
EMPLOYEES
We believe that one of our strengths is the quality and dedication of our
people and the shared sense of being part of a team. We strive to maintain a
work environment that fosters professionalism, excellence, diversity and
cooperation among our employees. As of February 29, 2000, we had 209 employees.
PROPERTIES
Our principal executive offices are located in Oakmont, Pennsylvania where
we lease 28,200 square feet of office space. The term of the lease expires in
2006. We also operate a 24,300 square foot office in Parsippany, New Jersey.
This lease expires in 2002. We also lease a 3,871 square foot office in Redwood
City, California with the term of lease expiring in 2002 and a smaller office in
the United Kingdom.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of our
executive officers, directors and key employees, their ages, and their
respective positions with the company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rajiv Enand............................... 38 Chairman of the Board of Directors, Secretary and
Treasurer
Mark Tapling.............................. 43 President, Chief Executive Officer and Director
Mark Finkel............................... 45 Chief Financial Officer
Peggy Biddison............................ 51 Vice President of Marketing
Richard Joslin............................ 37 Vice President of RightAnswers.com
Richard Koloski........................... 37 Vice President of Software Development
Lou Venezia............................... 49 Vice President of Global Sales
Susie Sedlacek............................ 41 Vice President of Global Enterprise Services
Kevin Hall(2)............................. 41 Director
Susanne Harrison(1)....................... 55 Director
Bruce Molloy(2)........................... 45 Director
Timothy Wallace(1)(2)..................... 42 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Rajiv Enand has served as Chairman of the Board of Directors since August
1999. Mr. Enand previously served as our President from July 1998 to May 1999,
Chief Executive Officer from July 1998 to January 2000, Vice President of
Business Development from May 1996 to July 1998, Vice President of Operations
from February 1995 to May 1996 and Vice President of Engineering from April 1993
to February 1995. Mr. Enand received a Bachelor of Science degree in Computer
Science from West Virginia University and has completed graduate courses at East
Tennessee State University and Southern Methodist University.
Mark Tapling has served as our President and Chief Executive Officer since
January 2000. Mr. Tapling previously served as our President and Chief Operating
Officer from May 1999 to January 2000 and as our Vice President of Worldwide
Sales from February 1998 to May 1999. From September 1996 to February 1998, Mr.
Tapling was employed by Comshare, most recently as Senior Vice President of
Operations for the Americas. From April 1994 to September 1996, Mr. Tapling was
employed by Lotus Development Corporation, most recently as Region Director for
the Northeast. Mr. Tapling received a Bachelor of Science degree in Economics
and Management from Michigan State University. Mr. Tapling will become a
director upon the effectiveness of our registration statement.
Mark Finkel has served as our Chief Financial Officer since January 2000.
From June 1996 to January 2000, Mr. Finkel was employed as a consultant and/or
acting executive officer for a variety of technology companies, including
InterWorld, BackWeb Technologies and the Molloy Group. From May 1995 to June
1996, Mr. Finkel was employed by Logic Works as Executive Vice President and
Chief Financial Officer. Prior to May 1995, Mr. Finkel served as Chief Financial
Officer for a number of technology companies, including Consilium and Neuron
Data (now Blaze Software), and also practiced corporate and securities law in
California. Mr. Finkel received a Bachelor of Arts degree from Oberlin College,
a Master's degree in Business Administration from New York University and a
Juris Doctor degree from the University of California at Davis.
Peggy Biddison has served as our Vice President of Marketing since June
1999. Ms. Biddison was previously employed by QAD as Vice President of Marketing
from October 1994 to June 1999. From
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September 1993 to November 1994, Ms. Biddison was employed by Fourth Shift as
Vice President of Professional Services. Ms. Biddison received a Bachelor of
Arts degree from the University of California at Santa Cruz.
Richard Joslin has served as our Vice President of RightAnswers.com since
September 1999. From October 1995 to September 1999, Mr. Joslin held a variety
of positions with us, most recently as Vice President of Knowledge Engineering.
Previously, Mr. Joslin was employed by a division of Westinghouse Electric,
which was acquired by Eaton Cutler-Hammer, most recently as Manager of
Commercial Systems Support. Mr. Joslin received a Bachelor of Science degree in
Computer Science from Indiana University of Pennsylvania. Mr. Joslin has
received a number of industry commendations in the customer service field,
including the 1999 Service 25 Award from ServiceNews magazine.
Richard Koloski has served as our Vice President of Software Development
since July 1999. From October 1997 to June 1999, Mr. Koloski was employed in the
same capacity by the Molloy Group. From June 1996 to October 1997, Mr. Koloski
was employed by Claremont Technology Group as Director of the Technology
Infrastructure Laboratories and Vice President of Telecommunications.
Previously, Mr. Koloski was employed by EDS, most recently as a Senior Software
Engineer and Architect. Mr. Koloski received a Bachelor of Arts degree in the
International Business Honors Program from William Paterson College.
Susie Sedlacek has served as our Vice President of Global Enterprise
Services since October 1998. From 1994 to 1998, Ms. Sedlacek was employed by Sun
Microsystems, most recently as the Professional Services Area General Manager
for the Latin America region. Ms. Sedlacek received a Master's degree in
Business Administration and a Bachelor of Science degree in Economics from the
University of San Francisco.
Lou Venezia has served as our Vice President of Global Sales since July
1999. From April 1998 to November 1998, Mr. Venezia was Vice President of Sales
of the Molloy Group. From November 1998 to July 1999, Mr. Venezia was President
and Chief Operating Officer of the Molloy Group. From 1993 to 1998, Mr. Venezia
was employed by Versatility as Senior Vice President of Enterprise Solutions.
Mr. Venezia received a Bachelor of Science degree in Mathematics and Physics
from the University of Massachusetts.
Kevin Hall has served as a director since April 1996. Mr. Hall has been a
General Partner of Norwest Equity Partners since 1993. He serves on the board of
directors of Continuus Software and many other private companies. Mr. Hall
received a Master's degree in Business Administration from Stanford University
and Master of Science and Bachelor of Science degrees in Electrical Engineering
from Purdue University.
Susanne Harrison has served as director since July 1994. Ms. Harrison has
been a General Partner of Poly Ventures, LP and Poly Ventures II, LP since 1989
and 1991, respectively. Ms. Harrison is also President of Harrison Enterprises,
a technology Angel investment fund. She serves as Director of several privately
held companies, as well as a director of Long Island Venture Group, and the Long
Island Capital Forum. Ms. Harrison received a Master's degree in Business
Administration from Adelphi University, a Master of Arts degree from the State
University of New York and a Bachelor of Arts degree from Hunter College of the
City University of New York.
Bruce Molloy has served as a director since July 1999. Mr. Molloy founded
the Molloy Group and served as its Chief Executive Officer and Chairman of the
Board of Directors from October 1992 until its acquisition in July 1999. Mr.
Molloy is the inventor of the patented Cognitive Processor used in
ServiceWare.com's products. Mr. Molloy received a Bachelor of Arts degree in
Music and Physics from Columbia University.
Timothy Wallace has served as a director since July 1994. Since January
2000, Mr. Wallace has served as the Chairman and Chief Executive Officer of Full
Tilt Solutions, a business-to-business professional service company. Prior to
Full Tilt, Mr. Wallace was the President and Chief Executive Officer of Xerox
Connect, a network integration technology company. From May 1996 until May 1998,
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Mr. Wallace was the President, Chief Executive Officer and a director of
XLConnect Solutions, which he founded. Xerox acquired XLConnect in May 1998.
From August 1991 to March 1996, Mr. Wallace was the Vice President of
Professional Services of The Future Now, a national systems integration company.
Mr. Wallace received a Bachelor of Science degree in Business Administration
from Indiana University of Pennsylvania and a Master's degree in Business
Administration from Miami University of Ohio.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: an Audit Committee and
a Compensation Committee.
The responsibilities of the Audit Committee include recommending to the
Board of Directors the independent public accountants to be selected to conduct
the annual audit of our books and records, reviewing the proposed scope of the
audit and approving the audit fees to be paid, reviewing our accounting and
financial controls with the independent public accountants and our financial and
accounting staff, and reviewing and approving transactions between us and our
directors, officers and affiliates. Kevin Hall, Bruce Molloy and Timothy Wallace
are the members of the Audit Committee.
The Compensation Committee provides a general review of our compensation
plans to ensure that they meet corporate objectives. The responsibilities of the
Compensation Committee also include administering our stock incentive plans.
Susanne Harrison and Timothy Wallace are the members of the Compensation
Committee.
None of the members of our Compensation Committee or Audit Committee has
ever been an officer or employee of our company. None of our executive officers
serves as a member of the Board of Directors or on the compensation committee of
any entity that has one or more executive officers serving on our Board of
Directors.
DIRECTOR COMPENSATION
Effective August 18, 1999, three directors who are not our employees or
consultants were each granted 60,000 non-qualified stock options under our 1996
stock option plan with an exercise price of $2.50 per share. 15,000 of these
options vested on August 18, 1999, with an additional 15,000 options vesting on
August 18 of each of the three subsequent years, provided that such individual
remains a member of our Board of Directors on such date of vesting. We also
reimburse our directors for their reasonable out-of-pocket expenses incurred in
attending meetings of our Board of Directors or its committees.
AMENDED AND RESTATED STOCK OPTION PLAN
In December 1996, our Board of Directors adopted and our stockholders
approved the ServiceWare, Inc. Amended and Restated Stock Option Plan, effective
January 1, 1996, which we refer to as the 1996 stock option plan. This plan
amended and restated the ServiceWare, Inc. 1994 Stock Option/Stock Issuance
Plan. The 1996 stock option plan will terminate on February 15, 2004, unless it
is earlier terminated by our Board of Directors. As discussed below, the Board
of Directors intends to terminate the 1996 stock option plan and replace it with
the 2000 stock incentive plan prior to the effectiveness of this registration
statement. We may grant incentive or nonqualified stock options under the 1996
stock option plan to our employees, directors, consultants and advisors.
We are authorized to issue 6,000,000 shares of our common stock under the
1996 stock option plan. As of February 29, 2000, we had options outstanding to
purchase shares of common stock under the 1996 stock option plan.
The Compensation Committee of our Board of Directors administers the 1996
stock option plan and is responsible for determining the terms and conditions of
all grants of options under the 1996 stock option plan. Subject to certain
exceptions, all rights to exercise options will terminate on the first to occur
of (1) the scheduled expiration date as set forth in the applicable stock option
agreement, (2) 90 days following the date of termination of employment for any
reason other than death or permanent disability of
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the participant, or (3) one year following the date of termination of employment
by reason of the participant's death or permanent disability.
If control of our company changes through, for example, a merger,
acquisition or consolidation of more than 50% of our stock by another person or
company, or through a merger with another company, and the acquiror fails to
assume or replace with equivalent options all outstanding options under the 1996
stock option plan, then all outstanding options that have not vested prior to
the change of control will immediately vest.
2000 STOCK INCENTIVE PLAN
Introduction. We intend to adopt a 2000 stock incentive plan to serve as
the successor program to our 1996 stock option plan. After it is adopted by our
Board of Directors and approved by our stockholders, the 2000 stock incentive
plan will become effective immediately prior to the consummation of this
offering.
Awards. We may grant incentive stock options, nonqualified stock options
or restricted stock under the 2000 stock incentive plan.
Share Reserve. Three million shares of our common stock will be reserved
for issuance under the 2000 stock incentive plan, plus any shares of our common
stock covered by any unexercised portion of terminated stock options granted
under the 1996 stock option plan. The shares reserved under our 2000 stock
incentive plan will automatically increase on the first trading day in January
of each calendar year, beginning with calendar year 2001, by an amount equal to
the lesser of 1.5 million or 6.25% of the total number of shares of our common
stock outstanding on the last trading day of December in the prior calendar
year, unless our Board of Directors determines to increase the amount by a
lesser number of shares.
Eligibility. The individuals eligible to participate in our 2000 stock
incentive plan will include our officers, other employees, members of our Board
of Directors and any consultants we hire.
Administration. Our 2000 stock incentive plan will be administered by our
Compensation Committee. The Compensation Committee will determine which eligible
individuals are to receive option grants or stock issuances under the 2000 stock
incentive plan, the time or times when the issuances are to be made, the number
of shares subject to each grant or issuance, the status of any granted option as
either an incentive stock option or a nonstatutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.
Change of Control. If control of our company changes through, for example,
an acquisition of more than 50% of our stock by another person or company, or
through a merger with another company, and the acquiror fails to assume or
replace with equivalent awards all outstanding awards under the 2000 stock
incentive plan, then all outstanding options that have not vested prior to the
change of control will immediately vest and the restrictions on any restricted
stock that have not lapsed before the change of control will immediately lapse.
In addition, any replacement options issued by the acquiror to any participant
will vest, and any restrictions on any replacement restricted stock issued to
such participant will lapse, if the participant is terminated without cause
within 12 months after the change of control.
2000 EMPLOYEE STOCK PURCHASE PLAN
We intend to adopt a 2000 employee stock purchase plan. Subject to approval
by our stockholders, the plan will become effective immediately prior to the
consummation of this offering and, unless our Board of Directors terminates it
earlier, will continue for a term of 20 years. The plan is designed to permit
eligible employees to purchase common stock, through payroll deductions, at a
discount from its fair market value. We will initially reserve 500,000 shares of
our common stock for issuance under the 2000 stock incentive plan. The reserve
will automatically increase on the first trading day of each calendar year
beginning in 2001 in an amount equal to the total number of shares purchased
under the 2000
44
<PAGE> 48
employee stock purchase plan during the immediately preceding fiscal year, up to
a maximum of one million shares that can be reserved for issuance under the
plan.
We intend for the 2000 employee stock purchase plan to be qualified under
Section 423 of the Internal Revenue Code. The 2000 employee stock purchase plan
will consist of six-month purchase periods. Participating employees will
automatically make stock purchases at the end of each purchase period. The
initial purchase period will begin on the date of this prospectus.
Our Board of Directors or a committee appointed by our Board of Directors
will administer the 2000 employee stock purchase plan. The 2000 employee stock
purchase plan will permit eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation,
unless our Board of Directors decides to modify such amount. The purchase price
will be equal to the lower of 85% of the fair market value of the common stock
at the beginning of the applicable purchase period or 85% of the fair market
value of the common stock at the end of each such purchase period. Our
employees, including officers and employee directors, will be eligible to
participate in the 2000 employee stock purchase plan if they are employed by us
for at least 20 hours per week and more than five months in the year. Employees
will be permitted to withdraw from participation in the 2000 employee stock
purchase plan at any time and receive a refund of their payroll deductions made
since the last purchase date. Participation will end automatically upon
termination of employment.
If another company acquires us, the 2000 employee stock purchase plan
generally will provide that the acquiror will assume each right to purchase
stock or shall substitute equivalent rights; otherwise, each right to purchase
common stock will accelerate and become exercisable immediately before the
acquisition. Our Board of Directors will have the power to amend or terminate
the 2000 employee stock purchase plan at any time.
EXECUTIVE BONUS
The Board of Directors has established an executive bonus plan for fiscal
year 2000. The plan will pay performance-based bonuses of up to a maximum of
$75,000 to each senior executive and up to a maximum of $100,000 to our Chief
Executive Officer, as incentive for the participants to contribute to our
growth. The Compensation Committee of the Board of Directors will administer the
plan. The bonus will be determined based on whether we meet and/or exceed our
corporate and financial goals.
401(K) PLAN
We maintain a 401(k) retirement savings plan. All of our employees meeting
certain minimum eligibility requirements are eligible to participate in the
401(k) plan. Under the 401(k) plan, an employee may contribute up to 15% of his
or her pre-tax gross compensation. The contribution cannot exceed a statutorily
prescribed annual limit. The 401(k) plan permits us, but does not require us to
make additional contributions to the 401(k) plan. All amounts contributed by the
employee participants in conformance with plan requirements and earnings on such
contributions are fully vested at all times. For the years ended December 31,
1997, 1998 and 1999, we did not contribute to the 401(k) plan. As of January 1,
2000, however, we provide a 25% company match to participant contributions.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS
Our Amended and Restated Certificate of Incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
45
<PAGE> 49
- unlawful payments or dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which a director derives an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we will indemnify our directors and executive officers, and may indemnify
our other officers and employees and other agents, to the fullest extent
permitted by law. We believe that indemnification under our Bylaws covers at
least negligence and gross negligence on the part of indemnified parties. Our
Bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity and certain other capacities, such as serving as a director of
another corporation at the request of the Board of Directors, regardless of
whether the Bylaws would permit indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered during 1999 by (1) the Chief Executive Officer
and (2) the four other most highly compensated executive officers as of December
31, 1999 whose total salary and bonus in 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------
------------------- NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------- -------- ------- -------------------- -------------
<S> <C> <C> <C> <C>
Rajiv Enand
Chairman(a)............................ $200,000 $45,000 150,000 $ 1,846(e)
Mark Tapling
President and CEO(b)................... $185,417 $45,000 465,000 $39,190(f)(g)
Lou Venezia
Vice-President of Global Sales......... $177,083(c) $47,500 138,000
Peggy Biddison
Vice-President of Marketing............ $ 93,817(d) $58,750 150,000
Susie Sedlacek
Vice-President of Global Enterprise
Services............................... $125,000 $66,657 30,000
</TABLE>
- ---------------
(a) Mr. Enand was our Chief Executive Officer during 1999 and President for a
portion of that year.
(b) Mr. Tapling was President, Chief Operating Officer and Vice President of
Worldwide Sales at various times during 1999. His current base salary is
$200,000.
(c) Includes earnings of $99,167 paid while at the Molloy Group prior to its
acquisition by us.
(d) Part year salary, based upon a base salary of $165,000.
(e) Includes $1,846 in automobile allowance.
(f) Includes $35,340 in commissions paid while Vice President of Worldwide
Sales.
(g) Includes $3,850 in automobile allowance.
46
<PAGE> 50
STOCK OPTIONS
OPTION GRANTS IN 1999
The following table provides information concerning grants of stock options
to the Chief Executive Officer and the four other most highly compensated
executive officers during 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------------
NAME GRANTED(1) IN 1999(2) ($/SHARE) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Rajiv Enand................. 150,000 5.05% $1.67 10/20/2009
Mark Tapling................ 15,000 0.51% $0.67 1/01/2009
450,000 15.16% $0.67 6/11/2009
Lou Venezia................. 138,000 4.65% $1.67 7/23/2009
148,500(4) 5.00% $0.81 7/23/2009
Peggy Biddison.............. 150,000 5.05% $0.67 6/07/2009
Susie Sedlacek.............. 30,000 1.01% $0.67 6/11/2009
</TABLE>
- ---------------
(1) All options granted in 1999 were granted under the 1996 stock option plan.
(2) These percentages are based on grants of 2,968,680 options which include the
590,925 options given to the Molloy Group option holders in exchange for
their Molloy Group options upon our acquisition of the Molloy Group.
(3) Potential realizable value is based on the assumption that the price per
share of common stock appreciates at the assumed annual rate of stock
appreciation on the market value of the common stock on the date of option
grant over the term of the option. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set forth
in accordance with the rules and regulations adopted by the Securities and
Exchange Commission, do not represent our estimate of stock price
appreciation and do not take into account any other appreciation in the
common stock from the date of grant to the date hereof.
(4) These options were issued in exchange for Mr. Venezia's Molloy Group options
upon our acquisition of the Molloy Group.
AGGREGATE OPTION EXERCISES IN 1999 OPTION VALUES
The following table sets forth certain information regarding the stock
options exercised during 1999 and the stock options held as of December 31, 1999
by our Chief Executive Officer and the other four most highly compensated
executive officers. None of these executive officers exercised options in 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON VALUE OF UNEXERCISED
STOCK UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Rajiv Enand.............................. 0 150,000 $ $
Mark Tapling............................. 28,125 550,875
Lou Venezia.............................. 123,701 162,800
Peggy Biddison........................... 0 150,000
Susie Sedlacek........................... 18,750 86,250
</TABLE>
47
<PAGE> 51
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
All of our executive officers serve at the discretion of the Board of
Directors.
Pursuant to a resolution of our Board of Directors, 50% of the then
unvested options held by executive officers and employees with a title of "Vice
President" will vest and become exercisable upon the occurrence of a "Change of
Control," as defined in the 1996 stock option plan, provided such executive
officer or employee is employed by us on the date of a Change of Control. This
right is in addition to any rights such individuals may have under the 1996
stock option plan.
Pursuant to Mark Tapling's letter of employment, 75% of Mr. Tapling's
unvested stock options will automatically vest upon a Change of Control, as
defined in the 1996 stock option plan. As of June 1, 2000, 100% of Mr. Tapling's
options, which were granted to him prior to December 31, 1999, would
automatically vest upon a Change of Control. In addition, 75% of the options
granted to Mr. Tapling on January 19, 2000 would vest upon a Change of Control,
with the remaining options to vest proportionally over the subsequent 12 months.
Mr. Tapling is also entitled to a severance package equal to six months of his
base salary should Mr. Tapling's employment with us be terminated, whether
voluntarily or not, without cause.
Mark Finkel, who became our Chief Financial Officer in January 2000, will
receive an annual salary of $150,000 per year. In addition, Mr. Finkel was
granted 450,000 options to purchase common stock. Mr. Finkel's stock options are
immediately exercisable, subject to various rights of repurchase by the Company.
Upon a Change of Control, as defined in the 1996 stock option plan, Mr. Finkel's
shares eligible for repurchase will be reduced by 50% where we are not the
controlling entity. In addition, within 12 months of a Change of Control, no
shares will be eligible for repurchase if Mr. Finkel is terminated without cause
or if his responsibilities significantly change.
Pursuant to an agreement with our Board of Directors dated January 19,
2000, Rajiv Enand's cash compensation and employee benefits are guaranteed
through June 30, 2001.
48
<PAGE> 52
CERTAIN TRANSACTIONS
SALE OF SERIES D PREFERRED STOCK
In July 1999, we sold 2,400,000 shares of our Series D convertible
preferred stock, par value $1.00 per share and warrants to purchase 540,000
shares of our common stock for an aggregate purchase price of $9,000,000 to a
total of 22 investors. Pursuant to the terms of the warrants, because we failed
to meet certain performance targets for the year ended December 31, 1999, the
warrants became exercisable. However, we expect to receive waivers of these
exercise rights from the holders of these warrants. The investors received
certain registration rights in connection with the purchase of the Series D
preferred stock.
SALE OF SERIES E PREFERRED STOCK
In connection with our acquisition of the Molloy Group in July 1999, we
issued 2,647,984 shares of our Series E convertible preferred stock, par value
$1.00 per share, to the former holders of preferred stock and promissory notes
of the Molloy Group, warrants to purchase of 60,710 shares of common stock, and
2,319,596 shares of our common stock to former holders of common stock of the
Molloy Group, including 2,269,646 shares of our common stock to Bruce Molloy,
one of our directors. The former security holders of the Molloy Group received
certain registration rights in connection with their receipt of our common
stock. Under the terms of the agreement and plan of merger, shares of our common
stock and Series E preferred stock representing approximately 2% of the total
consideration issuable to each former security holder of the Molloy Group were
placed in an escrow account pending determination of certain performance targets
relating to the business of the Molloy Group from July 1, 1999, as if the
acquisition had occurred on July 1, 1999. Because these performance targets were
not met, the escrowed shares are required to be returned to us.
WARRANTS
In April 1999, PolyVentures II, L.P. loaned us $150,000; in May 1999,
Geocapital III, L.P. loaned us $250,000; and in June 1999, Norwest Equity
Partners V loaned us $650,000. These loans were made for short-term working
capital purposes. As partial consideration for these loans, we issued warrants
to purchase 6,000, 10,000 and 26,000 shares of our common stock to each of
PolyVentures II, L.P., Geocapital III, L.P. and Norwest Equity Partners V,
respectively. We used a portion of the proceeds from the sale of our Series D
preferred stock in July 1999 to repay these loans in full. We expect the
warrants to be exercised prior to the consummation of this offering; however, if
not exercised, these warrants will expire upon this offering. Susanne Harrison
and Kevin Hall, each of whom are members of our Board of Directors, are general
partners of PolyVentures II, L.P. and Norwest Equity Partners V, respectively.
TRANSACTIONS INVOLVING C.E. UNTERBERG, TOWBIN
C.E. Unterberg, Towbin, one of our underwriters, and associated persons and
entities, beneficially own 3,362,155 shares of our common stock, comprising
12.5% of our total outstanding common stock. This ownership interest was
acquired in several transactions that occurred on or prior to July 1999. Prior
to July 1999, C.E. Unterberg, Towbin and related entities invested a total of
$5.2 million in the Molloy Group. As a result of our acquisition of the Molloy
Group in July 1999, C.E. Unterberg, Towbin and these entities received an
aggregate of 1,904,266 shares of our Series E convertible preferred stock. Also
in July 1999, certain entities associated with C.E. Unterberg, Towbin purchased
306,666 shares of our Series D convertible preferred stock at a purchase price
of $3.75 per share, as well as a warrant granting the conditional right to
purchase 39,999 shares of our common stock at an exercise price of $2.50 per
share. The warrant is currently exercisable but as of March 30, 2000 had not
been exercised.
In addition, in July 1999 C.E. Unterberg, Towbin was paid $245,000 as a
finder's fee in consideration for its services identifying potential purchasers
of our Series D convertible preferred stock. C.E. Unterberg, Towbin also served
as an advisor to the Molloy Group during the July 1999
49
<PAGE> 53
acquisition but did not receive compensation for these services. Finally, Thomas
Unterberg has the right to attend meetings of our Board of Directors as an
observer.
Robert Harris, a Senior Managing Director at Bear, Stearns & Co. Inc.,
beneficially owns approximately 30,000 shares of our common stock. He also has
various interests in Unterberg, Harris Private Equity Partners L.P. and
Unterberg, Harris Interactive Media L.P., which hold shares in our company. C.E.
Unterberg, Towbin, where he was a partner until February 1998, had previously
invested in the Molloy Group.
COMPENSATION, CONSULTATION AND SEVERANCE AGREEMENT
Upon consummation of our acquisition of the Molloy Group in July 1999,
Bruce Molloy, one of our directors, retired from his position as an officer of
the Molloy Group. At the same time, we entered into a compensation, consultation
and severance agreement with Mr. Molloy pursuant to which we agreed to pay Mr.
Molloy $5,000 per week for a period of 18 months as a consulting/severance fee,
and Mr. Molloy agreed to consult with and advise our management and officers in
respect of transition matters, including personnel matters, arising in
connection with our acquisition of the Molloy Group and matters relating to our
technology and strategic planning.
LICENSE AGREEMENT
In connection with our acquisition of the Molloy Group in July 1999, Bruce
Molloy sold his rights in certain intellectual property, including the patented
Cognitive Processor, to the Molloy Group. Concurrently, Mr. Molloy entered into
a license agreement with the Molloy Group permitting Mr. Molloy to use that
intellectual property in certain fields which we believe are not competitive
with our business.
LOANS TO OFFICERS
Certain executive officers were given loans by us to purchase shares of our
common stock pursuant to the exercise of their outstanding options. These
officers are personally liable for the principal of and interest due on their
loans. Each loan is secured by the shares purchased with the proceeds of that
loan. Each loan becomes due and payable three years from the date it is made or
earlier if the individual's employment is terminated or he or she no longer owns
the shares. These loans did not reduce our cash balance. The respective total
number of shares purchased and the amounts loaned are set forth in the table
below.
<TABLE>
<CAPTION>
NUMBER OF SHARES
STOCKHOLDER ACQUIRED ON EXERCISE LOAN AMOUNTS
- ----------- -------------------- ------------
<S> <C> <C>
Rajiv Enand................................................. 150,000 $250,000
Mark Tapling................................................ 510,000 887,500
Mark Finkel................................................. 450,000 750,000
Lou Venezia................................................. 148,500 119,790
Susie Sedlacek.............................................. 63,750 138,750
Richard Koloski............................................. 39,330 51,076
Richard Joslin.............................................. 92,625 125,395
</TABLE>
50
<PAGE> 54
STOCK EXERCISES BY EXECUTIVE OFFICERS
The following table sets forth exercises of shares of our common stock by
our executive officers. All purchases during 2000 by officers were pursuant to
the exercise of their outstanding options.
<TABLE>
<CAPTION>
PRICE PER SHARE
STOCKHOLDER SHARE AMOUNTS ISSUANCE DATE
- ----------- --------- ------- -----------------
<S> <C> <C> <C>
Rajiv Enand.......................................... $1.67 150,000 January 19, 2000
Mark Tapling......................................... 1.67 60,000 January 31, 2000
2.29 450,000 February 29, 2000
Mark Finkel.......................................... 1.67 450,000 January 31, 2000
Lou Venezia.......................................... 0.81 148,500 January 31, 2000
Susie Sedlacek....................................... 3.40 18,750 January 31, 2000
1.67 45,000 February 29, 2000
Richard Koloski...................................... 0.81 16,380 January 31, 2000
1.67 22,500 February 29, 2000
Richard Joslin....................................... 1.06 47,625 January 31, 2000
1.67 45,000 February 29, 2000
</TABLE>
STOCK OPTION GRANTS TO EXECUTIVE OFFICERS
The following table sets forth grants of options to purchase shares of our
common stock to our executive officers in the current fiscal year.
<TABLE>
<CAPTION>
PRICE PER SHARE
STOCKHOLDER SHARE AMOUNTS ISSUANCE DATE
- ----------- --------- ------- ----------------
<S> <C> <C> <C>
Mark Tapling.......................................... $1.67 450,000 January 19, 2000
Mark Finkel........................................... 1.67 450,000 January 31, 2000
Susie Sedlacek........................................ 1.67 45,000 January 19, 2000
Richard Koloski....................................... 1.67 22,500 January 19, 2000
Richard Joslin........................................ 1.67 45,000 January 19, 2000
</TABLE>
51
<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 29, 2000, as adjusted to reflect
the sale of common stock in this offering (assuming no exercise of the
underwriters' over-allotment option) by:
- each person (or group of affiliated persons) known by us to be the
beneficial owner of more than five percent of the outstanding common
stock;
- each of the Chief Executive Officer and our other four most highly
compensated executive officers;
- each of our directors; and
- all of our directors and the Chief Executive Officer and the other four
most highly compensated executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1)(2) OFFERING(1)(2)
--------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
- ------------------------ ---------- ------- -------------------
<S> <C> <C> <C>
Norwest Equity Partners V, LLP(3)...................... 3,672,940 13.7%
Suite 105
Building 3
300 Sand Hill Road
Menlo Park, CA 94025
Kevin Hall(3)(4)....................................... 3,695,440 13.8%
c/o Norwest Equity
Partners V, LLP
Suite 105
Building 3
300 Sand Hill Road
Menlo Park, CA 94025
Jeffrey Pepper(5)...................................... 3,575,421 13.3%
c/o ServiceWare.com, Inc.
333 Allegheny Avenue
Oakmont, PA 15139
C.E. Unterberg, Towbin L.P.(6)(7)...................... 3,362,155 12.5%
10 East 50th Street
New York, NY 10022
Geocapital III, L.P(8)................................. 2,661,433 9.9%
One Bridge Plaza
Fort Lee, NJ 07024
Poly Ventures II, L.P.(9).............................. 2,398,329 8.9%
901 Route 110
Farmingdale, NY 11735
Susanne Harrison(9)(10)................................ 2,420,829 9.0%
c/o Poly Ventures II, L.P.
901 Route 110
Farmingdale, NY 11735
Rajiv Enand(11)........................................ 2,388,705 8.9%
c/o ServiceWare.com, Inc.
333 Allegheny Avenue
Oakmont, PA 15139
Bruce Molloy(6)........................................ 2,096,493 7.8%
c/o ServiceWare.com, Inc.
333 Allegheny Avenue
Oakmont, PA 15139
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1)(2) OFFERING(1)(2)
--------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT PERCENT
- ------------------------ ---------- ------- -------------------
<S> <C> <C> <C>
Lovett Miller Venture Fund II, LP(12).................. 1,149,999 4.3%
c/o Scott Miller, Managing Director
100 North Tampa Street
Suite 2675
Tampa, FL 33602
Timothy Wallace(13).................................... 63,000 *
c/o ServiceWare.com, Inc.
333 Allegheny Avenue
Oakmont, PA 15139
Mark Tapling........................................... 510,000 1.9%
Mark Finkel............................................ 450,000 1.7%
Lou Venezia............................................ 387,909 1.4%
Susie Sedlacek......................................... 63,750 *
Peggy Biddison......................................... 0 *
All directors and executive officers as a group (13
persons)............................................. 12,280,632 45.7%
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual or entity has sole or shared voting power or
investment power and also any shares which the individual or entity has a
right to acquire within 60 days of February 29, 2000 through the exercise
of any stock option, warrant or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
shareholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity.
(2) Applicable percentage of ownership is based on 26,856,869 shares of common
stock outstanding on February 29, 2000 and shares of common
stock outstanding after the completion of this offering.
(3) Includes (a) 337,500 shares of common stock currently issued, (b) 2,583,441
shares of common stock issuable upon conversion of Series C preferred stock
held by Norwest, (c) 540,000 shares of common stock issuable upon
conversion of Series D preferred stock held by Norwest, (d) 105,000 shares
of common stock issuable to Norwest upon issuance to the holders of our
Series A preferred stock and Series B preferred stock of an aggregate of
889,620 shares of common stock in payment of dividends accrued on the
Series A preferred stock and Series B preferred stock through July 29, 1997
and June 29, 1998, respectively, and (d) 107,000 shares of common stock
issuable upon the exercise of outstanding warrants.
(4) Includes 22,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days. Mr. Hall may be deemed to own
beneficially the common stock owned by Norwest because he is affiliated
with the general partner of Norwest. Mr. Hall disclaims beneficial
ownership of the common stock and other of our securities owned
beneficially by Norwest, other than his beneficial interest in such
securities through his interest in the general partner of Norwest.
(5) Includes an aggregate of 315,000 shares owned by two separate trusts of
which Mr. Pepper is co-trustee and his children are beneficiaries.
(6) Includes 4,125 options exercisable within 60 days.
(7) Includes 810,108 shares held by C.E. Unterberg, Towbin Capital Partners I,
LP; 748,946 shares held by Unterberg, Harris Private Equity Partners, L.P.;
499,020 shares held by C.E. Unterberg, Towbin
53
<PAGE> 57
L.P.; 459,999 shares held by Tamar Venture Capital Ltd.; 312,411 shares
held by Thomas Unterberg, a managing director of C.E. Unterberg, Towbin
L.P.; 191,534 shares held by Unterberg, Harris Interactive Media LP;
159,969 shares held by Unterberg, Harris Private Equity Partners, L.P.;
31,598 shares held by C.E. Unterberg, Towbin LLC; 21,006 shares held by
Robert Towbin, a managing director of C.E. Unterberg, Towbin L.P.; 6,900
shares held by Estelle Konviser, a managing director of C.E. Unterberg,
Towbin L.P.; 4,599 shares held by Andrew Blum, a managing director of C.E.
Unterberg, Towbin L.P.; and an aggregate of 116,007 shares held by one
trust, one limited partnership, one sole proprietorship and three 401(k)
profit sharing accounts, all of which have beneficiaries or trustees who
are affiliated with C.E. Unterberg, Towbin L.P. or the principals of C.E.
Unterberg, Towbin L.P.
(8) Includes (a) 71,079 shares of common stock currently issued, (b) 1,896,612
shares of common stock issuable upon conversion of Series B preferred stock
held by Geocapital, (c) 200,000 shares of common stock issuable upon
conversion of Series D preferred stock held by Geocapital, (d) 453,741
shares of common stock issuable to Geocapital in payment of dividends
accrued on the Series B preferred stock through June 29, 1998, and (e)
40,001 shares of common stock issuable upon exercise of outstanding
warrants.
(9) Includes (a) 68,181 shares of common stock currently issued, (b) 1,096,754
shares of common stock issuable upon conversion of Series A preferred stock
held by Poly Ventures, (c) 722,516 shares of common stock issuable upon
conversion of Series B preferred stock held by Poly Ventures, (d) 60,000
shares of common stock issuable upon conversion of Series D preferred stock
held by Poly Ventures, (e) an aggregate of 435,879 shares of common stock
issuable to Poly Ventures in payment of dividends accrued on Series A
preferred stock and Series B preferred stock through July 29, 1997 and June
29, 1998, respectively, and (f) 15,000 shares of common stock issuable upon
exercise of outstanding warrants.
(10) Includes 22,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days. Ms. Harrison may be deemed to own
beneficially the common stock owned by Poly Ventures because she is a
general partner of Poly Ventures. Ms. Harrison disclaims beneficial
ownership of the common stock and other of our securities owned by Poly
Ventures, other than her beneficial interest in such securities through her
partnership interest in Poly Ventures.
(11) Includes an aggregate of 178,500 shares owned by two separate trusts of
which Mr. Enand is co-trustee and his children are beneficiaries.
(12) Includes (a) 999,999 shares of common stock issuable upon conversion of
Series D preferred stock held by Lovett Miller, and (b) 150,000 shares of
common stock issuable upon exercise of outstanding warrants.
(13) Consists of shares issuable upon the exercise of options exercisable within
60 days.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue 100
million shares of common stock, no par value, and five million shares of
undesignated preferred stock, no par value. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, our Amended and Restated Certificate of Incorporation and
our Bylaws, which we have included as exhibits to the registration statement of
which this prospectus forms a part.
COMMON STOCK
As of February 29, 2000, there were 26,736,869 shares of common stock
outstanding, held of record by approximately 130 stockholders. These amounts
assume the conversion of all outstanding shares of preferred stock into common
stock, the exercise of all outstanding warrants that would otherwise expire upon
the consummation of this offering and conversion of accrued dividends on
preferred stock into common stock, which is to occur upon completion of this
offering. In addition, as of February 29, 2000, there were 3,631,242 shares of
common stock subject to outstanding options. Upon completion of this offering,
there will be shares of common stock outstanding, assuming no
additional exercise of outstanding stock options or warrants.
Each share of common stock entitles its holder to one vote on all matters
to be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock may receive ratably any
dividends that our Board of Directors may declare out of funds legally available
for that purpose. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights, or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock that we will issue upon
completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Prior to this offering, we had five series of convertible preferred stock:
Series A, Series B, Series C, Series D and Series E. As of February 29, 2000,
the number of outstanding shares of each series of our preferred stock was:
- 243,723 shares of Series A;
- 1,058,574 shares of Series B;
- 1,111,111 shares of Series C;
- 2,400,000 shares of Series D; and
- 2,647,984 shares of Series E.
Upon the closing of this offering, all outstanding shares of our Series A
preferred stock (and accrued common stock), Series B preferred stock (and
accrued common stock), Series C preferred stock (and certain anti-dilution
adjustments), Series D preferred stock and Series E preferred stock will be
converted into 1,096,754, 2,709,435, 2,583,441, 3,600,000 and 3,971,976 shares
of common stock, respectively, and these classes of preferred stock will be
canceled. Thereafter, our Board of Directors will have the authority, without
further action by the stockholders, to issue up to five million shares of
preferred stock in one or more series and to designate the rights, preferences,
privileges and restrictions of each such series. The issuance of preferred stock
could have the effect of restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the common
stock, or delaying or preventing a change of control without further action by
the stockholders. We have no present plans to issue any shares of preferred
stock after the completion of this offering.
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<PAGE> 59
WARRANTS
As of December 31, 1999, there were warrants outstanding to purchase
772,931 shares of our common stock. We expect the warrants to be exercised prior
to the consummation of this offering; however, to the extent not exercised,
warrants to purchase shares of our common stock shall expire. The
other warrants to purchase shares of our common stock expire at
various dates through December 10, 2006.
REGISTRATION RIGHTS
The holders of shares of common stock (after conversion of our
existing preferred stock) and warrants to purchase shares of our
common stock are entitled to require us to register the sales of their shares
under the Securities Act pursuant to the terms of an agreement between us and
the holders of these securities. Subject to limitations specified in this
agreement, these registration rights include the following:
- an unlimited number of piggyback registration rights that require us to
register sales of a holder's shares when we undertake a public offering
(not including this public offering), subject to the discretion of the
managing underwriter of the offering to decrease the amount that holders
may register;
- two demand registration rights that holders may exercise no sooner than
six months after this offering, which require us to register sales of a
holder's shares; and
- an unlimited number of rights to require us to register sales of shares
on Form S-3, a short form of registration statement permitted to be used
by some companies, which holders may exercise if they request
registration following such time as we qualify for the use of this form
of registration with the Securities and Exchange Commission.
We will bear all registration expenses if these registration rights are
exercised, other than underwriting discounts and commissions. These registration
rights terminate as to a holder's shares when that holder sells those shares
within two successive three-month periods without registration under the
Securities Act.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our Amended and Restated Certificate of Incorporation and Bylaws, to be
effective upon or prior to the effectiveness of our registration statement,
divide the Board of Directors into three classes as nearly equal in size as
possible, with each class serving a three-year term. The terms are staggered, so
that one-third of the Board of Directors is to be elected each year. Susanne
Harrison and Rajiv Enand are Class I directors with their terms of office
expiring in 2001, Timothy Wallace and Kevin Hall are Class II directors with
their terms expiring in 2002, and Bruce Molloy and Mark Tapling are Class III
directors with their terms of office expiring in 2003. The classification of the
Board of Directors could have the effect of making it more difficult than
otherwise for a third party to acquire control of us, because it would typically
take more than a year for a majority of the stockholders to elect a majority of
our Board of Directors. In addition, our Amended and Restated Certificate of
Incorporation and Bylaws provide that any action required or permitted to be
taken by our stockholders at an annual or special meeting may be taken only if
it is properly brought before the meeting, and may not be taken by written
action in lieu of a meeting. The Bylaws also provide that special meetings of
the stockholders may be called only by the Board of Directors, the Chairman of
the Board of Directors or the Chief Executive Officer. Under our Bylaws,
stockholders wishing to propose business to be brought before a meeting of
stockholders must comply with various advance notice requirements. Finally, our
Amended and Restated Certificate of Incorporation and Bylaws do not permit
stockholders to take any action without a meeting.
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<PAGE> 60
DELAWARE ANTI-TAKEOVER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of some Delaware corporations. In general, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:
- our Board of Directors approved the business combination or the
transaction in which the person became an interested stockholder prior to
the date the person attained this status;
- upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- at or after the date the person became an interested stockholder, our
Board of Directors approved the business combination and the stockholders
other than the interested stockholder authorized the transaction at an
annual or special meeting of stockholders.
A "business combination" generally includes a merger, asset or stock sale
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with the person's affiliates and associates, owns, or within three years prior
to the determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.
LISTING
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "SVCW".
TRANSFER AGENT AND REGISTRAR
will serve as transfer agent and registrar for the common
stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of this offering, based upon the number of shares outstanding at
February 29, 2000, there will be shares of common stock outstanding
(assuming no exercise of outstanding options or warrants that do not expire on
consummation of this offering). Of these shares, the shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 described
below.
The remaining shares of common stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
shares of common stock, which are not subject to the 180-day lock-up
agreements with the underwriters, will be eligible for immediate sale in the
public market pursuant to Rule 144(k) under the Securities Act. Approximately
additional shares of common stock, which are not subject to lock-up
agreements, will be eligible for sale in the public market in accordance with
Rule 144 or Rule 701 under the Securities Act beginning 90 days after the
effective date of the registration statement. Upon expiration of the lock-up
agreements 180 days after the date of this prospectus, approximately
additional shares of common stock will be available for sale in the public
market, subject to the provisions of Rule 144 under the Securities Act.
LOCK-UP AGREEMENTS
Officers and directors, and certain security holders, holding in the
aggregate approximately shares of common stock (including
shares of common stock that may be acquired pursuant to
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<PAGE> 61
the exercise of options held by them) on February 29, 2000, have agreed that,
for a period of 180 days after the date of this prospectus, they will not sell,
consent to sell or otherwise dispose of any shares of common stock, or any
shares convertible into or exchangeable for shares of common stock, owned
directly by such persons or with respect to which they have the power of
disposition, without the prior written consent of the underwriters. Bear,
Stearns & Co. Inc., on behalf of the underwriters, may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; and
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144, but without
compliance with certain restrictions. Rule 701 provides that affiliates may sell
their Rule 701 shares under Rule 144 90 days after effectiveness without
complying with the holding period requirement and that non-affiliates may sell
such shares in reliance on Rule 144 90 days after effectiveness without
complying with the holding period, public information, volume limitation or
notice requirements of Rule 144.
OPTIONS
We intend to file a registration statement on Form S-8 under the Securities
Act to register approximately shares of common stock issuable under
our stock incentive plan approximately 90 days after the effectiveness of the
registration statement. Shares issued upon the exercise of stock options after
the effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements noted above, if applicable.
REGISTRATION RIGHTS
The holders of shares of our common stock that will be
outstanding after this offering and the holders of warrants to purchase
shares of our common stock are entitled to require us to register the
sale of their shares under the Securities Act.
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<PAGE> 62
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the common
stock, and no prediction can be made as to the effect, if any, that market sales
of shares of our common stock or the availability of shares for sale will have
on the market price of our common stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of our common stock in the
public market could adversely affect the market price of our common stock and
could impair our future ability to raise capital through an offering of our
equity securities.
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<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement between us
and the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation, Wit SoundView Corporation and C.E.
Unterberg, Towbin, the underwriters have severally agreed to purchase from us
the following respective number of shares of common stock less the underwriting
discounts and commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
SG Cowen Securities Corporation.............................
Wit SoundView Corporation...................................
C.E. Unterberg, Towbin......................................
[other].....................................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock set forth above, other than shares of
our common stock covered by the over-allotment option described below, if they
purchase any of the shares. Those obligations are subject, however, to various
conditions, including the approval of legal matters by their counsel.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, and, where such indemnification
is unavailable, to contribute to payments that the underwriters may be required
to make in respect of such liabilities.
The underwriters propose to offer the shares of our common stock directly
to the public initially at the public offering price set forth on the cover page
of this prospectus and to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such selected dealers
may reallow, a concession not to exceed $ per share. After the commencement
of this offering, the public offering price and the concessions may be changed
by the underwriters.
We have granted to the underwriters an option to purchase in the aggregate
up to additional shares to be sold in this offering at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. The underwriters may exercise this option solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this prospectus. To the extent the option
is exercised, the underwriters will be severally committed, subject to several
conditions, including the approval of legal matters by their counsel, to
purchase the additional shares of common stock in proportion to their respective
purchase commitments as indicated in the preceding table.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The following table shows the underwriters' discounts to be paid to the
underwriters by us. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------------- ----------------------
WITHOUT WITH WITHOUT WITH
OVER- OVER- OVER- OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions payable
by us......................................... $ $ $ $
</TABLE>
C.E. Unterberg, Towbin, one of our underwriters, is an affiliate of our
company. See "Principal Stockholders." The offering, therefore, is being
conducted in accordance with the applicable provisions of Rule 2720 of the
National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720
requires that the initial public offering price of the shares of common stock
not be higher than that recommended by a
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<PAGE> 64
"qualified independent underwriter" meeting certain standards. Accordingly,
Bear, Stearns & Co. Inc. is assuming the responsibilities of acting as the
qualified independent underwriter in pricing the offering and conducting due
diligence. The initial public offering price of the shares of common stock will
be no higher than recommended by Bear, Stearns & Co. Inc.
From time to time, C.E. Unterberg, Towbin has provided financial services
to us and, in connection with our acquisition of the Molloy Group in July 1999,
to the Molloy Group as well. See "Certain Transactions." Robert C. Harris Jr., a
Senior Managing Director of Bear, Stearns & Co. Inc. is the beneficial owner of
approximately 30,000 shares of our common stock.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ . The offering of the
shares is made for delivery, when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject an order
for the purchase of our shares in whole or in part.
Wit SoundView is making available a prospectus in electronic format on its
regular Internet Web site. In addition, all dealers purchasing shares from Wit
SoundView in this offering have agreed to make a prospectus in electronic format
available on Web sites maintained by each of them. Other than the electronic
version of this prospectus, the information on Wit SoundView's Web site and any
information contained on any other Web site maintained by Wit SoundView or any
dealer purchasing shares from it is not part of this prospectus or the
registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by ServiceWare.com or any underwriter in its capacity
as underwriter and should not be relied on by prospective investors.
At our request, the underwriters have reserved for sale at the initial
public offering price up to % of the number of shares of common stock to be
sold in this offering to persons associated with us, such as associates of some
of our employees and selected employees of companies with which we are
developing or have commercial relationships. The number of shares available for
sale to the general public will be reduced to the extent any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the
underwriters on the same basis as the other shares offered hereby and will not
be subject to resale restrictions.
We and our executive officers, directors and our current shareholders, who
own in the aggregate shares of common stock, have agreed not to, directly
or indirectly, offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of, or, in any manner, transfer all or a portion of
the economic consequences associated with the ownership of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock beneficially owned during the 180-day period following the date of
this prospectus, subject to limited exceptions, without the prior written
consent of Bear, Stearns & Co. Inc.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price has been determined
through negotiations among us and the representatives of the underwriters. The
primary factors considered in determining the public offering price were:
- our financial and operating history and condition;
- market valuations of other companies engaged in activities similar to
ours;
- our prospects and prospects for the industry in which we do business in
general;
- our management;
- prevailing equity market conditions; and
- the demand for securities considered comparable to ours.
In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock during and after this offering. Specifically, the underwriters may
over-allot or otherwise create a short position in our common stock for their
own account
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<PAGE> 65
by selling more shares of common stock than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing shares of
common stock in the open market or by exercising the over-allotment option
granted to them. In addition, the underwriters may stabilize or maintain the
price of our common stock by bidding for or purchasing shares of common stock in
the open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of our common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of our common stock to the extent that it discourages resales of our
common stock. No representation is made as to the magnitude or effect of any
such stabilization or other transactions. Such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "SVCW."
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters
related to this offering will be passed upon for the underwriters by Paul,
Hastings, Janofsky & Walker LLP, New York, New York.
EXPERTS
Our consolidated financial statements at December 31, 1998 and 1999 for
each of the three years in the period ended December 31, 1999, appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) on Form S-1 with respect to
the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
the shares of common stock offered hereby, reference is made to the registration
statement, including the exhibits and schedules thereto. Statements contained in
this prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where such contract is an exhibit to
the registration statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which such reference is hereby made. You may
read and copy any document we file at the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and the Securities and Exchange Commission's Regional
Offices located at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and 7
World Trade Center, 13th Floor, New York, NY 10048.
As a result of this offering, we will become subject to information and
reporting requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the common stock
for quotation on the Nasdaq National Market, such reports, proxy and information
statements and other
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<PAGE> 66
information may also be inspected at the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Securities and Exchange Commission maintains a World Wide Web site that
contains reports (including our registration statement on Form S-1), proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
Securities and Exchange Commission's Web site is http://www.sec.gov.
In addition, an electronic version of this prospectus is available on Wit
SoundView Corporation's regular Web site (http://www.witcapital.com) and on our
Web site (http://www.serviceware.com). Other than the electronic version of this
prospectus, the information on our Web site and on Wit SoundView Corporation's
web site is not a part of this prospectus.
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<PAGE> 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SERVICEWARE.COM, INC.
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity (Capital
Deficiency)............................................ F-5
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
MOLLOY GROUP, INC.
Report of Independent Auditors............................ F-22
Balance Sheets............................................ F-23
Statement of Operations................................... F-24
Statement of Shareholders' Equity (Capital Deficiency).... F-25
Statement of Cash Flows................................... F-26
Notes to Financial Statements............................. F-27
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ServiceWare.com, Inc.
We have audited the accompanying consolidated balance sheets of
ServiceWare.com, Inc. (formerly ServiceWare, Inc.), as of December 31, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity (capital deficiency), and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ServiceWare.com, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Ernst & Young LLP
Pittsburgh, Pennsylvania
January 28, 2000
F-2
<PAGE> 69
SERVICEWARE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 890,952 $ 6,623,033
Accounts receivable, less allowance for doubtful accounts
of $312,206 in 1999 and $241,788 in 1998................ 3,246,364 3,282,745
Other current assets...................................... 483,147 456,533
----------- ------------
Total current assets........................................ 4,620,463 10,362,311
Long term assets
Purchased technology, net of amortization of $259,199..... -- 1,518,168
Property and equipment
Office furniture, equipment, and leasehold
improvements........................................... 916,346 1,162,078
Computer equipment...................................... 2,237,040 3,468,761
----------- ------------
Total property and equipment............................ 3,153,386 4,630,839
Less accumulated depreciation........................... (1,467,053) (2,635,341)
----------- ------------
Property and equipment, net............................... 1,686,333 1,995,498
Intangible assets, net of accumulated amortization of
$2,203,580.............................................. -- 12,695,588
Other long term assets.................................... 50,000 162,338
Total long term assets...................................... 1,736,333 16,371,592
----------- ------------
Total assets................................................ $ 6,356,796 $ 26,733,903
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities
Revolving line of credit.................................. $ 1,450,000 $ 1,250,000
Accounts payable.......................................... 755,939 426,883
Accrued compensation and benefits......................... 487,671 1,324,840
Deferred revenue.......................................... 4,954,928 9,086,272
Other current liabilities................................. 790,661 1,036,459
----------- ------------
Total current liabilities................................... 8,439,199 13,124,454
Long term debt, less current portion........................ 204,167 2,930,328
Other long term liabilities................................. 14,038 18,207
----------- ------------
Total liabilities........................................... 8,657,404 16,072,989
Shareholders' equity (capital deficiency)
Series A convertible preferred stock, $1 par; 243,723
shares authorized, issued and outstanding in 1999 and
1998.................................................... 501,316 348,261
Series B convertible preferred stock, $1 par; 1,058,574
shares authorized, issued and outstanding in 1999 and
1998.................................................... 1,918,666 1,978,475
Series C convertible preferred stock, $1 par; 1,111,111
shares authorized, issued and outstanding in 1999 and
1998.................................................... 1,720,779 1,720,779
Series D convertible preferred stock, $1 par; 2,400,000
shares authorized, issued and outstanding in 1999....... -- 7,952,907
Series E convertible preferred stock, $1 par; 3,000,000
shares authorized, 2,647,984 issued and outstanding in
1999.................................................... -- 9,929,944
Common stock and additional paid in capital, no par value;
25,000,000 and 13,000,000 shares authorized in 1999 and
1998; 6,388,713 and 4,629,125 shares issued and
outstanding in 1999 and 1998............................ 779,460 5,263,743
Warrants.................................................. -- 856,734
Note receivable from common shareholder................... -- (199,999)
Deficit................................................... (7,220,829) (17,189,930)
----------- ------------
Total shareholders' equity (capital deficiency)............. (2,300,608) 10,660,914
----------- ------------
Total liabilities and shareholders' equity (capital
deficiency)............................................... $ 6,356,796 $ 26,733,903
=========== ============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 70
SERVICEWARE.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES
Licenses and subscriptions....................... $ 9,249,904 $11,283,614 $ 13,311,177
Services......................................... 436,285 1,639,623 4,340,698
----------- ----------- ------------
Total revenues..................................... 9,686,189 12,923,237 17,651,875
COST OF REVENUES
Cost of licenses and subscriptions............... 126,413 371,769 981,657
Cost of services................................. 501,571 1,057,354 3,506,085
----------- ----------- ------------
Total cost of revenues............................. 627,984 1,429,123 4,487,742
GROSS MARGIN....................................... 9,058,205 11,494,114 13,164,133
OPERATING EXPENSES
Sales and marketing.............................. 4,325,681 7,198,572 11,582,553
Research and development......................... 4,400,191 5,298,241 6,848,842
General and administrative....................... 1,880,551 2,800,768 2,418,292
Intangible assets amortization................... -- -- 2,203,580
----------- ----------- ------------
Total operating expenses........................... 10,606,423 15,297,581 23,053,267
-----------
LOSS FROM OPERATIONS............................... (1,548,218) (3,803,467) (9,889,134)
OTHER INCOME (EXPENSE)
Interest expense................................. (12,408) (73,061) (221,771)
Other (net)...................................... 52,533 60,083 48,558
----------- ----------- ------------
Other (expense) income, net........................ 40,125 (12,978) (173,213)
----------- ----------- ------------
NET LOSS........................................... (1,508,093) (3,816,445) (10,062,347)
Less preferred dividend amounts.................... (59,499) (124,050) (94,586)
----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON STOCK................ $(1,567,592) $(3,940,495) $(10,156,933)
=========== =========== ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED....... $ (0.34) $ (0.85) $ (1.88)
SHARES USED IN COMPUTING PER SHARE AMOUNTS......... 4,609,051 4,621,794 5,401,652
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 71
SERVICEWARE.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
-------- -------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 243,723 $377,577 1,058,574 $1,980,000 1,111,111 $1,720,779 --
Exercise of stock options.... -- -- -- -- -- -- --
Dividends and interest on
Series A redeemable
convertible preferred
stock...................... -- 59,499 -- -- -- -- --
Accretion of Series B
redeemable convertible
preferred stock............ 405,000 -- -- --
Net loss..................... -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- ---------
Balance at December 31, 1997... 243,723 437,076 1,058,574 2,385,000 1,111,111 1,720,779 --
Exercise of stock options.... -- -- -- -- -- -- --
Dividends and interest on
redeemable convertible
preferred stock............ -- 64,240 -- 59,810 -- -- --
Adjustment to accretion of
Series B redeemable
convertible preferred
stock...................... -- -- -- (526,144) -- -- --
Net loss..................... -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- ---------
Balance at December 31, 1998... 243,723 501,316 1,058,574 1,918,666 1,111,111 1,720,779 --
Issuance of Series D
convertible preferred stock
and warrants, net of
$271,251 issuance costs.... -- -- -- -- -- -- 2,400,000
Issuance of Series E
convertible preferred
stock, common stock,
warrants and options to
acquire The Molloy Group... -- -- -- -- -- -- --
Reversal of Series A
redemption premium......... -- (187,832) -- -- -- -- --
Exercise of stock options.... -- -- -- -- -- -- --
Dividends on preferred
stock...................... -- 34,777 -- 59,809 -- -- --
Issuance of warrant -- credit
facility................... -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- --
------- -------- --------- ---------- --------- ---------- ---------
Balance at December 31, 1999... 243,723 $348,261 1,058,574 $1,978,475 1,111,111 $1,720,779 2,400,000
======= ======== ========= ========== ========= ========== =========
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------
SERIES E
AMOUNT SHARES AMOUNT
---------- --------- ----------
<S> <C> <C> <C>
Balance at January 1, 1997..... $ -- -- $ --
Exercise of stock options.... -- -- --
Dividends and interest on
Series A redeemable
convertible preferred
stock...................... -- -- --
Accretion of Series B
redeemable convertible
preferred stock............ -- -- --
Net loss..................... -- -- --
---------- --------- ----------
Balance at December 31, 1997... -- -- --
Exercise of stock options.... -- -- --
Dividends and interest on
redeemable convertible
preferred stock............ -- -- --
Adjustment to accretion of
Series B redeemable
convertible preferred
stock...................... -- -- --
Net loss..................... -- -- --
---------- --------- ----------
Balance at December 31, 1998... -- -- --
Issuance of Series D
convertible preferred stock
and warrants, net of
$271,251 issuance costs.... 7,952,907 -- --
Issuance of Series E
convertible preferred
stock, common stock,
warrants and options to
acquire The Molloy Group... -- 2,647,984 9,929,944
Reversal of Series A
redemption premium......... -- -- --
Exercise of stock options.... -- -- --
Dividends on preferred
stock...................... -- -- --
Issuance of warrant -- credit
facility................... -- -- --
Net loss..................... -- -- --
---------- --------- ----------
Balance at December 31, 1999... $7,952,907 2,647,984 $9,929,944
========== ========= ==========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 72
SERVICEWARE.COM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY) (CONTINUED)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK AND RECEIVABLE SHAREHOLDERS'
ADDITIONAL PAID IN CAPITAL FROM EQUITY
-------------------------- COMMON (CAPITAL
SHARES AMOUNT WARRANTS SHAREHOLDER DEFICIT DEFICIENCY)
----------- ------------ -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997................... 4,601,505 $ 754,577 $ -- $ -- $ (1,833,886) $ 2,999,047
Exercise of stock options.................. 11,270 6,918 -- -- -- 6,918
Dividends and interest on Series A
redeemable convertible preferred stock... -- -- -- -- (59,499) --
Accretion of Series B redeemable
convertible preferred stock.............. -- -- -- -- (405,000) --
Net loss................................... -- -- -- -- (1,508,093) (1,508,093)
--------- ---------- -------- --------- ------------ ------------
Balance at December 31, 1997................. 4,612,775 761,495 -- -- (3,806,478) 1,497,872
Exercise of stock options.................. 16,350 17,965 -- -- -- 17,965
Dividends and interest on redeemable
convertible preferred stock.............. -- -- -- -- (124,050) --
Adjustment to accretion of Series B
redeemable convertible preferred stock... -- -- -- -- 526,144 --
Net loss................................... -- -- -- -- (3,816,445) (3,816,445)
--------- ---------- -------- --------- ------------ ------------
Balance at December 31, 1998................. 4,629,125 779,460 -- -- (7,220,829) (2,300,608)
Issuance of Series D convertible preferred
stock and warrants, net of $271,251
issuance costs........................... -- -- 775,842 -- -- 8,728,749
Issuance of Series E convertible preferred
stock, common stock, warrants and options
to acquire the Molloy Group.............. 1,512,307 4,209,882 34,492 -- -- 14,174,318
Reversal of Series A redemption premium.... -- -- -- -- 187,832 --
Exercise of stock options.................. 247,281 274,401 -- (199,999) -- 74,402
Dividends on preferred stock............... -- -- -- -- (94,586) --
Issuance of warrants....................... -- -- 46,400 -- -- 46,400
Net loss................................... -- -- -- -- (10,062,347) (10,062,347)
--------- ---------- -------- --------- ------------ ------------
Balance at December 31, 1999................. 6,388,713 $5,263,743 $856,734 $(199,999) $(17,189,930) $ 10,660,914
========= ========== ======== ========= ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 73
SERVICEWARE.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $(1,508,093) $(3,816,445) $(10,062,347)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization.................... 441,793 794,626 3,701,033
Changes in operating assets and liabilities, net
of effects from purchase of Molloy Group:
Accounts receivable........................... (1,814,246) (162,003) 782,765
Other current assets.......................... (197,482) (158,367) 105,565
Accounts payable.............................. 2,437 426,305 (1,022,089)
Accrued compensation and benefits............. 365,769 120,576 495,095
Other liabilities............................. 234,983 229,657 (233,010)
Deferred revenue.............................. 2,794,623 1,121,223 3,098,524
----------- ----------- ------------
Net cash provided by (used in) operating
activities....................................... 319,784 (1,444,428) (3,134,464)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment acquisitions................ (395,107) (1,136,400) (1,080,927)
Payments for purchase of Molloy Group, net of cash
acquired......................................... -- -- (346,016)
Payment for rights to the "ServiceWare" name....... -- -- (75,000)
----------- ----------- ------------
Net cash used in investing activities.............. (395,107) (1,136,400) (1,501,943)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of principal of capital lease
obligation....................................... (108,580) (217,516) (243,535)
Repayments of principal of term loan............... -- (54,035) (686,688)
Repayments of principal of line of credit.......... -- (29,166) (1,800,000)
Repayments of principal of equipment line.......... -- -- (205,556)
Repayments of principal of bridge loans............ -- -- (1,800,000)
Proceeds from borrowings under revolving line of
credit........................................... -- 1,450,000 4,100,000
Proceeds from borrowings under equipment line...... -- 350,000 401,116
Proceeds from bridge loans......................... -- 1,800,000
Proceeds from stock option issuances............... 6,918 17,965 74,402
Net proceeds from Series D Preferred stock
issuance......................................... -- -- 8,728,749
----------- ----------- ------------
Net cash provided by (used in) financing
activities....................................... (101,662) 1,517,248 10,368,488
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents... (176,985) (1,063,580) 5,732,081
Cash and cash equivalents at beginning of year..... 2,131,517 1,954,532 890,952
----------- ----------- ------------
Cash and cash equivalents at end of year........... $ 1,954,532 $ 890,952 $ 6,623,033
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest......................................... $ 12,408 $ 73,061 $ 232,967
=========== =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE> 74
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION OF THE COMPANY
ServiceWare.com, Inc. (the "Company") is a leading provider of software and
content solutions that businesses use to provide an Internet-based e-service
platform to their customers, partners, suppliers and employees.
The Company's eService Suite includes software and content products which
enable its customers to develop and manage a knowledge base of service-related
information. Its solutions also permit the dissemination of knowledge through
multiple communication channels, such as telephone, e-mail, chat and Web-based
self-service. Additionally, its Internet-based knowledge portal,
RightAnswers.com(TM), enables customers to access a continuously updated
knowledge base of content obtained from leading technology companies as well as
the Company's internally produced knowledge content. The Company also offers
integration, training, consulting and maintenance services that enable its
customers to realize the benefits of its eService Suite.
The Company's products (the "Products") include:
eService Architect. The eService Architect provides a robust set of
knowledge tools that allows customers' subject matter experts and system
administrators to administer, design, manage and maintain knowledge bases.
eService Professional. The eService Professional provides a Web-based
application interface for use by customer service professionals to more
easily navigate through the knowledge base, view various components of the
knowledge base as well as capture and revise additional knowledge.
eService Site. The eService Site allows customers to provide Web-based
self-service to their end-users.
RightAnswers.com. RightAnswers.com is an Internet-based knowledge portal
that enables customers to access a continuously updated database of
problem-solution pairs in a cost effective and timely manner.
RightAnswers.com is also sold in a CD-ROM version, previously marketed as
Knowledge-Pak Desktop Suite(R).
2. 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.
REVENUE RECOGNITION
The Company's revenue recognition policy is governed by Statement of
Position (SOP) 97-2, Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants (AICPA), as amended by SOP 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2. The Company derives
its revenues from licenses and subscriptions for its Products sold directly to
end-users and indirectly through distributors as well as from the provision of
related services, including installation and training, consulting, customer
support and maintenance contracts
F-8
<PAGE> 75
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are recognized only if persuasive evidence of an agreement exists,
delivery has occurred, all significant vendor obligations are satisfied, the fee
is fixed or determinable, and collection of the amount due from the customer is
deemed probable. If extended payment terms or acceptance criteria are in the
contract, revenue recognition is deferred until payment is within normal
payments terms or acceptance has occurred. If a transaction includes multiple
elements, the value given to each element is based on the value of that element
if sold separately. Additional revenue recognition criteria by revenue type are
listed below.
Licenses and subscriptions revenues
Licenses and subscriptions revenues include fees for perpetual licenses and
periodic subscription licenses. We recognize revenues on license fees after a
non-cancelable license agreement has been signed, the product has been
delivered, the fee is fixed, determinable and collectable, and there is
vendor-specific objective evidence to support the allocation of the total fee to
elements of a multiple-element arrangement. We recognize revenues on periodic
subscription licenses over the subscription term. Product returns and sales
allowances (which have not been significant through December 31, 1999) are
estimated and provided for at the time of sale.
Due to the significant delay in receiving sales reports from distributors,
the Company recognizes licenses revenues from distributors when the sales
reports are received because at the time of delivery the fees are not fixed or
determinable and collection is not probable. Accordingly, Annual Subscription
Agreement (ASA) sales included in these reports are recognized on a
straight-line basis over the remaining term of the contract beginning in the
period that the report is received. If certain multi-element arrangements are
not able to be allocated the entire arrangement is deferred and revenue is
recognized over the period of the last undelivered element.
Subscriptions revenues are derived from the sale of ASAs for content, which
provides mainly product updates. ASA revenues are recognized on a straight-line
basis over the term of the contract. Payments for ASAs are normally made in
advance and are nonrefundable.
Services revenues
Services revenues are derived from variable fees for installation,
training, consulting and building customized knowledge bases as well as from
fixed fees for customer support and maintenance contracts.
Maintenance and support revenues are derived from the sale of software
support contracts, which provide end-users with the right to product
enhancements, updates, and customer support. Maintenance revenues are recognized
on a straight-line basis over the term of the contract. Payments for maintenance
fees are normally made in advance and are nonrefundable.
Revenues for installation and training, system integration projects,
consulting and building customized knowledge bases services are recognized as
the services are performed.
Cost of revenues
Cost of licenses and subscriptions revenues consists primarily of the
expenses related to royalties, the cost of media on which a product is
delivered, product fulfillment costs, amortization of purchased technology and
salaries, benefits, direct expenses and allocated overhead costs related to
product fulfillment and the costs associated with maintaining our Web site.
F-9
<PAGE> 76
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cost of services revenues consists of direct and indirect costs related to
service revenues which primarily include salaries, benefits, direct expenses and
allocated overhead costs related to the customer support and services personnel,
fees for subcontractors and the cost associated with maintaining our customer
support site.
Deferred revenues relate to product licenses, ASAs, maintenance services,
professional services, and unearned inventory sale revenue from distributors,
all of which generally have been paid for in advance.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and interest-bearing money market
deposits with financial institutions having original maturities of ninety days
or less. Cash equivalents are stated at cost, which approximates market value.
The amounts held by major financial institutions may exceed the amount of
insurance provided on such deposits. These deposits may generally be redeemed
upon demand and, therefore, subject the Company to minimal risk.
OTHER CURRENT ASSETS
Other current assets consists primarily of deposits and prepayments for
expenses to be realized within the next year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
(generally two to five years). Leasehold improvements are amortized over the
lesser of their useful lives or the remaining term of the lease. Amortization of
assets recorded under capital leases is included in depreciation expense.
Capital leases are amortized over the term of the lease. Upon disposal, assets
and related accumulated depreciation are removed from the Company's accounts,
and the resulting gains or losses are reflected in the statement of operations.
INTANGIBLE ASSETS
Intangible assets resulted primarily from the acquisition of Molloy Group
(Note 3) and consist of the following identifiable assets:
<TABLE>
<CAPTION>
AMORTIZATION
DESCRIPTION AMOUNT PERIOD
- ----------- ------------ ------------
<S> <C> <C>
Assembled workforce......................................... $ 1,041,900 2 years
Customer list............................................... 1,043,543 4 years
Noncompetition agreement.................................... 345,174 3 years
Goodwill.................................................... 12,393,551 3 years
------------
Total intangible assets resulting from the Molloy
acquisition............................................... 14,824,168
Payment for rights to the "ServiceWare" name................ 75,000 3 years
------------
Total intangible assets..................................... 14,899,168
Less accumulated amortization............................... (2,203,580)
------------
Intangible assets, net...................................... $ 12,695,588
============
</TABLE>
Intangible assets are recorded at cost, net of accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful lives of the related assets (two to four years).
F-10
<PAGE> 77
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On an ongoing basis, when there are indicators of impairment such as
recurring losses, the Company evaluates the carrying value of intangibles
resulting from business acquisitions. If such indicators are apparent, the
Company compares the carrying value of the intangibles to the estimated future
undiscounted cash flows expected to be generated from the businesses acquired
over the remaining life of the intangible. If the undiscounted cash flows are
less than the carrying value of the intangibles, the cash flows will be
discounted to present value and the intangibles will be reduced to this amount.
There was no impairment for the year ended December 31, 1999.
CONCENTRATION OF CREDIT RISK/MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells its products to enterprises directly and through third-party
distributors (Distributors), and the Company's customer base is dispersed across
many different geographic areas throughout North America, parts of Europe, the
South Pacific / Australia, and Japan. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally no collateral,
such as letters of credit and bank guarantees, is required. The Company
maintains adequate reserves for potential credit losses and such losses have
been minimal and within management's estimates.
One direct sales customer accounted for 15% of total revenues in 1997 and
24% of total accounts receivable at December 31, 1997.
The Company recognized approximately $5,096,000, $6,253,000, and
$7,771,000, in product revenues related to Distributor sales in 1997, 1998, and
1999, respectively. In any given year, the revenue from a single Distributor may
be material to total revenue and/or total accounts receivable. For the years
ended December 31, 1997, 1998 and 1999, a single Distributor, two distributors
and a different single distributor accounted for approximately 12%, 15% and 17%
of total revenues and 13%, 14% and 0% of total accounts receivable,
respectively.
PRODUCT CONCENTRATION
The Company currently derives the majority of its revenue from the
licensing of its Products and related services. These products and services are
expected to account for the majority of the Company's revenue for the
foreseeable future. Consequently, a reduction in demand for these products or a
decline in sales of these products, would adversely affect operating results.
RESEARCH AND DEVELOPMENT
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers provided recoverability is reasonably assured. The Company follows the
"working model" approach, whereby technological feasibility is established at
the time the Company has a beta customer. The Company releases updated products
periodically soon after technological feasibility has been established for new
enhancements. For 1997, 1998, and 1999, costs which were eligible for
capitalization were insignificant and, thus, the Company has charged its
software development costs to research and development expense in the
accompanying statements of operations with the exception of the technology
acquired from Molloy (see Note 3). The value of the purchased technology was
capitalized and is being amortized on a straight line basis over 3 years.
F-11
<PAGE> 78
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
Advertising and sales promotions are charged to expense during the period
in which they are incurred. Total advertising and sales promotions expense for
the years ended December 31, 1997, 1998, and 1999 were approximately $562,000,
$675,000, and $1,039,000, respectively.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 permits the Company to continue
accounting for stock-based compensation as set forth in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion
No. 25), provided the Company discloses the pro forma effect on net income and
earnings per share of adopting the full provisions of SFAS No. 123. Accordingly,
the Company continues to account for stock-based compensation under APB Opinion
No. 25 and has provided the required pro forma disclosures (see Note 7).
STATEMENT OF CASH FLOWS
Noncash transactions for the years ended December 31, 1997, 1998, and 1999
include capital lease additions of approximately $395,000, $65,000 and $182,000,
respectively.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the balance sheet dates and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
NET LOSS PER SHARE
In accordance with SFAS No. 128, basic and dilutive net loss per share have
been computed using the weighted-average number of shares of common stock
outstanding during the period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. The adoption
of this pronouncement for fiscal year 2000 is not expected to materially affect
the Company's revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the adoption of SFAS No. 133 is not expected to have a
significant impact on its financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133, as amended, for
the year ending December 31, 2001.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. Management believes the Company's revenue recognition
practices are in conformity with SAB No. 101.
F-12
<PAGE> 79
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION
On July 23, 1999, the Company acquired the outstanding preferred stock,
common stock, and warrants and stock options to purchase common stock of Molloy
Group, Inc. (Molloy), a leading provider of knowledge-empowered software for
strengthening customer relationships. The acquisition was effected by issuing
2,647,984 shares of Series E Preferred Stock, 1,512,307 shares of common stock,
and 40,473 warrants and 393,950 options to purchase common stock. The
consideration was valued at approximately $14.2 million plus $445,000 in
transaction costs. This transaction was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16, Business
Combinations. The consideration in excess of the fair value of assets acquired
and liabilities assumed in the merger of $16.6 million is classified as
purchased technology and intangible assets and is being amortized over two to
four years.
The estimated fair value of the assets acquired and liabilities assumed of
Molloy are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- -----------
<S> <C>
Current assets.......................................... $ 903,184
Property and equipment.................................. 475,663
Purchased technology.................................... 1,777,367
Intangibles............................................. 14,824,168
Other long term assets.................................. 80,298
Current liabilities..................................... 3,468,996
Other long term liabilities............................. 51,905
</TABLE>
The following unaudited pro forma statements of operations give effect to
the Molloy acquisition as if the acquisition occurred on January 1, 1998. Basic
and diluted net loss per share has been calculated utilizing the basic and
diluted weighted average of ServiceWare, Inc. shares outstanding during the
years adjusted for 1,512,307 shares of common stock issued July 23, 1999 for the
Molloy acquisition assuming these shares were outstanding as of the beginning of
the years presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999
PRO FORMA PRO FORMA
-------------- --------------
<S> <C> <C>
Revenue................................................. $ 16,093,986 $ 20,305,946
Net loss................................................ $(13,507,433) $(14,337,826)
------------ ------------
Net loss applicable to common stock..................... $(13,631,483) $(14,432,412)
============ ============
Basic and diluted net loss per share.................... $ (2.22) $ (2.31)
Shares used in computing per share amounts.............. 6,134,101 6,246,863
</TABLE>
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not reflect
anticipated cost savings and do not necessarily represent results which would
have occurred if the Molloy acquisition had taken place at the date and on the
basis assumed above.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments consisting
principally of cash and cash equivalents, accounts receivable and payable, debt,
and note receivable from common shareholder approximate their fair values at
December 31, 1998 and 1999.
F-13
<PAGE> 80
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE
--------
<S> <C>
Balance, December 31, 1996................................ $ 19,457
Net charge to expense..................................... 79,106
Amounts written off....................................... --
--------
Balance, December 31, 1997................................ 98,563
Net charge to expense..................................... 150,875
Amounts written off....................................... (7,650)
--------
Balance, December 31, 1998................................ 241,788
Net charge to expense..................................... 90,420
Amounts written off....................................... (20,002)
--------
Balance, December 31, 1999................................ $312,206
========
</TABLE>
6. DEBT
In December 1999, the Company entered into a new credit facility with a
bank. This facility consists of three notes, a revolving loan facility, a
convertible equipment loan, and a term loan. The outstanding balances from the
previous revolving credit facility discussed below were transferred to the new
notes.
The amount available under the revolving credit note is $7,500,000 less
principal outstanding on the term loan and matures on December 10, 2001. Any
amounts drawn under the facility bear interest at the Base Rate plus 0.50%.
"Base Rate" is defined as the lesser of the bank's prime rate or the Federal
Fund's Effective Rate plus 2%. The availability of credit is based on a
percentage of eligible accounts receivable. At December 31, 1999, $1,520,658 was
available for use and $1,250,000 was outstanding on the revolving credit note.
The amount available under the convertible equipment note was $750,000 on
December 31, 1999. On June 8, 2000, outstanding amounts under this line will be
converted to single term loan which matures on June 1, 2003. Any amounts drawn
under the facility bear interest at the Base Rate plus 0.75%. The availability
of advances on this line is based on a percentage of invoice amounts for
equipment acquisitions. At December 31, 1999, nothing had been drawn and
$516,394 was outstanding on the new equipment line from the previous equipment
line (see discussion below). Of this amount, $86,066 is classified as other
current liabilities and $430,328 is classified as long term debt. Principal
repayments of this loan will be made upon conversion of the loan in 36 equal
installments beginning July 1, 2000.
The term loan is $2,500,000 and is due in two equal installments on June
10, 2001 and December 10, 2001. Any amounts drawn under the facility bear
interest at the Base Rate plus 2.25%. The total proceeds of the loan were
available on December 10, 1999. At December 31, 1999, $2,500,000 was outstanding
on the term loan.
In September 1998, the Company amended and restated its revolving credit
facility with a bank. This facility consisted of two lines, a revolving credit
line and an equipment line.
The revolving credit line was $3,000,000 and matured in September 1999. Any
amounts drawn under the facility bore interest at the Base Rate plus 0.75%.
"Base Rate" is defined as the greater of the bank's prime rate or the Federal
Funds rate plus 2%. The availability of credit was based on a percentage of
eligible accounts receivable. At December 31, 1998, $1,303,559 was available for
use and $1,450,000 was outstanding on the revolving credit line.
F-14
<PAGE> 81
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The equipment line was $750,000 and matures in September 2001. Any amounts
drawn under the facility bore interest at the Base Rate plus 1.0%. The
availability of advances on this line were based on a percentage of invoice
amounts for equipment acquisitions. At December 31, 1998, $350,000 had been
drawn and $320,833 was outstanding on the equipment line.
The Base Rate is variable and was 8.50% and 7.75% at December 31, 1999 and
1998, respectively.
The December 1999 revolving credit agreement contains covenants that
require the Company to, among other things, maintain a minimum tangible net
worth and provide certain financial reports to the bank. In addition, the
agreement restricts the Company's ability to pay cash dividends without the
bank's consent. The Company's accounts receivable, inventory, equipment, and
cash are pledged as collateral.
In conjunction with the new credit facility the Company issued 80,000
warrants to buy common stock. Additionally, the Company issued 6,814 and 28,000
warrants in connection with bridge loans in the amount of $750,000 and
$1,050,000 to its bank and Series A, B and C Shareholders, respectively. The
bridge loans were repaid with the proceeds from the Sale of Series D Convertible
preferred stock. Using the Black-Scholes pricing model described in note 8 the
value of warrants was $46,400.
Aggregate maturities of debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000..................................................... $ 86,066
2001..................................................... 2,672,131
2002..................................................... 172,131
2003..................................................... 86,066
----------
3,016,394
Less current portion..................................... 86,066
----------
Long term debt, less current portion..................... $2,930,328
==========
</TABLE>
7. SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
The Company has two classes of capital stock consisting of Common Stock and
Preferred Stock. There are five series of Preferred Stock as discussed below.
SERIES A CONVERTIBLE PREFERRED STOCK
On July 25, 1994, the Company sold 243,723 shares of Series A Preferred
Stock for approximately $250,000. The proceeds from this sale were used for
working capital, marketing, closing expenses, and existing liabilities. The
holders of Series A are entitled to receive dividends of $.082 per share from
July 29, 1994 through June 30, 1999, payable when and if declared by the Board
of Directors. The accrued dividends may be paid (at the option of the holder) in
cash or shares of Common Stock for dividends accruing for the first three years
and cash thereafter through June 30, 1999. The holders of Series A are also
entitled to dividends paid on the Common Stock as if the Series A was converted
into the Common Stock. Each share of Series A is currently convertible into
three shares of Common Stock, to be adjusted proportionally for future stock
splits, stock dividends, etc.
Prior to July 23, 1999, Series A had redemption privileges such that on
July 29, 1999 and thereafter, any holder of Series A representing at least 50%
of all of the shares of Series A outstanding or any holder with the consent of
the majority Series A holders, could require the Company to redeem the remaining
Series A at the redemption price plus a redemption premium, if applicable. The
redemption price was equal to the original issuance, plus any accrued dividends
unpaid, plus a redemption premium equal to
F-15
<PAGE> 82
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest on the original conversion price compounded at 12% per annum from July
25, 1994. The Company has accounted for the cumulative annual dividends and
redemption premium through periodic accretion to Series A through June 30, 1999.
On July 23, 1999, the redemption privileges were revoked and the dividend
accrual was limited through June 30, 1999. At December 31, 1999, the Company has
recorded the value of Series A to be the original issuance plus the accrued
dividends. No dividends have been declared or paid as of December 31, 1999.
SERIES B CONVERTIBLE PREFERRED STOCK
On June 29, 1995, the Company sold 1,058,574 shares of Series B Preferred
Stock for approximately $1.5 million. The proceeds from this sale were used for
working capital purposes and to repurchase 180,000 shares of Common Stock for
$1.417 per share. The holders of Series B are entitled to receive dividends of
$.113 per share from June 29, 1995 through June 30, 1999, payable when and if
declared by the Board of Directors. Such dividends accrued, whether or not
earned or declared, and are cumulative and payable upon liquidation, business
combination, or redemption or conversion of the Series B into Common Stock. The
accrued dividends can be paid (at the option of the holder) in cash or shares of
Common Stock for dividends accruing for the first three years and cash
thereafter through June 30, 1999. The holders of Series B are also entitled to
dividends declared on the Common Stock as if the Series B was converted into the
Common Stock. Each share of Series B is currently convertible into approximately
1.706 shares of Common Stock, to be adjusted proportionally for future stock
splits, stock dividends, etc.
Prior to July 23, 1999, Series B had redemption privileges such that on
June 29, 2002, 2003 and 2004, any holder of Series B representing at least a
majority of all of the shares of Series B outstanding could require the Company
to redeem one-third, one-half of the remaining Series B shares and all of the
Series B shares, respectively, outstanding on the applicable redemption date at
the redemption price. The redemption price was equal to the greater of the
original issuance, plus any accrued dividends unpaid or the fair market value of
the Series B shares as determined at that date. The Company has accreted Series
B in accordance with these terms through June 30, 1999. On July 23, 1999, the
redemption privileges were revoked and the dividend accrual was limited through
June 30, 1999. At December 31, 1999, the Company has recorded the value of
Series B to be the original issuance plus the accrued dividends. No dividends
have been declared or paid as of December 31, 1999.
SERIES C CONVERTIBLE PREFERRED STOCK
On April 24, 1996, the Company sold 500,051 shares of Series C Preferred
Stock and the contingent right to receive 320,095 shares of Common Stock
(subsequently issued) for $2.5 million less $18,116 for transaction costs. The
proceeds from this sale were used for general working capital purposes. Each
share of Series C is currently convertible into 1.550 shares of Common Stock, to
be adjusted proportionally for future stock splits, stock dividends, etc.
In connection with the sale of Series C shares to Norwest Equity Partners V
(Norwest) on April 24, 1996, the Company's common shareholders approved the
reclassification of 611,060 shares of Common Stock sold by certain shareholders
to Norwest into Series C.
There are no dividends or interest provisions related to Series C, however,
the terms of the Series C Preferred Stock include antidilution provisions with
respect to stock dividends that have accrued to the Series A and Series B
shareholders.
SERIES D CONVERTIBLE PREFERRED STOCK
On July 23, 1999, the Company sold 2,400,000 shares of Series D Preferred
Stock and the contingent right to exercise 360,000 warrants to buy common stock
for $9 million less $271,251 for transaction costs.
F-16
<PAGE> 83
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of the warrants are $2.50, and they are exercisable if
certain performance targets are not met. The proceeds from this sale were used
for general working capital purposes. Each share of Series D is currently
convertible into one share of Common Stock, to be adjusted proportionally for
future stock splits, stock dividends, etc.
The estimated fair value of the warrants granted of $775,842 was recorded
on December 31, 1999, the date when the performance criteria were deemed
satisfied (see Note 8).
There are no dividends or interest provisions related to Series D.
SERIES E CONVERTIBLE PREFERRED STOCK
On July 23, 1999, the Company issued 2,647,984 shares of Series E Preferred
Stock in connection with the acquisition of The Molloy Group (see Note 3). Each
share of Series E is currently convertible into one share of Common Stock, to be
adjusted proportionally for future stock splits, stock dividends, etc.
There are no dividends or interest provisions related to Series E.
Conversion, Voting, Liquidation Preference and Other Rights of Preferred Stock
Holders
The Preferred Stock may be converted to Common Stock at any time by the
holder and will be mandatorily converted to Common Stock upon the closing of the
Company's initial public offering of shares of Common Stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
subject to a minimum per share price and gross proceeds. Each Preferred Stock
holder has the right to vote as if their shares of Preferred Stock had been
converted to Common Stock at the then current conversion rate.
The terms of the Preferred Stock provide for preferences upon liquidation
and other rights. In general, the Preferred Stock holders have a preference at
liquidation equal to the issuance price, plus any accrued, unpaid dividends
whether or not declared for Series A and Series B. The remaining assets, if any,
would be distributed ratably to the Common Stock holders. The holders of
Preferred Stock are also parties to various agreements with the Company which
contain, among other provisions, preemptive rights, the exclusive selection of
one director to the Board of Directors, and other rights.
COMMON STOCK
The Company has reserved the following number of shares of Common Stock:
<TABLE>
<CAPTION>
SHARES PURPOSE OF ISSUANCE
- ---------- -------------------
<C> <S>
731,169 Upon conversion of Series A
1,806,290 Upon conversion of Series B
1,722,294 Upon conversion of Series C
2,400,000 Upon conversion of Series D
2,647,984 Upon conversion of Series E
3,659,599 Upon exercise of stock options
515,288 Upon exercise of warrants
- ----------
13,482,624 Total
==========
</TABLE>
STOCK OPTION PLAN
Effective January 1996, the Company's Board of Directors approved the
ServiceWare, Inc. Amended and Restated Stock Option Plan (the Plan) which
amended and restated the ServiceWare, Inc. 1994
F-17
<PAGE> 84
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option/Stock Issuance Plan. The Plan is administered by the Board of
Directors and provides for awards of stock options to employees, officers,
directors, consultants and advisors. A total of 4,000,000 shares of the
Company's Common Stock may be issued pursuant to the Plan. The exercise price of
incentive stock options is equal to the estimated fair market value of the
Company's Common Stock at the date of the grant as determined by management and
the Board of Directors for the years ended December 31, 1997, 1998 and 1999. The
exercise price of nonqualified options is also determined by the Board of
Directors. Options generally vest over a three to four year period in equal
annual amounts, or over such other period as the Board of Directors determines,
and may be accelerated in the event of certain transactions such as merger or
sale of the Company. These options expire within ten years after the date of
grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its plans. 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 Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased by approximately
$72,000, $154,000 and $398,000 or $0.02, $0.04 and $0.01 per share in 1997, 1998
and 1999, respectively. The average fair value of the options granted is
estimated as $0.42 during 1997, $0.57 during 1998, and $0.61 during 1999 on the
date of grant using the Black-Scholes pricing model with the following
assumptions: volatility 0.6, dividend yield 0.0%, assumed forfeiture rate of
4.2% for 1999 and 3.5% for 1998 and 1997, an expected life of 3 years, and
average risk-free interest rates of 6.13%, 4.60%, and 5.40% for 1997, 1998 and
1999, respectively.
The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net income for future
years. SFAS 123 does not apply to awards prior to 1995 and additional awards in
future years are anticipated.
The following table summarizes option activity for the years ended December
31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE WEIGHTED AVERAGE
OUTSTANDING RANGE PER SHARE EXERCISE PRICE
----------- ----------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1996.................... 1,208,975 $0.0110 - $2.3000 $1.3459
Options granted............................... 268,600 $2.3000 - $3.6000 $2.4684
Options exercised............................. 11,270 $0.3330 - $2.3000 $0.7154
Options forfeited............................. 90,205 $0.3330 - $2.3000 $1.6826
---------
Balance, December 31, 1997.................... 1,376,100 $0.0110 - $3.6000 $1.5247
Options granted............................... 742,700 $3.6000 - $5.1000 $4.5595
Options exercised............................. 16,350 $0.3330 - $2.3000 $1.0999
Options forfeited............................. 411,044 $0.9400 - $5.1000 $2.3512
---------
Balance, December 31, 1998.................... 1,691,406 $0.0110 - $5.1000 $2.6605
Options granted............................... 1,979,120 $1.0000 - $5.1000 $1.6029
Options exercised............................. 247,281 $0.0110 - $5.1000 $1.1100
Options forfeited............................. 775,835 $0.1670 - $5.1000 $2.6215
---------
Balance, December 31, 1999.................... 2,647,410 $0.0560 - $5.1000 $1.8858
=========
</TABLE>
F-18
<PAGE> 85
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options outstanding as of December 31, 1999 have been segregated into
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------------------
OPTIONS WEIGHTED AVERAGE
RANGE OF OUTSTANDING AS OF REMAINING WEIGHTED AVERAGE EXERCISABLE AS OF WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- ----------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.000 - $0.5100 196,500 4.9 $0.3125 196,500 $0.3125
$0.5101 - $1.0200 850,100 9.0 $0.9930 75,937 $0.9269
$1.0201 - $1.5300 383,460 8.7 $1.2100 249,909 $1.2100
$2.0401 - $2.5500 890,000 9.2 $2.4644 141,525 $2.3707
$3.5701 - $4.0800 160,000 8.1 $3.6000 40,600 $3.6000
$4.5901 - $5.1000 167,350 8.5 $5.1000 44,650 $5.1000
--------- --- ------- ------- -------
2,647,410 8.6 $1.8858 749,121 $1.5266
========= === ======= ======= =======
</TABLE>
8. WARRANTS
The following table summarizes warrant activity for the year ended December
31, 1999:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
OUTSTANDING RANGE PER SHARE
----------- ---------------
<S> <C> <C>
Balance, December 31, 1998............................... --
Warrants granted......................................... 515,288 $1.50 - $9.00
Warrants exercised....................................... --
Warrants forfeited....................................... --
-------
Balance, December 31, 1999............................... 515,288 $1.50 - $9.00
=======
</TABLE>
The valuation of warrants was calculated using the Black-Scholes pricing
model with the following assumptions: volatility of 0.6, dividend yield 0.0%,
assumed forfeiture rate of 0.0%, an expected life of 2 years, and an average
risk-free interest rate of 5.40%. The holders of the warrants have the right to
exercise at anytime until the expiration of the warrant which is 3 to 6 years
from the date of grant.
9. NOTE RECEIVABLE FROM COMMON SHAREHOLDER
On January 24, 1999, a former employee exercised options to purchase 86,956
shares of common stock at a purchase price of $2.30 per share. A promissory note
in the amount of $199,999 was issued in conjunction with the sale. The note
bears interest at the applicable federal rate defined in the Internal Revenue
Code of 1986, as amended and is due January 2001.
10. OPERATING LEASES
The Company has several operating leases covering office space and certain
equipment. Future minimum lease payments due under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000..................................................... $1,291,750
2001..................................................... 1,355,806
2002..................................................... 733,471
2003..................................................... 151,018
----------
$3,532,045
==========
</TABLE>
F-19
<PAGE> 86
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense under all operating leases amounted to approximately
$442,674, $585,891, and $975,796 in 1997, 1998 and 1999, respectively.
11. INCOME TAXES
A reconciliation of the benefit for income taxes on operations computed by
applying the federal statutory rate of 34% to the loss from operations before
income taxes and the reported benefit for income taxes on operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit computed at statutory federal
income tax rate.................................... $(512,752) $(1,297,591) $(3,402,661)
State income taxes, net of federal tax benefit, if
any................................................ (99,534) (251,885) (660,517)
Other (principally goodwill and meals and
entertainment)..................................... 14,908 57,139 794,208
Federal deferred tax asset valuation allowance
Adjustment......................................... 597,378 1,492,337 3,268,970
--------- ----------- -----------
Total benefit for income taxes....................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets (liabilities)
Accounts receivable................................ $ 39,000 $ 97,000 $ 125,000
Property and equipment............................. (43,000) (8,000) 16,000
Intangible assets.................................. -- -- (1,423,000)
Deferred revenue................................... 370,000 17,000 --
Loss carryforward.................................. 517,000 2,270,000 8,280,000
--------- ----------- -----------
Total net deferred tax assets........................ 883,000 2,376,000 6,998,000
Valuation allowance.................................. (883,000) (2,376,000) (6,998,000)
--------- ----------- -----------
Net deferred tax asset............................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
Management has recorded a valuation allowance against the deferred tax
assets until such time that the Company demonstrates an ability to consistently
produce taxable income.
The federal net operating loss carryforward completely expires for losses
originating prior to the year ended December 31, 1999 by the year ended 2013.
Federal net operating loss carryforward originating in the year ended December
31, 1999 expires by the year ending 2019. The state net operating loss
carryforward for losses originating prior to the year ended December 31, 1999
expires by the years ending 2000 and 2001. The state net operating loss
carryforward originating in the year ended December 31, 1999 expires by the year
ending 2009.
F-20
<PAGE> 87
SERVICEWARE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. NET LOSS PER SHARE
Basic and diluted net loss per share has been computed as described above.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Numerator:
Net loss......................................... $(1,508,093) $(3,816,445) $(10,062,347)
Series A and Series B dividends.................. (59,499) (124,050) (94,586)
----------- ----------- ------------
Numerator for basic and diluted net loss per
share -- income available to common
stockholders.................................. $(1,567,592) $(3,940,495) $(10,156,933)
Denominator:
Denominator for basic and diluted earnings per
share -- weighted average shares.............. 4,609,051 4,621,794 5,401,652
=========== =========== ============
Basic and diluted net loss per share............... $ (0.34) $ (0.85) $ (1.88)
=========== =========== ============
</TABLE>
Dilutive securities include options, warrants, and preferred stock as if
converted. Potentially dilutive securities totaling 5,635,853, 5,951,159 and
12,470,435 for the years ended December 31, 1997, 1998 and 1999, respectively,
were excluded from historical basic and diluted loss per share because of their
antidilutive effect.
13. RETIREMENT PLAN
The Company has a 401(k) profit sharing plan (the "Plan") covering all of
its employees subject to certain age and service requirements. Under provisions
of the Plan, participants may contribute up to 15% of their eligible
compensation to the Plan. The Company did not contribute to the Plan in 1997,
1998, or 1999.
14. SUBSEQUENT EVENT (UNAUDITED)
From January 1, 2000 to March 15, 2000, the Company granted 892,440 stock
option to employees, which vest over four years. The Company will record
approximately $2.5 million as deferred compensation for these grants during the
quarter ended March 31, 2000. Additionally, the Company changed the vesting
period for 100,000 stock options originally granted in October 1999 to the
Chairman of the Board of the Company to vest immediately. The Company will
record approximately $300,000 of stock-based compensation during the quarter
ended March 31, 2000 due to the modification of this award.
On March 24, 2000, the Company changed its name from ServiceWare, Inc. to
ServiceWare.com, Inc.
F-21
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Molloy Group, Inc.
We have audited the accompanying balance sheets of Molloy Group, Inc. as of
September 30, 1997 and 1998, and the related statements of operations, changes
in stockholders' equity (capital deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Molloy Group, Inc. as of
September 30, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
Pittsburgh, Pennsylvania
March 30, 2000
F-22
<PAGE> 89
MOLLOY GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 169,249 $ 61,204
Accounts receivable, net of allowance for doubtful
accounts of $23,625 and $9,721......................... 2,002,770 594,898
Prepaid expenses.......................................... 53,029 25,959
Prepaid taxes............................................. 9,200 64,002
----------- -----------
Total current assets........................................ 2,234,248 746,063
----------- -----------
Software development costs, less accumulated amortization of
$67,737 and $292,588...................................... 388,326 1,328,839
Property and equipment:
Computer equipment........................................ 551,118 668,788
Office furniture, equipment and leasehold improvements.... 316,023 425,792
----------- -----------
867,141 1,094,580
Less accumulated depreciation............................. 352,488 579,721
----------- -----------
514,653 514,859
----------- -----------
Deposits.................................................... 131,188 78,123
----------- -----------
Total assets................................................ $ 3,268,415 $ 2,667,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 667,651 $ 523,122
Accrued expenses.......................................... 377,018 458,775
Current portion of capital lease obligations.............. 80,471 130,171
Line of credit............................................ 375,000 803,336
Current portion of long-term debt......................... 64,868 --
Note payable officer...................................... -- 352,814
Subordinated convertible note............................. 1,500,000 --
Deferred revenue.......................................... 818,054 505,775
----------- -----------
Total current liabilities................................... 3,883,062 2,773,993
----------- -----------
Capital lease obligations, net of current portion........... 156,722 140,179
Long-term debt, net of current portion...................... 94,955 --
----------- -----------
Total long-term liabilities................................. 251,677 140,179
----------- -----------
Stockholders' equity (capital deficiency):
Preferred stock: $1,000,000 shares authorized -- Series A,
par value $.0001, 323,077 shares issued and
outstanding............................................ 32 32
Series B, par value $.0001, 0 and 111,800 shares issued
and outstanding, respectively.......................... -- 12
Common stock, par value $.0001, 7,000,000 shares
authorized, 4,643,715 shares issued and outstanding.... 464 464
Warrants.................................................. 25,175 25,175
Deferred compensation..................................... (329,838) (724,799)
Additional paid-in capital................................ 1,444,306 5,430,514
Accumulated stockholders' deficit......................... (2,006,463) (4,977,687)
----------- -----------
Total stockholders' equity (capital deficiency)............. (866,324) (246,289)
----------- -----------
Total liabilities and stockholders' equity (capital
deficiency)............................................... $ 3,268,415 $ 2,667,883
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE> 90
MOLLOY GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Product revenue..................... $ 2,669,404 $ 1,693,737 $ 1,512,937 $ 1,665,472
Maintenance revenue................. 1,082,320 1,233,904 906,722 690,257
Training and consulting revenue..... 670,796 1,213,536 942,641 635,597
----------- ----------- ----------- -----------
Total revenue......................... 4,422,520 4,141,177 3,362,300 2,991,326
----------- ----------- ----------- -----------
Cost and expenses:
Costs of products and services
sold............................. 1,264,864 1,537,477 994,824 818,504
Selling and marketing expenses...... 2,859,200 2,547,804 2,039,021 1,486,604
Product development expenses........ 985,864 862,413 483,232 1,272,339
General and administrative
expenses......................... 1,908,693 1,780,382 1,465,331 1,544,364
Stock-based compensation............ 53,412 120,288 76,617 134,775
----------- ----------- ----------- -----------
Total costs and expenses.............. 7,072,033 6,848,364 5,059,025 5,256,586
----------- ----------- ----------- -----------
Loss from operations.................. (2,649,513) (2,707,187) (1,696,725) (2,265,260)
Interest expense...................... 141,497 264,037 231,507 252,225
----------- ----------- ----------- -----------
Loss before income tax benefit........ (2,791,010) (2,971,224) (1,928,232) (2,517,485)
Income tax (benefit) expense.......... (240,885) -- -- --
----------- ----------- ----------- -----------
Net loss.............................. $(2,550,125) $(2,971,224) $(1,928,232) $(2,517,485)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE> 91
MOLLOY GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED PREFERRED COMMON DEFERRED ADDITIONAL
STOCK STOCK STOCK WARRANTS COMPENSATION PAID-IN CAPITAL
--------- --------- ------ -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1996.......... $32 $-- $461 $25,175 $ -- $ 961,062
Issuance of common stock............ -- -- 3 -- -- 99,994
Stock-based compensation............ -- -- -- -- (383,250) 383,250
Amortization of stock-based
compensation...................... -- -- -- -- 53,412 --
Net loss............................ -- -- --
--- --- ---- ------- --------- ----------
Balance September 30, 1997.......... 32 -- 464 25,175 (329,838) 1,444,306
Issuance of preferred stock......... -- 2 -- -- -- 750,010
Conversion of notes................. -- 10 -- -- -- 2,720,949
Stock-based compensation............ -- -- -- -- (515,249) 515,249
Amortization of stock-based
compensation...................... -- -- -- -- 120,288 --
Net loss............................ -- -- -- -- -- --
--- --- ---- ------- --------- ----------
Balance at September 30, 1998....... 32 12 464 25,175 (724,799) 5,430,514
Amortization of stock-based
compensation (unaudited).......... -- -- -- -- 134,775 --
Net loss (unaudited)................ -- -- -- -- -- --
--- --- ---- ------- --------- ----------
Balance at June 30, 1999
(unaudited)....................... $32 $12 $464 $25,175 $(590,024) $5,430,514
=== === ==== ======= ========= ==========
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
----------- -----------
<S> <C> <C>
Balance September 30, 1996.......... $ 543,662 $ 1,530,392
Issuance of common stock............ -- 99,997
Stock-based compensation............ -- --
Amortization of stock-based
compensation...................... -- 53,412
Net loss............................ (2,550,125) (2,550,125)
----------- -----------
Balance September 30, 1997.......... (2,006,463) (866,324)
Issuance of preferred stock......... -- 750,012
Conversion of notes................. 2,720,959
Stock-based compensation............ -- --
Amortization of stock-based
compensation...................... -- 120,288
Net loss............................ (2,971,224) (2,971,224)
----------- -----------
Balance at September 30, 1998....... (4,977,687) (246,289)
Amortization of stock-based
compensation (unaudited).......... -- 134,775
Net loss (unaudited)................ (2,517,485) (2,517,485)
----------- -----------
Balance at June 30, 1999
(unaudited)....................... $(7,495,172) $(2,628,999)
=========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE> 92
MOLLOY GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................ $(2,550,125) $(2,971,224) $(1,928,232) $(2,517,485)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation.......................... 188,282 227,233 161,083 143,040
Amortization of software costs........ 67,737 224,851 67,623 352,333
Stock-based compensation.............. 53,412 120,288 76,617 134,775
Deferred income taxes................. (241,085) -- -- --
Accrued interest on convertible
note............................... -- 212,500 -- --
Adjustments to reconcile net loss to net
cash used in operations:
Accounts receivable................... (403,723) 1,407,872 669,229 (481,586)
Other current assets.................. (39,132) (27,732) (56,767) 81,055
Deposits.............................. (104,104) 53,066 -- --
Accounts payable...................... 494,980 (144,529) (450,782) 17,193
Accrued expenses...................... 168,858 81,757 220,783 99,203
Deferred revenue...................... 287,629 (312,279) (78,003) 862,470
----------- ----------- ----------- -----------
Net cash used by operating activities... (2,077,271) (1,128,197) (1,318,449) (1,309,002)
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant, and equipment.......... (173,903) (83,152) (47,268) (109,477)
Capitalized software development
costs................................. (287,138) (1,165,364) (805,469) (826,979)
----------- ----------- ----------- -----------
Net cash used by investing activities... (461,041) (1,248,516) (852,737) (936,456)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from officer loan.............. -- 352,814 -- --
Principal payments on capital lease
obligations........................... (59,856) (111,130) (96,164) (78,344)
Repayments on line of credit and
long-term debt........................ (100,000) (534,823) (254,579) (1,415,794)
Proceeds from long-term debt............ 159,823 -- -- 1,873,062
Proceeds from note payable -- line of
credit................................ -- 803,336 803,336 --
Proceeds from issuance of preferred
stock................................. 99,997 750,012 750,012 --
Proceeds from convertible note.......... 1,500,000 1,008,459 1,008,459 2,385,000
----------- ----------- ----------- -----------
Net cash provided by financing
activities............................ 1,599,964 2,268,668 2,211,064 2,763,924
----------- ----------- ----------- -----------
Net decrease in cash.................... (938,348) (108,045) 39,878 518,466
Cash beginning of year.................. 1,107,597 169,249 169,249 61,204
----------- ----------- ----------- -----------
Cash end of year........................ $ 169,249 $ 61,204 $ 209,127 $ 579,670
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 155,115 $ 273,784 $ 252,759 $ 236,048
Income taxes paid....................... $ -- $ 1,000 $ -- $ --
</TABLE>
See accompanying notes.
F-26
<PAGE> 93
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The primary business activity of Molloy Group, Inc. (Molloy or the Company)
is the design, development, sales and service of advanced software products. The
Company also provides support services for the commercial applications of the
software.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the balance sheet dates and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
For the years ended September 30, 1997 and September 30, 1998, two
customers and one customer represented approximately 10% and 35% of total
revenues, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and interest-bearing money market
deposits with financial institutions having original maturities of ninety days
or less. Cash equivalents are stated at cost, which approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the related assets which
range from three to twenty years. The cost of major renewals or betterments that
extend the useful lives of the property and equipment are capitalized as assets.
Amortization of assets recorded under capital leases is included in depreciation
expense. General repairs and maintenance are charged to income when incurred.
INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment with the adjustment being recorded through income tax expense in the
year of the change.
REVENUE RECOGNITION
Revenue is recognized on the sale of software products when products have
been delivered and invoiced in accordance with SOP 91-1.
Revenue from the sale of extended support and maintenance service contracts
is recorded as deferred revenue and recognized on a straight-line basis over the
term of the contract. Costs against those contracts are expense as incurred.
F-27
<PAGE> 94
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue from the sale of training and consulting services is billed in
advance of the performance of the services. These billings are classified as
unearned revenue with revenue being recognized when the performance of the
services are complete.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers.
All costs incurred prior to establishing the technological feasibility of
software products to be sold are accounted for as research and development costs
and are expensed in the period incurred. The Company recorded $67,737 and
$224,851 of amortization expense related to software development costs in 1997
and 1998, respectively.
ADVERTISING
The Company expenses advertising as incurred. Advertising expense totaled
$295,839 and $134,541 for the years ended September 30, 1997 and 1998,
respectively.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options and awards. Accordingly, compensation costs for
stock options and awards are measured as the excess, if any, of the fair value
of the Company's stock at the date of grant over the exercise price of the stock
option or award.
STATEMENT OF CASH FLOWS
Noncash transactions for the years ended September 30, 1997 and 1998
include capital lease additions of approximately $199,387 and $144,287,
respectively.
Preferred stock was issued upon the conversion of $2,508,459 of convertible
notes and $212,500 of accrued interest.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the AICPA issued Statement of Position 97-2 (SOP 97-2),
"Software Revenue Recognition," which changes the requirements for revenue
recognition effective for transactions that the Company will enter into
beginning October 1, 1998. Beginning on October 1, 1998 revenue will be
recognized on the sale of software products when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is considered probable. The adoption of this pronouncement is not
expected to materially affect the Company's revenue recognition policies.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." The
adoption of this pronouncement is not expected to materially affect the
Company's revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities.
F-28
<PAGE> 95
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Because the Company does not currently hold any derivative instruments and does
not engage in hedging activities, the adoption of SFAS No. 133 is not expected
to have a significant impact on its financial position, results of operations or
cash flows. The Company will be required to adopt SFAS No. 133, as amended, for
the year ending December 31, 2001.
INTERIM FINANCIAL INFORMATION
The accompanying statements of operations and cash flows for the nine
months ended June 30, 1998 and 1999, and the consolidated statement of
shareholders' equity for the nine months ended June 30, 1999 ("interim financial
statements") have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and with
Article 10 of Regulation S-X. Accordingly, they do not included all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation of the results of interim periods. Operating
results for the nine-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 1999.
2. CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through the year 2002. The assets are depreciated over the lower
of their related lease terms or their estimated productive lives. Depreciation
of assets under capital leases is included in depreciation expense for the years
ended September 30, 1997 and 1998.
The following is a schedule of the future minimum lease payments under
capital leases by year together with the present value of the net minimum lease
payments:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30
------------
<S> <C>
1999.................................................. $155,989
2000.................................................. 124,870
2001.................................................. 18,751
2002.................................................. 1,922
--------
Total minimum lease payments.......................... 301,532
Less amount representing interest..................... 31,182
--------
Present value of net minimum lease payments........... 270,350
Less current portion.................................. 130,171
--------
Total long-term capital lease obligation.............. $140,179
========
Capital leases classified as property and equipment
consist of:
Computer equipment.................................... $282,575
Less accumulated depreciation......................... 136,743
--------
$145,832
========
</TABLE>
Interest rates on capitalized leases vary from 4.03% to 22.10% and are
imputed based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
Certain capital leases provided for purchase options. Generally, purchase
options are at a price lower than the expected fair value of the property at the
expiration of the lease term.
F-29
<PAGE> 96
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMITMENTS
The Company leases its office under a noncancelable operating lease.
Minimum future lease obligations under such noncancelable operating lease
as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30
------------
<S> <C>
1999.................................................. $ 512,989
2000.................................................. 548,941
2001.................................................. 584,232
2002.................................................. 186,744
----------
$1,832,906
==========
</TABLE>
Total rent expense for the years ended September 30, 1997 and 1998 was
$335,334 and $513,189, respectively.
4. NOTE PAYABLE OFFICER
During 1998, the Company entered into a note payable agreement with one of
its officers which is due March 31, 1999. The note payable bears an interest
rate of 15% with interest and principal due at maturity. The balance due at
September 30, 1998 was $352,814.
5. LINE OF CREDIT
In February 1998, the Company entered into a $2,000,000 line of credit
agreement with a bank which initially expired in February 1999 and contains
provisions for automatic one-year renewals. The line of credit agreement bears
an interest rate of prime plus 2.5% subject to an interest rate flow of 9% with
minimum monthly fees of $7,500. The balance due as of September 30, 1998 was
$803,336.
The line of credit is secured by substantially all of the Company's assets.
All payments on the Company's accounts receivable are remitted to a lock box at
the lending institution and are used to pay the outstanding balance on the line
of credit.
The Company also maintained a line of credit which was secured by
substantially all of the Company's assets and personally guaranteed by the
Company's President. Interest on the line of credit was charged at prime plus
.25%. The balance at September 30, 1997 was $375,000. The line of credit was
repaid in 1998.
6. LONG-TERM DEBT
The Company had a note payable to a bank with an interest rate of 8.25%
payable in 36 monthly installments of $6,288.
The following summarizes the amounts related to the note:
<TABLE>
<CAPTION>
1997 1998
-------- ----
<S> <C> <C>
Balance due at September 30................................ $159,823 $--
Less current portion....................................... 64,868 --
-------- --
Long-term portion of note payable at September 30.......... $ 94,955 $--
======== ===
</TABLE>
7. SUBORDINATED CONVERTIBLE NOTE
The Company entered into a subordinated convertible note agreement with an
investor bearing interest at 10% per annum. This note was convertible into
preferred stock if a sale of any class of stock in
F-30
<PAGE> 97
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
excess of $750,000 occurred. The balance of the convertible note was $1,500,000
at September 30, 1997. Also, during 1998 an additional subordinated convertible
note was issued to an investor for $1,000,000. As more fully described in Note
13, in September 1998, the principal and interest related to the subordinated
convertible notes were converted into 87,606 shares of Series B Noncumulative
Convertible Preferred Stock.
8. INCOME TAXES
The provision for income tax expense (benefit) consists of the following as
of September 30:
<TABLE>
<CAPTION>
1997 1998
--------- ----
<S> <C> <C>
Federal:
Current................................................... $ -- $--
Deferred.................................................. (187,451) --
State
Current................................................... -- --
Deferred.................................................. (53,434) --
--------- --
$(240,885) $--
========= ===
</TABLE>
A reconciliation of the benefit for income taxes on operations, computed by
applying the federal statutory rate of 34% to the loss from operations before
income taxes and the reported benefit for income taxes on operations, is as
follows:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Income tax benefit computed at statutory federal
income tax rate................................ $ 948,943 $ 1,009,825
State income taxes, net of federal tax benefit,
if any......................................... 165,786 176,422
Non-deductible items............................. (36,056) (69,337)
Federal deferred tax asset valuation allowance
adjustment..................................... (837,788) (1,116,910)
--------- -----------
Total benefit for income taxes................... $ 240,885 $ --
========= ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets (liabilities)................... $ (446,305) $ 103,852
Software development costs........................ (155,098) (530,738)
Deferred revenue.................................. 326,731 202,007
Accrued expenses.................................. 43,166 39,940
Net operating losses.............................. 1,069,294 2,139,637
---------- ----------
Total net deferred tax assets....................... 837,788 1,954,698
---------- ----------
Valuation allowance................................. 837,788 1,954,698
---------- ----------
Net deferred tax asset.............................. $ -- $ --
========== ==========
</TABLE>
Management has recorded a valuation allowance against the deferred tax
assets until such time that the Company demonstrates an ability to consistently
produce taxable income.
F-31
<PAGE> 98
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has net operating loss carryovers to offset future income tax.
If not used, these carryovers will expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2011.................................................. $ 282,126
2012.................................................. 2,395,125
2018.................................................. 2,679,878
----------
Total................................................. $5,357,129
==========
</TABLE>
9. STOCK-BASED COMPENSATION PLANS
In November 1996, the Company approved the 1996 Stock Plan (the Plan). The
Plan was intended to provide the Company the ability to grant incentive stock
options (ISOs) to employees of the Company, to provide an opportunity for
employees and vendors to purchase stock in the Company through the exercise of
Nonqualified Stock Options (NQSOs) and to provide the Company an opportunity to
award shares of stock in the Company at the discretion of the Company's board of
directors. The Plan provides for the Company to issue ISOs, NQSOs and stock
awards such that the aggregate number of shares upon exercise is limited to
881,470 shares. The exercise price and the vesting period of the ISOs and NQSOs
is established by the board of directors.
Pro forma information regarding net loss for options granted is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123. The fair value for these option grants was
estimated at the dates of grant using a Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Risk-free interest rate.................................. 6.25% 6.25%
Dividend yield........................................... 0% 0%
Volatility factor........................................ .6 .6
Weighted-average expected life of options................ 3 years 3 years
Options granted.......................................... 388,500 356,500
Weighted-average fair market value of options granted
during the year........................................ 1.71 1.74
</TABLE>
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss would
have been increased by approximately $115,000 and $211,000 in 1997 and 1998,
respectively.
F-32
<PAGE> 99
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity for the years ended
September 30, 1997 and 1998:
<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS OPTION PRICE AVERAGE
OUTSTANDING PER SHARE EXERCISE PRICE
----------- ------------ --------------
<S> <C> <C> <C>
Balance at September 30, 1996.................. -- -- --
Options granted................................ 388,500 $1.50 $1.50
Options forfeited.............................. 14,000 $1.50 $1.50
-------
Balance at September 30, 1997.................. 374,500 $1.50 $1.50
Options granted................................ 356,500 $1.50 $1.50
Options forfeited.............................. 143,000 $1.50 $1.50
-------
Balance at September 30, 1998.................. 588,000 $1.50 $1.50
=======
</TABLE>
10. RETIREMENT PLAN
The Company has a 401(k) profit sharing plan (the Plan) covering all of its
employees subject to certain age and service requirements. Under the provisions
of the Plan, participants may contribute up to 15% of their eligible
compensation to the Plan. No contributions were made to the Plan in 1997 or
1998.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments consisting
principally of cash and cash equivalents, accounts receivable, accounts payable
and debt approximate their fair values at September 30, 1997 and 1998.
12. STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
The Company has two classes of capital stock outstanding consisting of
Common Stock, par value $.0001, and preferred stock. There are two series of
preferred stock: Series A, Noncumulative Preferred Stock, par value $.0001
(Series A Preferred Stock) and Series B, Noncumulative Convertible Preferred
Stock, par value $.001 (Series B Preferred Stock), as discussed below.
COMMON STOCK
The Company has authorized 7,000,000 shares of common stock of which
4,643,715 was issued and outstanding as of September 30, 1997 and 1998. In
December 1996, the Company issued 33,334 shares of common stock for $99,997.
The Company has reserved the following number of shares of common stock:
<TABLE>
<CAPTION>
SHARES PURPOSE OF ISSUANCE
- ------ ------------------------------
<S> <C>
1,118,000............................... Upon conversion of Series B
588,000................................ Upon exercise of stock options
111,538................................ Upon exercise of warrants
</TABLE>
SERIES A PREFERRED STOCK
In September 1996, the Company sold 323,077 shares of Series A Preferred
Stock with 61,538 detachable warrants for approximately $969,000. Each warrant
entitles the holder thereof to one share of common stock of the Company at an
exercise price of $3.00 per share. (See discussion of warrants below.)
F-33
<PAGE> 100
MOLLOY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of common stock by reason of their
ownership thereof, an amount per share equal to $3.00 (subject to adjustment for
stock splits, combinations, reclassifications or similar events affecting such
shares) for each outstanding share of Series A Preferred Stock plus an amount
equal to all dividends declared but unpaid. If, upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire assets and funds of the
Company legally available for distribution shall be distributed ratably among
the holders of the Series A Preferred Stock in proportion to the preferential
amount each such holder is otherwise entitled to receive in respect to such
shares.
Series A Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance into the number of fully-paid
and nonassessable shares of common stock as is convertible on a one-to-one
basis.
SERIES B PREFERRED STOCK
In May 1998, the Company sold 24,194 shares of Series B Preferred Stock at
an offering price of $31.00 per share. Each share is convertible into common
stock at a ratio of $3.10 per share or ten shares of common stock for each share
of Series B Preferred Stock. Proceeds from the sale of the 24,194 shares was
approximately $750,000.
In September 1998, the amounts related to the Company's subordinated
convertible notes were converted into 87,606 shares of Series B Preferred Stock
at a conversion rate of approximately $24.17 per share.
WARRANTS
In addition to the 61,538 detachable warrants related to the Series A
Preferred Stock as described above, the Company also issued 50,000 warrants to
an employee in September 1996, each of which entitles the holder thereof to one
share of common stock of the Company at an exercise price of $4.00 per share.
As of September 30, 1998, the Company has 61,538 warrants outstanding at an
exercise price of $3.00 per share and 50,000 warrants with an exercise price of
$4.00 per share. There were no warrants to purchase shares exercised during the
years ended September 30, 1997 and 1998.
13. SUBSEQUENT EVENTS -- UNAUDITED
On November 13, 1998, the Company raised $500,000 by entering into a
subordinated convertible note agreement with Unterberg Harris Private Equity
Partners, L.P. for this amount.
On December 2, 1998, the Company raised $385,000 by entering into a
subordinated convertible note agreement with Unterberg Harris Private Equity
Partners, L.P. for this amount.
On December 4, 1998, the Company raised $500,000 by entering into a
subordinated convertible note agreement with Unterberg Harris Private Equity
Partners, L.P.
On April 29, 1999, the Company raised $500,000 by entering into a
subordinated convertible bridge note agreement with Unterberg Harris Private
Equity Partners, L.P. with a commitment of an additional $500,000, if needed.
On July 23, 1999 ServiceWare, Inc. (ServiceWare) acquired the outstanding
preferred stock, common stock, warrants and stock options of the Molloy Group,
Inc. (Molloy). The acquisition was executed through the issuance of stock,
warrants and options of ServiceWare to Molloy valued at $14.2 million plus
transaction costs of $445,000.
F-34
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER SERVICEWARE.COM, INC. NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO
PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS
NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF OUR STOCK.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Use of Proceeds....................... 18
Dividend Policy....................... 18
Dilution.............................. 19
Capitalization........................ 20
Selected Historical Financial Data.... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 30
Management............................ 41
Certain Transactions.................. 49
Principal Stockholders................ 52
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 57
Underwriting.......................... 60
Legal Matters......................... 62
Experts............................... 62
Where You Can Find Additional
Information......................... 62
Index to Financial Statements......... F-1
</TABLE>
Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in the common stock offered hereby, whether or
not participating in this distribution, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[ ] SHARES
[SERVICEWARE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BEAR, STEARNS & CO. INC.
SG COWEN
WIT SOUNDVIEW
C.E. UNTERBERG, TOWBIN
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by us in connection
with the offering (other than underwriting compensation). All of such amounts
(except the SEC registration fee and the NASD filing fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $
NASD filing fee............................................. *
Nasdaq National Market Listing Fee..........................
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... *
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
----------
Total............................................. $
==========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article VII of the
registrant's Amended and Restated Certificate of Incorporation, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the personal liability of directors of the
registrant is eliminated to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article VII of the registrant's Amended and Restated Bylaws, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the registrant will indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
(or to the extent permitted under Delaware law, has agreed to be) a director,
officer, employee or agent of the registrant, or is or was serving (or, to the
extent permitted under Delaware law, has agreed to serve) at the request of the
registrant as a director, officer, employee or agent of another entity, against
certain liabilities, costs and expenses. Article VII further permits the
registrant to maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the registrant, or is or was serving at
the request of the registrant as a director, officer, employee or agent of
another entity, against any liability asserted against such person and incurred
by such person in any such capacity or arising out of his status as such,
whether or not the
II-1
<PAGE> 103
registrant would have the power to indemnify such person against such liability
under the DGCL. The registrant expects to maintain directors' and officers'
liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We have sold and issued the following securities since January 1997 (as
adjusted to reflect certain stock splits):
1. We issued and sold [ ] shares of our common stock to
employees for an aggregate purchase price of [ ] pursuant to the
exercise of options under our 1996 stock option plan.
2. In July 1999, we sold an aggregate of (a) 2,400,000 shares of our
Series D preferred stock, and (b) common stock warrants for the purchase of
540,000 shares of our common stock in the aggregate, for an aggregate
purchase price of $9.0 million to a group of 22 investors.
3. In connection with our acquisition of Molloy Group, Inc. in July
1999, we issued 2,707,680 shares of our Series E preferred stock to the
former holders of preferred stock of the Molloy Group, Inc. (b) common
stock warrants for the purchase of 60,710 shares of our common stock in the
aggregate and (c) 2,319,596 shares of our common stock to former holders of
common stock of the Molloy Group, Inc.
4. In April, May and June 1999, PolyVentures II, L.P., Geocapital III,
L.P. and Norwest Equity Partners V loaned us $150,000, $250,000 and
$650,000, respectively, for short term working capital purposes. As partial
consideration for these loans, we issued warrants to purchase 6,000, 10,000
and 26,000 shares of our common stock to each of PolyVentures II, L.P.,
Geocapital III, L.P. and Norwest Equity Partners V, respectively.
5. We issued to PNC Bank warrants to purchase 10,221 shares of our
common stock as part of the consideration for a bridge loan in the amount
of $0.75 million which was repaid with the proceeds from the sale of our
Series D convertible preferred stock.
The issuances described in Item 15(1) were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act. The issuances of the
securities described in item 15(2) and 15(3) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transactions represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<TABLE>
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed prior to completion of this
offering.
3.2 Form of Bylaws of the Registrant to be filed prior to
completion of this offering.
4.1 Registration Rights Agreement dated July 23, 1999.
10.1 Loan Agreement, dated December 10, 1999, between the
Registrant and PNC Bank.
10.2 Agreement and Plan of Merger, dated July 13, 1999, between
the Registrant and the parties thereto in connection with
the acquisition of the Molloy Group.
10.3 Commercial Lease Agreement, dated May 31, 1995, as amended,
between the Registrant and Sibro Enterprises, for property
located in Oakmont, Pennsylvania.
</TABLE>
II-2
<PAGE> 104
<TABLE>
<C> <S>
10.4 First Amendment of Lease, dated June 30, 1998, between the
Registrant and PW/MS OP SUB I, LLC., for property located in
Piscataway, New Jersey
10.5 2000 Stock Incentive Plan of Registrant.
10.6 Employee Stock Purchase Plan of Registrant.
23.1 Consent of Ernst & Young LLP (see Page ).
24.1 Power of Attorney (included on signature page of this
registration statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ We have applied for confidential treatment with respect to certain portions of
these documents.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X, or
the information that would otherwise be included in such schedules is contained
in our financial statements or accompanying notes.
ITEM 17. UNDERTAKINGS.
(i) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(ii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(iii) The undersigned registrant hereby undertakes that:
(1) For the purposes determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, the State of
New York, on the day of , 2000.
ServiceWare.com, Inc.
By:
------------------------------------
Name: Mark Tapling
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ragiv Enand and Mark Finkel, and each of them,
with full power to act without the other, such persons true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments thereto
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments thereto and to file the same, with exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President and Chief Executive , 2000
- --------------------------------------------------- Officer
Mark Tapling
Vice President and Chief , 2000
- --------------------------------------------------- Financial Officer
Mark Finkel
Director , 2000
- ---------------------------------------------------
Rajiv Enand
Director , 2000
- ---------------------------------------------------
Kevin Hall
Director , 2000
- ---------------------------------------------------
Susanne Harrison
Director , 2000
- ---------------------------------------------------
Bruce Molloy
Director , 2000
- ---------------------------------------------------
Timothy Wallace
</TABLE>
II-4
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed prior to completion of this
offering.
3.2 Form of Bylaws of the Registrant to be filed prior to
completion of this offering.
4.1 Registration Rights Agreement dated July 23, 1999.
10.1 Loan Agreement, dated December 10, 1999, between the
Registrant and PNC Bank.
10.2 Agreement and Plan of Merger, dated July 13, 1999, between
the Registrant and the parties thereto in connection with
the acquisition of the Molloy Group.
10.3 Commercial Lease Agreement, dated May 31, 1995, as amended,
between the Registrant and Sibro Enterprises, for property
located in Oakmont, Pennsylvania.
10.4 First Amendment of Lease, dated June 30, 1998, between the
Registrant and PW/MS OP SUB I, LLC., for property located in
Piscataway, New Jersey
10.5 2000 Stock Incentive Plan of Registrant.
10.6 Employee Stock Purchase Plan of Registrant.
23.1 Consent of Ernst & Young LLP (see Page ).
24.1 Power of Attorney (included on signature page of this
registration statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ We have applied for confidential treatment with respect to certain portions of
these documents.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SERVICEWARE.COM, INC.
1. (a) The name of the corporation is ServiceWare.com, Inc. The original
name of the corporation was SWRC, Inc.
(b) The original Certificate of Incorporation of the corporation was
filed with the Secretary of State of the State of Delaware on _______________,
2000.
2. Pursuant to Sections 228, 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and further amends the provisions of the Amended and Restated
Certificate of Incorporation of the corporation as heretofore amended and
supplemented.
3. The text of the Amended and Restated Certificate of Incorporation as
heretofore amended and supplemented is hereby amended and restated in its
entirety to read as follows:
------------
ARTICLE I
NAME
The name of the corporation is ServiceWare.com, Inc.
ARTICLE II
REGISTERED AGENT
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange Street, City of Wilmington 19801, County of New Castle.
The name of the corporation's registered agent at that address is The
Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
<PAGE> 2
ARTICLE IV
CAPITAL STOCK
The total number of shares of stock which the corporation shall have
authority to issue is One Hundred Five Million (105,000,000) shares, which shall
be divided into two classes as follows:
A. One Hundred Million (100,000,000) shares of Common Stock, no par value
per share; and
B. Five Million (5,000,000) shares of Preferred Stock, no par value per
share. The corporation's board of directors is hereby expressly authorized to
provide by resolution or resolutions from time to time for the issue of the
Preferred Stock in one or more series, the shares of each of which series may
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
permitted under the General Corporation Law of the State of Delaware and as
shall be stated in the resolution or resolutions providing for the issue of such
stock adopted by the board of directors pursuant to the authority expressly
vested in the board of directors hereby.
ARTICLE V
DIRECTORS
A. The business and affairs of the corporation shall be managed by or
under the direction of a board of directors consisting of such total number of
authorized directors as shall be fixed by, or in the manner provided in, the
bylaws. The board of directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of authorized directors. Class I
directors shall serve for a term ending upon the annual meeting of stockholders
held in 2001, Class II directors shall serve for a term ending upon the annual
meeting of stockholders held in 2002 and Class III directors shall serve for a
term ending upon the annual meeting of stockholders held in 2003. At each
succeeding annual meeting of stockholders beginning with the annual meeting of
stockholders held in 2001, successors to the class of directors whose term
expires at such annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
directors. A director shall hold office until the annual meeting for the year in
which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, incapacitation
or removal from office, and except as otherwise required by law.
2
<PAGE> 3
B. Except as otherwise required by law, vacancies and newly created
directorships resulting from any increase in the total number of authorized
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the number of directors shall
have the same remaining term as that of his or her predecessor. A director may
be removed by the stockholders only for cause.
C. Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of stock issued by the corporation shall have the right,
voting separately by class or series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the term of this
certificate of incorporation applicable thereto and such directors so elected
shall not be divided into classes pursuant to this Article V, in each case
unless expressly provided by such terms.
ARTICLE VI
BYLAWS
In furtherance and not in limitation of the powers conferred by the laws
of the State of Delaware:
A. The board of directors of the corporation is expressly authorized to
adopt, amend or repeal the bylaws of the corporation.
B. Elections of directors need not be by written ballot unless the bylaws
of the corporation shall so provide.
C. The books of the corporation may be kept at such place within or
without the State of Delaware as the bylaws of the corporation may provide or as
may be designated from time to time by the board of directors of the
corporation.
ARTICLE VII
LIMITATION OF LIABILITY
No director shall be personally liable to the corporation or the holders
of shares of capital stock for monetary damages for breach of fiduciary duty as
a director, except (i) for any breach of the duty of loyalty of such director to
the corporation or such holders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which such director derives an improper personal benefit. No
amendment to or repeal of this Article VII shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
If the laws of the State of Delaware are hereafter amended to authorize
3
<PAGE> 4
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent then permitted. No repeal or
modification of this Article VII shall adversely affect any right of or
protection afforded to a director of the corporation existing immediately prior
to such repeal or modification.
ARTICLE VIII
INDEMNIFICATION
The corporation shall indemnify and may advance expenses to its officers
and directors to the fullest extent permitted by law from time to time in
effect. Without limiting the generality of the foregoing, the bylaws of the
corporation may provide for indemnification and advancement of expenses to the
corporation's officers, directors, employees and agents on such terms and
conditions as the board of directors may from time to time deem appropriate or
advisable.
ARTICLE IX
ACTION BY STOCKHOLDERS
Effective immediately upon the corporation becoming subject to the
periodic reporting requirements of Section 13 of the Securities Exchange Act of
1934, as amended, with respect to any class of its capital stock:
A. No action required to be taken or which may be taken at any annual
or special meeting of stockholders of the corporation may be taken without a
meeting; and
B. The power of the stockholders to consent in writing, without a meeting,
to the taking of any action is specifically denied.
C. Special meetings of the stockholders of the corporation may be called
only by the board of directors pursuant to a resolution adopted by a majority of
the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board of Directors for adoption), the chairman of the board
of directors, or the chief executive officer.
ARTICLE X
AMENDMENTS
Except as provided herein, from time to time any of the provisions of this
Amended and Restated Certificate of Incorporation may be amended, altered or
repealed, and other provisions authorized by the laws of the State of Delaware
at the time in force may be added or inserted in the manner and at the time
prescribed by said laws, and all rights at any time conferred upon the
4
<PAGE> 5
stockholders of the corporation by this Amended and Restated Certificate of
Incorporation are granted subject to the provisions of this Article X.
* * *
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed on the _____ day of __________, 2000, by the undersigned officer
thereunto duly authorized.
-------------------------------
Mark Tapling
President and Chief Executive Officer
5
<PAGE> 1
EXHIBIT 3.2
----------------------------------
BYLAWS
----------------------------------
As adopted by the Board of Directors, effective as of __________ __, 2000.
<PAGE> 2
BYLAWS
OF
SWRC, INC.
ARTICLE I
OFFICES
Section 1.01 Registered Office. The registered office of the Corporation
shall be at CT Corporation, 1209 Orange Street, in the City of Wilmington,
County of New Castle, State of Delaware 19801, until otherwise established by a
resolution of the Board of Directors of the Corporation (the "Board of
Directors") and a certificate certifying the change is filed in the manner
provided by statute.
Section 1.02 Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 2.01 Annual Meetings. An annual meeting of stockholders shall be
held at such date, time and place, either within or without the State of
Delaware, as the Board of Directors shall each year fix. At such annual meeting,
the stockholders shall elect a Board of Directors and transact such other
business as may properly be brought before the meeting.
Section 2.02 Special Meetings. Special meetings of the stockholders, for
any purpose or purposes described in the notice of the meeting, may be called
only by:
(a) the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption);
(b) the Chairman of the Board; or
(c) the Chief Executive Officer.
Special meetings of the stockholders shall be held at such place, on such date
and at such time as the person or persons calling the meeting shall fix.
Business transacted at any special meeting shall be confined to the purpose or
purposes stated in the notice of such meeting.
Section 2.03 Notice of Meetings. Written notice of all meetings of
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the
1
<PAGE> 3
purpose or purposes for which the meeting is called. Unless otherwise required
by applicable law or the Certificate of Incorporation of the Corporation as then
in effect (the "Certificate of Incorporation"), such notice shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting, by depositing it in the United
States mail, postage prepaid, directed to each stockholder at his or her address
as it appears on the records of the Corporation. An affidavit of the Secretary,
Assistant Secretary or transfer agent of the Corporation that the notice has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. No notice need be given to any person with whom communication is
unlawful or to any person who has waived.
Section 2.04 Adjournments. Any meeting of stockholders may adjourn from
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken; provided, however, that if the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, then a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting. At
the adjourned meeting the Corporation may transact any business that might have
been transacted at the original meeting.
Section 2.05 Quorum. At each meeting of stockholders the holders of a
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except to the extent otherwise required by applicable law. Where a
separate vote by a class or classes is required, a majority of the shares of
such class or classes then outstanding, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter. If a quorum shall fail to attend any meeting, the chairman
of the meeting or the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, at the meeting may adjourn the meeting.
Shares of the Corporation's stock belonging to the Corporation (or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation are held, directly or indirectly, by the
Corporation) shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation or any other corporation to vote any shares of the Corporation's
stock held by it in a fiduciary capacity.
Section 2.06 Organization. Every meeting of the stockholders shall be
presided over by the Chairman of the Board, if any, or, if the Chairman of the
Board is not present (or, if there is none), one of the following persons in the
order stated: (a) the Chief Executive Officer, if one has been appointed; (b)
the President; (c) a Vice President; (d) if none of the individuals named in
clauses (a), (b) or (c) is present, such person who may have been chosen by the
Board of Directors; or (e) if no individual named in clause (d) is present, a
chairman to be chosen by the stockholders owning a majority of the shares of
capital stock of the Corporation issued and outstanding and entitled to vote at
the meeting and who are present at in person or represented by proxy. The
Secretary of the Corporation, or such other person as may be appointed by the
chairman of the meeting, shall act as secretary of the meeting.
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Section 2.07 Voting.
(a) At any meeting of stockholders, every stockholder having the
right to vote shall be entitled to vote in person or by proxy. Except as
otherwise provided by the Delaware General Corporation Law (the "DGCL") or the
Certificate of Incorporation, each stockholder of record shall be entitled to
one vote for each share of capital stock having voting power registered in such
stockholder's name on the books of the Corporation.
(b) All elections shall be determined by a plurality vote, and,
except as otherwise provided by law or the Certificate of Incorporation, all
other matters shall be determined by a vote of a majority of the shares present
in person or represented by proxy and voting on such other matters.
(c) If a vote is to be taken by written ballot, then each such
ballot shall state the name of the stockholder or proxy voting and such other
information as the chairman of the meeting deems appropriate.
Section 2.08 Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and which shall not be more than 60 nor less than 10 days before the
date of such meeting, nor more than 60 days prior to any other action. If no
record date is fixed by the Board of Directors, then the record date shall be as
provided by applicable law. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 2.09 List of Stockholders Entitled to Vote. A complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present at the meeting.
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Section 2.10 Notice of Stockholder Business; Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the stockholders
shall be made at an annual meeting of stockholders:
(A) pursuant to the Corporation's notice of such
meeting;
(B) by or at the direction of the Board of Directors; or
(C) by any stockholder of the Corporation who was a
stockholder of record at the time of the giving of the notice provided for in
this Section 2.10, who is entitled to vote at such meeting and who complies with
the notice procedures set forth in this Section 2.10.
(ii) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (C) of subparagraph
(a)(i) of this Section 2.10, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other business
must otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the Corporation:
(A) if the date of the annual meeting is not more than
30 days before and not more than 30 days after the first anniversary of the
preceding year's annual meeting, then not earlier than the close of business on
the 90th day, and not later than the close of business on the 60th day, prior to
the date on which the Corporation first mailed its proxy materials for the
preceding year's annual meeting of stockholders; and
(B) if the date of the annual meeting is more than 30
days before or more than 30 days after the first anniversary of the preceding
year's annual meeting, then not earlier than the close of business on the 120th
day prior to such annual meeting and not later than the close of business on the
later of the 90th day prior to such annual meeting or the 10th day following the
day on which public announcement (as defined herein) of the date of such meeting
is first made by the Corporation.
(iii) The stockholder's notice described in subparagraph
(a)(ii) of this Section 2.10 shall set forth:
(A) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including such person's written consent to being named in the
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proxy statement as a nominee and to serving as a director if elected;
(B) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and
(C) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made:
(1) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner; and
(2) the class and number of shares of the
Corporation that are owned beneficially and held of record by such stockholder
and such beneficial owner.
(b) Special Meetings of Stockholders.
(i) Only such business shall be conducted at a special meeting
of stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of such meeting.
(ii) Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation's notice of such meeting:
(A) by or at the direction of the Board of Directors;
or
(B) provided that the Board of Directors has determined
that directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who is entitled to vote at the meeting and who complies
with the notice procedures set forth in this Section 2.10.
(iii) If the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, then any such stockholder may nominate a person or persons (as the
case may be) for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by subparagraph (a)(ii)
of this Section 2.10 shall be delivered to the Secretary of the Corporation at
the principal executive offices of the Corporation:
(A) not earlier than the 90th day prior to such special
meeting; and
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(B) not later than the close of business on the later of
the 60th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such
meeting.
(c) General.
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 2.10 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 2.10. Except as otherwise provided by law or these
Bylaws, the chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 2.10 and, if any proposed nomination or business is not in
compliance herewith, to declare that such defective proposal or nomination shall
be disregarded.
(ii) For purposes of this Section 2.10, the term "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section
2.10, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 2.10 shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01 Number; Classes; Qualification. The Board of Directors shall
consist of no more than 12 members. The total number of authorized directors
shall be fixed from time to time by a duly adopted resolution of the Board of
Directors. The Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of authorized directors.
Directors need not be stockholders of the Corporation.
Section 3.02 Initial Terms; Subsequent Terms.
(a) The initial term of office of directors of:
(i) Class I shall expire at the annual meeting of
stockholders held in
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2001;
(ii) Class II shall expire at the annual meeting of
stockholders held in 2002; and
(iii) Class III shall expire at the annual meeting of
stockholders held in 2003.
(b) Each subsequent term of office of each class shall expire at
each third succeeding annual meeting of stockholders after the election of the
directors of such class. Subject to the provisions of the Certificate of
Incorporation, each director shall serve until his or her successor is elected
and qualified or until his or her earlier resignation or removal. No decrease in
the total number of authorized directors constituting the Board of Directors
shall shorten the term of any incumbent director.
Section 3.03 Resignation; Removal; Vacancies. Any director may resign at
any time upon written notice to the Corporation. Unless otherwise specified in
such written notice, a resignation shall take effect upon delivery of such
written notice to the Corporation. It shall not be necessary for a resignation
to be accepted before it becomes effective. Subject to the rights of any holders
of any preferred stock of the Corporation then outstanding and the Certificate
of Incorporation:
(a) any director, directors or the entire Board of Directors may be
removed, with cause, by the holders of a majority of the shares then entitled to
vote at an election of directors; and
(b) except as otherwise required by law, vacancies and newly created
directorships resulting from any increase in the total number of authorized
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. Any director elected to
fill a vacancy not resulting from an increase in the total number of authorized
directors shall have the same remaining term as that of his or her predecessor.
Any director elected to fill a vacancy shall hold office for a term expiring at
the next annual meeting of stockholders at which the term of office of the Class
to which such director has been elected expires, and until such director's
respective successor is elected, except in the case of the death, resignation or
removal of such director.
Section 3.04 Regular Meetings. Regular meetings of the Board of Directors
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the dates, times and places thereof are
fixed by resolution of the Board of Directors.
Section 3.05 Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or a majority of the
members of the Board of
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Directors then in office and may be held at any time, date or place, within or
without the State of Delaware, as the person or persons calling the meeting
shall fix. Notice of the time, date and place of such meeting shall be given,
orally or in writing, by the person or persons calling the meeting to all
directors at least four days before the meeting if the notice is mailed (which
shall be by first class, registered or certified United States mail), or at
least 48 hours before the meeting if such notice is given by telephone, hand
delivery, overnight or similar courier, telegram, telex, mailgram, facsimile or
similar communication method.
Section 3.06 Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee of the Board, may participate in a meeting of the
Board of Directors or of such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to such
means shall constitute presence in person at such meeting.
Section 3.07 Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the directors then in office shall constitute a
quorum for the transaction of business; provided that in no event shall a quorum
be less than one-third (1/3) of the total number of authorized directors. Except
as otherwise provided herein or in the Certificate of Incorporation, or required
by law, the vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
Section 3.08 Organization. Meetings of the Board of Directors shall be
presided over: (a) by the Chairman of the Board; (b) in the absence of the
Chairman of the Board, by the President (if a director); and (c) in the absence
or ineligibility of the President, by a chairman chosen at the meeting by a
majority of those directors present. The Secretary, or such other person as the
chairman of the meeting may appoint, shall act as secretary of the meeting.
Section 3.09 Written Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or of such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee, respectively. Written consents representing
actions taken by the Board of Directors or committee may be executed by telex,
telecopy or other facsimile transmission, and such facsimile shall be valid and
binding to the same extent as if it were an original.
Section 3.10 Powers. The Board of Directors may, except as otherwise
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 3.11 Compensation of Directors. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including, without limitation, their services
as members of committees of the Board of Directors.
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ARTICLE IV
COMMITTEES
Section 4.01 Creation. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of such committee present at any meeting of such committee who
are not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member.
Section 4.02 Powers.
(a) Subject to paragraph (b) of this Section 4.02, any committee, to
the extent provided in the resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it.
(b) Notwithstanding paragraph (a) of this Section 4.02, no committee
shall have the power or authority to:
(i) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in subsection (a) of Section 151 of the DGCL, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series);
(ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the DGCL;
(iii) recommend to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets;
(iv) recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution;
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(v) amend these Bylaws; or
(vi) unless the resolution of the Board of Directors expressly
provides to the contrary, declare a dividend, authorize the issuance of stock or
adopt a certificate of ownership and merger pursuant to Section 253 of the DGCL.
Section 4.03 Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules, each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article III of these Bylaws.
ARTICLE V
OFFICERS
Section 5.01 Designations. The officers of the Corporation shall be
chosen by the Board of Directors. The Board of Directors shall choose a
President, a Secretary and a Treasurer (together, the "Required Officers"), and
may choose a Chairman of the Board, a Chief Executive Officer, a Chief Operating
Officer, a Chief Financial Officer, an Executive Vice President or Executive
Vice Presidents, a Vice President or Vice Presidents, one or more Assistant
Secretaries and/or Assistant Treasurers and other officers and agents as it
shall deem necessary or appropriate (together, the "Permitted Officers"). All
officers of the Corporation shall exercise such powers and perform such duties
as shall from time to time be determined by the Board of Directors. Any number
of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws otherwise provide.
Section 5.02 Term of Office; Removal. Subject to the next sentence of
this Section 5.02, each officer of the Corporation shall hold office until such
officer's successor is chosen and shall qualify. Any officer elected or
appointed by the Board of Directors may be removed, with or without cause, at
any time by the affirmative vote of a majority of the directors then in office.
Such removal shall not prejudice the contract rights, if any, of the person so
removed. Any vacancy occurring in any office of the Corporation may be filled
for the unexpired portion of the term by the Board of Directors.
Section 5.03 Compensation. The salaries of all officers of the
Corporation shall be fixed from time to time by the Board of Directors, and no
officer shall be prevented from receiving such salary by reason of the fact that
such person is also a director of the Corporation.
Section 5.04 The Chairman of the Board. The Chairman of the Board, if
any, shall be an officer of the Corporation and, subject to the direction of the
Board of Directors, shall perform such executive, supervisory and management
functions and duties as may be assigned to the Chairman of the Board from time
to time by the Board of Directors. The Chairman of the Board shall, if present,
preside at all meetings of stockholders and of the Board of Directors.
Section 5.05 The Chief Executive Officer. The Chief Executive Officer, if
any, shall
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be an officer of the Corporation and, subject to the direction of the Board of
Directors, shall perform such executive, supervisory and management functions
and duties as may be assigned to the Chief Executive Officer from time to time
by the Board of Directors or by the Chairman of the Board (if the Chairman of
the Board be so authorized by the Board of Directors).
Section 5.06 The President.
(a) The President shall, subject to the direction of the Board of
Directors, have general supervision over the business and operations of the
Corporation. The President shall, in general and unless otherwise prescribed by
the Board of Directors, perform all duties incident to the office of President
and such other duties as from time to time may be assigned by the Board of
Directors, the Chairman of the Board (if the Chairman of the Board be so
authorized by the Board of Directors) or the Chief Executive Officer.
(b) Unless otherwise prescribed by the Board of Directors, the
President shall have full power and authority on behalf of the Corporation to
attend, act and vote at any meeting of security holders of other corporations in
which the Corporation may hold securities. At such meeting the President shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities which the Corporation might have possessed and exercised if
it had been present. The Board of Directors may from time to time confer like
powers upon any other person or persons.
Section 5.07 The Chief Financial Officer and the Chief Operating Officer.
The Chief Financial Officer and the Chief Operating Officer shall, subject to
the direction of the Board of Directors, perform such executive, supervisory and
management functions and duties as may be assigned to each of them,
respectively, from time to time by the Board of Directors, the Chairman of the
Board (if the Chairman of the Board be so authorized by the Board of Directors)
or the Chief Executive Officer.
Section 5.08 The Executive Vice Presidents and the Vice Presidents. The
Executive Vice President, if any (or in the event that there be more than one,
the Executive Vice Presidents in the order designated, or in the absence of any
designation, in the order of their election), or, if none, the Vice President,
if any (or in the event that there be more than one, the Vice Presidents in the
order designated, or in the absence of any designation, in the order of their
election), shall, in the absence of, or in the event of the disability of, the
President, perform the duties and exercise the powers of the President and shall
generally assist the President and perform such other duties and have such other
powers as may from time to time be prescribed by the Board of Directors.
Section 5.09 The Secretary; Assistant Secretaries.
(a) Duties of the Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of stockholders and record all votes
and the proceedings of the meetings in a book to be kept for that purpose and
shall perform like duties for other
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committees, if required. The Secretary shall give, or cause to be given, notice
of all meetings of stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may from time to time be prescribed by
the Board of Directors, the Chairman of the Board or the President, under whose
supervision the Secretary shall act. The Secretary shall have custody of the
seal of the Corporation, and the Secretary or any Assistant Secretary, shall
have authority to affix the same to any instrument requiring it, and, when so
affixed, the seal may be attested by the Secretary's signature or by the
signature of such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing thereof by such officer's signature.
(b) Duties of the Assistant Secretary. The Assistant Secretary, if
any (or in the event there be more than one, the Assistant Secretaries in the
order designated, or in the absence of any designation, in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's disability, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors.
Section 5.10 The Treasurer; Assistant Treasurers.
(a) Duties of the Treasurer. The Treasurer shall have the custody of
the corporate funds and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may from
time to time be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chairman of the Board, the President and the Board of Directors, at regular
meetings of the Board, or whenever they may require it, an account of all
transactions and of the financial condition of the Corporation.
(b) Duties of the Assistant Treasurer. The Assistant Treasurer, if
any (or in the event there shall be more than one, the Assistant Treasurers in
the order designated, or in the absence of any designation, in the order of
their election), shall, in the absence of the Treasurer or in the event of the
Treasurer's disability, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors.
Section 5.11 Delegation of Authority. Notwithstanding any provision
hereof, the Board of Directors may, from time to time, delegate the powers or
duties of any officer to any other officers or agents.
Section 5.12 Representation of Shares of Other Corporations. Any Required
Officer or Permitted Officer, and any other person authorized by the Board of
Directors or a Required Officer, may vote, represent and exercise on behalf of
the Corporation all rights incident to any and all shares of any other
corporation or corporations held by the Corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized
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to do so by proxy or power of attorney duly executed by the person having such
authority.
ARTICLE VI
STOCK CERTIFICATES
Section 6.01 Form; Signatures.
(a) Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by the Chairman of the Board, the Chief Executive
Officer or the President and the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation, exhibiting the number
and class (and series, if any) of shares owned by such person. Such signatures
may be facsimile. A certificate may be manually signed by a transfer agent or
registrar other than the Corporation or its employee but may be a facsimile. In
case any officer who has signed, or whose facsimile signature was placed on, a
certificate shall have ceased to be such officer before such certificate is
issued, it may nevertheless be issued by the Corporation with the same effect as
if such person were such officer at the date of its issue.
(b) All stock certificates representing shares of capital stock
which are subject to restrictions on transfer or to other restrictions may have
imprinted thereon such notation to such effect as may be determined by the Board
of Directors.
Section 6.02 Registration of Transfer. Upon surrender to the Corporation
or any transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation or its transfer
agent to issue a new certificate to the person entitled thereto, to cancel the
old certificate and to record the transaction upon its books.
Section 6.03 Registered Stockholders.
(a) Except as otherwise provided by law, the Corporation shall be
entitled to recognize the exclusive right of a person who is registered on its
books as the owner of shares of its capital stock to receive dividends or other
distributions, to vote as such owner, and to hold liable for calls and
assessments any person who is registered on its books as the owner of shares of
its capital stock. The Corporation shall not be bound to recognize any equitable
or legal claim to or interest in such shares on the part of any other person.
(b) If a stockholder desires that notices and/or dividends shall be
sent to a name or address other than the name or address appearing on the stock
ledger maintained by the Corporation (or by the transfer agent or registrar, if
any), such stockholder shall have the duty to notify the Corporation (or the
transfer agent or registrar, if any) in writing, of such desire. Such written
notice shall specify the alternate name or address to be used. Any stockholder
directing or permitting dividends or other distributions to be sent to a name or
address other than that appearing on the Corporation's stock ledger shall bear
full responsibility for all taxes, fees, charges and other sums that may be or
become due and payable as a result thereof.
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Section 6.04 Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation which is claimed to have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or such person's legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum, or other security in such form, as
it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate claimed to have been lost, stolen or
destroyed.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Nature of Indemnity. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was (or, to the extent permitted by Delaware law, has agreed to
become) a director or officer of the Corporation, or is or was serving (or, to
the extent permitted by Delaware law, has agreed to serve) at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged to have
been taken or omitted in such capacity (each of the foregoing, a "Mandatory
Indemnitee"), and may indemnify any person who was or is a party or is
threatened to be made a party to such an action, suit or proceeding by reason of
the fact that such person is or was (or, to the extent permitted by Delaware
law, has agreed to become) an employee or agent of the Corporation, or is or was
serving (or, to the extent permitted by Delaware law, has agreed to serve) at
the request of the Corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (each of the foregoing, a
"Permissive Indemnitee"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person or on such person's behalf in connection with such action, suit
or proceeding and any appeal therefrom, if such person acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful; except that in the case of an action or suit by or in the right of the
Corporation to procure a judgment in its favor, (a) such indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such person in the defense or settlement of such action or suit, and
(b) no indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the Corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon
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a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
Section 7.02 Successful Defense. To the extent that any Mandatory
Indemnitee or Permissive Indemnitee has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
7.01, or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith.
Section 7.03 Determination That Indemnification Is Proper. Any
indemnification of a Mandatory Indemnitee or Permissive Indemnitee (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of such person is proper
in the circumstances because such person has met the applicable standard of
conduct set forth in Section 7.01. Any such determination shall be made, with
respect to a person who is a director or officer at the time of such
determination:
(a) by the majority vote of the Board of Directors who were not
parties to such action, suit or proceeding even though less than a quorum;
(b) by a committee of such directors designated by majority vote of
such directors, even though less than a quorum;
(c) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion; or
(d) by the stockholders.
Section 7.04 Advance Payment of Expenses. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Mandatory
Indemnitee in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such Mandatory
Indemnitee to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Corporation as authorized in this
Article VII. Such expenses incurred by a Permissive Indemnitee may be so paid
upon such terms and conditions, if any, as the Board of Directors deems
appropriate. The Board of Directors may authorize the Corporation's legal
counsel to represent any Mandatory Indemnitee or Permissive Indemnitee in any
action, suit or proceeding, whether or not the Corporation is a party to such
action, suit or proceeding.
Section 7.05 Survival. The foregoing indemnification provisions shall be
deemed to be a contract between the Corporation and each Mandatory Indemnitee or
Permissive Indemnitee who serves in any such capacity at any time while these
provisions as well as the relevant provisions of the DGCL are in effect and any
repeal or modification thereof shall not affect any
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<PAGE> 17
right or obligation then existing with respect to any state of facts then or
previously existing or any action, suit, or proceeding previously or thereafter
brought or threatened based in whole or in part upon any such state of facts.
Such a contract right may not be modified retroactively without the consent of
such Mandatory Indemnitee or Permissive Indemnitee.
Section 7.06 Preservation of Other Rights. The indemnification and
advancement of expenses provided by this Article VII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in any
such person's official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. Subject to the limitations
set forth in Section 7.05, the Corporation may enter into an agreement with any
of its directors, officers, employees or agents, or any person serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
employee benefit plans, providing for indemnification and advancement of
expenses, including attorneys' fees, that may change, enhance, qualify or limit
any right to indemnification or advancement of expenses created by this Article
VII.
Section 7.07 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power to indemnify him or her against such liability under the provisions of the
DGCL.
Section 7.08 Severability. If this Article VII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each Mandatory Indemnitee and may
indemnify each Permissive Indemnitee as to costs, charges and expenses
(including attorneys' fees), judgment, fines and amounts paid in settlement with
respect to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article VII that shall not have been invalidated and to the fullest extent
permitted by applicable law.
Section 7.09 Subrogation. In the event of payment of indemnification to a
Mandatory Indemnitee or Permissive Indemnitee, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation to effectively
enforce any such recovery.
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Section 7.10 No Duplication of Payments. The Corporation shall not be
liable under this Article VII to make any payment in connection with any claim
made against a Mandatory Indemnitee or Permissive Indemnitee to the extent such
person has otherwise received payment (under any insurance policy, bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.
Section 7.11 Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VII shall be prospective only, and shall not
adversely affect any right or protection conferred on any person pursuant to
this Article VII and existing at the time of such amendment, repeal or
modification.
ARTICLE VIII
NOTICES
Section 8.01 Notice. Except as otherwise specifically provided herein or
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing. No requirement of notice in these Bylaws shall be construed to
mean personal notice unless otherwise specifically provided herein. Any notice
other than those specifically required herein to be given personally and other
than those specifically required herein to be transmitted by a particular means
may be given by first class mail or by telegram (with messenger service
specified), or courier service, charges prepaid, or by facsimile transmission
(with confirmation of receipt) to the address (or to the facsimile number) of
the person appearing on the books of the Corporation, or, in the case of
directors, supplied to the Corporation for the purpose of notice. Except as
otherwise specifically provided herein, if the notice is sent by mail, telegram
or courier service, it shall be deemed to be given when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person or, in the case of facsimile transmission, when transmitted.
Section 8.02 Waiver of Notice. Whenever notice is required to be given
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to such notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice, unless
so required by the Certificate of Incorporation.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01 Dividends. Subject to applicable law and the provisions of
the Certificate of Incorporation, dividends upon the outstanding capital stock
of the Corporation may be
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declared by the Board of Directors at any regular or special meeting and may be
paid in cash, in property or in shares of the Corporation's capital stock. The
Board of Directors shall have full power, subject to the provisions of law and
the Certificate of Incorporation, to determine whether any, and, if so, what
part, of the funds legally available for the payment of dividends shall be
declared as dividends and paid to the stockholders of the Corporation.
Section 9.02 Reserves. The Board of Directors, in its sole discretion,
may fix a sum which may be set aside as a fund or reserved over and above the
paid-in capital of the Corporation for working capital or as a reserve for any
proper purpose, and may, from time to time, increase, diminish or vary such fund
or reserve.
Section 9.03 Fiscal Year. The fiscal year of the Corporation shall be
determined, and may be subsequently changed from time to time, by resolution of
the Board of Directors.
Section 9.04 Seal. The Board of Directors may provide for a corporate
seal, which shall have inscribed thereon the name of the Corporation, the year
of its incorporation and the words "Corporate Seal" and "Delaware." Any
corporate seal shall otherwise be in such form as may be approved from time to
time by the Board of Directors.
Section 9.05 Certificate of Incorporation Governs. In the event of any
conflict between the provisions of the Certificate of Incorporation and these
Bylaws, the provisions of the Certificate of Incorporation shall govern.
Section 9.06 Severability. If any provision of these Bylaws shall be held
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Certificate of Incorporation, then such provision shall nonetheless be enforced
to the maximum extent possible consistent with such holding and the remaining
provisions of these Bylaws (including, without limitation, all portions of any
section of these Bylaws containing any such provision held to be invalid,
illegal, unenforceable or in conflict with the Certificate of Incorporation,
that are not themselves invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation) shall remain in full force and effect.
ARTICLE X
AMENDMENTS
Section 10.01 Amendment by Stockholders. Stockholders of the Corporation
holding at least a majority of the Corporation's outstanding voting stock,
voting as a single class, shall have the power to adopt, amend or repeal bylaws
of the Corporation.
Section 10.02 Amendment by the Board of Directors. To the extent provided
in the Certificate of Incorporation, the Board of Directors shall have the power
to adopt, amend or repeal bylaws of the Corporation by an affirmative vote of a
majority of the whole Board of Directors, except insofar as bylaws adopted by
the stockholders shall otherwise provide.
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<PAGE> 1
Exhibit 4.1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is made as of
this ____ day of July, 1999 by and among ServiceWare, Inc., a Pennsylvania
corporation (the "Company"), the persons or entities listed on Schedule A
attached hereto (individually, an "Investor", and collectively, the "Investors")
and the Shareholders (as hereinafter defined).
1. Certain Definitions.
As used in this Agreement, the following terms shall have the
following meanings.
(a) "Commission" means the Securities and Exchange Commission,
or any other federal agency at the time administering the Securities
Act and Exchange Act.
(b) "Common Stock" means: (i) the Company's Common Stock, no
par value per share, as authorized on the date of this Agreement; (ii)
any other capital stock of any class or classes (however designated) of
the Company, authorized on or after the date hereof, the holders of
which shall have the right, without limitation as to amount, either to
all or to a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall
ordinarily, in the absence of contingencies or in the absence of any
provision to the contrary in the Company's Articles of Incorporation,
as amended, be entitled to vote for the election of a majority of
directors of the Company (even though the right to vote has been
suspended by the happening of such a contingency or provision); and
(iii) any other securities into which or for which any of the
securities described in (i) or (ii) may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of
assets or otherwise.
(c) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder, as shall be in effect at the
time.
(d) "Person" means an individual, corporation, partnership,
joint venture, trust, or unincorporated organization, or a government
or any agency or political subdivision thereof.
(e) "Registrable Securities" means any shares of Common Stock
owned by an Investor or its permitted successors and assigns, including
but not limited to shares of Common Stock issued or issuable upon
conversion of any shares of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock, Series D Convertible Preferred Stock or Series E Convertible
Preferred Stock or upon exercise of any warrants to purchase Common
Stock; except for any shares of such
<PAGE> 2
Common Stock that: (i) have at any time been sold by such parties other
than to a permitted assignee, as defined in Section 5 hereof; and (ii)
which have at any time been sold in a registered public offering or
pursuant to Rule 144 promulgated under the Securities Act.
(f) "Securities Act" means the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the
time.
(g) "Shareholders' Agreement" means that certain Shareholders'
Agreement dated as of the date hereof among the Company, the Investors
and the Shareholders.
(h) "Shareholders" mean Jeff Pepper, Rajiv Enand, and Bruce
Molloy.
(i) "Shareholders' Shares" shall mean all shares of Common
Stock owned by the Shareholders now held or hereafter acquired, but
excluding any such Common Stock that has been: (i) registered under the
Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with that registration
statement; or (ii) publicly sold pursuant to Rule 144 under the
Securities Act.
2. Registration Rights.
(a) Piggyback Registrations. If at any time or times after the
date hereof, the Company shall determine to register any of its Common
Stock or securities convertible into or exchangeable for Common Stock
under the Securities Act, whether in connection with a public offering
of securities by the Company (a "primary offering"), a public offering
thereof by shareholders (a "secondary offering"), or both (but not in
connection with a registration effected solely to register securities
issuable pursuant to, or rights or interests under, an employee benefit
plan or a transaction to which Rule 145 or any other similar rule of
the Commission under the Securities Act is applicable), the Company
will promptly give written notice thereof to the holders of Registrable
Securities and Shareholders' Shares then outstanding (the "Holders"),
and will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities and Shareholders' Shares
which the Holders may request in a writing delivered to the Company
within fifteen (15) days after the notice given by the Company;
provided, however, that in the event that any registration pursuant to
this Section 2(a) (including a registration requested under Section
2(b) and subsequently converted into a piggyback registration at the
election of the Company, as provided in Section 2(b)) shall be, in
whole or in part, an underwritten public offering of Common Stock, the
number of shares of Registrable Securities and Shareholders' Shares to
be included in such an underwriting may be reduced (pro rata among the
requesting Holders based upon the number of shares of Registrable
Securities and Shareholders' Shares owned by such Holders) if and to
the extent that the managing underwriter shall be of the opinion that
such inclusion would adversely affect the marketing of the securities
to be sold by the Company therein provided, further, that, prior to any
such reduction, the Company shall first exclude from
2
<PAGE> 3
such registration, in the following order, all shares of Common Stock
sought to be included therein by: (i) any holder thereof not having any
such contractual, incidental registration rights; and (ii) any holder
thereof having contractual, incidental registration rights subordinate
and junior to the rights of the Holders of Registrable Securities. The
Holders acknowledge that the rights of holders of Registrable
Securities and Shareholders' Shares exercising their "piggyback rights"
pursuant to this Section 2(a) shall be junior to the rights of holders
of Registrable Securities who have exercised their demand rights under
Section 2(b) in a situation in which the Company did not elect to make
a primary offering, as provided in Section 2(b).
(b) Demand Registrations. If at any time following the date
which is six months after the Company's initial public offering, one or
more of the holders of an aggregate of not less than 20% of the
Registrable Securities then outstanding shall notify the Company in
writing that it or they intend to offer or cause to be offered for
public sale all or any portion of their Registrable Securities, the
Company will notify all of the holders of Registrable Securities who
would be entitled to notice of a proposed registration under the terms
of this Agreement. Upon the written request of any such holder after
receipt from the Company of such notification, the Company shall
either: (A) elect to make a primary offering, in which case the rights
of Holders shall be as set forth with respect to a primary offering in
Section 2(a) and such registration shall be deemed to be a registration
under Section 2(a) and not a registration hereunder (in which event the
Company shall not be required to cause a registration statement
requested pursuant to this Section 2(b) to become effective prior to 90
days following the effective date of the registration statement
initiated by the Company under Section 2(a)); or (B) file as soon as
practicable, and in any event within 60 days of the receipt of such
written request, a registration statement, and use its best efforts to
cause to become effective the registration of such Registrable
Securities as may be requested by any holders (including the holder or
holders giving the initial notice of intent to register hereunder) to
be registered under the Securities Act in accordance with the terms of
this Section 2(b). Anything herein to the contrary notwithstanding, the
Company shall be obligated to comply with this Section 2(b) on two
occasions only.
(c) Form S-3. If the Company becomes eligible to use Form S-3,
the Company shall use its commercially reasonable efforts to continue
to qualify at all times for registration of securities on Form S-3. If
and when the Company becomes entitled to use Form S-3, the holders of
an aggregate of such number of Registrable Securities that have an
aggregate sales price of not less than $250,000 shall have the right to
request and have effected not more than one registration per year of
shares of Registrable Securities held by them on Form S-3. Such
requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended method of
disposition of such shares by such holder or holders. The Company shall
not be required to cause a registration statement requested pursuant to
this Section 2(c) to become effective prior to 90 days following the
effective date of a registration statement initiated by the Company, if
the request for registration has been received by the Company
subsequent to the giving of written notice by the Company, made in good
faith, to the
3
<PAGE> 4
holders or Registrable Securities to the effect that the Company is
commencing to prepare a Company-initiated registration statement (other
than a registration effected solely to register securities issuable
pursuant to, or rights or interests under, an employee benefit plan or
a transaction to which Rule 145 or any other similar rule of the
Commission under the Securities Act is applicable); provided, however,
that the Company shall use its best efforts to achieve such
effectiveness promptly following such 90-day period. The Company shall
give notice to all holders of Registrable Securities of the receipt of
a request for registration pursuant to this Section 2(c) and shall
provide a reasonable opportunity for such holders to participate in the
registration. Subject to the foregoing, the Company will use its best
efforts to effect promptly the registration of all shares of Common
Stock on Form S-3 to the extent requested by the holder or holders
thereof for purposes of disposition. Notwithstanding the foregoing, the
Company shall not be required to effect a registration under this
Section 2(c) or Section 2(a) or 2(b) if such Holders of Registrable
Securities may then sell all Registrable Securities within any two
successive 3-month periods without registration under the Securities
Act. In connection with any Form S-3, the Shareholders agree: (i) to
provide all such information and material and take all actions as may
be reasonably required in order to enable the Company to comply with
all applicable requirements of the Commission and to obtain
acceleration of the effective dates of any Form S-3; (ii) that the
distribution of shares of Common Stock included in the Form S-3 shall
be made in accordance with the plan of distribution set forth in such
registration statement and with all applicable rules and regulations of
the Commission; (iii) not to deliver any form of prospectus in
connection with the sale of any shares of Common Stock as to which the
Company has advised the Holders in writing that it is preparing an
amendment or supplement; and (iv) to notify the Company promptly in
writing upon the sale by the Holder of any shares of Common Stock
covered by the Form S-3.
(d) Registration Expenses. In the event of a registration
described in Section 2(a) or 2(b), all expenses of registration and
offering of the Holders participating in the offering including,
without limitation, printing expenses, fees and disbursements of
counsel (including one counsel for the selling Holders of Registrable
Securities or Shareholders' Shares), and independent public
accountants, fees and expenses (including counsel fees incurred by the
Company in connection with complying with state securities or "blue
sky" laws), fees of the National Association of Securities Dealers,
Inc. and fees of transfer agents and registrars), shall be borne by the
Company, except that the Holders shall bear underwriting commissions
and discounts attributable to their Registrable Securities or
Shareholders' Shares, as the case may be, being registered. In the
event of a registration described in Section 2(c), all expenses of
registration and offering of the Holders shall be paid for pro rata by
the Holders whose Registrable Securities are included in the Form S-3.
(e) Further Obligations of the Company. Whenever under the
preceding sections of this Agreement the Company is required hereunder
to register Registrable Securities or Shareholders' Shares, it agrees
that it shall also do the following:
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<PAGE> 5
(i) use commercially reasonable efforts to diligently
prepare for filing with the Commission a registration
statement and such amendments and supplements to said
registration statement and the prospectus used in connection
therewith as may be necessary to keep said registration
statement effective and to comply with the provisions of the
Securities Act with respect to the sale of securities covered
by said registration statement for the period necessary to
complete the proposed public offering;
(ii) furnish to each selling Holder such copies of
each preliminary and final prospectus and such other documents
as such Holder may reasonably request to facilitate the public
offering of his Registrable Securities or Shareholders'
Shares;
(iii) enter into and perform its obligations under
any underwriting agreement with provisions reasonably required
by the proposed underwriter for the selling Holders, if any;
(iv) use its commercially reasonable efforts to
register or qualify the Registrable Securities and
Shareholders' Shares covered by said registration statement
under the securities or "blue-sky" laws of such jurisdictions
as any selling holder of Registrable Securities or
Shareholders' Shares may reasonably request, provided that the
Company shall not be required to register in any states which
shall require it to qualify to do business or subject itself
to general service of process as a condition of such
registration;
(v) prepare and file with the Commission such
amendments and supplements to such registration statement and
the prospectus used in connection with such registration
statement as and to the extent necessary to comply with the
federal securities and any applicable state securities statute
or regulation;
(vi) notify each holder of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under
the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing;
(vii) cause all such Registrable Securities
registered pursuant hereto to be listed or quoted on each
securities exchange or tier of The Nasdaq Stock Market on
which similar securities issued by the Company are then listed
or quoted;
(viii) provide a transfer agent and registrar for all
Registrable Securities registered hereunder not later than the
effective date of such registration.
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<PAGE> 6
3. Indemnification.
(a) Incident to any registration referred to in this
Agreement, and subject to applicable law, the Company will indemnify
each underwriter, each Holder of Registrable Securities and
Shareholders' Shares so registered, the officers and directors of each
Holder of Registrable Securities and each person controlling any of
them against all claims, losses, damages and liabilities, including
legal and other expenses reasonably incurred in investigating or
defending against the same, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any prospectus
or other document (including any related registration statement) or any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or arising out of any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any state securities
or "blue-sky" laws or any rule or regulation thereunder in connection
with such registration; provided, however, that the Company will not be
liable in any case to the extent that any such claim, loss, damage or
liability may have been caused by an untrue statement or omission based
upon information furnished in writing to the Company by such
underwriter or such Holder expressly for use therein. In the event of
any registration of any of the Registrable Securities or Shareholders'
Shares under the Securities Act pursuant to this Agreement, each seller
of Registrable Securities or Shareholders' Shares, as the case may be,
severally and not jointly, will indemnify and hold harmless the
Company, each of its directors and officers and each underwriter (if
any) and each person, if any, who controls the Company or any such
underwriter within the meaning of the Securities Act or the Exchange
Act against any claim, losses, damages and liabilities, including legal
and other expenses reasonably incurred in investigating, or defending
it against the same, arising out of any untrue statement of a material
fact contained in any prospectus or other document (including any
related registration statement) or any omission to state therein a
material fact required to be stated therein or necessary to make the
statement therein not misleading, if the statement or omission was made
in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of such selling Holder,
specifically for use in connection with the preparation of such
registration statement, prospectus, amendment or supplement; provided,
however, that the obligations of such selling Holders hereunder shall
be limited to an amount equal to the proceeds to each Holder of
Registrable Securities or Shareholders' Shares sold as contemplated
herein.
(b) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this subsection, notify the indemnifying party
who shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying
party similarly notified, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that the
indemnified parties in any such proceeding shall have the right to
retain one counsel at the expense of the indemnifying party, if there
is or could reasonably be expected to be a conflict of interest with
respect to a third party between
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<PAGE> 7
the position of the indemnified parties and the indemnifying party. The
failure to notify an indemnifying party promptly of the commencement of
any such action, if prejudicial to his ability to defend such action,
shall relieve such indemnifying party of any liability to the
indemnified party under this subsection, but the omission so to notify
the indemnifying party will not relieve him of any liability that he
may have to any indemnified party otherwise than under this Section.
(c) To the extent that the indemnification provided for in
this Section 3 from the indemnifying party is held by a court of
competent jurisdiction (by the entry of a final judgment or decree and
the expiration of time to appeal or the denial of the last right of
appeal) to be unavailable to an indemnified party hereunder in respect
of any losses, claims, damages liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect
the relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among
other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified
parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. No
person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The obligations of the Company and the Holders under this
Section 3 shall survive the completion of any offering of Registrable
Securities in a registration statement under Section 2.
4. Rule 144 Requirements. If the Company becomes subject to the
reporting requirements of either Section 13 or Section 15(d) of the Exchange
Act, the Company will use its best efforts to file with the Commission such
information as the Commission may require under either of said Sections; and in
such event, the Company shall use its best efforts to take all action as may be
required as a condition to the availability of Rule 144 under the Securities Act
(or any successor exemptive rule hereinafter in effect). The Company shall
furnish to any Holder of Registrable Securities or Shareholders' Shares upon
request, a written statement executed by the Company as to the steps it has
taken to comply with the reporting requirements of Rule 144.
7
<PAGE> 8
5. Transfer of Registration Rights. The registration rights of the
Holders under this Agreement may be transferred to any transferee of any shares
of Series A Convertible Preferred Stock, shares of Series B Convertible
Preferred Stock, shares of Series C Convertible Preferred Stock, shares of
Series D Preferred Stock, shares of Series E Convertible Preferred Stock,
Registrable Securities or Shareholders' Shares who: (i) is a Holder of shares of
Series A Convertible Preferred Stock, shares of Series B Convertible Preferred
Stock, shares of Series C Convertible Preferred Stock, shares of Series D
Convertible Preferred Stock, shares of Series E Convertible Preferred Stock,
Registrable Securities or Shareholders' Shares as of the date of this Agreement;
(ii) is an affiliate, as that term is defined in the Investment Company Act of
1940, of a Holder of Registrable Securities as of the date of this Agreement
(including a partner of such Holder); or (iii) is the owner of an investment
account which is managed or advised by an Investor, an affiliate of an Investor,
or any person or entity that acquires 76,000 shares of Series B Convertible
Preferred Stock (as adjusted for stock splits, stock dividends,
reclassifications, recapitalizations or other similar events) (each a "permitted
assignee"). Each such transferee shall be deemed to be a "Holder" for purposes
of this Agreement; provided, that, no transfer of registration rights by a
Holder pursuant to this Section 5 shall create any additional rights in the
transferee beyond those rights granted to Holders in this Agreement.
6. Granting of Registration Rights. The Company shall not, without the
prior written consent of the holders of at least a majority in interest of the
Registrable Securities, grant any rights to any Persons to register any shares
of capital stock or other securities of the Company if such rights could
reasonably be expected to be superior to or be on parity with, the rights of the
holders of Registrable Securities granted pursuant to this Agreement.
7. Prior Agreements. All parties to that certain Registration Rights
Agreement dated June 29, 1995 (the "June 29 Agreement") acknowledge and agree
that the June 29 Agreement which was superseded and replaced by the April 24
Agreement (defined below) has no effect whatsoever and is null and void. Poly
Ventures II, L.P. acknowledges and agrees that this Agreement supersedes and
replaces the registration rights provisions contained in Section 11 ("Section
11") of that certain Share Purchase Agreement with the Company dated as of July
25, 1994 in all respects and Section 11 is hereby rendered null and void. All
parties to that certain Registration Rights Agreement dated April 24, 1996 (the
"April 24 Agreement") acknowledge and agree that this Agreement supersedes and
replaces the April 24 Agreement in all respects, and the April 24 Agreement is
hereby rendered null and void.
8. Miscellaneous.
(a) Damages. The Company recognizes and agrees that the
holders of Registrable Securities will not have an adequate remedy if
the Company fails to comply with this Agreement and that damages may
not be readily ascertainable, and the Company expressly agrees that, in
the event of such failure, it shall not oppose an application by a
Holder of Registrable Securities requiring specific performance of any
and all provisions hereof or enjoining the Company from continuing to
commit any such breach of this Agreement.
8
<PAGE> 9
(b) No Waiver; Cumulative Remedies. No failure or delay on the
part of any party to this Agreement in exercising any right, power or
remedy hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other
right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
(c) Amendments and Waivers. Except as hereinafter provided,
amendments to this Agreement shall require and shall be effective upon
receipt of the written consent of: (i) the Company; (ii) the holders of
at least a majority in interest of the Registrable Securities; and
(iii) in the case of any amendment adversely affecting the rights of
the Shareholders, the holders of at least a majority in interest of the
Shareholders' Shares. Except as hereinafter provided, compliance with
any covenant or provision set forth herein may be waived upon written
consent by the party or parties whose rights are being waived;
provided, that: (i) if the rights of holders of Registrable Securities
are being waived, upon the written consent of the holders of at least a
majority in interest of the Registrable Securities; and (ii) if the
rights of holders of Shareholders' Shares are being waived, upon the
written consent of the holders of at least a majority in interest of
the Shareholders' Shares. Notwithstanding the foregoing, no waivers or
amendments shall be effective to reduce the percentage in interest of
the Registrable Securities or Shareholders' Shares the consent of the
holders of which is required under this Section. Any waiver or
amendments may be given subject to satisfaction of conditions stated
therein and any waiver or amendments shall be effective only in the
specific instance and for the specific purpose for which given.
(d) Notices. As the terms "notice" or "notices" are used
herein as between the parties, such term shall mean a written document,
explaining the reason for the notice, and the same shall be mailed by
United States Postal Service, via Certified Mail, Return Receipt
Requested, addressed as follows:
to the Company:
ServiceWare, Inc.
333 Allegheny Ave.
Oakmont, PA 15139
Attn: Rajiv Enand
with a copy by mail and fax (which shall not constitute notice) to:
Marlee S. Myers, Esquire
Morgan, Lewis & Bockius LLP
One Oxford Centre
Pittsburgh, PA 15219-1417
Facsimile: 412-560-3399
9
<PAGE> 10
to the holders of Series B Preferred Stock:
at the addresses on Schedule A,
with a copy by mail and fax (which shall not constitute notice) to:
William B. Asher, Jr., Esquire
Testa, Hurwitz & Thibeault
53 State Street
Boston, MA 02109
and
to the holders of Series C Preferred Stock:
at the addresses on Schedule A,
with a copy by mail and fax (which shall not constitute notice) to:
Steven E. Bochner, Esquire
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
to the holders of Series D Preferred Stock:
at the addresses on Schedule A,
with a copy by mail and fax (which shall not constitute notice) to:
Golenbock, Eiseman, Assor & Bell
437 Madison Avenue
New York, NY 10022-7302
Attn: Lawrence M. Bell, Esq.
Telephone: 212-907-7300
Facsimile: 212-754-0330
to the holders of Series E Preferred Stock:
at the addresses on Schedule A,
with a copy by mail and fax (which shall not constitute notice) to:
Golenbock, Eiseman, Assor & Bell
437 Madison Avenue
10
<PAGE> 11
New York, NY 10022-7302
Attn: Lawrence M. Bell, Esq.
Telephone: 212-907-7300
Facsimile: 212-754-0330
Such notice shall be deemed to have been given on the date received by
the addressee. The parties shall, as a matter of convenience and
courtesy, send each party receiving notice a copy of said notice by
facsimile or electronic means, or by courier, Federal Express, or
similar service, but such notifications shall not be deemed lawful
"notice" as required hereby. The parties may from time to time amend
the above addresses and names by written notice given the other party.
(e). Binding Effect; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective heirs, successors and permitted assigns, except that the
Company shall not have the right to delegate its obligations hereunder
or to assign its right hereunder or any interest herein without the
prior written consent of the holders of at least a majority in interest
of the Registrable Securities.
(f) Prior Agreement. This Agreement constitutes the entire
agreement between the parties and supersedes any prior understandings
or agreements concerning the subject matter hereof.
(g) Severability. The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction
shall determine that any one or more of the provisions or part of a
provision contained in this Agreement, shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement, but this Agreement
shall be reformed and construed as if such invalid or illegal or
unenforceable provision, or part of a provision, had never been
contained herein, and such provisions or part reformed so that it would
be valid, legal and enforceable to the maximum extent possible.
(h) Governing Law. This Agreement shall be governed by and
construed in accordance with the substantive laws of the Commonwealth
of Pennsylvania, excluding its conflict of laws principles.
(i) Headings. Article, section and subsection headings in this
Agreement are included herein for convenience of reference only and
shall not constitute a part of this Agreement for any other purpose.
(j) Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and
the same instrument, and any of the parties hereto may execute this
Agreement by signing any such counterpart.
11
<PAGE> 12
(k) Further Assurances. From and after the date of this
Agreement, upon the request of any party hereto, the other parties
shall execute and deliver such Agreements, documents and other writings
as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.
12
<PAGE> 13
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the day and year first above written.
SERVICEWARE, INC.
By: ___________________________
Rajiv Enand
Chief Executive Officer
SHAREHOLDERS:
_______________________________
Jeff Pepper, individually and as trustee under various
family trusts
_______________________________
Rajiv Enand, individually and as trustee under various
family trusts and Voting Trust Agreement dated as
of December 28, 1995
_______________________________
Bruce Molloy
SERIES A INVESTOR:
POLY VENTURES II, L.P.
By: ___________________________
General Partner
SERIES B INVESTORS:
POLY VENTURES II, L.P.
By: ___________________________
General Partner
<PAGE> 14
GEOCAPITAL III, L.P.
By: Geocapital Management, L.P.
By:______________________
General Partner
_________________________
Paul Deninger
_________________________
Charles Federman
_________________________
Bernard Goldstein
_________________________
Harvey Poppel
_________________________
Stephen Smith
SERIES C INVESTOR:
NORWEST EQUITY PARTNERS V
A Minnesota Limited Liability Partnership
By: ITASCA PARTNERS V, L.L.P.,
General Partner
By:_____________________
Kevin G. Hall, Partner
<PAGE> 15
SERIES D INVESTORS:
POLY VENTURES II, L.P.
By:____________________________
Name:_________________________
Title:__________________________
GEOCAPITAL III, L.P.
By:____________________________
Name:_________________________
Title:__________________________
NORWEST EQUITY PARTNERS V
A Minnesota limited liability partnership
By: Itasca Partners V, LLP, General Partner
By:__________________________
Kevin G. Hall
Partner
LOVETT MILLER VENTURE FUND II,
Limited Partnership
By: Lovett Miller Venture Partners II, LLC
Its General Partner
By:__________________________
W. Scott Miller
Managing Director
<PAGE> 16
CEO VENTURE FUND III
By:____________________________
Name:_________________________
Title:__________________________
_______________________________
Andrew Blum
LANCASTER INVESTMENT PARTNERS
By:____________________________
Name:_________________________
Title:__________________________
_______________________________
Bruce Lewellyn
_______________________________
Burt Rubin
_______________________________
Edmund Shea
_______________________________
Alan Edelman
_______________________________
Estelle Konviser
_______________________________
James Borner
_______________________________
Lizabeth Moses
<PAGE> 17
COMMONWEALTH ASSOCIATES LP
By:____________________________
Name:_________________________
Title:__________________________
LINDEN PARTNERS
By:____________________________
Name:_________________________
Title:__________________________
HULL OVERSEAS, LTD.
By:____________________________
Name:_________________________
Title:__________________________
_______________________________
Rick Berdon
_______________________________
Stanley Cohen
STANLEY COHEN 1994 IRREVOCABLE
RETAINED ANNUITY TRUST
By:____________________________
Name:_________________________
Title:__________________________
_______________________________
Steve Frankel
<PAGE> 18
RADIX ASSOCIATES
By:____________________________
Name:_________________________
Title:__________________________
TAMAR VENTURE CAPITAL LTD.
By:____________________________
Name:_________________________
Title:__________________________
SERIES E INVESTORS:
_______________________________
Jody Owen
_______________________________
Robert C. Harris, Jr.
_______________________________
John A. Dexheimer
_______________________________
Thomas I. Unterberg
_______________________________
A. Robert Towbin
<PAGE> 19
PARK CITY INVESTMENTS
By: _________________________
Name: _______________________
Title: ________________________
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, LP
By: _________________________
Name: _______________________
Title: ________________________
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, CV
By: _________________________
Name: _______________________
Title: ________________________
UNTERBERG HARRIS 401K PROFIT SHARING
FBO ANDREW ARNO
By: _________________________
Name: _______________________
Title: ________________________
ANDREW ARNO, ACF
MATTHEW ARNO, U/NY/UGMA
(DOB - 8/10/93)
By: _________________________
Name: _______________________
<PAGE> 20
ANDREW ARNO, ACF
JESSE ARNO, U/NY/UGMA
(DOB - 10/8/89)
By: _________________________
Name: _______________________
_______________________________
Steven Hellman
PAINE WEBBER F/B/O MARTIN E. HELLMAN IRA
By: _________________________
MARTIN E. HELLMAN AND DOROTHY L. HELLMAN
TRUSTEES, FAMILY REVOCABLE TRUST UAD
7/6/88
By: _________________________
C. E. UNTERBERG, TOWBIN, LLC
By: _________________________
Name: _______________________
Title: ________________________
C. E. UNTERBERG, TOWBIN INTERACTIVE
MEDIA PARTNERSHIP LP, CV
By: _________________________
Name: _______________________
Title: ________________________
<PAGE> 21
C. E. UNTERBERG, TOWBIN, LP
By: _________________________
Name: _______________________
Title: ________________________
________________________
James C. Arnold
________________________
Donald S. Arnold, III
GEORGE R. BEGLEY, ACF
G. ROLLO BEGLEY, U/NY/UGMA
(DOB - )
By: _________________________
Name: George R. Begley
GEORGE R. BEGLEY, ACF
TRACY C. BEGLEY, U/NY/UGMA
(DOB - )
By: _________________________
Name: George R. Begley
_______________________________
John R. Lakian
_______________________________
Martha Logan
_______________________________
Edward Swyer
_______________________________
Carol H. Plum
<PAGE> 22
UNTERBERG TOWBIN CAPITAL PARTNERS I
By: _________________________
Name: _______________________
Title: ________________________
_______________________________
Thomas Unterberg
MARJORIE & CLARENCE E. UNTERBERG
FOUNDATION, INC.
By: ___________________________
_______________________________
Ellen Unterberg Celli
_______________________________
Emily Unterberg Satloff
_______________________________
Louis Venezia
FTS CAPITAL MANAGEMENT AG
By: _________________________
Name: _______________________
Title: ________________________
TIGAN CAPITAL HOLDINGS LTD.
By: _________________________
Name: _______________________
Title: ________________________
<PAGE> 23
SCHEDULE A
NAMES AND ADDRESSES OF PARTIES
Jeff Pepper
ServiceWare, Inc.
333 Allegheny Avenue
Oakmont, PA 15139
Rajiv Enand
ServiceWare, Inc.
333 Allegheny River Blvd.
Oakmont, PA 15139
Bruce Molloy
Molloy Group, Inc.
Four Century Drive
Parsippany, NJ 07054
Poly Ventures II, L.P.
901 Route 110
Room 123
Farmingdale, NY 11735
Geocapital Capital III, L.P.
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Paul Deninger
c/o Broadview Associates
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Bernard Goldstein
c/o Broadview Associates
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
<PAGE> 24
Charles Federman
c/o Broadview Associates
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Harvey Poppel
c/o Broadview Associates
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Stephen Smith
c/o Broadview Associates
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Norwest Equity Partners V
3000 Sand Hill Road
Suite 3-105
Menlo Park, CA 94025
Attn: Kevin Hall
Lovett Miller Venture Fund II, Limited Partnership
Uwharrie Point Parkway
Badin Lake, NC 28127
Attn: Kevin Emery/Scott Miller
CEO Venture Fund III
2000 Technology Drive
Pittsburgh, PA 15219
Attn: Gary Glausser
Andrew Blum
c/o C. E. Unterberg, Towbin
10 East 50th Street, 22nd Floor
New York, NY 10022
Lancaster Investment Partners
500 North Gulph Road, Suite 10
King of Prussia, PA 19406
Attn: Dan Gardner
<PAGE> 25
Bruce Lewellyn
30 Rockefeller Plaza
New York, NY 10112
Burt Rubin
30 Rockefeller Plaza
New York, NY 10012
Edmund Shea
655 Brea Canyon Road
Walnut, CA 91789
Alan Edelman
1408 Locust Avenue
Baltimore, MD 21204
Estelle Konviser
c/o C. E. Unterberg, Tobin
10 East 50th Street, 22nd Floor
New York, NY 10022
James Borner
716 S. Columbus Avenue
Mt. Vernon, NY 10550
Lizabeth Moses
c/o C. E. Unterberg, Towbin
10 East 50th Street, 22nd Floor
New York, NY 10022
Commonwealth Associates LP
830 Third Avenue, 4th Floor
New York, NY 10022
Attn: Michael Falk
Linden Partners
10 East 50th Street, 10th Floor
New York, NY 10022
Attn: Michael Marrus
Hull Overseas, Ltd.
152 West 57th Street, 11th Floor
New York, NY 10019
Attn: Mitch Hull
Rick Berdon
<PAGE> 26
717 Post Road, Suite 105
Scarsdale, NY 10583
Stanley Cohen
c/o C. E. Unterberg, Towbin
10 East 50th Street, 22nd Floor
New York, NY 10022
Attn: Stanley Cohen
Stanley Cohen 1994 Irrevocable Retained Annuity Trust
c/o C. E. Unterberg, Towbin
10 East 50th Street, 22nd Floor
New York, NY 10022
Attn: Steve Frankel
Radix Associates
135 East 57th Street, 11th Floor
New York, NY 10022
Attn: Stewart Shapiro
Tamar Venture Capital Ltd.
50 Yamat Yam
46851 Herzlia Petuach
Israel
Attn: Zohar Gilan
Jody Owen
473 West End Avenue (11C)
New York, NY 10023
Robert C. Harris, Jr.
2535 Green Street
San Francisco, CA 94123
John A. Dexheimer
38 Tory Hill Lane
Rowayton, CT 06853
Thomas I. Unterberg
15 West 53rd Street
New York, NY 10019
<PAGE> 27
A. Robert Towbin
1010 Fifth Avenue (11B)
New York, NY 10028
Park City Investments
Swiss Bank Tower,
10 East 50th Street
22nd Floor
New York, NY 10022
Unterberg Harris
Private Equity Partners, LP
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Unterberg Harris
Private Equity Partners, CV
P.O. Box 224, Piet Ermaai 15
Curacao, Netherlands Antilles
C.E. Unterberg, Towbin, LLC
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Unterberg Harris 401k Profit Sharing
Fbo Andrew Arno
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Andrew Arno, ACF
Mathew Arno, U/NY/UGMA
(DOB = 8/10/93)
270 West End Avenue (9S)
New York, NY 10023
<PAGE> 28
Andrew Arno, ACF
Jesse Arno, U/NY/UGMA
(DOB = 10/8/89)
270 West End Avenue (9S)
New York, NY 10023
C.E. Unterberg, Towbin, LP
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
Unterberg Harris Interactive Media Limited Partnership, C.V.
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
Don Arnold
Jim Arnold
c/o Vernat Company
Vermont National Bank Trust Department
87 West St, Box 669
Rutland, VT 05702-9995
John R. Lakian
The Fort Hill Group
767 Third Avenue, 20th Floor
New York, NY 10017
George Begley, ACR G. Rollo Begley U/NY/UGMA
George Begley, ACR Tracey C. Begley U/NY/UGMA
FTS Capital Management AG
Tigan Capital Holdings Ltd.
c/o George Begley
108 East 82nd Street
New York, NY 10018
Edward Swyer
The Swyer Companies
10 Executive Park Drive
Albany, NY 12203
Martha Logan
2075 Millburn Avenue
Maplewood, NJ 07040
Carol H. Plum
<PAGE> 29
2 Beekman Place, Apt. 7F
New York, NY 10022
Unterberg Towbin Capital Partners I
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
Marjorie & Clarence E. Unterberg Foundation, Inc.
Ellen Unterberg Celli
Emily Unterberg Satloff
c/o Thomas Unterberg
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
Louis Venezia
Molloy Group, Inc.
4 Century Drive
Parsippany, New Jersey 07054
<PAGE> 1
Exhibit 10.1
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "AGREEMENT"), is entered into as of
December 10, 1999, between SERVICEWARE, INC., a Pennsylvania corporation (the
"BORROWER"), and PNC BANK, NATIONAL ASSOCIATION (the "BANK").
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, and intending to be legally bound, and subject to
the terms and conditions hereof and relying upon the representations and
warranties herein set forth in this Agreement, the Borrower and the Bank agree
as set forth below.
1. LOAN. The Bank agrees to make secured loans to the Borrower at
any time or from time to time on or after the date hereof under the following
credit facilities (collectively, whether one or more, the "LOAN") in the
aggregate maximum amount of $8,250,000 (the "AGGREGATE LOAN AMOUNT") in
accordance with the terms of this Agreement.
(a) REVOLVING CREDIT. A revolving credit facility (the "REVOLVING
CREDIT") in the maximum amount of $7,500,000 (the "REVOLVING
CREDIT AMOUNT"), provided, however, the aggregate principal
balance outstanding at any one time under the Revolving Credit
shall not exceed $5,000,000 unless and until the Borrower has
made a Mandatory Prepayment (as defined hereinafter) in an amount
equal to the then outstanding principal balance of and accrued
but unpaid interest owing on the Term Loan (as defined
hereinafter) as a result of an IPO (as defined hereinafter).
Proceeds of the Revolving Credit shall be used (i); together with
the proceeds of the Term Loan (as defined hereinafter), to repay
on the Closing Date the then outstanding principal balance and
accrued but unpaid interest owing on certain indebtedness (the
"PRIOR BANK INDEBTEDNESS") from the Borrower to the Bank pursuant
to that certain Amended and Restated Loan Agreement dated
September 3, 1998, between the Borrower and the Bank, as amended
by that certain Second Amendment to the Loan Agreement dated May
13, 1999 (the "1998 LOAN AGREEMENT"), except the then outstanding
principal balance and accrued but unpaid interest owing on that
Equipment Line Note (as defined in the 1998 Loan Agreement, the
"PRIOR EQUIPMENT LINE NOTE"), and (ii) to finance the Borrower's
working capital requirements; provided, however, advances under
the Revolving Credit shall be available to the Borrower only to
the extent provided in Section (2)(d)(i) below. Advances under
the Revolving Credit may be borrowed, repaid and re-borrowed at
any time prior to the Revolving Credit Maturity Date.
<PAGE> 2
(b) EQUIPMENT LINE. A convertible line of credit facility (the "EQUIPMENT
LINE") in the maximum amount of $750,000 (the "EQUIPMENT LINE AMOUNT")
that shall be used (i) to repay on the Closing Date the then
outstanding principal balance and accrued but unpaid interest owing on
the Prior Equipment Line Note, and (ii) to finance up to 90% of the
invoice amount of new equipment purchased by the Borrower during the
period commencing 30 days prior to the Closing Date and ending on the
day immediately prior to the Conversion Date. After the funding to
occur on the Closing Date, the balance of the principal amount
available under the Equipment Line shall be advanced to the Borrower
in accordance with the provisions of Sections 2(d)(ii) and 2(e)(ii)
below. No amount borrowed under the Equipment Line may be re-borrowed
after being repaid.
(c) TERM LOAN. A term loan (the "TERM LOAN") in the maximum amount of
$2,500,000 (the "TERM LOAN AMOUNT"). Proceeds of the Term Loan shall
be available to the Borrower in a single advance on the Closing Date
and shall be used, together with the proceeds of the Revolving Credit,
to repay on the Closing Date the then outstanding principal balance
and accrued but unpaid interest owing on the Prior Bank Indebtedness.
No amount borrowed under the Term Loan may be re-borrowed after being
repaid.
2. TERMS AND CONDITIONS. The Revolving Credit, the Equipment Line and
the Term Loan shall have the following terms:
(a) MATURITY AND CONVERSION DATES.
(i) REVOLVING CREDIT. The Revolving Credit will mature on December
10, 2001 (the "REVOLVING CREDIT MATURITY DATE").
(ii) EQUIPMENT LINE. On June 8, 2000 (the "CONVERSION DATE") all
amounts then outstanding under the Equipment Line will convert to
a single term loan that will be amortized in equal monthly
installments of principal, plus accrued interest, over a period
of thirty-six (36) months with payments due on the 1st day of
each month commencing on July 1, 2000.
(iii) TERM LOAN. The outstanding principal on the Term Loan shall be
due and payable in two equal installments, the first of which
shall be due and payable on June 10, 2001, with the remaining
outstanding principal, together with accrued and unpaid interest
thereon shall be due and payable on December 10, 2001 (the "TERM
LOAN MATURITY DATE"); provided, however, that principal shall be
due and payable earlier upon the occurrence of a
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Mandatory Prepayment (as defined hereinafter) or of an Event of
Default.
(b) INTEREST RATE.
(i) REVOLVING CREDIT. Each advance outstanding under the Revolving Credit
shall bear interest at a rate per annum equal to the sum of the Base
Rate (as defined hereinafter) and 0.50%, but in no event greater than
the maximum rate permitted by law. Interest will be computed on the
basis of a 360 day year and for the actual days elapsed.
(ii) EQUIPMENT LINE. The principal amount from time to time outstanding
under the Equipment Line prior to the Conversion Date, and the
principal amount outstanding on the Equipment Line from and after the
Conversion Date, shall bear interest at a rate per annum equal to the
sum of the Base Rate and 0.75%, but in no event greater than the
maximum rate permitted by law. Interest will be computed on the basis
of a 360 day year and for the actual days elapsed.
(iii) TERM LOAN. The principal amount outstanding on the Term Loan shall
bear interest at a rate per annum equal to the sum of the Base Rate
and 2.25%, but in no event greater than the maximum rate permitted by
law. Interest will be computed on the basis of a 360 day year and for
the actual days elapsed.
(iv) For purposes hereof, the term "BASE RATE" means the lesser of (A) the
Bank's Prime Rate (as defined hereinafter) and (B) the sum of the
Federal Fund's Effective Rate (as defined hereinafter) and 2.0%.
For purposes hereof, the term "PRIME RATE" means the rate of interest
per annum announced by the Bank from time to time as its prime rate.
The Prime Rate is not tied to any external rate or index and does not
necessarily reflect the lowest rate of interest actually charged to
any particular class or category of customers of the Bank. If and when
the Prime Rate changes, the rate of interest on the Loans bearing
interest at the Prime Rate will change automatically without notice to
the Borrower, effective on the date of any such change.
For purposes hereof, the term "FEDERAL FUNDS EFFECTIVE RATE" means,
for any day, the weighted average (rounded upwards, if necessary, to
the next 1/100 of 1%) of the rates on overnight
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Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding
Business Day by the Federal Reserve Bank of New York, or, if such rate
is not so published for any day that is a Business Day, the average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the
quotations for such day for transactions received by the Bank from
three Federal funds brokers of recognized standing selected by the
Bank.
For purposes hereof, the term "BUSINESS DAY" means any day other than
a Saturday, Sunday or public holiday under the laws of the
Commonwealth of Pennsylvania.
(c) FEES.
The Borrower shall pay to the Bank at Closing (i) $5,000 representing a
facility fee in respect of the Revolving Credit (the "REVOLVING CREDIT
FACILITY FEE"), and (ii) $25,000 representing a facility fee in respect of
the Term Loan (the "TERM LOAN FACILITY FEE" and, collectively with the
Revolving Credit Facility Fee, the "FACILITY FEES").
(d) BORROWING BASE/AVAILABILITY.
(i) REVOLVING CREDIT. Proceeds of the Revolving Credit shall be available
to the Borrower from time to time prior to the Revolving Credit
Maturity Date only in amounts determined in accordance with the
Borrowing Base Rider; provided, however, that, at any time while any
amount of principal shall be outstanding on the Term Loan, advances on
the Revolving Credit shall not exceed $5,000,000.
(ii) EQUIPMENT LINE. The proceeds of the Equipment Line shall be available
to the Borrower in a single advance prior to the Conversion Date in an
amount not less than (A) $200,000 determined in accordance with an
equipment line request to be submitted to the Bank by the Borrower in
the form attached as Exhibit B (the "EQUIPMENT LINE REQUEST") or (B)
the amount available under the Equipment Line after repayment of the
Prior Equipment Line Note on the Closing Date, which amount is the
lesser.
(iii) TERM LOAN. All of the proceeds of the Term Loan shall be available to
the Borrower on the Closing Date.
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(e) REQUESTS.
(i) REVOLVING CREDIT. Except as otherwise provided herein, the
Borrower may from time to time prior to the Revolving Credit
Maturity Date, request the Bank to make a loan under the Revolving
Credit, by making a telephonic request to the Bank (each a "LOAN
REQUEST"), not later than 12:00 noon Pittsburgh time on the Business
Day that the loan is to be made, which shall be immediately
confirmed in writing in a form acceptable to the Bank and delivered
by mail, facsimile or telex, it being understood that the Bank may
rely on the authority of any individual making such a telephonic
request without the necessity of receipt of such written
confirmation. Each Loan Request shall be irrevocable and (A) shall
specify (i) the proposed borrowing date, and (ii) the amount of the
requested loan, which shall not exceed the Revolving Credit, and (B)
shall be accompanied by a duly executed and properly completed
Borrowing Base Certificate in the form attached to the Borrowing
Base Rider.
(ii) EQUIPMENT LINE. Except as otherwise provided herein, the Borrower
may prior to the Conversion Date request the Bank to make a loan
under the Equipment Line by delivery to the Bank of a duly executed
and properly completed Equipment Line Request, accompanied by
supporting invoices, not less than one (1) day prior to the date of
the proposed borrowing date and by otherwise following the request
procedures in Section 2(e)(i) above.
(f) NOTES.
The obligation of the Borrower to repay loans under the Revolving Credit,
together with interest thereon, shall be evidenced by a single line of
credit note of the Borrower (the "REVOLVING CREDIT NOTE") payable to the
order of the Bank in a face amount equal to the Revolving Credit Amount.
The obligation of the Borrower to repay the advance under the Equipment
Line, together with interest thereon, shall be evidenced by a single
convertible equipment loan note (the "CONVERTIBLE EQUIPMENT LOAN NOTE")
payable to the order of the Bank in a face amount equal to the Equipment
Line Amount. The obligation of the Borrower to the Term Loan, together
with interest thereon, shall be evidenced by a promissory note (the "TERM
LOAN NOTE" and, together with the Revolving Credit Note and the
Convertible Equipment Loan Note, collectively, the "NOTES"). All loans
evidenced by the Notes and all payments of the principal thereof and
interest thereon and the respective dates thereof shall be recorded in the
books and records of the Bank; provided, however, that
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<PAGE> 6
the failure of the Bank to make such a notation or any error in
such a notation shall not affect the obligations of the Borrower
under the Notes.
(g) MANDATORY PREPAYMENTS. From the date hereof through the Term Loan
Maturity Date, each of the following events, (A) a sale of a
material portion of the assets of the Borrower not in the
ordinary course of business or (B) an Initial Public Offering (as
defined hereinafter), will trigger a mandatory prepayment in an
amount equal to the proceeds realized by the Borrower from such
event up to the maximum aggregate amount of the outstanding
principal balance of the Term Loan and accrued interest thereon
(each a "MANDATORY PREPAYMENT"). For purposes hereof, the term
"INITIAL PUBLIC OFFERING" means the Borrower's first firm
commitment underwritten public offering of the its common stock
registered under the Securities Act of 1933.
(h) ADDITIONAL EXIMBANK TERMS.
Additional terms related to the Revolving Credit may be reflected
in an Eximbank Borrower Agreement (as defined in the Borrowing
Base Rider). Upon execution of an Eximbank Borrower Agreement,
the terms thereof shall be incorporated herein in their entirety
and the principal amount available to the Borrower from time to
time under Revolving Credit shall be reduced by then outstanding
principal balance owing under the Eximbank Borrower Agreement,
except as otherwise provided to the contrary in the Eximbank
Borrower Agreement.
3. SECURITY. To secure repayment of the Loan, the Borrower shall
contemporaneously execute and deliver to the Bank the Security Agreement
(including any Riders thereto) (the "SECURITY DOCUMENTS"), which shall secure
repayment of the Loan, the Notes and all other loans, advances, debts,
liabilities, obligations, covenants and duties owing by the Borrower to the Bank
of any kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, whether arising under this Agreement or any other
agreement, instrument or document, whether or not for the payment of money,
whether arising by reason of an extension of credit, opening of a letter of
credit, loan or guarantee or in any other manner, whether arising out of
overdrafts on deposit or other accounts or electronic funds transfers
(whether through automatic clearing houses or otherwise) or out of the Bank's
non-receipt of or inability to collect funds or otherwise not being made whole
in connection with depository transfer check or other similar arrangements,
whether direct or indirect (including those acquired by assignment or
participation), absolute or contingent, joint or several, due or to become due,
now existing or hereafter arising, and any amendments, extensions, renewals or
increases and all reasonable costs and expenses of the Bank incurred in the
documentation, negotiation, modification, enforcement, collection or otherwise
in connection with any of the foregoing, including but not limited to reasonable
attorneys' fees and expenses (hereinafter referred to collectively as the
"OBLIGATIONS"). Unless expressly provided to the contrary in documentation for
any other loan or loans, it is the express intent of the Bank and the Borrower
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that all Obligations including those included in the Loan be
cross-collateralized and cross-defaulted, such that collateral securing any of
the Obligations shall secure repayment of all Obligations and a default under
any Obligation shall be a default under all Obligations. This Agreement
(including the Addendum), the Notes, the Security Documents and all other
documents executed and delivered in connection herewith or related hereto are
collectively referred to as the "LOAN DOCUMENTS."
4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby makes the
following representations and warranties, which shall be continuing in nature
and remain in full force and effect until the Obligations are paid in full, and
which shall be true and correct except as otherwise set forth on the Addendum
attached hereto and incorporated herein by reference (the "ADDENDUM").
4.1. EXISTENCE, POWER AND AUTHORITY. The Borrower is duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and has the corporate power and authority to own and operate
its assets and to conduct its business as now or proposed to be carried on,
and is duly qualified, licensed and in good standing to do business in all
jurisdictions where its ownership of property or the nature of its business
requires such qualification or licensing, except where the failure to be so
qualified or licensed would not have a material adverse effect on the
business, operations, or financial condition, or results of operations or
prospects of the Borrower. The Borrower is duly authorized to execute and
deliver the Loan Documents, all necessary corporate action to authorize the
execution and delivery of the Loan Documents has been properly taken, and
the Borrower is and will continue to be duly authorized to borrow under
this Agreement and to perform all of the other terms and provisions of the
Loan Documents. The Borrower is a corporation incorporated under the law of
the Commonwealth of Pennsylvania. The individuals who represent themselves
to the Bank as holding one or more of the executive officer positions with
the Borrower listed in the Addendum hereto (each an "AUTHORIZED OFFICER")
shall be authorized to execute and deliver on behalf of the Borrower the
certifications contemplated under this Agreement to be delivered in the
future.
4.2. FINANCIAL STATEMENTS. The Borrower has delivered or caused to be
delivered to the Bank its audited balance sheet and income statement and
audited statement of results of operations for the period ending December
31, 1998 (the "DECEMBER 1998 FINANCIAL STATEMENTS"), and its unaudited
interim management financial statements as of March 31, 1999 (the "MARCH
1999 FINANCIAL STATEMENTS"), June 30, 1999 (the "JUNE 1999 FINANCIAL
STATEMENTS"), and September 30, 1999 (the "SEPTEMBER 1999 FINANCIAL
STATEMENTS," and, together with the December 1998 Financial Statements, the
March 1999 Financial Statements and the June 1999 Financial Statements, are
true, complete and accurate in all material respects and fairly present the
financial condition, assets and liabilities, whether accrued, absolute,
contingent or otherwise and the result of the Borrower's operations for the
period specified therein. The
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<PAGE> 8
Historical Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied from period to
period.
4.3. NO MATERIAL ADVERSE CHANGE. Since September 30, 1999, the Borrower
has not suffered any damage, destruction or loss to any material portion of its
assets (tangible or intangible), and no event or condition has occurred or
exists, which has resulted or could reasonably be expected to result in a
material adverse change in its business, assets, operations, financial
condition, results of operations or prospects.
4.4. BINDING OBLIGATIONS. The Borrower has full corporate power and
authority to enter into the transactions provided for in this Agreement and has
been duly authorized to do so by appropriate action of its Board of Directors
and there are no consents, approvals or waivers required that have not been
obtained. The Loan Documents, when executed and delivered by the Borrower, will
constitute the legal, valid and binding obligations of the Borrower
enforceable in accordance with their terms, except as such enforceability may
be limited by bankruptcy; insolvency, reorganization or similar laws relating
to or limiting creditors' rights generally or by equitable principles relating
to enforceability.
4.5. NO DEFAULTS OR VIOLATIONS. There does not exist any Event of Default
under this Agreement, or any event, fact or circumstance that, with the
delivery of notice, passage of time, or both would constitute any Event of
Default under this Agreement, or any material default or violation by the
Borrower of or under any of the terms, conditions or obligations of: (i) its
articles or certificate of incorporation or bylaws; (ii) any indenture,
mortgage, deed of trust, franchise, permit, contract, agreement, or other
instrument to which it is a party or by which it or its assets are bound; or
(iii) any law, regulation, ruling, order, injunction, decree, condition or
other requirement applicable to or imposed upon or against the Borrower or its
assets by any law, the action by any court or any governmental authority or
agency; and the consummation of this Agreement and the transactions set forth
herein will not result in any such default or violation.
4.6. TITLE TO ASSETS. Except for assets disposed of by the Borrower in
the ordinary course of business since September 30, 1999, the Borrower has good
title to or a valid leasehold interest in the assets reflected on the September
1999 Financial Statements, free and clear of all liens and encumbrances, except
for (I) current taxes and assessments not yet due and payable, (ii) liens and
encumbrances, if any, reflected or noted in the September 1999 Financial
Statements, (iii) those liens or encumbrances specified on the Addendum, (iv)
liens securing the payment of taxes or other governmental charges not yet
delinquent or being contested in good faith by appropriate proceeding, for
which adequate reserves are maintained in accordance with generally accepted
accounting principles; (v) liens securing claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like persons imposed
without action of such parties, provided that the payment thereof is not yet
required; (vi) liens incurred or deposits made in the ordinary course of the
Borrower's or a subsidiary's
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<PAGE> 9
business in connection with worker's compensation, unemployment insurance,
social security and other like laws; (vii) non-exclusive licenses and
sublicenses of its Patent, Trademarks and Copyrights (each as defined in the
Security Agreement) granted to others in the ordinary course of business; (viii)
liens arising from judgments, decrees or attachments to the extent and only so
long as such judgment, decree or attachment has not caused or resulted in an
Event of Default; (ix) liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection with the
importation of goods; (x) liens which constitute rights of set-off of a
customary nature or bankers' liens with respect to amounts on deposit, whether
arising by operation of law or by contract, in connection with arrangements
entered into with banks in the ordinary course of business; (xi) those other
liens and encumbrances that do not individually or in the aggregate materially
diminish the value of the assets or impair their use in the Borrower's business
as it is currently conducted; or (xii) those liens and encumbrances in favor of
or approved by the Bank (the liens and encumbrances described in the foregoing
clauses hereof being hereinafter collectively called the "PERMITTED LIENS").
4.7. LITIGATION. There are no actions, suits, proceedings or governmental
investigations pending or, to the Borrower's knowledge, threatened against the
Borrower, which could reasonably be expected to result in a material adverse
change in its business assets, operations, financial condition, results of
operations or prospects and there is no basis known to the Borrower for any
action, suit, proceedings or investigation which could reasonably be expected
to result in such a material adverse change. All litigation pending against the
Borrower or litigation threatened against the Borrower of which Borrower has
knowledge is listed on the Addendum.
4.8. TAX RETURNS. The Borrower has filed all returns and reports that are
required to be filed by it in connection with any federal, state or local tax,
duty or charge levied, assessed or imposed upon it or its property withheld by
it, including unemployment, social security and similar taxes and all of such
taxes, have been either paid or adequate reserves or other provision for the
payment thereof have been made.
4.9. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which the
Borrower may have any liability complies in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended from time to time ("ERISA"), including minimum funding requirements,
and form (i) no Prohibited Transaction (as defined under Section 4043 of ERISA)
has occurred with respect to any such plan which would cause the Pension
Benefit Guaranty Corporation to institute proceedings under Section 4042 of
ERISA, (iii) the Borrower has not withdrawn from any such plan or initiated
steps to do so, and (iv) no steps have been taken to terminate any such plan.
4.10. ENVIRONMENTAL MATTERS. The Borrower is (or, in respect of prior owned
or operated real property, was) in compliance, in all material respects, with
all
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<PAGE> 10
Environmental Laws, including, without limitation, all Environmental Laws in
jurisdictions in which the Borrower owns or operates or has owned or operated a
facility or site, stores or has stored Collateral, arranges or has arranged for
a disposal or treatment of hazardous substances, solid waste or other waste,
accepts or has accepted for transport any hazardous substances, solid waste or
other wastes or holds or has held any interest in real property or otherwise.
No litigation or proceeding arising under, relating to or in connection with
any Environmental Law is pending or, to the best of the Borrower's knowledge,
threatened against the Borrower, any real property which the Borrower holds or
has held an interest or any past or present operation of the Borrower. To the
Borrower's knowledge, no release, threatened release or disposal of hazardous
waste, solid waste or other wastes in material violation of any Environmental
Law is occurring, or to the Borrower's knowledge has occurred, on, under or to
any real property in which the Borrower holds any interest or performs any of
its operations. As used in this Section, "LITIGATION OR PROCEEDING" means any
demand, claim notice, suit, suit in equity, action, administrative action,
investigation or inquiry whether brought by a governmental authority or other
person, and "ENVIRONMENTAL LAWS" means all provisions of laws, statutes,
ordinances, rules, regulations, permits, licenses, judgments, writs,
injunctions, decrees, orders, awards and standards promulgated by any
governmental authority concerning health, safety and protection of, or
regulation of the discharge of substances into, the environment.
4.11 INTELLECTUAL PROPERTY. The Borrower owns or has a valid and
enforceable right to use free and clear of all liens and encumbrances except
Permitted Liens all patents and patent rights necessary for the conduct of its
business as currently conducted that are material to the condition, business or
operations of the Borrower. To the knowledge of Borrower, Borrower owns or has
a valid and enforceable right to use all trademarks, trade names, service
marks, copyrights, intellectual property, technology, know-how and processes
necessary for the conduct of its business as currently conducted that are
material to the condition (financial or otherwise), business or operations of
the Borrower free and clear of all liens and encumbrances except Permitted
Liens.
4.12 REGULATORY MATTERS. No part of the proceeds of the Loan will be used
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulation U of the Board of Governors of the
Federal Reserve System as now and from time to time in effect or for any
purpose which violates the provisions of the Regulations of such Board of
Governors.
4.13 SOLVENCY. As of the date hereof and after giving effect to the
transactions contemplated by the Loan Documents, (i) the aggregate value of the
Borrower's assets will exceed its liabilities (including contingent liabilities
of which the Borrower is aware, subordinated, unmatured and unliquidated
liabilities), (ii) the Borrower will have sufficient cash flow to enable it to
pay its debts as they mature, and (iii) the Borrower will not have unreasonably
small capital for the business in which it is engaged.
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4.14. YEAR 2000. The Borrower has reviewed the areas within its
business and operations which could be adversely affected by, and has
developed and is implementing a program to address on a timely basis the
risk that certain computer applications used by the Borrower may be unable
to recognize and perform properly date-sensitive functions involving dates
prior to and after December 31, 1999 (the "YEAR 2000 PROBLEM"). The
Borrower does not expect the Year 2000 Problem to have a material adverse
effect on the business, assets, operations, financial condition, or results
of operations or prospects of the Borrower.
4.15. DISCLOSURE. None of the Loan Documents contains any untrue
statement of material fact or omits to state a material fact necessary in
order to make the statements contained in this Agreement or the Loan
Documents not misleading. There is no fact known to the Borrower which
materially adversely affects or is reasonably likely to materially affect,
the business, assets, operations, financial condition, or results of
operations or prospects of the Borrower and which has not otherwise been
fully set forth in this Agreement, the Addendum or in the other Loan
Documents. Each of the certificates delivered or to be delivered by the
Borrower or any of its officers pursuant to the terms of this Agreement
will be true and accurate and complete in all material respects.
5. AFFIRMATIVE COVENANTS. The Borrower agrees that from the date of
execution of this Agreement until all Obligations have been fully paid and any
commitments of the Bank to the Borrower have been terminated, the Borrower will:
5.1. BOOKS AND RECORDS. Maintain accurate and complete books
and records. The Borrower will give representatives of the Bank access to
books and records of account at all reasonable times, including permission
to examine, copy and make abstracts from any of such books and records and
such other information as the Bank may from time to time reasonably
request, and the Borrower will make available to the Bank upon request for
examination copies of any reports, statements or returns which the Borrower
may make to or file with any governmental department, bureau or agency,
federal or state. So long as an Event of Default does not exist, the Bank
shall give reasonable notice prior to conducting any examination under the
preceding sentence and only one of such examinations shall be conducted at
the Borrower's expense in any calendar year. The Bank shall treat as
confidential all non-public information contained in such books and
records; provided, however, that if the Bank is required to disclose
confidential information pursuant to a court order, subpoena or similar
process, prior to disclosure the Bank shall: (i) promptly provide the
Borrower with a copy of the court order or subpoena; (ii) cooperate with
the Borrower at the Borrower's expense in obtaining a protective or similar
order; and (iii) in any event, disclose only such confidential information
as the Bank, with the advice of its counsel, shall deem necessary to comply
with such court order or subpoena.
5.2. INTERIM FINANCIAL STATEMENTS: ACCOUNTS RECEIVABLE AND
CERTIFICATES. Furnish the Bank within 20 days after the end of each month a
detailed
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report on its accounts receivable aging and accounts payable aging in such
reasonable detail consistent with the form currently used by the Borrower's
management. The Borrower shall provide within 20 days of the end of each month
its Financial Statements (as defined hereinafter) for such period, in
reasonable detail, certified by an Authorized Officer of the Borrower and
prepared in accordance with GAAP consistently applied from period to period.
Such certification shall accompany the Financial Statements and shall be in the
form attached hereto as Exhibit C, each of which shall report whether the
Borrower has complied with all applicable financial covenants for the period
then ended and whether any Event of Default exists, and, if the Borrower
reports that it has not complied or an Event of Default exists, then such
certification shall state the nature thereof and the corrective measures the
Borrower proposes to take. "FINANCIAL STATEMENTS" means the Borrower's
consolidated and, if required by the Bank in its sole discretion, consolidating
balance sheets, income statements and statements of cash flows for the year,
month or quarter together with year-to-date figures and comparative figures for
the corresponding periods of the prior year. The Borrower shall also deliver an
updated Borrowing Base Certificate within 20 days of month end.
5.3 ANNUAL FINANCIAL STATEMENTS. Furnish the Borrower's Financial
Statements for each annual period ending December 31 (the "ANNUAL FINANCIAL
STATEMENTS") to the Bank within 120 days after the end of each fiscal year
beginning with the fiscal year ending December 31, 1999. The Annual Financial
Statements will be prepared in accordance with GAAP and audited by the
independent certified public accounting firm that audited the December 1998
Financial Statements or by another independent certified public accounting firm
of national standing selected by the Borrower. The audited Annual Financial
Statements shall contain the unqualified opinion of such independent certified
public accountant satisfactory to the bank and its examination shall have been
made in accordance with GAAP consistently applied from period to period. The
Borrower will also provide projections, forecasts, financial pro formas and
such other information reasonably requested by the Bank from time to time.
5.4 PAYMENT OF TAXES AND OTHER CHARGES. Pay and discharge when due all
indebtedness and all taxes, assessments, charges, levies and other liabilities
imposed upon the Borrower, its income, profits, property or business, except
those which currently are being contested in good faith by appropriate
proceedings and for which the Borrower shall have set aside adequate reserves
in accordance with GAAP or made other adequate provision with respect thereto
acceptable to the Bank in its reasonable discretion.
5.5 MAINTENANCE OF EXISTENCE, OPERATION AND ASSETS. Do all things
necessary to maintain, renew and keep in full force and effect its
organizational existence and all rights, permits and franchises necessary to
enable it to continue its business; continue in operation in substantially the
same manner as at present; keep its properties in good operating condition and
repair; and make all necessary and proper repairs, renewals, replacements,
additions and improvements thereto.
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5.6. INSURANCE. Maintain with financially sound and reputable insurers
insurance with respect to its property and business against such casualties and
contingencies, of such types and in such amounts as is customary for established
companies engaged in the same or similar business and similarly situated and in
conformity with the requirements of Section 4(j) of the Security Agreement.
5.7. COMPLIANCE WITH LAWS. Comply in all material respects with all laws
applicable to the Borrower and to the operation of its business (including any
statute, rule or regulation relating to employment practices and pension
benefits or to environmental, occupational and health standards and controls).
5.8. FINANCIAL COVENANTS. Comply with all of the financial and other
covenants, if any, set forth on the Addendum.
5.9. ADDITIONAL REPORTS. Provide prompt written notice to the Bank of the
occurrence of any of the following of which the Borrower obtains knowledge
(together with a description of the action which the Borrower proposes to take
with respect thereto): (i) any Event of Default or an event or circumstance that
with the passage of time, provision of notice or both would constitute an Event
of Default, (ii) any litigation filed by or against the Borrower claiming in
excess of $50,000, (iii) any Reportable Event or Prohibited Transaction with
respect to any Employee Benefit Plan(s) (as defined in ERISA) or (iv) any event
which is reasonably expected to result in a material adverse change in the
business, assets, operations, financial condition or results or operation of the
Borrower.
5.10. MEETING OF DIRECTORS. Upon the occurrence and continuation of an
Event of Default, the Borrower shall provide to the Bank copies of all reports
provided to the Board of Directors of the Borrower and the Bank shall be
entitled to attend meetings of the directors of the Borrowers of the purpose of
observing such proceedings, unless such attendance would be inappropriate as
determined in good faith by the Chairman of the Borrower's Board of Directors.
5.11. OPERATING ACCOUNTS. Maintain its primary depositary accounts with
the Bank.
5.12. OPINION OF BORROWER'S COUNSEL. Deliver to the Bank at Closing, or,
upon waiver of such delivery by the Bank, on or prior to the date fifteen (15)
days after the Closing, an opinion of Borrower's counsel in form and substance
reasonably satisfactory to the Bank and its counsel.
<PAGE> 14
6. NEGATIVE COVENANTS. The Borrower covenants and agrees that from the
date of execution of this Agreement until all Obligations have been fully paid
and any commitments of the Bank to the Borrower have been terminated, the
Borrower will not, except as set forth in the Addendum, without the Bank's prior
written consent not to be unreasonably withheld:
6.1. INDEBTEDNESS. Incur any indebtedness for borrowed money other
than: (i) the Loan and any subsequent indebtedness to the Bank, and (ii)
existing indebtedness disclosed on the September 1999 Financial Statements
referred to in Section 4.2.
6.2 LIENS AND ENCUMBRANCES. Except for Permitted Liens, create,
assume or permit to exist any mortgage, pledge, encumbrance or other
security interest or lien upon any assets now owned or hereafter acquired
or enter into any lease or any arrangement for the acquisition of property
subject to any conditional sales agreement, other than security interests
granted in connection with indebtedness permitted under Section 6.1 hereof.
6.3. GUARANTEES. Guarantee, endorse or become contingently liable for
the obligations of any person, firm or corporation, except in connection
with the endorsement and deposit of checks in the ordinary course of
business for collection.
6.4. LOANS, INVESTMENTS OR ADVANCES. Purchase or hold beneficially any
stock, other securities or evidences of indebtedness, or make any
investment or acquire any interest whatsoever in, any other person, firm or
corporation, except (i) investments disclosed on the September 1999
Financial Statements, or (ii) investments acceptable to the Bank in its
reasonable discretion or previously approved by the Bank in accordance with
the terms of the documents evidencing the Prior Bank Indebtedness;
provided, however, that the Borrower may in the ordinary course of business
extend (A) loans to employees or make other loans and advances which shall
not at any time exceed in the aggregate $100,000 and (B) loans to
management employees which are directly related to relocation expenses
incurred by such management employees and which do not exceed $15,000 with
respect to any single employee or $50,000 in the aggregate outstanding at
any time.
6.5. MERGER OR TRANSFER OF ASSETS. Merge or consolidate with or into
any person, firm or corporation or lease, sell, transfer or otherwise
dispose of all, or substantially all, of its property, assets and business
whether now owned or hereafter acquired; except for a merger, consolidation
or dissolution of Molloy Group, Inc. provided that the Borrower is the
survivor in any such merger or consolidation.
6.6. CHANGE IN BUSINESS, MANAGEMENT OR OWNERSHIP. Make or permit any
material change (i) in the nature of its business as carried on as of the
date hereof, (ii) in the composition of its current executive management,
as described in the Addendum hereto; or (iii) in its equity ownership other
than transfers to heirs and
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<PAGE> 15
beneficiaries of a stockholder upon the death of a stockholder or in connection
with an Initial Public Offering.
6.7 DIVIDENDS. Declare or pay any cash dividends on or make any cash
distribution with respect to any class of its equity or ownership interest, or
purchase, redeem, retire or otherwise acquire any of its equity other than in
connection with employee repurchase agreements entered into by the Borrower
pursuant to the grant of stock options or stock grants issued to employees under
a stock option plan approved by the Borrower's Board of Directors.
7. EVENTS OF DEFAULT; REMEDIES
7.1 EVENT OF DEFAULT. The occurrence of any of the following will be
deemed to be an "EVENT OF DEFAULT":
(a) PAYMENT DEFAULT. The Borrower shall fail to pay any payment of
principal when due or any payment of interest within five (5) calendar
days following the date when due, in respect of the Obligations.
(b) MATERIAL ADVERSE CHANGE. There shall be a material adverse change in
the business, operations, assets, financial condition or results of
operations of Borrower.
(c) COVENANT DEFAULT. The borrower shall default in the performance of, or
violate any of, the covenants or agreements contained in this
Agreement (other than the Obligation to pay principal and interest on
the Notes) and, if capable of being cured, such default or violation
shall continue uncured for a period of fifteen (15) calendar days
after written notice thereof is given to the Borrower by the Bank.
(d) BREACH OF WARRANTY. Any Financial Statement, representation, warranty
or certificate made or furnished by the Borrower to the Bank in
connection with this Agreement shall be false, incorrect or incomplete
in any material respect when made.
(e) BANKRUPTCY OR INSOLVENCY. A proceeding shall have been instituted in a
court having jurisdiction over the Borrower seeking a decree or order
for relief in respect of Borrower in an involuntary case under any
applicable bankruptcy, insolvency reorganization or other similar law
and such involuntary case shall remain undismissed or unstayed and in
effect for a period of thirty (30) consecutive days, or Borrower shall
commence a voluntary case under any such law or consent to the
appointment of a
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<PAGE> 16
receiver, liquidator, assignee, custodian, trustee, sequestrator,
conservator (or other similar official).
(f) OTHER DEFAULT. The occurrence of an Event of Default as defined
in the Notes or any of the Security Documents.
7.2. REMEDIES. Upon the occurrence of an Event of Default
described in Section 7.1(e), the principal of and accrued interest and all
other amounts due and owing on the Loan (if not then due and payable) shall
become due and payable immediately, with presentment, demand, notice,
protest, declaration or any other requirement of any kind, all which the
Borrower expressly waives. Upon the occurrence and continuance of an Event
of Default other than as described in Section 7.1(e), the Bank may provide
written notice to the Borrower stating that an Event of Default has
occurred and declaring that the principal of and accrued interest and all
other amounts due and owing on the Loan (if not then due and payable) shall
become due and payable immediately, without any further notice,
presentment, demand, protest, declaration or other requirement of any kind,
all of which the Borrower expressly waives. Upon the occurrence and
continuance of an Event of Default, and irrespective of whether the Loan
has been declared due and payable pursuant to the immediately preceding
sentence, the Bank will have all rights and remedies specified in the Notes
and the Security Documents and all rights and remedies (which are
cumulative and not exclusive) available under applicable law or in equity.
Upon the occurrence and continuance of an Event of Default, the Bank may
notify any persons who are account debtors of the Borrower to submit all
payments in respect of the Borrower's accounts receivable directly to the
Bank and shall provide written notice to the Borrower that it has done so.
8. CONDITIONS. The closing of the loan shall take place at such
place and on such date (the "CLOSING DATE") as the Borrower and the Bank
shall mutually agree. The Bank's obligation to make any advance or fund any
draw under the Loan is subject to the conditions that as of the date of the
advance:
8.1. NO EVENT OF DEFAULT. No Event of Default or fact, event or
circumstance which with the passage of time, provision of notice or both
would constitute an Event of Default shall have occurred and be continuing.
8.2. AUTHORIZATION DOCUMENTS. The Bank shall have been furnished
certified copies of resolutions of the Borrower's Board of Directors
authorizing the execution of this Agreement, the Note or any of the
Security Documents; or other proof of authorization satisfactory to the
Bank.
8.3. RECEIPT OF LOAN DOCUMENTS AND WARRANT. The Bank shall have
received the Loan Documents and such other instruments and documents which
the Bank may reasonably request in connection with the transactions
provided for in this
<PAGE> 17
Agreement. As additional consideration for the extension of credit under
the Loan, the Borrower has agreed to issue to the Bank a warrant to
purchase up to 80,000 shares of the Borrower's common stock at a price per
share of $3.75, which price the Borrower represents to the Bank to be the
price per share paid by outside investors in the most recent offering by
the Borrower of shares of its preferred stock, which price will be subject
to adjustment from time to time upon the occurrence of certain events and
contingencies. On the Closing Date and as a condition to Closing, the
Borrower shall deliver to the Bank a duly signed warrant certificate in
form and substance reasonably satisfactory to the Bank and its counsel.
8.4 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Borrower to the Bank shall be true and correct in all
respects.
8.5 OPENING BALANCE SHEET. The Borrower shall furnish the Bank with
its Opening Balance Sheet. "OPENING BALANCE SHEET" means the balance sheet
of the Borrower dated September 30, 1999.
8.6 EQUIPMENT LINE. On or prior to a draw under the Equipment Line,
the Borrower shall deliver to the Bank invoices supporting the invoice cost
amount included in the calculation of the first draw in accordance with
Exhibit B.
8.7 PAYMENT OF FEES. The Borrower shall have paid, to the extent
due, the Facility Fees.
9. EXPENSES. The Borrower agrees to pay the Bank, upon the closing of
this Agreement, and otherwise on demand, all reasonable and necessary legal and
filing costs and expenses incurred by the Bank in connection with the (i)
preparation, negotiation and delivery of this Agreement and the other Loan
Documents, and any modifications thereto, and (ii) collection of payments due
under the Loan or instituting, maintaining, preserving, enforcing and
foreclosing the security interest in any of the collateral securing the Loan,
whether through judicial proceedings or otherwise, including reasonable fees
and expenses of counsel, expenses for auditors, appraisers and environmental
consultants, lien searches, recording and filing fees and taxes.
10. INCREASED COSTS. Within thirty (30) days following written demand,
together with the written evidence of the justification therefor, the Borrower
agrees to pay the Bank, all direct costs incurred and any losses suffered or
payments made by the Bank as a consequence of making the Loan by reason of any
change in law or regulation or its interpretation imposing any reserve,
deposit, allocation of capital or similar requirement (including without
limitation, Regulation D of the board of Governors of the Federal Reserve
System) on the Bank, its holding company or any of their respective assets.
11. MISCELLANEOUS.
11.1 NOTICES. All notices, demands, requests, consents, approvals
and other communications required or permitted hereunder must be in writing
and will be
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<PAGE> 18
effective upon receipt if delivered personally to such party, or if sent by
facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the address set forth below or to such
other address as any party may give to the other in writing for such purpose:
To the Bank: To the Borrower:
PNC Bank, National Association ServiceWare, Inc.
600 Grant Street 333 Allegheny Avenue
29th Floor Oakmont, PA 15139
Pittsburgh, PA 15219 Attention: Stephen McMahon,
Attention: Jeffrey D. Sletten Chief Financial Officer
Facsimile No.: 412-768-9259 Facsimile No.: 412-826-0577
11.2 PRESERVATION OF RIGHTS. No delay or omission on the part of the
Bank to exercise any right or power arising hereunder will impair any such
right or power or be considered a waiver of any such right or power or any
acquiescence therein, nor will the action or inaction of the Bank impair any
right or power arising hereunder. The Bank's rights and remedies hereunder are
cumulative and not exclusive of any other rights or remedies which the Bank may
have under other agreements, at law or in equity.
11.3 ILLEGALITY. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
11.4 CHANGES IN WRITING. No modification, amendment or waiver of any
provision of this Agreement nor consent to any departure by the Borrower
therefrom, will in any event be effective unless the same is in writing and
signed by the Bank, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on the Borrower in any case will entitle the Borrower to any other or
further notice or demand in the same, similar or other circumstance.
11.5 ENTIRE AGREEMENT. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof.
11.6 COUNTERPARTS. This Agreement may be signed in any number of
counterpart copies and by the parties hereto on separate counterparts, but all
such copies shall constitute one and the same instrument.
11.7 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of the Borrower and the Bank and their respective,
successors and assigns; provided, however, that the Borrower may not assign
this Agreement in whole or
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<PAGE> 19
in part without the prior written consent of the Bank and the Bank at any time
may assign this Agreement in whole or in part.
11.8. INTERPRETATION. In this Agreement, unless the Bank and the Borrower
otherwise agree in writing, the singular includes the plural and the plural the
singular; words importing any gender include the other genders; references to
statutes are to be construed as including all statutory provisions
consolidating, amending or replacing the statute referred to; the word "or"
shall be deemed to include "and/or," the words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to articles, sections (or subdivisions of sections) or exhibits are
to those of this Agreement unless otherwise indicated; and references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments and other modifications to such instruments, but only to
the extent such amendments and other modifications are not prohibited by the
terms of this Agreement. Section headings in this Agreement are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose. Unless otherwise specified in this Agreement, all
accounting terms shall be interpreted and all accounting determinations shall be
made in accordance with GAAP. If this Agreement is executed by more than one
party as Borrower, the obligations of such persons or entities will be joint and
several.
11.9. INDEMNITY. The Borrower agrees to indemnify each of the Bank, its
directors, officers and employees and each legal entity, if any, which controls
the Bank (the "INDEMNIFIED PARTIES") and to hold each Indemnified Party harmless
from and against any and all claims, damages, losses, liabilities and expenses
(including, without limitation, all fees of counsel with whom any Indemnified
Party may consult and all expenses of litigation or preparation therefor) which
any Indemnified Party may incur or which may be asserted against any Indemnified
Party in connection with or arising out of the matters referred to in this
Agreement or in the other Loan Documents by any person, entity or governmental
authority (including any person or entity claiming derivatively on behalf of the
Borrower), whether (a) arising from or incurred in connection with any breach of
a representation, warranty or covenant by the Borrower, or (b) arising out of or
resulting from any suit, action, claim, proceeding or governmental
investigation, pending or threatened, whether based on statute, regulation or
order, or tort, or contract or otherwise, before any court or governmental
authority, which arises out of or relates to this Agreement, any other Loan
Document, or the use of the proceeds of the Loan; provided, however, that the
foregoing indemnity agreement shall not apply to claims, damages, losses,
liabilities and expenses solely attributable to an Indemnified Party's gross
negligence or willful misconduct. The indemnity agreement contained in this
Section shall survive the termination of this Agreement, payment of any Loan and
assignment of any rights hereunder. The Borrower may participate at its expense
in the defense of any such action or claim.
11.10. TERMINATION; REINSTATEMENT. Except as otherwise provided in Section
9 and Section 11.9 and the other indemnification obligations and waivers under
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<PAGE> 20
the Loan Documents, this Agreement will terminate upon satisfaction of the
following events: (a) payment to the Bank in full (unconditionally and
indefeasibly) of all monetary Obligations due hereunder and under the Loan
Documents and (b) the termination of the Bank's commitment to lend under the
Revolving Credit; provided, however, that this Agreement and the other Loan
Documents will, to the maximum extent not prohibited by applicable law, be
reinstated and the Obligations correspondingly increased (as though such
payment(s) had not been made) if at any time any amount received by the Bank
in respect of any Obligations is rescinded or must otherwise be restored,
refunded or returned by the Bank to the Borrower or any other person or entity
(X) upon or as a result of the insolvency, bankruptcy, dissolution, liquidation
or reorganization of the Borrower or (Y) upon or as a result of the appointment
of any receiver, intervenor, conservator, trustee or similar official for the
Borrower or for any substantial part of the assets of the Borrower.
11.11. ASSIGNMENTS AND PARTICIPATION. At any time, without any notice to
the Borrower, the Bank may sell, assign, transfer, negotiate, grant
participation in, or otherwise dispose of all or any part of the Bank's
interest in the Loan. The Borrower hereby authorizes the Bank to provide,
without any notice to the Borrower, any information concerning the Borrower,
including information pertaining to the Borrower's financial condition,
business operations or general creditworthiness, to any person or entity not a
competitor of Borrower which may succeed to or participate in all or any part
of the Bank's interest in the Loan, provided that such person or entity agrees
to maintain the confidentiality of such information.
11.12. GOVERNING LAW.
THIS AGREEMENT HAS BEEN DELIVERED TO AN ACCEPTED BY THE BANK AND
WILL BE DEEMED TO BE MADE IN THE COMMONWEALTH OF PENNSYLVANIA. THIS AGREEMENT
WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
EXCLUDING ITS CONFLICT OF LAWS RULES.
11.13. CHOICE OF FORUM.
THE BORROWER HEREBY IRREVOCABLY CONSENTS TO THE EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT SEATED IN ALLEGHENY COUNTY OR THE
WESTERN DISTRICT OF PENNSYLVANIA, AND CONSENTS THAT ALL SERVICE OF PROCESS BE
SENT BY NATIONALLY RECOGNIZED OVERNIGHT COURIER SERVICE DIRECTED TO THE
BORROWER AT THE BORROWER'S ADDRESS SET FORTH HEREIN AND SERVICE SO MADE WILL BE
DEEMED TO BE COMPLETED ON THE BUSINESS DAY AFTER DEPOSIT WITH SUCH COURIER;
PROVIDED THAT NOTHING CONTAINED IN THIS AGREEMENT
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<PAGE> 21
WILL PREVENT THE BANK FROM BRINGING ANY ACTION, ENFORCING ANY AWARD OR JUDGMENT
OR EXERCISING ANY RIGHTS AGAINST THE BORROWER INDIVIDUALLY, AGAINST ANY
SECURITY OR AGAINST ANY PROPERTY OF THE BORROWER WITHIN ANY OTHER COUNTY, STATE
OR OTHER FOREIGN OR DOMESTIC JURISDICTION. THE BANK AND THE BORROWER AGREE THAT
THE VENUE PROVIDED ABOVE IS THE MOST CONVENIENT FORUM FOR BOTH THE BANK AND THE
BORROWER. THE BORROWER WAIVES ANY OBJECTION TO VENUE AND ANY OBJECTION BASED ON
A MORE CONVENIENT FORUM IN ANY ACTION INSTITUTED UNDER THIS AGREEMENT.
11.14. WAIVER OF JURY TRIAL.
EACH OF THE BORROWER AND THE BANK IRREVOCABLY WAIVES ANY AND ALL
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE
BORROWER AND THE BANK ACKNOWLEDGE THAT THE FOREGOING WAIVER IS KNOWING AND
VOLUNTARY.
THE BORROWER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT, INCLUDING THE WAIVER OF JURY TRIAL, AND HAS BEEN
ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE.
[Signature Page to Follow]
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<PAGE> 22
WITNESS the due execution of this Loan Agreement as a document under seal,
as of the date first written above.
ATTEST: SERVICEWARE, INC.
By: /s/ Stephen McMahon By: Rajiv Enand (SEAL)
---------------------------- -----------------------------
Print Name: Stephen McMahon Print Name: Rajiv Enand
--------------------
Title: CFO Title: Chief Executive Officer
-------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey D. Sletten (SEAL)
------------------------
Print Name: Jeffrey D. Sletten
Title: Vice President
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<PAGE> 23
ADDENDUM to that certain Loan Agreement dated December 10, 1999, between
SERVICEWARE, INC., as the Borrower, and PNC BANK, NATIONAL ASSOCIATION, as the
Bank. Capitalized terms used in this Addendum and not otherwise defined shall
have the meanings given them in the Agreement.
FINANCIAL COVENANTS
1. The Borrower will not permit its Tangible Net Worth to be less than the
following amounts as of the end of each quarterly accounting period as
specified below:
Quarter Ending Tangible Net Worth
-------------- ------------------
December 31, 1999 $ 3,450,000
March 31, 2000 $ 4,200,000
June 30, 2000 $ 4,700,000
September 30, 2000 $ 6,300,000
December 31, 2000 $ 8,550,000
2. The Borrower shall have a minimum "Quick Ratio" at the end of each month
or quarterly accounting period as specified below:
Month/Quarter Ending Quick Ratio
-------------------- -----------
November 30, 1999 0.78
December 31, 1999 1.60
March 31, 2000 1.60
June 30, 2000 1.60
September 30, 2000 1.90
3. Reporting to commence with the accounting quarter ending June 30, 2000,
which means that the initial report shall cover the consecutive quarterly
accounting periods ending March 31, 2000 and June 30, 2000, the Borrower
will not report Negative Net Operating Income in any two consecutive
quarterly accounting periods.
A-1
<PAGE> 24
DEFINITIONS:
"CASH" means cash, cash equivalents and marketable securities as appears on
the balance sheet delivered in accordance with Section 5.2 of this Agreement.
"CURRENT LIABILITIES" means the sum of all current liabilities determined in
accordance with generally accepted accounting principles other than deferred
revenue plus indebtedness to the Bank for money borrowed under the Term Loan.
"NEGATIVE NET OPERATING INCOME" means earnings before interest, taxes,
depreciation and amortization less than zero calculated in accordance with
generally accepted accounting principles.
"QUICK RATIO" means the sum of Cash and accounts receivable divided by Current
Liabilities.
"TANGIBLE NET WORTH" means shareholders' equity as reflected in the Financial
Statements of the Borrower delivered to the Bank pursuant to Sections 5.2 and
5.3 of this Loan Agreement, plus, without duplication, deferred revenue, and
minus good will and other intangible assets.
<PAGE> 25
AUTHORIZED OFFICERS
Rajiv Enand, Chief Executive Officer
Stephen McMahon, Chief Financial Officer and Treasurer
Mark Tapling, President
SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
All information contained in the following schedule of exceptions is to be
considered as an entirety and any information appearing under one Section
heading or subheading shall be deemed to be in response to all requests for
information in all Sections of the Agreement. In addition, all descriptions of
agreements or other matters appearing on this schedule are not complete
descriptions of agreements and other matters and are qualified by reference to
the more complete documents and records referred to thereby.
4.1 EXISTENCE, POWER AND AUTHORITY
The Company may not be qualified to do business in certain states in which it
has development and sales offices.
4.2 FINANCIAL STATEMENTS
The financial statements for the years ended December 31, 1998 and 1997 are
completed, but the audit opinion has not yet been signed. Adjustments for a
change in revenue recognition and for preferred stock accretion are to be made
and a footnote regarding subsequent events is to be added to disclose the July
23, 1999 merger and financing.
4.4 BINDING OBLIGATIONS
The Borrower has obtained those shareholder and contractual approvals, waivers
and consents required in connection with (i) the Borrower's incurrence of
indebtedness pursuant to this Agreement and (ii) the Borrower's issuance of the
Warrant in accordance with Section ___ of this Agreement.
4.5 NO DEFAULTS OR VIOLATIONS
As required by the share purchase agreements and the Amended and Restated Loan
Agreement, the Company failed to provide 1998 audited financial statements to
its Series A, Series B, and Series C preferred shareholders and PNC Bank on a
timely basis.
Additionally, monthly financial statements have not been provided to the
Preferred shareholders and Investors in accordance with their stock purchase
agreements and the Amended and Restated Articles of Incorporation.
A-1
<PAGE> 26
The Company has not held annual shareholders meetings in accordance with
Section 1.01 of the Bylaws. Only two such meetings have been held on 7/26/94
and 6/15/95. A unanimous written consent in lieu of an annual meeting was
executed on 4/11/96.
At times, the Company has been out of compliance with the covenants and
collateral requirements of the loan agreements with PNC Bank, N.A.
4.7 LITIGATION
The Company is currently being sued for royalty fees owed in connection with a
distribution agreement entered into with another company.
4.8 TAX RETURNS
The Company's tax returns that have been filed to date have not been audited or
settled.
Sales tax: The Company has collected and needs to remit sales tax for sales made
in Texas and Massachusetts amounting to approximately $24,000 in total at
9/30/99. Additionally, a reserve of $100,000 has been set up to account for any
additional unknown sales tax liability.
4.9 EMPLOYEE BENEFIT PLANS
(i) The Company plans to terminate the 401(k) plan of Molloy Group, Inc., its
wholly owned subsidiary, and consolidate this plan into the Service Ware
401(k) plan.
4.14 YEAR 2000
The Company has not received Year 2000 compliance certificates from all of its
third party software suppliers.
The Company's voice mail system is not Year 2000 compliant. However, a Year 2000
software upgrade has been ordered, and the system should be Year 2000 compliant
by December 31, 1999.
<PAGE> 27
EXHIBIT A
BORROWING BASE RIDER
THIS BORROWING BASE RIDER ("RIDER") is executed this 10th day of
December, 1999, by and between SERVICEWARE, INC., a Pennsylvania corporation
(the "BORROWER"), and PNC BANK, NATIONAL ASSOCIATION (the "BANK"). This Rider is
incorporated into and made part of that certain Loan Agreement by and between
the Borrower and the Bank of even date herewith (the "LOAN AGREEMENT").
Pursuant to and subject to the terms and conditions set forth in the
Loan Agreement, the Bank has extended a Loan to the Borrower which includes a
secured revolving credit facility (the "REVOLVING CREDIT") in an amount not to
exceed $7,500,000, under which the Borrower may borrow, repay and reborrow funds
at any time prior to the Revolving Credit Maturity Date. As a condition to the
Bank's willingness to extend the Revolving Credit to the Borrower, the Bank and
the Borrower are entering into this Rider in order to set forth their agreement
regarding the maximum amount which may be outstanding under the Revolving Credit
at any given time, and for the other purposes set forth below:
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties hereto covenant and agree as follows:
In addition to the terms defined in Section 3 hereof or elsewhere in
this Rider, initially capitalized terms used and not otherwise defined herein
shall have the same meanings ascribed to them in the Loan Agreement.
1. LIMITATIONS ON BORROWINGS UNDER REVOLVING CREDIT. Notwithstanding
any provisions to the contrary in any of the other Loan Documents, at no time
shall the aggregate principal amounts of indebtedness outstanding at any one
time under the Revolving Credit exceed a dollar amount equal to the Borrowing
Base at such time. If at any time the aggregate principal amount of indebtedness
outstanding under the Revolving Credit exceeds the limitation set forth in this
Section 1 for any reason other than a return of goods by an Account Debtor, then
the Borrower shall immediately repay the amount of such excess to the Bank in
immediately available funds. If the aggregate principal amount of indebtedness
outstanding under the Revolving Credit exceeds the Borrowing Base because of a
return of goods by an Account Debtor such that the Account represented thereby
ceases to constitute a Qualified Account, the Borrower shall repay the amount of
such excess to the Bank in immediately available funds within thirty (30) days
from the date of such return unless the Account Debtor accepts replacement goods
prior to the expiration of such 30-day period.
<PAGE> 28
2. BORROWING BASE CERTIFICATES. In addition to any and all provisions of
the other Loan Documents which establish conditions to the Borrower's ability
to request and obtain any advance under the Revolving Credit, the Borrower may
not request an advance under the Revolving Credit unless a Borrowing Base
Certificate shall have been delivered to the Bank not more than five (5)
calendar days prior to the date of such proposed advance.
3. ADDITIONAL DEFINITIONS. The following terms shall have the following
meanings when used in this Rider:
"ACCOUNT" shall mean an "account" or a "general intangible" as defined in
the Uniform Commercial Code as in effect in the jurisdiction whose Law governs
the perfection of the Bank's security interest therein, whether now owned or
hereafter acquired or arising.
"ACCOUNT DEBTOR" shall mean, with respect to any Account, each Person who
is obligated to make payments to the Borrower on such Account.
"AFFILIATE" of the Borrower or any Account Debtor shall mean (a) any
Person who (either alone or with a group of Persons, and either directly or
indirectly through one or more intermediaries) is in control of, is controlled
by or is under common control with the Borrower or such Account Debtor, (b) any
director, officer, partner, employee or agent of the Borrower or such Account
Debtor, and (c) any member of the immediate family of any natural person
described in the preceding clauses (a) and (b). A Person or group of Persons
shall be deemed to be in control of the Borrower or an Account Debtor when such
Person or group of Persons possesses, directly or indirectly, the power to
direct or cause the direction of the management or policies of the Borrower or
such Account Debtor, whether through the ownership of voting securities, by
contract or otherwise.
"BORROWING BASE" at any time shall mean 80% of Qualified Accounts. The
value of Qualified Accounts at any time shall be determined by reference to the
most recent Borrowing Base Certificate delivered by the Borrower to the Bank.
"BORROWING BASE CERTIFICATE" shall mean each Borrowing Base Certificate to
be delivered by the Borrower to the Bank pursuant to Section 2 of this Rider,
in substantially the form attached as Exhibit A to this Rider, with blanks
appropriately completed, as amended, supplemented or otherwise modified from
time to time.
"EXIMBANK BORROWER AGREEMENT" shall mean any agreement made and entered
into by the Borrower and acknowledged by the Bank as a condition to the making
of any Loan (as defined in the applicable Eximbank Borrower Agreement) by the
Bank to the Borrower the repayment of which is guaranteed, in whole or in part,
by the Export-Import Bank of the United States.
"EXIMBANK BORROWING BASE" shall mean the Borrowing Base as defined in the
applicable Eximbank Borrower Agreement.
2
<PAGE> 29
"LAW" shall mean any law (including common law), constitution, statute,
treaty, regulation, rule, ordinance, order, injunction, writ, decree or award
of any Official Body.
"LIEN" shall mean any mortgage, pledge, security interest, bailment,
encumbrance, claim, lien or charge of any kind, including any agreement to give
any of the foregoing, any conditional sale or other title retention agreement
and any lease in the nature thereof, and the filing of or agreement to give any
financing statement under the Uniform Commercial Code.
"OFFICIAL BODY" shall mean any government or political subdivision or any
agency, authority, bureau, central bank, commission, department or
instrumentality of any government or political subdivision, or any court,
tribunal, grand jury or arbitrator, in each case whether foreign or domestic.
"PERSON" shall mean an individual, sole proprietorship, corporation,
partnership (general or limited), trust, business trust, limited liability
company, unincorporated organization or association, joint venture, joint-stock
company, Official Body, or any other entity of whatever nature.
"QUALIFIED ACCOUNTS" shall mean Accounts which are and at all times
continue to be acceptable to the Bank in its reasonable discretion. In order
for an Account to be acceptable to the Bank it must meet the following
requirements and amounts owing under it shall be subject to the following
limitations:
(a) It complies with all requirements of applicable Law, including,
without limitation, if applicable, usury Laws, the Federal Truth
in Lending Act, the Federal Consumer Credit Protection Act, the
Fair Credit Billing Act, and Regulation Z of the Board of
Governors of the Federal Reserve System;
(b) It is not originated in any jurisdiction the Laws of which, nor is
it subject to any law the effect of which, would make it or the
grant of a security interest in the Account to the Bank unlawful,
invalid or unenforceable;
(c) It was originated by the Borrower in connection with (i) a sale of
goods by the Borrower in the ordinary course of business, which
sale has been consummated and the goods sold therein delivered in
accordance with the terms of such sale, or (ii) the rendering of
services by the Borrower in the ordinary course of business, which
services have been fully rendered, in each case, such that the
performance of the related contract has been completed by the
Borrower and by all parties other than the Account Debtor to the
extent necessary thereunder to enforce payment of the Account
against the Account Debtor;
(d) It is evidenced by a written invoice or other documentation and
arises from an enforceable contract, all of which are in form and
substance satisfactory to the Bank;
-3-
<PAGE> 30
(e) It does not arise out of a contract with, or order from, an
Account Debtor that, by its terms, forbids or makes void or
unenforceable the grant of the security interest by the Borrower
to the Bank in and to the Account arising with respect thereto;
(f) The title of the Borrower to the Account and, except as to the
Account Debtor, to any related goods is absolute and is not
subject to any Lien except Liens in favor of the Bank;
(g) It or the contract giving rise to it provides for payment in
United States Dollars by the Account Debtor;
(h) The amounts owing under it are not less than the amounts
represented by the Borrower to be owing under it in the applicable
Borrowing Base Certificate;
(i) Any portion of an Account for which income has not yet been earned
or which constitutes unearned discount, service charges or
deferred interest shall be ineligible;
(j) It is not subject to any defense, claim of reduction,
counterclaim, set-off, recoupment, or any dispute or claim for
credits, allowances or adjustments by the Account Debtor because
of returned, inferior, damaged goods or unsatisfactory service, or
for any other reason;
(k) The goods the sale of which gave rise to the Account were shipped
or delivered or provided to the Account Debtor on an absolute sale
basis and not (i) on a bill and hold sale basis, (ii) a
consignment sale basis, (iii) a guaranteed sale basis, (iv) a sale
or return basis, or (v) on the basis of any other similar terms
making the Account Debtor's payment obligations conditional;
(l) No default exists under the Account by any party thereto, and all
rights and remedies of the Borrower under the Account are freely
assignable by the Borrower;
(m) It or the contract giving rise to it does not provide for deferred
payments terms and it has not been outstanding for more than
ninety (90) days past the invoice date;
(n) It shall be ineligible if 50% or more, in amount, of the Accounts
of the Account Debtor and its Affiliates are more than ninety (90)
days past due from the date of original invoice therefor;
(o) If, when added to the outstanding Accounts of the Account Debtor
and its Affiliates, such Accounts in the aggregate would exceed
20% (the
-4-
<PAGE> 31
"AGGREGATE LIMIT") of all of the Borrower's Accounts, then amount
thereof in excess of such Aggregate Limit shall be ineligible;
(p) The Borrower has not received any note, trade acceptance, draft,
chattel paper or other instrument with respect to, or in payment of,
the Account, unless, if any such instrument has been received, the
Borrower immediately notifies the Bank and, at the Bank's request,
endorses or assigns and delivers such instrument to the Bank;
(q) The Borrower has not received any notice of (i) the death of the
Account Debtor or a partner thereof; (ii) the filing by or against the
Account Debtor of any proceeding in bankruptcy, receivership,
insolvency, reorganization, liquidation, conservatorship or any
similar proceeding, or (iii) any assignment by the Account Debtor for
the benefit of creditors. Upon receipt by the Borrower of any such
notice, it will give the Bank prompt written notice thereof;
(r) The Account Debtor is not an Affiliate of the Borrower;
(s) The Account Debtor is domiciled in the United States of America or, if
the Account Debtor is domiciled in a country other than the United
States of America, such Account shall be eligible to the extent of the
portion thereof that is (i) supported by a documentary letter of
credit, duly assigned to and in the possession of the Bank, from a
financial institution acceptable to the Bank and the terms and
conditions of which are acceptable to the Bank, and (ii) excluded from
the Eximbank Borrowing Base;
(t) It shall be ineligible if the Account Debtor is an Official Body,
unless the Borrower shall have taken all actions deemed necessary by
the Bank in order to perfect the Bank's security interest therein,
including but not limited to any notices or filings required under the
Federal Assignment of Claims Act of 1940, as amended, or other
applicable Laws; and
(u) The Bank has not reasonably deemed such Account ineligible because of
uncertainty about the creditworthiness of the Account Debtor
(including, without limitation, unsatisfactory past experiences of the
Borrower or the Bank with the Account Debtor or unsatisfactory
reputation of the Account Debtor) or because the Bank otherwise makes
a reasonable determination that the collateral value of the Account to
the Bank is impaired or that the Bank's ability to realize such value
is insecure.
The Bank may revise from time to time the requirements for acceptability of
Accounts, in each case in its reasonable judgment. In the case of any dispute
about whether an Account is or has ceased to be a Qualified Account, the
decision of the Bank shall be final.
<PAGE> 32
4. GOVERNING LAW.
THIS RIDER WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE
PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA, EXCLUDING ITS CONFLICT OF LAW RULES.
5. COUNTERPARTS. This Rider may be signed in any number of counterpart
copies and by the parties hereto on separate counterparts, but all such copies
shall constitute one and the same instrument.
[Signature Page to Follow]
-6-
<PAGE> 33
WITNESS the due execution of this Borrowing Base Rider as a document under
seal as of the date first written above.
ATTEST: SERVICEWARE, INC.
By:________________________________ By:________________________________(SEAL)
Print Name:________________________ Print Name: Rajiv Enand
Title:_____________________________ Title: Chief Executive Officer
PNC BANK, NATIONAL ASSOCIATION
By:________________________________(SEAL)
Print Name: Jeffrey D. Sletten
Title: Vice President
-7-
<PAGE> 34
EXHIBIT A
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
ACCOUNTS
COLLATERAL STATUS RECEIVABLE TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Beginning Balance (Previous Report - Line 4)
- ------------------------------------------------------------------------------------------------------------
2. Additions (New Billings, Increases and Adjustments)
- ------------------------------------------------------------------------------------------------------------
3. Deductions (Gross Invoices Paid)
- ------------------------------------------------------------------------------------------------------------
4. Total
- ------------------------------------------------------------------------------------------------------------
5. Less Ineligible Amounts
- ------------------------------------------------------------------------------------------------------------
6. Total Eligible Amounts
- ------------------------------------------------------------------------------------------------------------
LOAN STATUS
- ------------------------------------------------------------------------------------------------------------
7. Advance Percentage (Non-EXIM Bank Guaranty) 80%
- ------------------------------------------------------------------------------------------------------------
8. Value (Eligible Amount x Advance Percentage)
- ------------------------------------------------------------------------------------------------------------
9. Advance Percentage (EXIM Bank Guaranty) 100%
- ------------------------------------------------------------------------------------------------------------
10. Value (Eligible Amount x Advance Percentage
- ------------------------------------------------------------------------------------------------------------
11. Total of Lines 8 and 11
- ------------------------------------------------------------------------------------------------------------
12. Lesser of Value or Credit Limit of $7,500,000(1)
- ------------------------------------------------------------------------------------------------------------
13. Previous Loan Balance (Previous Report - Line 14)
- ------------------------------------------------------------------------------------------------------------
14. Less: Repayments, Adjustments and Other Decreases
- ------------------------------------------------------------------------------------------------------------
15. Subtotal for Loan Balance
- ------------------------------------------------------------------------------------------------------------
16. Additional Loan Increase: Request on funds and Return items
- ------------------------------------------------------------------------------------------------------------
17. Adjusted Loan Balance
- ------------------------------------------------------------------------------------------------------------
18. Amount Available for Loan
</TABLE>
To induce PNC Bank, National Association ("the Bank") to grant advances or
other financial accommodations to us pursuant to the terms of our Loan
Agreement dated as of December 10, 1999 with the Bank, as the same may be
extended, amended, and/or restated from time to time ("Loan Agreement"), we
hereby certify, represent and warrant the following to the Bank, all as of the
date hereof: (1) the foregoing statements of our accounts receivable collateral
described above are true and complete; (2) the total eligible collateral
described in line 6 above represents only Qualified Accounts as defined in the
Loan Agreement, (3) we are in compliance with all of the terms and provisions
of the Loan Agreement; (4) there exists no Default or Event of Default under
the Loan Agreement; and (5) the undersigned is an Authorized Officer.
DATE:
--------------------------
BORROWER: ServiceWare, Inc.
BY:
--------------------------
- ------------
(1) Except as limited to $5,000,000 pursuant to terms of Loan Agreement while
principal remains outstanding on the Term Loan.
Document #: 1021955v3
<PAGE> 35
EXHIBIT B
EQUIPMENT LINE REQUEST
________________________________________________________________________________
-------------------------------------------------------------
BASIS INVOICE COST
@ 100% TOTAL
-------------------------------------------------------------
Beginning Amount
-------------------------------------------------------------
Additional Amounts
-------------------------------------------------------------
Total
-------------------------------------------------------------
Advance Rate x0.90%
-------------------------------------------------------------
Maximum Available $(1)
-------------------------------------------------------------
Remainder Available
-------------------------------------------------------------
To induce PNC Bank, National Association ("the Bank") to grant advances or
other financial accommodations to us pursuant to the terms of our Loan Agreement
dated as of December 10, 1999 with the Bank, as the same may be extended,
amended, and/or restated from time to time ("Loan Agreement"), we hereby
certify, represent and warrant the following to the Bank, all as of the date
hereof: (1) the foregoing statements of equipment purchases described above are
true and complete; (2) we are in compliance with all of the terms and
provisions of the Loan Agreement; (3) there exists no Default or Event of
Default under the Loan Agreement; and (4) the undersigned is an Authorized
Officer.
SERVICEWARE, INC.
By:
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
Date:
--------------
- ------------------
(1) Enter dollar amount equal to $500,000 minus the lesser of (i) $150,000 or
(ii) the principal amount outstanding as of the Closing Date on that certain
loan to Borrower from Silicon Valley Bank referenced in the Loan Agreement.
<PAGE> 36
EXHIBIT C
OFFICER'S FINANCIAL STATEMENT CERTIFICATION
AND CERTIFICATE OF NO DEFAULT
The undersigned hereby certifies that he or she is an Authorized
Officer of SERVICEWARE, INC. (The "BORROWER") and is furnishing this Compliance
Certificate and these certified Financial Statements on behalf of the Borrower
pursuant to that certain Loan Agreement dated December 10, 1999 (as the same
may be extended, amended or restated from time to time, the "LOAN AGREEMENT"),
with PNC BANK, NATIONAL ASSOCIATION (the "BANK").
Initially capitalized terms used and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
The undersigned hereby represents and agrees as follows.
1. He or she is familiar with the provisions of the Loan Documents and
the transactions contemplated thereby, and has reviewed the Loan Documents, had
such discussions with the Borrower's management and employees and done such
other investigation as reasonably necessary to support the statements made
below.
2. The attached Financial Statements are delivered pursuant to Section
5.2 of the Loan Agreement, and have been prepared in accordance with GAAP
consistently applied from period to period.
3. No Event of Default exists under the Loan Documents and no event has
occurred which with the passage of time, delivery of notice or both would
constitute an Event of Default.
4. The Borrower has performed all of its obligations under the Loan
Documents, and all of the representations and warranties made by the Borrower
in the Loan Documents are true and correct as of the date hereof in all
material respects.
5. If applicable, the calculations set forth on Exhibit A hereto
manifest in reasonable detail the Borrower's compliance with each and every
financial covenant contained in the Loan Documents as of the close of the
period indicated thereon.
WITNESS the due execution hereof with the intent to be legally bound
hereby as of this ___ day of ___________________, ____.
By: _____________________
Print Name: _____________
Title: __________________
<PAGE> 37
EXHIBIT A
Financial Covenants for Period Ending ___________
1. Tangible Net Worth
Actual:
Shareholder's Equity
Less: Intangible Assets
Tangible Net Worth
Covenant: Tangible Net Worth
2. Quick Ratio
Actual:
Cash + Accounts Receivable (A)
Current Liabilities (B)
Quick Ratio (A)/(B)
Covenant: Quick Ratio
3. Quarterly Loss for Most Recent Quarter End
<PAGE> 1
Exhibit 10.2
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of July 13, 1999,
by and among ServiceWare, Inc., a Pennsylvania corporation ("ServiceWare"),
Molloy Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of ServiceWare ("Sub"), and Molloy Group, Inc., a Delaware
corporation ("Molloy").
WHEREAS, the Boards of Directors of ServiceWare, Sub and Molloy deem it
advisable and in the best interests of each corporation and its respective
stockholders that ServiceWare and Molloy combine in order to advance the
long-term business interests of ServiceWare and Molloy;
WHEREAS, the strategic combination of ServiceWare and Molloy shall be
effected by the terms of this Agreement through a transaction in which Sub will
merge with and into Molloy, Molloy will become a wholly owned subsidiary of
ServiceWare and the stockholders of Molloy will become shareholders of
ServiceWare (the "Merger");
WHEREAS, Bruce Molloy, Unterberg Harris Private Equity Partners, LP,
Unterberg Harris and C.E. Unterberg Towbin, LP (the "Molloy Principal
Stockholders") hold shares of the capital stock of Molloy representing, in the
aggregate, approximately 76% of the voting power of all issued and outstanding
capital stock of Molloy;
WHEREAS, the Molloy Principal Stockholders have agreed, pursuant to a
letter agreement in substantially the form of Exhibit A-l attached hereto (the
"Molloy Principal Stockholder Agreements") to vote all the shares of capital
stock of Molloy beneficially owned by them in favor of the matters included as
part of the Molloy Stockholder Approval (as defined in Section 7.01 (a)) and to
be bound by the provisions of Sections 6.01(a) and 8.03 hereof;
WHEREAS, Jeff Pepper, Rajiv Enand, Poly Ventures II, L.P., Geocapital
III, L.P. and Norwest Equity Partners V (the "ServiceWare Principal
Shareholders") hold shares of capital stock of ServiceWare, representing, in the
aggregate, approximately 97% of the voting power of all issued and outstanding
capital stock of ServiceWare;
WHEREAS, the ServiceWare Principal Shareholders have agreed, pursuant
to a letter agreement in substantially the form of Exhibit A-2 attached hereto
(the "ServiceWare Principal Shareholder Agreements") to vote all the shares of
capital stock of ServiceWare beneficially owned by them in favor of the matters
included as part of the ServiceWare Shareholder Approval (as defined in Section
7.01 (a)) and to be bound by the provisions of Section 6.01(b) hereof;
WHEREAS, immediately prior to the Merger, the Articles of Incorporation
of ServiceWare shall be amended and restated as set forth in Exhibit B attached
hereto (the "ServiceWare Articles");
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.01 Effective Time of the Merger. Subject to the provisions of
this Agreement, a certificate of merger (the "Certificate of Merger") in such
form as is required by the relevant provisions of the Delaware General
Corporation Law ("DGCL") shall be duly prepared, executed and acknowledged by
the Continuing Corporation (as defined in Section 1.03) and thereafter delivered
to the Secretary of State of the State of Delaware, for filing, as provided in
the DGCL, as soon as practicable on or after the Closing Date (as defined in
Section 1.02). The Merger shall become effective upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware or at
such time thereafter as is provided in the Certificate of Merger (the "Effective
Time").
Section 1.02 Closing. The closing of the Merger (the "Closing") will
take place at 10:00 a.m., prevailing time, on a date (the "Closing Date") to be
specified by ServiceWare and Molloy, which shall be no later than the second
business day after satisfaction or waiver of the latest to occur of the
conditions set forth in Article VII (other than those conditions that, by their
terms, cannot be satisfied until the Closing Date), at the offices of Morgan,
Lewis & Bockius, LLP, One Oxford Centre, 32nd floor, Pittsburgh, PA 15219, or at
such other place as ServiceWare and Molloy may agree.
Section 1.03 Effects of the Merger.
(a) At the Effective Time (i) the separate existence of Sub shall cease
and Sub shall be merged with and into Molloy (Sub and Molloy are sometimes
referred to below as the "Constituent Corporations" and Molloy is sometimes
referred to below as the "Continuing Corporation"), (ii) the Certificate of
Incorporation of Sub in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation of the Continuing Corporation, and (iii) the
Bylaws of Sub as in effect immediately prior to the Effective Time shall be the
Bylaws of the Continuing Corporation.
(b) At and after the Effective Time, the Continuing Corporation shall
possess all the rights, privileges, powers and franchises of a public as well as
of a private nature, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations; and all and singular rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as all other things in
action or belonging to each of the Constituent Corporations, shall be vested in
the Continuing Corporation, and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually
the property of the Continuing Corporation as they were of the Constituent
Corporations, and the title to any real estate vested by deed or otherwise, in
either of the Constituent Corporations, shall not revert or be in any way
impaired; but all rights of creditors and all liens upon any property of either
of the
2
<PAGE> 3
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thereafter attach
to the Continuing Corporation, and may be enforced against it to the same extent
as if such debts and liabilities had been incurred by it.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.01 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of Molloy or Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the Continuing
Corporation.
(b) Cancellation of Treasury Stock. All shares of common stock, par
value $.0001 per share of Molloy ("Molloy Common Stock"), if any, that are owned
by Molloy as treasury stock shall be canceled and retired and shall cease to
exist, and no stock of ServiceWare or other consideration shall be delivered in
exchange therefor.
(c) Exchange of Molloy Common Stock. At the Effective Time, except as
provided in Section 2.01(j), each issued and outstanding share of Molloy Common
Stock (other than shares to be canceled in accordance with Section 2.01(b))
shall be converted into the right to receive 0.3330 (the "Conversion Number")
fully paid and nonassessable shares of common stock, no par value, of
ServiceWare ("ServiceWare Common Stock"). All such shares of Molloy Common
Stock, when so converted at the Effective Time, shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such shares shall cease to have
any rights with respect thereto, except the right to receive the shares of
ServiceWare Common Stock to be issued in consideration therefor upon the
surrender of such certificate to ServiceWare in accordance with Section 2.02.
(d) Exchange of Molloy Preferred Stock. At the Effective Time, except
as provided in Section 2.01(j), (i) each issued and outstanding share of Series
A Non-Cumulative Convertible Preferred Stock of Molloy ("Molloy Series A
Preferred Stock") shall be converted into the right to receive 0.3796 fully paid
and nonassessable shares of Series E Convertible Preferred Stock, par value
$1.00 per share of ServiceWare as set forth in the ServiceWare Articles
("ServiceWare Series E Preferred Stock"), and (ii) each issued and outstanding
share of Series B Non-Cumulative Convertible Preferred Stock of Molloy ("Molloy
Series B Preferred Stock" and, together with the Molloy Series A Preferred
Stock, the "Molloy Preferred Stock") shall be converted into the right to
receive 12.9042 fully paid and nonassessable shares of Series E Convertible
Preferred Stock. All such shares of Molloy Preferred Stock, when so converted at
the Effective Time, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto,
3
<PAGE> 4
except the right to receive the shares of ServiceWare Series E Preferred Stock
to be issued in consideration therefor upon the surrender of such certificate to
ServiceWare in accordance with Section 2.02.
(e) Warrants to Purchase Molloy Common Stock. At the Effective Time,
except as provided in Section 2.01(j), each then outstanding warrant to purchase
one share of Molloy Common Stock (the "Molloy Common Stock Warrants") shall be
exchanged for a warrant to purchase a number of shares of ServiceWare Common
Stock equal to the Conversion Number (the "ServiceWare Common Stock Warrants")
at an exercise price equal to the exercise price of such Molloy Common Stock
Warrant divided by the Conversion Number. All such Molloy Common Stock Warrants,
when so exchanged at the Effective Time, shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a Molloy Common Stock Warrant shall cease to have any rights with
respect thereto, except the right to receive the ServiceWare Common Stock
Warrants to be issued in consideration therefor upon the surrender of such
Molloy Common Stock Warrants to ServiceWare in accordance with Section 2.02.
(f) Molloy Stock Options. At the Effective Time, all then outstanding
options to purchase Molloy Common Stock under the Molloy Group Inc. 1996 Stock
Plan (the "Molloy Option Plan") shall be assumed by ServiceWare in accordance
with Section 6.07.
(g) Exchange of Warrants and Notes. At the Effective Time, except as
provided in Section 2.01(j), each $1,000 in outstanding principal amount plus
accrued and unpaid interest of subordinated promissory notes (each, a "November
Note") issued pursuant to the Note and Preferred Stock Warrant Purchase
Agreement dated as of November 30, 1998 among Molloy and certain purchasers and
the related warrant to purchase 1,250 shares of Molloy's Series C Non-Cumulative
Convertible Preferred Stock (each, a "Molloy Preferred Stock Warrant" and,
together with the related November Note, a "Unit") shall be exchanged for
416.2613 fully paid and nonassessable shares of Series E Convertible Preferred
Stock. All such Units, when so converted at the Effective Time, shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a Unit shall cease to have any rights with respect
thereto, except the right to receive the shares of ServiceWare Series E
Preferred Stock to be issued in consideration therefor upon the surrender of
such Unit to ServiceWare in accordance with Section 2.02.
(h) Notes. At the Effective Time, except as provided in Section
2.10(j), the notes issued by Molloy on June 1, 1999 in the aggregate principal
amount of $500,000, the additional notes issued by Molloy on June 25, 1999 in
the aggregate principal amount of $500,000 and the notes issued by Molloy on
July 13, 1999 in the aggregate principal amount of $200,000 (collectively, the
"Working Capital Notes") will be exchanged at the rate of 277.5075, 302.7355 and
302.7355, respectively, fully paid and nonassessable shares of Series E
Convertible Preferred Stock for each $1,000 in outstanding principal amount plus
accrued and unpaid interest thereon. All such Working Capital Notes, when so
exchanged at the Effective Time, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a Working Capital Note shall cease to have any rights with respect thereto,
except the right to receive the ServiceWare Series E Preferred Stock to be
issued in consideration therefor upon the surrender of such Working Capital
Notes to ServiceWare in accordance with Section 2.02.
4
<PAGE> 5
(i) Escrow of Shares
(i) Escrow of Shares. Notwithstanding anything to the contrary
contained in this Article II, at the Effective Time, shares of Common Stock and
Series E Preferred Stock representing, in the aggregate, two percent of the
Fully Diluted Merger Consideration (as defined below) (the "Escrowed Shares")
issuable to each person or entity holding Molloy Common Stock, Molloy Preferred
Stock, Units and/or Working Capital Notes (each, an "Escrow Participant"), shall
not be delivered by ServiceWare to such Escrow Participant upon surrender of its
Molloy Common Stock, Molloy Preferred Stock, Units and/or Working Capital Notes
and shall instead be deposited in escrow with an escrow agent selected by
ServiceWare and reasonably satisfactory to Molloy (the "Escrow Agent").
ServiceWare shall deliver into escrow, on behalf of each Escrow Participant,
certificates representing shares of ServiceWare Common Stock and ServiceWare
Series E Preferred Stock (rounded to the nearest whole share) in the proportion
that the Fully Diluted Merger Consideration issuable to such Escrow Participant
bears to the Fully Diluted Merger Consideration issuable to all Escrow
Participants (in each case without giving effect the escrow of shares pursuant
to this Section 2.01 (i)). Each certificate for Escrowed Shares shall be
registered in the name of the appropriate Escrow Participant. As a condition to
its receipt of merger consideration hereunder, each Escrow Participant shall
execute a stock power in blank with respect to each certificate for Escrowed
Shares and shall deliver such stock power to ServiceWare. ServiceWare shall
deliver to the Escrow Agent (A) two share certificates, together with signed
stock powers, with respect to the ServiceWare Common Stock deposited in escrow
on behalf of each Escrow Participant that will receive ServiceWare Common Stock
in the Merger, each representing one-half of such Escrow Participant's Escrowed
Shares of ServiceWare Common Stock and (B) two share certificates, together with
signed stock powers, with respect to the ServiceWare Series E Preferred Stock
deposited in escrow on behalf of each Escrow Participant that will receive
ServiceWare Series E Preferred Stock in the Merger, each representing one-half
of such Escrow Participant's Escrowed Shares of ServiceWare Series E Preferred
Stock. The Escrow Agent shall hold such certificates until it it is required to
deliver them pursuant to Section 2.01(i)(iii).
(ii) Delivery of Shares. In the event that the Combined
Company (as defined below) shall, from July 1, 1999 through December 31, 1999,
receive orders or binding commitments from the prospective customers of Molloy
listed on Schedule 1 attached hereto ("Bookings"):
(A) in an aggregate amount equal to less than $6
million, the Escrowed Shares and related stock powers shall be delivered to
ServiceWare and canceled;
(B) in an aggregate amount equal to at least $6
million but less than $7.5 million, one-half of the number of the Escrowed
Shares deposited in escrow on behalf of each Escrow Participant (rounded to the
nearest whole share) and related stock powers shall be delivered to such Escrow
Participant, and the remaining Escrowed Shares and related stock powers shall be
delivered to the Company and canceled; or
(C) in an aggregate amount equal to $7.5 million or
more, all the Escrowed Shares and related stock powers deposited in escrow on
behalf of each Escrow Participant shall be delivered to such Escrow Participant.
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(iii) Procedures. Promptly following the end of the calendar year
ending December 31, 1999 (but in any event no later than March 31, 1999),
ServiceWare shall determine the amount of Bookings. Upon making such
determination, ServiceWare shall deliver to the Escrow Agent and the
Representative a certificate of ServiceWare's Chief Executive Officer (an
"Officer's Certificate") (A) certifying (I) the amount of Bookings and (II) if
the Officer's Certificate indicates that amount of the Bookings is less than
$7.5 million reasonably detailed back-up information as to the Bookings received
(by customer and amount) and (B) directing the Escrow Agent to deliver the
Escrowed Shares in accordance with the appropriate provision of Section
2.01(i)(ii), unless the Escrow Agent receives a timely Participant Request (as
defined below). If the Officer's Certificate indicates that the amount of the
Bookings is less than $7.5 million, no later than ten days following delivery of
the Officer's Certificate, the Representative may request (a "Participant
Request") a review by ServiceWare's independent certified public accountants
(the "Accountants") of the Bookings. Upon such request, ServiceWare shall engage
the Accountants to perform such review and shall use its best efforts to cause
such Accountants to determine the amount of the Bookings in no more than 30 days
from the date of the Participant Request. The Accountants shall deliver their
preliminary report to ServiceWare and to the Representative, and shall entertain
questions from such parties with respect to such report. The final determination
of the Accountants shall be made no later than 30 days after delivery by the
Accountants of their preliminary report. The final determination of the
Accountants (the "Accountants' Determination"), which shall be delivered in
writing to ServiceWare, the Representative and the Escrow Agent, shall state the
amount of the Bookings and shall be final and binding on ServiceWare and the
Escrow Participants. If the Accountants determine that the actual amount of the
Bookings differs from the amount of Bookings as certified in the Officers'
Certificate and, as a result of such difference, the Escrow Participants would
have received fewer Escrowed Shares than they are entitled to, the cost of the
review shall be borne by ServiceWare; otherwise, the cost of the review shall be
borne by the Escrow Participants.
If the Escrow Agent does not receive a Participant Request
within 10 days after the Escrow Agent receives the Officer's Certificate, the
Escrow Agent shall deliver the Escrowed Shares and related stock powers in
accordance with the directions set forth in the Officer's Certificate. If the
Escrow Agent receives a Participant Request within 10 days after the Escrow
Agent receives the Officer's Certificate, the Escrow Agent shall retain the
Escrowed Shares and shall deliver them and the related stock powers only upon
receipt of (i) joint instructions from ServiceWare and the Representative
directing the Escrow Agent as to delivery of the Escrow Shares or (ii) receipt
of the Accountants' Determination, in which event the Escrow Agent shall deliver
the Escrowed Shares and related stock powers in accordance with the appropriate
provision of Section 2.01(i)(ii), depending on the amount of the Bookings
specified in the Accountants' Determination.
(iv) Definitions.
(A) "Fully Diluted Merger Consideration" means the aggregate
number of shares of ServiceWare Common Stock (I) issuable on conversion of
Molloy Common Stock, (II) issuable on exercise of ServiceWare Common Stock
Warrants issuable in exchange for Molloy Common Stock Warrants, (III) issuable
on conversion of ServiceWare Series E Preferred Stock and (IV) issuable on
exercise of options to purchase Molloy Common Stock pursuant to Section 6.07.
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(B) "Combined Company" means ServiceWare, Inc. and Molloy
Group, Inc., on a pro forma combined basis as if the Merger had occurred on July
1, 1999.
(v) Escrow Agent.
(A) The Escrow Agent (I) shall have no duties or
responsibilities except as expressly set forth in this Section 2.01(i), (II)
shall not be responsible in its capacity as Escrow Agent for any recitals,
statements, representations or warranties contained herein, or in any
certificate or other document referred to herein, the validity, effectiveness or
enforceability of this Agreement, or the failure of any party to perform any of
its obligations hereunder, (III) shall not be required to initiate or conduct
any litigation or collection proceedings and (IV) shall not be responsibility
for any action taken or omitted to be taken hereunder except for its gross
negligence or willful misconduct. The Escrow Agent may consult with legal
counsel and other experts selected by it in its sole discretion at the expense
of ServiceWare, and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel or
experts.
(B) The Escrow Agent shall be entitled to rely upon any
certification, notice or other communication believed by it to be genuine and
correct and to have been signed or sent by or on behalf of the proper person or
entity and delivered in accordance with this Agreement. The Escrow Agent shall
not be required to take any action which shall expose it to personal liability
or which is contrary to this Agreement or applicable law.
(C) The Escrow Agent shall not be deemed to have knowledge or
notice of the occurrence of any event unless it shall have received written
notice thereof in accordance with this Agreement.
(D) ServiceWare hereby agrees to indemnify the Escrow Agent
for any and all losses, liabilities, damages, deficiencies or expenses of any
kind and nature whatsoever that may be imposed on, incurred by or asserted
against the Escrow Agent in its capacity as such in any way relating to or
arising out of this Agreement or the transactions contemplated hereby, including
the enforcement of any of the terms hereof. Except as expressly required herein,
the Escrow Agent shall in all cases be fully justified in failing or refusing to
act hereunder unless it shall receive further assurances to its reasonable
satisfaction from ServiceWare of its indemnification obligations hereunder and
against any and all losses, liabilities, damages, deficiencies or expenses that
may be incurred by the Escrow Agent by reason of taking or continuing to take
such action in accordance with the terms hereof.
(E) Any fees or other amounts due to the Escrow Agent in
connection with its obligations hereunder shall be paid by ServiceWare.
(j) Adjustment of Conversion Number and Conversion Rates.
(1) In the event that, between the date of execution of this
Agreement and the Closing, (i) ServiceWare issues or agrees to issue any equity
security or security convertible into or exchangeable for any equity security
resulting in a change in the number of shares of
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ServiceWare Common Stock on a fully diluted as-converted basis (other than (A)
pursuant to this Agreement, (B) the issuance of (1) warrants to PNC Bank,
National Association ("PNC") pursuant to the Second Amendment to Amended and
Restated Loan Agreement between ServiceWare and PNC (the "PNC Warrants") and (2)
warrants exercisable for not more than 28,000 shares of ServiceWare Common Stock
issuable pursuant to Convertible Demand Promissory Notes issued and to be issued
by ServiceWare for working capital financing in May, June and July 1999, (such
warrants in clauses (1) and (2) aggregating no more than 38,000 shares) and (C)
in connection with the issuance of ServiceWare's Series D Convertible Preferred
Stock and related warrants to purchase Common Stock in the ServiceWare Financing
(as defined in Section 7.01(d)), (ii) subdivides (by any stock split, stock
dividend or otherwise) its outstanding shares of any equity security into which
any security of Molloy is to be converted or exchanged in the Merger into a
larger number of shares or combines such securities into a smaller number of
shares, then, in each such case, the Conversion Number and the rate of
conversion of the Molloy Preferred Stock, Units and Working Capital Notes into
securities of ServiceWare shall be appropriately adjusted.
(2) The Conversion Number and the number of shares of
ServiceWare Series E Preferred Stock issuable in exchange for Molloy Preferred
Stock, Units and Working Capital Notes have been determined on the basis of an
allocation that takes account of accrued and unpaid interest on the November
Notes and the Working Capital Notes through July 23, 1999. In the event that the
Effective Time occurs prior to or after July 23, 1999, the Conversion Number and
the number of shares of ServiceWare Series E Preferred Stock issuable in
exchange for Molloy Preferred Stock, Units and Working Capital Notes will be
appropriately adjusted to take account of the difference in the amount of
accrued and unpaid interest on the November Notes and the Working Capital Notes.
(k) Allocation Schedule. Attached to this Agreement as Annex B
is a schedule prepared by Molloy showing the allocation of the merger
consideration under this Section 2.01 among the holders of securities of Molloy.
Section 2.02 Exchange of Securities.
(a) Exchange Procedures. Upon surrender to ServiceWare of a
certificate for Molloy Common Stock or Molloy Preferred Stock (a "Certificate")
or of any of the Units or Working Capital Notes, together with a duly executed
shareholder representation letter in substantially the form of Exhibit D
attached hereto (a "Representation Letter"), subject to Section 2.01(i), the
holder of such Certificate, Unit or Working Capital Note shall be entitled to
receive in exchange therefor a certificate representing the number of shares of
ServiceWare Common Stock or ServiceWare Series E Preferred Stock, as the case
may be, which such holder has the right to receive in respect of such
Certificate, Unit or Working Capital Note pursuant to the provisions of this
Article II. Any Certificate or Molloy Preferred Stock Warrant so surrendered
shall forthwith be canceled, and any Working Capital Note or November Note so
surrendered shall forthwith be marked paid. Upon surrender to ServiceWare of a
Molloy Common Stock Warrant, together with a duly executed Representation
Letter, the holder of such Molloy Common Stock Warrant shall be entitled to
receive in exchange therefor a ServiceWare Common Stock Warrant exercisable for
the number of shares of ServiceWare Common Stock to which such holder is
entitled pursuant to the
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provisions of this Article II. Any Molloy Common Stock Warrant so surrendered
shall forthwith be canceled. From and after the Effective Time, no interest will
accrue or be payable on any amount payable upon surrender of a Certificate, a
Molloy Common Stock Warrant, a Unit or a Working Capital Note. No ServiceWare
Common Stock or ServiceWare Series E Preferred Stock will be issued to any
person or entity other than the person or entity in whose name the Certificate,
Unit or Working Capital Note surrendered for exchange is registered, and no
ServiceWare Common Stock Warrant will be issued to any person or entity other
than the person in whose name the Molloy Common Stock Warrant surrendered for
exchanged is registered.
(b) Distributions with Respect to Unexchanged Shares; Voting
Rights. Notwithstanding any other provision of this Agreement, no dividends or
other distributions on shares of ServiceWare Common Stock or ServiceWare Series
E Preferred Stock shall be paid until such Certificate, Working Capital Note or
Unit is surrendered for exchange as provided herein, nor shall any ServiceWare
Common Stock Warrant to be issued in exchange for a Molloy Common Stock Warrant
be exercisable until such Molloy Common Stock Warrant is surrendered for
exchange as provided herein; provided that, upon surrender, the holder of any
Certificate, Working Capital Note or Unit shall be entitled to receive dividends
and distributions declared between the Effective Time and surrender on the
Serviceware Common Stock or ServiceWare Series E Preferred Stock that such
holder is entitled to receive. At the Effective Time persons shown on the books
of Molloy as the record holders of Certificates, Working Capital Notes or Units
shall be entitled to vote and give and express consent with respect to that
number of shares of ServiceWare Common Stock or ServiceWare Series E Preferred
Stock issuable pursuant to this Article II upon conversion or exchange of their
Certificates, Working Capital Notes or Units at any regular or special meeting
of ServiceWare's shareholders with a record date, or by written consent dated,
after the Effective Time.
(c) Fractional Shares. No fractional shares of ServiceWare
Common Stock or ServiceWare Series E Preferred Stock or cash in lieu thereof
shall be issued or paid in the Merger, and the number of shares of ServiceWare
Common Stock or ServiceWare Series E Preferred Stock to be issued shall be
rounded to the nearest whole share. Whether or not fractional shares are
issuable shall be determined on the basis of the total number of shares of
Molloy Common Stock, Molloy Preferred Stock, Units and Working Capital Notes
that any holder is surrendering for exchange and the total number of shares of
ServiceWare Common Stock or ServiceWare Series E Preferred Stock issuable in
exchange.
(c) No Liability. Notwithstanding any other provision of this
Agreement, neither ServiceWare nor any other person shall be liable to any
person for any amount properly delivered to a public official upon his request
pursuant to applicable abandoned property, escheat or similar laws.
(d) Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and such arrangements as ServiceWare shall reasonably
require as indemnity against any claim that may be made against it with respect
to such Certificate, ServiceWare will issue in exchange for such lost, stolen or
destroyed Certificate a
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certificate representing shares of ServiceWare Common Stock or ServiceWare Serie
E Preferred Stock, as the case may be, as issuable in respect thereof pursuant
to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MOLLOY
Molloy represents and warrants to ServiceWare and Sub that the
statements contained in this Article III are true and correct as of the date
hereof and will be true and correct at the Effective Time, except as set forth
in the disclosure schedule delivered by Molloy to ServiceWare on or before the
date of this Agreement (the "Molloy Disclosure Schedule"). The Molloy Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article III and the disclosure in any
paragraph shall be deemed to qualify all other clearly relevant paragraphs in
this Article III.
Section 3.01 Organization. Molloy is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power to own, lease and operate its
property and to carry on its business as now being conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified is reasonably expected
to have a material adverse effect on its business, assets (including intangible
assets), financial condition or results of operations ("Material Adverse
Effect"). Molloy does not directly or indirectly own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any corporation, partnership, joint venture or other business association
or entity.
Section 3.02 Capital Structure.
(a) The Molloy Disclosure Schedule sets forth (i) the authorized,
issued and outstanding capital stock of Molloy, (ii) the number of shares of
each class or series of Molloy capital stock issuable as of the date hereof
under outstanding warrants or other rights to purchase capital stock (other than
employee stock options referred to in clause (iii) below) or held in the
treasury of Molloy (iii) the number of shares of Molloy Common Stock reserved
for issuance pursuant to stock options granted and outstanding under each Molloy
Option Plan, (iv) the number of shares of Molloy Common Stock available for
grant under each Molloy Option Plan, and (v) the amount of outstanding principal
and accrued and unpaid interest as of July 23, 1999 on the November Notes and
the Working Capital Notes. All outstanding shares of Molloy Common Stock and
Molloy Preferred Stock are duly authorized, validly issued, fully paid and
nonassessable. All shares of Molloy Common Stock and Molloy Preferred Stock
subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. Molloy
has no obligations, contingent or otherwise, to repurchase, redeem or otherwise
acquire any shares of Molloy Common Stock, Molloy Preferred Stock or any other
capital stock of Molloy or to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any entity.
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(b) Except as set forth in Section 3.02 of the Molloy Disclosure
Schedule, there are no equity securities of any class of Molloy, or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as set forth in Section 3.02 of the Molloy
Disclosure Schedule, there are no options, warrants, equity securities, calls,
rights, commitments or agreements of any character to which Molloy is a party or
by which it is bound obligating Molloy to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of Molloy or
obligating Molloy to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement.
Except as set forth in Section 3.02 of the Molloy Disclosure Schedule, there are
no voting trusts, proxies or other agreements or understandings (including
agreements with respect to registration rights) with respect to the shares of
capital stock of Molloy.
Section 3.03 Authority; No Conflict; Required Filings and Consents.
(a) Molloy has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Molloy, subject only to the Molloy Stockholder
Approval (as defined in Section 7.01(a)). This Agreement has been duly executed
and delivered by Molloy and, assuming the due authorization, execution and
delivery by ServiceWare and Sub, constitutes the valid and binding obligation of
Molloy enforceable in accordance with its terms, except as such enforceability
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting or relating to creditors rights generally and (ii)
the availability of injunctive relief and other equitable remedies.
(b) The execution and delivery of this Agreement by Molloy do not, and
the consummation of the transactions contemplated hereby will not, (i) conflict
with, or result in any violation or breach of any provision of the Certificate
of Incorporation or Bylaws of Molloy, (ii) result in any violation or breach of,
or constitute (with or without notice or lapse of time, or both) a default (or
give rise to a right of termination, cancellation or acceleration of any
obligation) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Molloy is a party or by which it or any of its properties or
assets may be bound, or (iii) subject to obtaining Molloy Stockholder Approval
and compliance with the requirements set forth in Section 3.03(c) below,
conflict with or violate any permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Molloy
or any of its properties or assets, except in the case of (ii) and (iii) for any
such conflicts, violations, defaults, terminations, cancellations or
accelerations which are not reasonably expected to have a Material Adverse
Effect on Molloy or on the ability of Molloy to consummate the transactions
contemplated by this Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity"), is
required by or with respect to Molloy in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger with the Delaware
Secretary of State,
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(ii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws and the laws of any foreign country and (iii) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, are not reasonably expected to have a Material Adverse Effect
on Molloy.
Section 3.04 Financial Statements. Molloy's balance sheets as at
December 31, 1997 and 1998 and its statements of operations, cash flows and
shareholders' equity for the years then ended, audited and reported on by M.I.
Grossman & Company L.L.C., independent certified public accountants for Molloy,
and its unaudited interim balance sheets as at March 31, 1999 (the "Molloy
Balance Sheet") and 1998 and its statements of operations, cash flows and
shareholders' equity for the periods then ended were prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved ("GAAP") and fairly present the financial
position of Molloy as at the respective dates and the results of its operations
and cash flows for the periods indicated, except that the unaudited interim
financial statements (i) were or are subject to normal year-end adjustments
which were not or are not expected to be material in amount, and (ii) do not
contain footnote disclosure.
Section 3.05 No Undisclosed Liabilities. Molloy does not have any
liabilities as of the date hereof, either accrued or contingent (whether or not
required to be reflected in financial statements in accordance with generally
accepted accounting principles), and whether due or to become due, which,
individually or in the aggregate, are reasonably likely to have a Material
Adverse Effect on Molloy, other than (i) liabilities reflected in the Molloy
Balance Sheet, (ii) liabilities specifically described in this Agreement or in
the Molloy Disclosure Schedule, (iii) normal or recurring liabilities incurred
since March 31, 1999 in the ordinary course of business consistent with past
practices and which are not individually or in the aggregate, material to the
business, results, operations or financial condition of Molloy, (iv) borrowings
under the Transamerica Credit Documents, (v) liabilities under the Working
Capital Notes, (vi) liabilities relating to additional cash flow borrowings not
to exceed $500,000 and (vii) liabilities relating to this Agreement and the
transactions contemplated hereby.
Section 3.06 Absence of Certain Changes or Events. Since the date of
the Molloy Balance Sheet, Molloy has conducted its business only in the ordinary
course and in a manner consistent with past practice and, since such date, there
has not been (i) any material adverse change in Molloy's financial condition,
results of operations or business (a "Material Adverse Change"), excluding
changes in general economic conditions affecting companies generally; (ii) any
damage, destruction or loss (whether or not covered by insurance), which damage,
destruction or loss had or could be reasonably expected to have, a Material
Adverse Effect on Molloy; (iii) any material change by Molloy in its accounting
methods, principles or practices except as required by concurrent changes in
generally accepted accounting principles; (iv) any revaluation by Molloy of any
of its assets having a Material Adverse Effect on Molloy; or (v) except as
disclosed in the Molloy Disclosure Schedule, any other action or event that
would have required the consent of ServiceWare pursuant to Section 5.01 of this
Agreement had such action or event occurred after the date of this Agreement and
that has or could be reasonably expected to have a Material Adverse Effect on
Molloy.
Section 3.07 Taxes.
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(a) Definition of Taxes. For the purposes of this Agreement, a "Tax"
or, collectively, "Taxes," means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) Molloy has prepared and filed on a timely basis all
material federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") required to be filed relating to any and all
Taxes concerning or attributable to Molloy or its operations, and such Returns
are true and correct in all material respects and have been completed in all
material respects in accordance with applicable law.
(ii) Molloy (A) has paid or accrued all Taxes it is required
to pay or accrue prior to the Effective Time and (B) has withheld with respect
to its employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld, except (i) where any failure to make such payment,
accrual or withholding is not reasonably expected to have a Material Adverse
Effect on Molloy and (ii) if Molloy is contesting any such Taxes in good faith
by appropriate proceedings diligently conducted and has established such reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP.
(iii) There is no Tax deficiency outstanding or assessed or to
the knowledge of Molloy proposed, against Molloy that is not reflected as a
liability on the Molloy Balance Sheet (except to the extent that Molloy is
contesting the related Tax in good faith by appropriate proceedings diligently
conducted and has established such reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP) nor has Molloy executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
Section 3.08 Title to Assets. Molloy does not own any real property.
Molloy has good title to all of its properties, as reflected in the Molloy
Balance Sheet, except for properties and assets that have been disposed of in
the ordinary course of business since the date of the Molloy Balance Sheet, free
and clear of all mortgages, liens, pledges, charges or encumbrances of any
nature, except (a) the lien of Transamerica Business Credit Corporation
("Transamerica") pursuant to the Loan and Security Agreement dated February 20,
1998, as amended, between Molloy and Transamerica and related documents (the
"Transamerica Credit Documents"), (b) the lien of current taxes, payments of
which are not delinquent, (c) such encumbrances, if any, which, singly or in the
aggregate, are not reasonably expected to have a Material Adverse Effect on
Molloy. All leases of all real property leased by Molloy ("Molloy Leases") are
valid and effective in accordance with their respective terms, and Molloy is not
in default under any of such Molloy Leases, except where the lack of such
validity and effectiveness or the existence of such default is not reasonably
expected to have a Material Adverse Effect on Molloy.
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Section 3.09 Intellectual Property.
(a) Molloy owns, or has license to or otherwise has the right to use,
all patents, trademarks, trade names, service marks, copyrights, schematics,
technology, know-how, computer software programs or code and tangible or
intangible proprietary information or material and any applications for any
patents, trademarks, trade names, service marks, copyrights or other proprietary
rights, that are used in the business of Molloy (the "Molloy Intellectual
Property Rights"), except where the failure to possess such rights is not
reasonably expected to have a Material Adverse Effect on Molloy. Schedule 3.09
of the Molloy Disclosure Schedule lists (i) all patents and patent applications
and all trademarks, registered copyrights, mask works, trade names and service
marks, which Molloy considers to be material to its business and included in the
Molloy Intellectual Property Rights, including the jurisdictions in which each
such Molloy Intellectual Property Right has been issued or registered or in
which any such application for such issuance or registration has been filed,
(ii) all licenses, sublicenses and other agreements as to which Molloy is a
party and pursuant to which any person is authorized to use any Molloy
Intellectual Property Rights, which are material to the business of Molloy, and
(iii) all material licenses, sublicenses and other agreements as to which Molloy
is a party and pursuant to which Molloy is authorized to use any third party
patents, trademarks, trade names, service marks, copyrights, mask works,
schematics, technology, know-how, computer software programs or code and
tangible or intangible proprietary information or material ("Molloy Third Party
Intellectual Property Rights") which are incorporated in, are, or form a part of
any Molloy product or service that is material to the business of Molloy (except
for any license of generally commercially available software).
(b) Molloy is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Molloy Intellectual Property Rights or Molloy Third Party Intellectual
Property Rights, except such breaches which do not, and are not reasonably
expected to, have a Material Adverse Effect on Molloy.
(c) Molloy has not been sued in any suit, action or proceeding which
involves a claim of infringement of any patents, trademarks, service marks,
copyrights or violation of any trade secret or other proprietary right of any
third party; and Molloy has no knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party.
Section 3.10 Agreements, Contracts and Commitments. Molloy has not
breached, or received in writing any claim or threat that it has breached, any
of the terms or conditions of any agreement, contract or commitment that is
material to the business of Molloy as currently conducted ("Molloy Material
Contracts") in such a manner as would permit any other party to cancel or
terminate the same or would entitle any other party to damages from Molloy under
any Molloy Material Contract which cancellation, termination or damages are
reasonably expected to have a Material Adverse Effect on Molloy. Each Molloy
Material Contract that has not expired or been terminated is in full force and
effect, and Molloy is not aware of any material default thereunder by any party
obligated to Molloy pursuant to such Molloy Material Contract.
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Section 3.11 Litigation. There is no action, suit or proceeding, claim,
arbitration, litigation or investigation ("Action"), against Molloy pending or
as to which Molloy has received any written notice of assertion, or, to the
knowledge of Molloy, threatened, nor, to Molloy's knowledge, is there any such
Action against any current or former affiliate of Molloy as to whom Molloy has
or may have an indemnification obligation, except any such Action as is not
reasonably likely to have a Material Adverse Effect and any Action as may arise
after the date hereof relating to the transactions contemplated by this
Agreement.
Section 3.12 Environmental Matters.
(a) Hazardous Material. Except as is not reasonably expected to have a
Material Adverse Effect on Molloy (i) as of the date hereof, to the knowledge of
Molloy, no underground storage tanks for the storage of Hazardous Material (as
defined below) are present under any property that Molloy has at any time owned,
operated, occupied or leased; and (ii) as of the date hereof, no material amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws, (a
"Hazardous Material"), but excluding office and janitorial supplies, are
present, as a result of the actions of Molloy or, to the knowledge of Molloy,
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water, that Molloy has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. At no time has Molloy transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has Molloy disposed of, transported, sold, or manufactured any
product containing a Hazardous Material (collectively, "Hazardous Materials
Activities") in violation of any rule, regulation, treaty or statute promulgated
by any Governmental Entity to prohibit, regulate or control Hazardous Materials
or any Hazardous Material Activity, which such violation is reasonably expected
to have a Material Adverse Effect on Molloy.
(c) Permits. Molloy currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of any Hazardous Material Activities it conducts and
other businesses of Molloy as such activities and businesses are currently being
conducted, the absence of which is reasonably expected to have a Material
Adverse Effect on Molloy.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending or, to the
knowledge of Molloy, threatened concerning any Environmental Permit or any
Hazardous Materials Activity of Molloy other than any action, proceeding,
revocation proceeding, amendment procedure, writ, injunction or claim which is
not reasonably expected to have a Material Adverse Effect on Molloy. Molloy is
not aware of any
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fact or circumstance which could involve Molloy in any environmental litigation
or impose upon Molloy any environmental liability which is reasonably expected
to have a Material Adverse Effect on Molloy.
Section 3.13 Employment Matters.
(a) Definition. "Employee Plans" means all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) and all bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other similar
employee benefit plans, and all unexpired severance agreements, written or
otherwise, for the benefit of, or relating to, any current or former employee of
an entity or any trade or business (whether or not incorporated) which is a
member or which is under common control with such entity (an "ERISA Affiliate")
within the meaning of Section 414 of the Code.
(b) Schedule and Documents. Molloy has set forth on Schedule 3.13 of
the Molloy Disclosure Schedule a list of each Employee Plan of Molloy (the
"Molloy Employee Plans"). With respect to each Molloy Employee Plan, Molloy has
made available to ServiceWare, a true and correct copy of (i) the most recent
annual report (Form 5500) filed with the Internal Revenue Service ("IRS"), (ii)
such Molloy Employee Plan, (iii) each trust agreement and group annuity
contract, if any, relating to such Molloy Employee Plan and (iv) the most recent
actuarial report or valuation relating to a Molloy Employee Plan subject to
Title IV of ERISA.
(c) No Liability. With respect to the Molloy Employee Plans,
individually and in the aggregate, no event has occurred, and to the knowledge
of Molloy, there exists no condition or set of circumstances in connection with
which Molloy is likely to be subject to any liability that is reasonably likely
to have a Material Adverse Effect on Molloy, under ERISA, the Code or any other
applicable law.
(d) Contributions. With respect to the Molloy Employee Plans,
individually and in the aggregate, (i) as of March 31, 1999, there are no funded
benefit obligations for which contributions have not been made or properly
accrued and there are no unfunded benefit obligations which have not been
accounted for by reserves, or otherwise properly footnoted in accordance with
generally accepted accounting principles, on the financial statements of Molloy,
and (ii) the Molloy Disclosure Schedule describes any funded or unfunded benefit
obligations which have arisen since March 31, 1999, which obligations referred
to in clause (i) or (ii) above are reasonably likely to have a Material Adverse
Effect on Molloy.
(e) Certain Agreements. Except as set forth in Schedule 3.13 of the
Molloy Disclosure Schedule and except as provided for in this Agreement, Molloy
is not a party to any oral or written (i) union or collective bargaining
agreement, (ii) agreement with any officer or other key employee of Molloy or
any of its Subsidiaries, the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction involving
Molloy of the nature contemplated by this Agreement, (iii) agreement with any
officer of Molloy providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof or for the
payment of compensation in excess of $25,000 per annum, or (iv) agreement or
plan, including
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any stock option plan, stock appreciation right plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
(f) Employee Relations. There are no significant controversies pending
or, to the knowledge of Molloy, threatened between Molloy and any
representatives of its employees. To the knowledge of Molloy, there are no
organizational efforts presently being made involving any employees of Molloy.
There are no proceedings now pending or threatened against Molloy before the
National Labor Relations Board, any state department of labor, any state
commission on human rights, the Equal Employment Opportunity Commission or any
other local, state or federal agencies having jurisdiction over employee rights,
except for any of the foregoing which would not have a Material Adverse Effect
on Molloy.
Section 3.14 Compliance With Laws. Molloy has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for
failures to comply or violations which are not reasonably expected to have a
Material Adverse Effect on Molloy.
Section 3.15. Year 2000 Compliant. Except as set forth on the Molloy
Disclosure Schedule, all equipment, software and systems (including without
limitation those developed pursuant to the license dated September 24, 1996
between Molloy and Bruce Molloy (the "Molloy License")) of, or used, by Molloy,
whether internally or for sale or license to third parties, that store, process
or present date information, including without limitation those sold or licensed
to others for use in, or used internally in, designing, manufacturing, ordering,
costing and billing, are Millennium Compliant in all material respects;
provided, however, that with respect to (a) equipment, software and systems
manufactured or developed by third parties and used by Molloy, Molloy is relying
solely on representations of such third parties (which Molloy has no reason to
believe are false) that such equipment, software or system is Millennium
Compliant, supplemented, in certain cases, by internal tests (which tests may,
at most, indicate Millennium Compliant status of the tested software in a
controlled test environment, and such tests may indicate Millennium Compliant
Status for items that are not Millennium Compliant), and (b) software
manufactured or developed by Molloy, Molloy is relying on internal tests
conducted by Molloy of its standard test suite. Notwithstanding the foregoing,
the current standard application suite of software manufactured or developed by
Molloy, when used in its current environments and in the current shipping
version, is Millennium Compliant in all material respects. "Millennium
Compliant" means such equipment, software and systems each has the ability to
provide all of the following functions: (i) accurately process all date
information whether before, during or after January 1, 2000, including,
without limitation, accepting date input, providing accurate date output and
performing accurate calculation involving dates or portions of dates;
(ii) function accurately, efficiently and without interruption before,
during and after January 1, 2000 without any change in operations, or in
any input or output procedures; (iii) accurately process date input in a
way that does not create any ambiguity as to century; (iv) accurately store,
retrieve and process date information in a manner that does not create any
ambiguity as to century; and (v) accurately present all date output
information in a manner that does not create any
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ambiguity as to century. Molloy estimates that the aggregate unpaid cost to
become Millennium Compliant will be less than $150,000, including costs
associated with the replacement of computerized systems, hardware and equipment
Section 3.16. Disclosure. No representation or warranty of Molloy in
this Agreement or any certificate, schedule, statement, document or instrument
furnished or to be furnished to ServiceWare pursuant hereto or in connection
herewith, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated herein or
therein or necessary to make any statement herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SERVICEWARE AND SUB
ServiceWare and Sub jointly and severally represent and warrant to
Molloy and to each person or entity that will receive ServiceWare Common Stock,
ServiceWare Series E Preferred Stock, ServiceWare Common Stock Warrants or
vested options to purchase ServiceWare Common Stock in the Merger (a "Molloy
Holder") that the statements contained in this Article IV are true and correct
as of the date hereof and will be true and correct at the Effective Time, except
as set forth in the disclosure schedule delivered by ServiceWare to Molloy on or
before the date of this Agreement (the "ServiceWare Disclosure Schedule"). The
ServiceWare Disclosure Schedule shall be arranged in paragraphs corresponding to
the numbered and lettered paragraphs contained in this Article IV and the
disclosure in any paragraph shall be deemed to qualify all other clearly
relevant paragraphs in this Article IV.
Section 4.01 Organization. ServiceWare and each of its Subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate power
to own, lease and operate its property and to carry on its business as now being
conducted, and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so qualified
is reasonably expected to have a Material Adverse Effect on ServiceWare and its
Subsidiaries, taken as a whole. Except for Sub, ServiceWare does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any corporation, partnership, joint
venture or other business association or entity. As used in this Agreement, the
word "Subsidiary" means, with respect to any party, any corporation, other
organization, whether incorporated or unincorporated, of which (i) such party or
any other Subsidiary of such party is a general partner (excluding partnerships,
the general partnership interests of which held by such party or any Subsidiary
of such party do not have a majority of the voting interest in such partnership)
or (ii) at least a majority of the securities or other interests having by their
terms ordinary voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries.
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Section 4.02 Capital Structure.
(a) The ServiceWare Disclosure Schedule sets forth (i) the authorized,
issued and outstanding capital stock of ServiceWare and Sub, (ii) the number of
shares of each class and series of capital stock of ServiceWare issuable as of
the date hereof under outstanding warrants or other rights to purchase capital
stock of ServiceWare (other than the employee stock options referred to in
clause (iii) below) or held in the treasury of ServiceWare, (iii) the number of
shares of ServiceWare Common Stock reserved for issuance pursuant to stock
options granted and outstanding under ServiceWare's Amended and Restated Stock
Option Plan (the "ServiceWare Option Plan"), and (iv) the number of shares of
ServiceWare Common Stock available for grant under each ServiceWare Option Plan.
There are no outstanding warrants, options or other rights to purchase capital
stock of Sub, nor is any capital stock of Sub available for grant under the
ServiceWare Option Plan. All outstanding shares of capital stock of ServiceWare
and Sub are, and all shares to be issued in the Merger will be, duly authorized,
validly issued, fully paid and nonassessable. All shares of ServiceWare capital
stock subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. Neither
ServiceWare nor Sub has any obligations, contingent or otherwise, to repurchase,
redeem or otherwise acquire any shares of capital stock of ServiceWare or Sub or
to provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any entity, except as provided in ServiceWare's
Amended and Restated Articles of Incorporation as in effect on the date hereof.
(b) Except as set forth in Section 4.02 of the ServiceWare Disclosure
Schedule, there are no equity securities of any class of ServiceWare, or any
security exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding. Except as set forth in Section 4.02 of the
ServiceWare Disclosure Schedule, there are no options, warrants, equity
securities, calls, rights, commitments or agreements of any character to which
ServiceWare is a party or by which it is bound obligating ServiceWare to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock of ServiceWare or obligating ServiceWare to grant, extend,
accelerate the vesting of or enter into any such option, warrant, equity
security, call, right, commitment or agreement. Except for the Stockholders
Agreement dated as of April 24, 1996 among ServiceWare and certain of its
shareholders, the Registration Rights Agreement dated dated as of April 24, 1996
among ServiceWare and certain of its shareholders, there are no voting trusts,
proxies or other agreements or understandings (including agreements with respect
to registration rights) with respect to the shares of capital stock of
ServiceWare.
Section 4.03 Authority; No Conflict; Required Filings and Consents.
(a) Each of ServiceWare and Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of ServiceWare and Sub, subject
only to the ServiceWare Shareholder Approval (as defined in Section 7.01(a)).
This Agreement has been duly executed and delivered by ServiceWare and Sub and,
assuming the due authorization, execution and delivery by Molloy, constitutes
the valid and binding obligation of ServiceWare and
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Sub, enforceable in accordance with its terms, except as such enforceability may
be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting or relating to creditors rights generally and (ii) the
availability of injunctive relief and other equitable remedies.
(b) The execution and delivery of this Agreement by ServiceWare and Sub
do not, and the consummation of the transactions contemplated hereby will not,
(i) conflict with, or result in any violation or breach of any provision of the
Articles of Incorporation or Bylaws of ServiceWare or the Certificate of
Incorporation or Bylaws of Sub, (ii) result in any violation or breach of, or
constitute (with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any obligation)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract or other agreement, instrument or obligation to which
ServiceWare or Sub is a party or by which either of them or any of their
properties or assets may be bound, or (iii) subject to obtaining the ServiceWare
Shareholder Approval and compliance with the requirements set forth in Section
4.03(c) below, conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to ServiceWare or any of its Subsidiaries or any of their properties
or assets, except in the case of (ii) and (iii) for any such conflicts,
violations, defaults, terminations, cancellations or accelerations which are not
reasonably expected to have a Material Adverse Effect on ServiceWare and its
Subsidiaries, taken as a whole, or on the ability of ServiceWare and Sub to
consummate the transactions contemplated by this Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity, is required by or with
respect to ServiceWare or any of its Subsidiaries in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the ServiceWare Articles with
the Pennsylvania Secretary of the Commonwealth, (ii) the filing of the
Certificate of Merger with the Delaware Secretary of State, (iii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws and the laws
of any foreign country and (iv) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, are not reasonably
expected to have a Material Adverse Effect on ServiceWare and its Subsidiaries,
taken as a whole.
Section 4.04 Financial Statements. ServiceWare's consolidated balance
sheets as at December 31, 1997 and 1998 and its consolidated statements of
operations, cash flows and shareholders' equity for the years then ended,
audited and reported on by Ernst & Young, independent certified public
accountants for ServiceWare, and its unaudited interim consolidated balance
sheets as at March 31, 1999 (the "ServiceWare Balance Sheet") and 1998 and its
consolidated statements of operations, cash flows and shareholders' equity for
the periods then ended were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved and fairly present the financial position of ServiceWare and its
Subsidiaries as at the respective dates and the results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements (i) were or are subject to normal year-end adjustments
which were not or are not expected to be material in amount, and (ii) do not
contain footnote disclosure.
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Section 4.05 No Undisclosed Liabilities. ServiceWare and its
Subsidiaries do not have any liabilities as of the date hereof, either accrued
or contingent (whether or not required to be reflected in financial statements
in accordance with generally accepted accounting principles), and whether due or
to become due, which, individually or in the aggregate, are reasonably likely to
have a Material Adverse Effect on ServiceWare and its Subsidiaries, taken as a
whole, other than (i) liabilities reflected in the ServiceWare Balance Sheet,
(ii) liabilities specifically described in this Agreement or in the ServiceWare
Disclosure Schedule, (iii) normal or recurring liabilities incurred since March
31, 1999 in the ordinary course of business consistent with past practices and
which are not individually or in the aggregate, material to the business,
results, operations or financial condition of ServiceWare and its Subsidiaries,
taken as a whole and (iv) liabilities relating to this Agreement, the
transactions contemplated hereby and the ServiceWare Financing (as defined in
Section 7.01(d).
Section 4.06 Absence of Certain Changes or Events. Since the date of
the ServiceWare Balance Sheet, ServiceWare has conducted its business only in
the ordinary course and in a manner consistent with past practice and, since
such date, there has not been (i) any Material Adverse Change affecting
ServiceWare and it Subsidiaries, taken as a whole, excluding changes in general
economic conditions affecting companies generally; (ii) any damage, destruction
or loss (whether or not covered by insurance), which damage, destruction or loss
had or could be reasonably expected to have, a Material Adverse Effect on
ServiceWare and its Subsidiaries, taken as a whole; (iii) any material change by
ServiceWare in its accounting methods, principles or practices except as
required by concurrent changes in generally accepted accounting principles; (iv)
any revaluation by ServiceWare of any of its assets having a Material Adverse
Effect on ServiceWare and its Subsidiaries, taken as a whole, or (v) except as
disclosed in the ServiceWare Disclosure Schedule, any other action or event that
would have required the consent of Molloy pursuant to Section 5.02 of this
Agreement had such action or event occurred after the date of this Agreement and
that has or could be reasonably expected to have a Material Adverse Effect on
ServiceWare and its Subsidiaries, taken as a whole.
Section 4.07 Taxes.
(a) Tax Returns and Audits.
(i) ServiceWare has prepared and filed on a timely basis all
material Returns required to be filed relating to any and all Taxes concerning
or attributable to ServiceWare or its operations, and such Returns are true and
correct in all material respects and have been completed in all material
respects in accordance with applicable law.
(ii) ServiceWare (A) has paid or accrued all Taxes it is
required to pay or accrue prior to the Effective Time and (B) has withheld with
respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld, except (i) where any failure to make such
payment, accrual or withholding is not reasonably expected to have a Material
Adverse Effect on ServiceWare and its Subsidiaries, taken as a whole, and (ii)
if ServiceWare is contesting any such Taxes in good faith by appropriate
proceedings diligently conducted and has established such reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP.
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(iii) There is no Tax deficiency outstanding or assessed or to
ServiceWare's knowledge proposed, against ServiceWare that is not reflected as a
liability on the ServiceWare Balance Sheet (except to the extent that
ServiceWare is contesting the related Tax in good faith by appropriate
proceedings diligently conducted and has established such reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP) nor
has ServiceWare executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax.
Section 4.08 Title to Assets. Neither ServiceWare nor any of its
Subsidiaries owns any real property. ServiceWare and its Subsidiaries have good
title to all of their properties, as reflected in the ServiceWare Balance Sheet,
except for properties and assets that have been disposed of in the ordinary
course of business since the date of the ServiceWare Balance Sheet, free and
clear of all mortgages, liens, pledges, charges or encumbrances of any nature,
except (a) the lien of PNC pursuant to the Amended and Restated Loan Agreement
dated as of September 3, 1998, as amended, between ServiceWare and PNC and
related documents (the "PNC Credit Documents"), (b) the lien of current taxes,
payments of which are not delinquent, (c) such encumbrances, if any, which,
singly or in the aggregate, are not reasonably expected to have a Material
Adverse Effect on ServiceWare. All leases of all real property leased by
ServiceWare or any of its Subsidiaries ("ServiceWare Leases") are valid and
effective in accordance with their respective terms, and ServiceWare or such
Subsidiary is not in default under any of such ServiceWare Leases, except where
the lack of such validity and effectiveness or the existence of such default is
not reasonably expected to have a Material Adverse Effect on ServiceWare and its
Subsidiaries, taken as a whole.
Section 4.09 Intellectual Property.
(a) ServiceWare owns, or has license or otherwise has the right to use,
all patents, trademarks, trade names, service marks, copyrights, schematics,
technology, know-how, computer software programs or code and tangible or
intangible proprietary information or material and any applications for any
patents, trademarks, trade names, service marks, copyrights or other proprietary
rights, that are used in the business of ServiceWare (the "ServiceWare
Intellectual Property Rights"), except where the failure to possess such rights
is not reasonably expected to have a Material Adverse Effect on ServiceWare and
its Subsidiaries, taken as a whole. Schedule 4.09 of the ServiceWare Disclosure
Schedule lists (i) all patents and patent applications and all trademarks,
registered copyrights, mask works, trade names and service marks, which
ServiceWare considers to be material to its business and included in the
ServiceWare Intellectual Property Rights, including the jurisdictions in which
each such ServiceWare Intellectual Property Right has been issued or registered
or in which any such application for such issuance or registration has been
filed, (ii) all licenses, sublicenses and other agreements as to which
ServiceWare is a party and pursuant to which any person is authorized to use any
ServiceWare Intellectual Property Rights, which are material to the business of
ServiceWare, and (iii) all material licenses, sublicenses and other agreements
as to which ServiceWare is a party and pursuant to which ServiceWare is
authorized to use any third party patents, trademarks, trade names, service
marks, copyrights, mask works, schematics, technology, know-how, computer
software programs or code and tangible or intangible proprietary information or
material ("ServiceWare Third Party Intellectual Property Rights") which are
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incorporated in, are, or form a part of any ServiceWare product or service that
is material to the business of ServiceWare (except for any license of generally
commercially available software).
(b) ServiceWare is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the ServiceWare Intellectual Property Rights or ServiceWare Third Party
Intellectual Property Rights, except such breaches which do not, and are not
reasonably expected to, have a Material Adverse Effect on ServiceWare and its
Subsidiaries, taken as a whole.
(c) ServiceWare (i) has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary right of
any third party; and (ii) has no knowledge that the manufacturing, marketing,
licensing or sale of its products infringes any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party.
Section 4.10 Agreements, Contracts and Commitments. ServiceWare has not
breached, or received in writing any claim or threat that it has breached, any
of the terms or conditions of any agreement, contract or commitment that is
material to the business of ServiceWare as currently conducted ("ServiceWare
Material Contracts") in such a manner as would permit any other party to cancel
or terminate the same or would entitle any other party to damages from
ServiceWare under any ServiceWare Material Contract which cancellation,
termination or damages would reasonably be expected to have a Material Adverse
Effect on ServiceWare and its Subsidiaries, taken as a whole. Each ServiceWare
Material Contract that has not expired or been terminated is in full force and
effect, and ServiceWare is not aware of any material default thereunder by any
party obligated to ServiceWare pursuant to such ServiceWare Material Contract.
Section 4.11 Litigation. There is no Action against ServiceWare pending
or as to which ServiceWare has received any written notice of assertion, or, to
ServiceWare's knowledge, threatened, nor, to ServiceWare's knowledge, is there
any such Action against any current or former affiliate of ServiceWare as to
whom ServiceWare has or may have an indemnification obligation, except any such
Action as is not reasonably likely to have a Material Adverse Effect and any
Action as may arise after the date hereof relating to the transactions
contemplated by this Agreement.
Section 4.12 Environmental Matters.
(a) Hazardous Material. Except as is not reasonably expected to have a
Material Adverse Effect on ServiceWare and its Subsidiaries, taken as a whole,
(i) as of the date hereof, to the knowledge of ServiceWare, no underground
storage tanks for the storage of Hazardous Materials are present under any
property that ServiceWare or any of its Subsidiaries has at any time owned,
operated, occupied or leased; and (ii) as of the date hereof, no material amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
any Hazardous Material, but excluding office and janitorial supplies, are
present, as a result of the actions of ServiceWare or any of its Subsidiaries
and, to the knowledge of ServiceWare,
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otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water, that ServiceWare or any of its
Subsidiaries has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. At no time has ServiceWare or any
of its Subsidiaries transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in violation
of any law in effect on or before the Closing Date, nor has ServiceWare or any
of its Subsidiaries conducted any Hazardous Materials Activities in violation of
any rule, regulation, treaty or statute promulgated by any Governmental Entity
to prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity, which such violation is reasonably expected to have a Material Adverse
Effect on ServiceWare and its Subsidiaries, taken as a whole.
(c) Permits. ServiceWare currently holds all Environmental Permits
necessary for the conduct of any Hazardous Material Activities which it or any
of its Subsidiaries may conduct and other businesses of ServiceWare and its
Subsidiaries as such activities and businesses are currently being conducted,
the absence of which is reasonably expected to have a Material Adverse Effect on
ServiceWare and its Subsidiaries, taken as a whole.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending or, to the
knowledge of ServiceWare, threatened concerning any Environmental Permit or any
Hazardous Materials Activity of ServiceWare or any of its Subsidiaries other
than any action, proceeding, revocation proceeding, amendment procedure, writ,
injunction or claim which is not reasonably expected to have a Material Adverse
Effect on ServiceWare and its Subsidiaries, taken as a whole. ServiceWare is not
aware of any fact or circumstance which could involve ServiceWare or any of its
Subsidiaries in any environmental litigation or impose upon ServiceWare or any
of its Subsidiaries any environmental liability which is reasonably expected to
have a Material Adverse Effect on ServiceWare and its Subsidiaries taken as a
whole.
Section 4.13 Employment Matters.
(a) No Liability. With respect to the Employee Plans of ServiceWare
(the "ServiceWare Employee Plans"), individually and in the aggregate, no event
has occurred, and to the knowledge of ServiceWare, there exists no condition or
set of circumstances in connection with which ServiceWare is likely to be
subject to any liability that is reasonably likely to have a Material Adverse
Effect on ServiceWare and its Subsidiaries, taken as a whole, under ERISA, the
Code or any other applicable law.
(b) Contributions. With respect to the ServiceWare Employee Plans,
individually and in the aggregate, (i) as of March 31, 1999, there are no funded
benefit obligations for which contributions have not been made or properly
accrued and there are no unfunded benefit obligations which have not been
accounted for by reserves, or otherwise properly footnoted in accordance with
generally accepted accounting principles, on the financial statements of
ServiceWare and (ii) the ServiceWare Disclosure Schedule describes any funded or
unfunded benefit obligations which have
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arisen since March 31, 1999, which obligations referred to in clause (i) or (ii)
above are reasonably likely to have a Material Adverse Effect on ServiceWare and
its Subsidiaries, taken as a whole.
(c) Employee Matters. ServiceWare is not party to any union or
collective bargaining agreement. There are no significant controversies pending
or, to the knowledge of ServiceWare, threatened between ServiceWare and any
representatives of its employees. To the knowledge of ServiceWare, there are no
organizational efforts presently being made involving any employees of
ServiceWare. There are no proceedings now pending or threatened against
ServiceWare before the National Labor Relations Board, any state department of
labor, any state commission on human rights, the Equal Employment Opportunity
Commission or any other local, state or federal agencies having jurisdiction
over employee rights, except for any of the foregoing which would not have a
Material Adverse Effect on ServiceWare and its Subsidiaries, taken as a whole.
Section 4.14 Compliance With Laws. Each of ServiceWare and its
Subsidiaries has complied with, is not in violation of, and has not received any
notices of violation with respect to, any federal, state or local statute, law
or regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for failures to comply or violations which are
not reasonably expected to have a Material Adverse Effect on ServiceWare and its
Subsidiaries, taken as a whole.
Section 4.15. Year 2000 Compliant. Except as set forth on the
ServiceWare Disclosure Schedule, all equipment, software and systems of, or
used, by ServiceWare, whether internally or for sale or license to third
parties, that store, process or present date information, including without
limitation those sold or licensed to others for use in, or used internally in,
designing, manufacturing, ordering, costing and billing, are Millennium
Compliant in all material respects; provided, however, that with respect to
equipment, software and systems manufactured or developed by third parties and
used by ServiceWare, ServiceWare is relying solely on representations of such
third parties that such equipment, software or system is Millennium Compliant.
ServiceWare has prepared a plan to become Millennium Compliant, which plan (i)
identifies the business systems of or used by ServiceWare (whether internally or
for sale or license to third parties), including computer software, computer
systems and other equipment within information systems infrastructure, financial
and administrative systems, process control and manufacturing operating systems
and significant vendors and customers, that are susceptible to system failures
or processing errors as a result of the Year 2000 or century date change issues,
and (ii) involves the actual remediation and replacement of such business
systems. ServiceWare estimates that the aggregate unpaid cost to become
Millennium Compliant will be less than $100,000, including costs associated with
the replacement of computerized systems, hardware and equipment.
Section 4.16. U.S. Real Property Holding Corporation. ServiceWare is
not now and has never been a "United States Real Property Holding Corporation",
as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the
Regulations promulgated by the Internal Revenue Service.
Section 4.17. Section 1202 Stock Qualification. As of the Closing and
taking into account the Merger, (i) ServiceWare will be a "qualified small
business" within the meaning of Section 1202(d) of the Code, (ii) the shares of
ServiceWare to be issued in connection with the Merger shall
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qualify as "qualified small business stock" within the meaning of Section
1202(c) of the Code and (iii) ServiceWare will meet the active business
requirements of Section 1202(e) of the Code. The parties acknowledge that there
are no final treasury regulations promulgated under Section 1202 of the Code,
and the foregoing representation is based on ServiceWare's reasonable
interpretation of Section 1202 as it is currently written.
Section 4.18. Disclosure. No representation or warranty of ServiceWare
in this Agreement or any certificate, schedule, statement, document or
instrument furnished or to be furnished to ServiceWare pursuant hereto or in
connection herewith, contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact required to be stated herein
or therein or necessary to make any statement herein or therein not misleading.
ARTICLE V
CONDUCT OF BUSINESS
Section 5.01 Covenants of Molloy. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, Molloy agrees (except to the extent that
ServiceWare shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other obligations when due,
and to use all reasonable efforts consistent with past practices and policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, to the end that its goodwill and ongoing businesses
be substantially unimpaired at the Effective Time. Molloy shall promptly notify
ServiceWare of any event or occurrence not in the ordinary course of its
business (including without limitation the filing of any Action against it or
the receipt by it of any threat in writing of any Action relating to this
Agreement and the transactions contemplated hereby). Except as expressly
contemplated by this Agreement, Molloy shall not, without the prior written
consent of ServiceWare:
(a) Accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under any of such plans except as
required by the terms of such plans or any related agreements in effect as of
the date of this Agreement;
(b) Transfer or license to any person or entity or otherwise extend,
amend or modify any rights to its Intellectual Property Rights, other than in
the ordinary course of business consistent with past practices;
(c) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its
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capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of capital stock of such
party, or purchase or otherwise acquire, directly or indirectly, any shares of
its capital stock;
(d) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into shares of its capital stock, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, other than shares of Molloy Common Stock or Molloy
Preferred Stock issuable pursuant to its existing stock option plans, warrants
or rights (which options, warrants or rights are outstanding on the date
hereof);
(e) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or in any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets otherwise than in the ordinary course of business;
(f) Directly or indirectly sell, lease, license or otherwise dispose of
any of its properties or assets except in the ordinary course of business;
(g) (i) Increase or agree to increase the compensation payable or to
become payable to its officers or employees, except for increases in salary or
wages of employees in accordance with past practice, (ii) increase or agree to
increase the compensation payable or to become payable to officers or grant any
additional severance or termination pay to or enter into any employment or
severance agreements with, such officers, (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement, with
any employee, except in the ordinary course of business consistent with
practices or policies currently in effect, (iv) enter into any collective
bargaining agreement, (v) establish, adopt, enter into or amend any bonus,
profit sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, trust, fund, policy or arrangement for the benefit of any directors,
officers or employees except as contemplated by this Agreement;
(h) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of such party or any of its Subsidiaries or
guarantee any debt securities of others, other than indebtedness incurred under
the terms existing on the date hereof under the Transamerica Credit Documents,
indebtedness incurred by Molloy to meet its working capital requirements and
indebtedness contemplated by that certain letter agreement dated April 29, 1999
between Molloy and C. E. Unterberg Towbin Capital Partners I L.P.;
(i) Make or commit to make any capital or other extraordinary
expenditures;
(j) Amend or propose to amend its Certificate of Incorporation or
Bylaws; or
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(k) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (j) above, or any action which is reasonably
likely to make any of its representations or warranties contained in this
Agreement untrue or incorrect in any material respect on the date made (to the
extent so limited) or as of the Effective Time.
Section 5.02 Covenants of ServiceWare. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, ServiceWare agrees as to itself and its
Subsidiaries (except to the extent that Molloy shall otherwise consent in
writing) to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform other obligations when due, and to use all reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
to the end that its goodwill and ongoing businesses be substantially unimpaired
at the Effective Time. ServiceWare shall promptly notify Molloy of any event or
occurrence not in the ordinary course of its business (including without
limitation the filing of any Action against it or the receipt by it of any
threat of any Action relating to this Agreement and the transactions
contemplated hereby). Except as expressly contemplated by this Agreement,
ServiceWare shall not, without the prior written consent of Molloy:
(a) Accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock plan or authorize cash
payments in exchange for any options granted under any of such plans except as
required by the terms of such plans or any related agreements in effect as of
the date of this Agreement;
(b) Transfer or license to any person or entity or otherwise extend,
amend or modify any rights to its Intellectual Property Rights, other than in
the ordinary course of business consistent with past practices;
(c) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of such party, or purchase or otherwise acquire,
directly or indirectly, any shares of its capital stock, except for the
declaration of accrued dividends on ServiceWare's Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock (so long as the holders thereof
have previously agreed to receive payment of such dividends in ServiceWare
Common Stock);
(d) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into shares of its capital stock, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities, except as contemplated by this Agreement, in connection
with the ServiceWare Financing or as required by ServiceWare's existing stock
option plans, by the PNC
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Warrants or in connection with indebtedness incurred by ServiceWare to meet its
working capital requirements;
(e) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or in any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets otherwise than in the ordinary course of business;
(f) Directly or indirectly sell, lease, license or otherwise dispose of
any of its properties or assets except in the ordinary course of business;
(g) (i) Increase or agree to increase the compensation payable or to
become payable to its officers or employees, except for increases in salary or
wages of employees in accordance with past practice, (ii) increase or agree to
increase the compensation payable or to become payable to officers or grant any
additional severance or termination pay to or enter into any employment or
severance agreements with, such officers, (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement, with
any employee, except in the ordinary course of business consistent with
practices or policies currently in effect, (iv) enter into any collective
bargaining agreement, (v) establish, adopt, enter into or amend any bonus,
profit sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, trust, fund, policy or arrangement for the benefit of any directors,
officers or employees except as contemplated by this Agreement;
(h) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of such party or any of its Subsidiaries or
guarantee any debt securities of others, other than indebtedness incurred under
the terms existing on the date hereof under the PNC Credit Documents and
indebtedness incurred by ServiceWare to meet its working capital requirements;
(i) Make or commit to make any capital or other extraordinary
expenditures;
(j) Amend or propose to amend its Articles of Incorporation or Bylaws,
except as contemplated by this Agreement;
(k) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (j) above, or any action which is reasonably
likely to make any of its representations or warranties contained in this
Agreement untrue or incorrect in any material respect on the date made (to the
extent so limited) or as of the Effective Time.
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 No Solicitation. From and after the date hereof until the
earlier of the termination of this Agreement and the Effective Time:
(a) Molloy agrees that neither it nor any of its shareholders, officers
or directors shall, and Molloy shall cause its employees, agents and
representatives (including, without limitation, any investment banking, legal or
accounting firm retained by it and any individual member or employee of the
foregoing) (each, an "Agent") not to, (a) initiate, solicit or seek, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders
or any of them) with respect to a merger, acquisition, consolidation,
recapitalization, liquidation, dissolution or similar transaction involving, or
any purchase of all or any substantial portion of the assets or any equity
securities of, Molloy or any of its subsidiaries (any such proposal or offer
being hereinafter referred to as a "Molloy Acquisition Proposal"), or (b) engage
in any negotiations concerning, or provide any confidential information or data
to, or have any substantive discussions with, any person relating to a Molloy
Acquisition Proposal, or (c) otherwise cooperate in any effort or attempt to
make, implement or accept a Molloy Acquisition Proposal. Molloy and its
stockholders and Agents shall immediately cease and cause to be terminated any
existing activities, including discussions or negotiations with any parties,
conducted heretofore with respect to any Molloy Acquisition Proposal and shall
take the necessary steps to inform the individuals and entities referred to in
the first sentence hereof of the obligations undertaken in this Section 6.01(a).
Molloy shall notify ServiceWare immediately if any inquiries, proposals or
offers related to a Molloy Acquisition Proposal are received by, any
confidential information or data is requested from, or any negotiations or
discussions related to a Molloy Acquisition Proposal are sought to be initiated
or (subject to any outstanding confidentiality obligations of Molloy) continued
with, it or any individual or entity referred to in the first sentence of this
Section 6.01(a). Notwithstanding the foregoing, this provision shall not
eliminate the ability of Molloy to seek outside financing to meet its working
capital needs (subject to the provisions of Section 7.02(g) and to the
understanding that in no event shall the percentage of the post-Merger fully
diluted as converted ownership of ServiceWare, as provided in Article II, be
adjusted as a result of any equity component of such outside financing).
(b) ServiceWare agrees that neither it nor any of its stockholders,
officers or directors shall, and ServiceWare shall cause its Agents not to, (a)
initiate, solicit or seek, directly or indirectly, any inquiries or the making
or implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders or any of them) with respect to a merger,
acquisition, consolidation, recapitalization, liquidation, dissolution or
similar transaction involving, or any purchase of all or any substantial portion
of the assets or any equity securities of, ServiceWare or any of its
subsidiaries (any such proposal or offer being hereinafter referred to as a
"ServiceWare Acquisition Proposal"), or (b) engage in any negotiations
concerning, or provide any confidential information or data to, or have any
substantive discussions with, any person relating to a ServiceWare Acquisition
Proposal, or (c) otherwise cooperate in any effort or attempt to make, implement
or accept a ServiceWare Acquisition Proposal. Neither ServiceWare nor any of its
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Agents is currently engaged in any activities, discussions or negotiations with
any parties with respect to a ServiceWare Acquisition Proposal (except for the
Merger and the ServiceWare Financing). ServiceWare shall notify Molloy
immediately if any inquiries, proposals or offers related to a ServiceWare
Acquisition Proposal are received by, any confidential information or data is
requested from, or any negotiations or discussions related to a ServiceWare
Acquisition Proposal are sought to be initiated with, it or any individual or
entity referred to in the first sentence of this Section 6.01(b).
Notwithstanding the foregoing, this provision shall not eliminate the ability of
ServiceWare to seek outside financing to meet its working capital needs.
Section 6.02 Access to Information. Upon reasonable notice and subject
to applicable laws, Molloy and ServiceWare shall afford to the officers,
employees, accountants, counsel and other representatives of the other, access,
during normal business hours during the period prior to the earlier of the
termination of this Agreement and the Effective Time, to all its properties,
books, contracts, commitments and records. During the period prior to the
earlier of the termination of this Agreement or the Effective Time, Molloy and
ServiceWare shall furnish promptly to the other all information concerning its
business, properties and personnel as the other may reasonably request. The
parties acknowledge that they are bound by the provisions of the Confidentiality
Agreement previously entered into between ServiceWare and Molloy (the
"Confidentiality Agreement") . No information or knowledge obtained in any
investigation pursuant to this Section 6.02 shall affect or be deemed to modify
a representation or warranty of Molloy or ServiceWare contained in this
Agreement or the conditions to the obligations of the parties to consummate the
Merger.
Section 6.03 Stockholders' Meetings. Molloy, ServiceWare and Sub each
shall call a meeting of its respective stockholders or solicit a written consent
of its respective stockholders to be held or executed as promptly as practicable
after the execution and delivery of this Agreement for the purpose of obtaining
the Molloy Stockholder Approval and the ServiceWare Stockholder Approval (each
as defined in Section 7.01(a)).
Section 6.04 Legal Conditions to Merger. Each of ServiceWare and Molloy
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Merger and will
promptly cooperate with and furnish information to each other in connection with
any such requirements imposed upon any of them or any of their Subsidiaries in
connection with the Merger. Each of ServiceWare and Molloy will, and will cause
its Subsidiaries to, take all reasonable actions necessary to obtain (and will
cooperate with each other in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other third party,
required to be obtained or made by ServiceWare, Molloy or any of their
Subsidiaries in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement.
Section 6.05 Public Disclosure. ServiceWare and Molloy shall consult
with each other before issuing any press release or otherwise making any public
statement with respect to the Merger or this Agreement and shall not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by law.
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Section 6.06 Tax-Free Reorganization. ServiceWare and Molloy shall
each use its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code.
Section 6.07 Stock Plans and Other Employee Benefit Matters.
(a) At the Effective Time, (i) ServiceWare shall assume and become the
sponsor of the Molloy Option Plan (the "Assumed Option Plan"), (ii) the names of
the Assumed Option Plan shall be changed to reflect the ServiceWare name, (iii)
except as provided in Section 2.01(j), there shall be substituted a number of
shares of ServiceWare Common Stock equal to the Conversion Number for each share
of Molloy Common Stock available at the Effective Time under the Assumed Option
Plan for future option grants and (iv) except as provided in Section 2.01(j),
each outstanding option to purchase shares of Molloy Common Stock (a "Molloy
Stock Option") under the Molloy Option Plan, whether vested or unvested, shall
be deemed to constitute an option to acquire a number of shares of ServiceWare
Common Stock equal to the Conversion Number (a "ServiceWare Stock Option") for
each share of Molloy Common Stock subject to such Molloy Stock Option, at an
exercise price equal to the exercise price per share of Molloy Common Stock
divided by the Conversion Number. The ServiceWare Stock Options shall each vest
in accordance with the vesting schedules applicable to the corresponding Molloy
Stock Options and shall be incentive stock options or non-qualified stock
options as shall correspond to the applicable Molloy Stock Option.
(b) As soon as practicable after the Effective Time, ServiceWare shall
deliver to the participants in Molloy Option Plan appropriate notice setting
forth such participants' rights pursuant thereto and the grants pursuant to
Molloy Option Plan shall continue in effect on the same terms and conditions,
except as set forth above.
(c) ServiceWare shall take all corporate action necessary at or prior
to the Effective Time to reserve for issuance 4 million shares of ServiceWare
Common Stock, which shall include a sufficient number of shares of ServiceWare
Common Stock for delivery under the Assumed Option Plan plus an additional
240,000 shares for issuance of new stock options to be granted to former Molloy
employees under the terms of the ServiceWare Plan.
(d) Each Molloy employee shall receive full credit for his service as a
full-time employee of Molloy under any employee benefit plan or arrangement of
ServiceWare for purposes of eligibility to participate in any such plan or
arrangement and, where applicable, for purposes of determining the extent to
which the employee's benefit under such plan or arrangement is vested.
Section 6.08 Brokers or Finders. Each of ServiceWare and Molloy
represents, as to itself, its Subsidiaries and its affiliates, that no agent,
broker, investment banker, financial advisor or other firm or person is or will
be entitled to any broker's or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated by this Agreement,
except that ServiceWare is obligated to pay a brokers' fee of no more than
$250,000 to PNC.
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Section 6.09 Indemnification.
(a) From and after the Effective Time, ServiceWare and the Continuing
Corporation shall, indemnify, defend and hold harmless each person who is as of
the date hereof, an officer or director of Molloy (the "Indemnified Parties")
against, and shall advance the expenses of each Indemnified Party with respect
to, all losses, claims, damages, costs, expenses (including reasonable
attorneys' fees), liabilities or judgments or amounts that are paid in
settlement with the approval of the indemnifying party (which approval shall not
unreasonably be withheld or delayed) of or in connection with any claim, action,
suit, proceeding or investigation based in whole or in part on or arising in
whole or in part out of the fact that such person is or was a director or
officer of Molloy, pertaining to any matter existing or occurring at or prior to
the Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time, including without limitation the transactions contemplated by
this Agreement ("Indemnified Liabilities"), to the full extent a corporation is
permitted under the DGCL to indemnify and advance expenses to its own directors
or officers, as the case may be, provided that neither ServiceWare nor the
Continuing Corporation shall be liable for any settlement of any claim effected
without its written consent (which consent shall not be unreasonably withheld or
delayed). Any Indemnified Party wishing to claim indemnification under this
Section 6.09, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify ServiceWare and the Continuing Corporation,
and shall deliver to ServiceWare and the Continuing Corporation the undertaking
contemplated by Section 145(e) of the DGCL. The Indemnified Parties as a group
shall only be entitled to be represented by one law firm to represent them as a
group with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(b) The provisions of this Section 6.09 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives.
Section 6.10 Additional Agreements; Reasonable Efforts. Subject to the
terms and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the Molloy Stockholder Approval and the ServiceWare
Shareholder Approval, including cooperating fully with the other party. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Continuing
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of the Constituent Corporations, the proper
officers and directors of each party to this Agreement shall take all such
necessary action.
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ARTICLE VII
CONDITIONS TO MERGER
Section 7.01 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to this Agreement to effect the
Merger shall be subject to the satisfaction, or waiver by Molloy and
ServiceWare, on or prior to the Closing Date of the following conditions:
(a) Stockholder Approval. This Agreement, the Merger and the allocation
of the consideration payable in the Merger among the holders of capital stock of
Molloy, Molloy Common Stock Warrants, Units and Working Capital Notes shall have
been approved and adopted by the affirmative vote of such holders of Molloy
Common Stock, Molloy Preferred Stock and other securities issued by Molloy as
may be required under the governing instruments of Molloy, any other applicable
agreements and applicable law (including, if necessary, through amendment of the
Certificate of Incorporation of Molloy) (the "Molloy Stockholder Approval"). The
Merger shall have been approved by ServiceWare as the sole stockholder of Sub,
and the issuance of shares of ServiceWare Common Stock pursuant to the Merger
and adoption of the ServiceWare Articles shall have been approved by the
affirmative vote of such holders of ServiceWare Common Stock and outstanding
series of preferred stock of ServiceWare ("ServiceWare Preferred Stock") as may
be required under the governing instruments of ServiceWare and by applicable law
(such approvals by the shareholders of Sub and the ServiceWare being referred to
as the "ServiceWare Shareholder Approval").
(b) Certificates of Amendment. The Certificate of Amendment relating to
the ServiceWare Articles and the Certificate of Amendment to the Certificate of
Incorporation of Molloy, if included as part of the Molloy Stockholder Approval,
shall have been filed with the Secretary of State of the State of Delaware.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger or limiting or restricting
ServiceWare's conduct or operation of the business of ServiceWare after the
Merger shall have been issued, nor shall there be any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger which
makes the consummation of the Merger illegal.
(d) ServiceWare Financing. Contemporaneously with the Effective Time,
ServiceWare shall have completed the equity financing (the "ServiceWare
Financing") contemplated by a Series D Convertible Preferred Stock and Common
Stock Warrant Purchase Agreement in substantially the form attached hereto as
Exhibit E, and shall have entered into a Shareholders' Agreement in
substantially the form attached hereto as Exhibit F (which includes provisions
pursuant to which the parties thereto agree to vote their shares of ServiceWare
to elect a director nominated by the Molloy Holders holding voting securities of
ServiceWare ) (the "Shareholders' Agreement) and a Registration Rights Agreement
in substantially the form attached hereto as Exhibit G (the "Registration Rights
Agreement").
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(e) Consulting and Employment Arrangements. ServiceWare shall have
entered into a Compensation, Consulting and Severance Agreement with Bruce
Molloy in substantially the form attached hereto as Exhibit H and shall have
entered into employment arrangements with Louis Venezia satisfactory to
ServiceWare and to each such employee.
Section 7.02 Additional Conditions to Obligations of ServiceWare and
Sub. The obligations of ServiceWare and Sub to effect the Merger are subject to
the satisfaction of each of the following conditions, any of which may be waived
in writing exclusively by ServiceWare and Sub:
(a) Representations and Warranties. The representations and warranties
of Molloy set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except for (i) changes
contemplated by this Agreement and (ii) where the failure to be true and correct
would not have a Material Adverse Effect on Molloy or a material adverse effect
upon the consummation of the transactions contemplated hereby; and ServiceWare
shall have received a certificate signed on behalf of Molloy by the chief
executive officer of Molloy to such effect.
(b) Performance of Obligations of Molloy. Molloy shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date; and ServiceWare shall have
received a certificate signed on behalf of Molloy by the chief executive officer
of Molloy to such effect.
(c) Approvals. The authorizations, consents, orders or approvals of
third parties and any Governmental Entity, or declarations or filings with, or
expirations of waiting periods imposed by, any Governmental Entity set forth on
Sections 3.03(b) and 3.03 (c) of the Molloy Disclosure Schedule (other than that
of Transamerica) shall have been filed, occurred or been obtained.
(d) Blue Sky Laws. ServiceWare shall have received all state securities
or "Blue Sky" permits and other authorizations necessary to issue shares of
ServiceWare Common Stock pursuant to the Merger.
(e) Dissenters' and Appraisal Rights. The period for the assertion of
dissenters' and appraisal rights by stockholders of Molloy shall have expired,
and no holders of Molloy Common Stock or Molloy Preferred Stock shall have
perfected or preserved such rights in connection with the Merger.
(f) Transfer of Intellectual Property. Bruce Molloy shall have
transferred to Molloy all his right, title and interest in and to "System and
Method for Representing and Retrieving Knowledge in an Adaptive Cognitive
Network," U. S. Patent Serial No. 5,787,234, and the trademarks "TOP OF MIND"
and "COGNITIVE PROCESSOR," Trademark Register No. 1,919,047 (which is the only
intellectual property right of any kind owned by Bruce Molloy and used or
currently contemplated to be used in the business of Molloy), free and clear of
any liens, charges or encumbrances, pursuant to an assignment in substantially
the form of Exhibit I attached hereto
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<PAGE> 36
(subject to a License Agreement between ServiceWare and Bruce Molloy in
substantially the form of Exhibit J attached hereto (the "License")).
(g) Repayment of Indebtedness. Molloy shall have repaid all of its
indebtedness for borrowed money, except that Molloy may have outstanding up
working capital debt in an amount not to exceed the borrowing base under the
Transamerica Credit Documents and secured as provided therein.
(h) Termination of Certain Agreements. Except as provided in Article
II, all voting trusts, proxies and other agreements or understandings (including
registration rights agreements) with respect to the capital stock of Molloy
shall have been terminated in writing pursuant to instruments reasonably
satisfactory to ServiceWare.
(i) Non-Competition Agreement. Bruce Molloy shall have executed and
delivered a Non-Competition Agreement in substantially the form attached hereto
as Exhibit K.
(j) Opinion of Counsel. ServiceWare shall have received the favorable
opinion of Golenbock, Eiseman, Assor & Bell as to the matters set forth in
Exhibit L (subject to customary exceptions and qualifications reasonably
satisfactory to counsel for ServiceWare).
(k) Appointment of Representative. The Molloy Holders shall have
appointed the persons identified on Annex A or other Molloy Holders reasonably
satisfactory to ServiceWare to serve as their representatives (collectively, the
"Representative") for purposes of this Agreement, and the Representative shall
have agreed to serve in accordance with the procedures set forth in Annex A.
Section 7.03 Additional Conditions to Obligations of Molloy. The
obligation of Molloy to effect the Merger is subject to the satisfaction of each
of the following conditions, any of which may be waived, in writing, exclusively
by Molloy:
(a) Representations and Warranties. The representations and warranties
of ServiceWare and Sub set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the extent
such representations speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except for, (i) changes contemplated
by this Agreement and (ii) where the failure to be true and correct would not
have a Material Adverse Effect on ServiceWare and its Subsidiaries, taken as a
whole, or a material adverse effect upon the consummation of the transactions
contemplated hereby; and Molloy shall have received a certificate signed on
behalf of ServiceWare by the chief executive officer of ServiceWare to such
effect.
(b) Performance Of Obligations of ServiceWare and Sub. ServiceWare and
Sub shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
Molloy shall have received a certificate signed on behalf of ServiceWare by the
chief executive officer of ServiceWare to such effect.
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(c) License. ServiceWare and Bruce Molloy shall have executed and
delivered the License.
(d) Termination of Certain Agreements. Except for the Articles, the
Shareholders' Agreement, the Registration Rights Agreement, the agreements
relating to the purchase and sales of the ServiceWare Preferred Stock, the PNC
Warrants and the warrants to purchase common stock issued in connection with
indebtedness incurred by ServiceWare to meet its working capital requirements,
all voting trusts, proxies and other agreements or understandings (including
registration rights agreements) with respect to the capital stock of ServiceWare
shall have been terminated in writing pursuant to instruments reasonably
satisfactory to Molloy.
(e) Opinion of Counsel. Molloy shall have received the favorable
opinion of Morgan, Lewis & Bockius LLP as to the matters set forth in Exhibit M
(subject to customary exceptions and qualifications reasonably satisfactory to
counsel for Molloy).
(f) Approvals. The authorizations, consents, orders or approvals of
third parties and any Governmental Entity, or declarations or filings with, or
expirations of waiting periods imposed by, any Governmental Entity set forth on
Sections 4.03(b) and 4.03 (c) of the ServiceWare Disclosure Schedule shall have
been filed, occurred or been obtained.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.01 Termination. This Agreement may be terminated at any time
prior to the Effective Time by written notice by the terminating party to the
other party under the circumstances set forth below:
(a) by mutual written consent of ServiceWare and Molloy; or
(b) by either ServiceWare or Molloy if the Merger shall not have been
consummated by August 31, 1999 (provided that the right to terminate this
Agreement under this Section 8.01(b) shall not be available to any party whose
failure to fulfill any material obligation under this Agreement has been a cause
of or has resulted in the failure of the Merger to occur on or before such
date); or
(c) by either ServiceWare or Molloy if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or
(d) by Molloy, if, at the stockholders' meetings of ServiceWare and Sub
(including any adjournment or postponement) the ServiceWare Shareholder Approval
shall not have been obtained, or by ServiceWare if at the Molloy stockholders'
meeting (including any adjournment or
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postponement), the Molloy Stockholder Approval shall have not been obtained
(subject to ServiceWare's rights under the Principal Stockholder Agreements).
Section 8.02 Effect of Termination; Survival. In the event of
termination of this Agreement as provided in Section 8.01, this Agreement shall
immediately become void and there shall be no liability or obligation on the
part of ServiceWare, Molloy, Sub or their respective officers, directors,
stockholders or affiliates, except as set forth in Section 8.03 and further
except to the extent that such termination results from the wilful breach by a
party of any of its representations, warranties or covenants set forth in this
Agreement or in any Molloy Principal Stockholder Agreement or ServiceWare
Principal Shareholder Agreement; provided that, the provisions of Section 8.03
of this Agreement and the Confidentiality Agreement shall remain in full force
and effect and survive any termination of this Agreement.
Section 8.03 Fees and Expenses. Except as set forth in this Section
8.03, each of ServiceWare and Molloy shall bear its own expenses, including the
fees and disbursements of investment bankers, counsel and accountants, incurred
in connection with this Agreement and the transactions contemplated hereby;
provided, however, that if a Closing occurs the Molloy Principal Stockholders
shall be responsible for paying any fees and expenses of Molloy incurred in
connection with this Agreement and the transactions contemplated hereby other
than reasonable fees and expenses of Golenbock, Eiseman, Assor & Bell, of M. I.
Grossman & Company L.L.C. and of Mark Finkel ; and provided further that if this
Agreement is terminated by ServiceWare or Molloy by reason of a material breach
hereof by the other or, in the case of a termination by ServiceWare by reason of
a material breach hereof or of any Molloy Principal Stockholder Agreement by a
Molloy Principal Stockholder, or, in the case of a termination by Molloy by
reason of a material breach hereof or of any ServiceWare Principal Shareholder
Agreement by a ServiceWare Principal Shareholder, the breaching party shall pay
the reasonable legal and accounting expenses incurred to the date of termination
by the terminating party in connection with this Agreement and the transactions
contemplated hereby.
Section 8.04 Amendment. This Agreement may be amended by the parties
hereto at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of Molloy or of ServiceWare, but,
after any such approval, no amendment shall be made which by law requires
further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of Molloy and ServiceWare.
Section 8.05 Extension; Waiver. At any time prior to the Effective
Time, the parties hereto may, to the extent legally allowed, (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed by or on behalf of such
party.
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ARTICLE IX
INDEMNIFICATION
Section 9.01. Indemnification by Molloy Holders. By accepting
consideration in the Merger, on the terms and subject to the conditions set
forth herein, each Molloy Holder agrees to defend, indemnify and hold harmless
ServiceWare and the Continuing Corporation in accordance with this Article IX in
the event that, following the Closing Date, ServiceWare or the Continuing
Corporation suffers, sustains, incurs or becomes subject to any loss, liability,
damage or deficiency (including without limitation penalties and reasonable
attorneys' fees, but not including special or consequential damages (including
lost profits)) arising out of any inaccuracy of any representation of Molloy or
any breach of any warranty or covenant of Molloy contained in this Agreement
arising from a bona fide, third party claim asserted on or prior to March 31,
2001 to the extent attributable to matters having an origin prior to the Closing
Date (such loss, liability, damage or deficiency being hereinafter referred to
as a "Covered ServiceWare Loss").
Section 9.02. Indemnification by ServiceWare. ServiceWare shall defend,
indemnify and hold harmless each Molloy Holder in accordance with this Article
IX in the event that, following the Closing Date, such Molloy Holder suffers,
sustains, incurs or becomes subject to any loss, liability, damage or deficiency
(including without limitation penalties and reasonable attorneys' fees, but not
including special or consequential damages (including lost profits)) arising out
of any inaccuracy of any representation of ServiceWare or Sub or any breach of
any warranty or covenant of ServiceWare or Sub contained in this Agreement
arising from a bona fide, third party claim asserted on or prior to March 31,
2001 to the extent attributable to matters having an origin prior to the Closing
Date (such loss, liability, damage or deficiency being hereinafter referred to
as a "Covered Molloy Loss").
Section 9.03 Manner of Indemnification.
(a) Any indemnification payment made by the Molloy Holders to
ServiceWare may be made, at the option of each Molloy Holder, in cash or by the
delivery to ServiceWare of an aggregate number of shares of ServiceWare Common
Stock having a Fair Market Value (as defined below), or of ServiceWare Series E
Preferred Stock convertible into ServiceWare Common Stock having a Fair Market
Value, equal to the amount of the Covered ServiceWare Loss. Each Molloy Holder
shall contribute cash or shares of ServiceWare Common Stock and/or ServiceWare
Series E Preferred Stock in such proportion (the "Indemnification Percentage")
as (i) the total aggregate number of shares of ServiceWare Common Stock issued
to such Molloy Holder in the Merger and into which ServiceWare Series E
Preferred Stock issued to such Molloy Holder in the Merger is convertible bears
to (ii) the total aggregate number of shares of ServiceWare Common Stock issued
to all Molloy Holders in the Merger and into which ServiceWare Series E
Preferred Stock issued to all Molloy Holders in the Merger is convertible. If a
Molloy Holder holds both ServiceWare Series E Preferred Stock and ServiceWare
Common Stock, such Molloy Holder shall first contribute ServiceWare Series E
Preferred Stock prior to contributing ServiceWare Common Stock.
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(b) Any indemnification payment made by ServiceWare to the Molloy
Holders shall be made by the issuance by ServiceWare to the Molloy Holders of
(i) an aggregate number of shares of ServiceWare Common Stock having a Fair
Market Value equal to the amount of the Covered Molloy Loss plus (ii) such
number of shares of ServiceWare Common Stock as shall be equitably required to
eliminate the dilutive effects of the issuance of shares provided for in the
preceding clause (i). Any such payment shall be allocated among the Molloy
Holders in accordance with each Molloy Holder's Indemnification Percentage.
(c) Payment shall be made under this Article IX when either (i)
ServiceWare and the Representative agree as to the amount of the Covered
ServiceWare Loss or Covered Molloy Loss, as the case may be or (ii) the amount
of the Covered ServiceWare Loss or Covered Molloy Loss, as the case may be,
shall have been finally determined by a court of competent jurisdiction with no
appeal taken or with the time for appeal having passed. If a Covered ServiceWare
Loss has occurred for which payment is required pursuant to the preceding
sentence, ServiceWare shall so notify the Molloy Holders in writing specifying
(x) the number of shares of ServiceWare Common Stock and ServiceWare Series E
Preferred Stock required to be delivered by each Molloy Holder if the entire
amount as to which ServiceWare is entitled to indemnification hereunder were to
be paid in ServiceWare Common Stock and ServiceWare Series E Preferred Stock and
(y) the cash payment required to be made by each Molloy Holder if the entire
amount as to which ServiceWare is entitled to indemnification hereunder were to
be paid in cash, and each Molloy Holder shall make such payment, in cash or
through the surrender of ServiceWare Common Stock or ServiceWare Series E
Preferred Stock within 10 days after delivery of such notice. If, within such
10-day period, ServiceWare has not received the entire payment from each Molloy
Holder in cash or through the surrender of ServiceWare Common Stock or
ServiceWare Series E Preferred Stock, ServiceWare may treat the shares of
ServiceWare Common Stock and ServiceWare Series E Preferred Stock equivalent to
the amount for which cash payment was not made and held by each Molloy Holder to
the extent he or it did not pay in cash or through surrender of such shares as
being no longer outstanding for any purpose at such time.
(d) "Fair Market Value" means: (i) if the ServiceWare Common Stock is
listed on a national securities exchange reporting a closing trade price, the
average of the closing trade prices for the ServiceWare Common Stock on the
principal such exchange on which the ServiceWare Common Stock is listed reported
by Bloomberg Financial Markets ("Bloomberg") for the ten trading days preceding
the date of determination, (ii) if the ServiceWare Common Stock is not listed on
a securities exchange reporting a closing trade price, but is traded in the
over-the-counter market, the last closing bid price of the ServiceWare Common
Stock reported by Bloomberg (or if no closing bid price is reported by
Bloomberg, the average of the bid prices of any market makers for the
ServiceWare Common Stock as reported in the "pink sheets" by the National
Quotation Bureau, Inc.) for the ten trading days preceding the date of
determination, or (iii) if the ServiceWare Common Stock is not listed on a
national securities exchange or in the over-the-counter market, the amount
resulting by dividing (a) the highest price for which ServiceWare could be sold
as a going concern to an independent third party, assuming a reasonable time (up
to 12 months) to accomplish such sale, by (b) the number of shares of
ServiceWare Common Stock then outstanding on an as converted basis and taking
into account outstanding ServiceWare Common Stock Warrants and vested options to
purchase ServiceWare Common Stock (net of the exercise price therefor). In order
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to determine the Fair Market Value under clause (iii) above, ServiceWare and the
Representative, shall use their best efforts to reach an agreement on the Fair
Market Value. If such parties are unable to reach an agreement within a
reasonable amount of time (not to exceed 30 business days), such parties will
use their best efforts to agree upon the selection of an independent appraiser
or investment banking firm within 20 business days after giving of notice that
requires a determination of Fair Market Value. Such appraiser or investment
banking firm will have 20 business days in which to determine the Fair Market
Value, and its determination will be final and binding on all parties concerned.
All costs of such determination shall be borne by the party (ServiceWare or the
Molloy Holders) that proposed a fair market value furthest from the Fair Market
Value determined by the appraiser or investment banking firm.
Section 9.04 Threshold and Cap. ServiceWare shall not be entitled to
any indemnification under Section 9.01, and the Molloy Holders shall not be
entitled to indemnification under Section 9.02, (i) unless the amount of all
Covered ServiceWare Losses or Covered Molloy Losses, respectively, exceeds
$250,000 (calculated on a cumulative and not a per item basis, and, as to
Covered Molloy Losses, calculated as to all Molloy Holders) and then only with
respect to the excess over such $250,000 or (ii) in excess of the Fair Market
Value of the aggregate number of shares of ServiceWare Common Stock and
ServiceWare Series E Preferred Stock issued or issuable in connection with the
Merger (the "Maximum Recovery Amount").
Section 9.05 Amount of Indemnification.
(a) The amount of any Covered ServiceWare Losses or Covered Molloy
Losses shall be determined (i) net of any benefit (including any tax benefit if
and when actually realized as an offset by any tax burden resulting from the
matter for which a claim is asserted or from the indemnification; provided,that
no indemnified party shall be required solely for the purpose of realizing a
benefit to take any tax position that could have an adverse effect on such
indemnified party if taken and (ii) net of any amounts recovered or recoverable
in respect thereof or in connection therewith under any one or more policies of
insurance maintained by ServiceWare or the Continuing Corporation, on the one
hand, or a Molloy Holder, on the other hand, as the case may be, or any third
party by or on behalf of (x) ServiceWare or the Continuing Corporation (or their
successors or assigns) in the case of a Covered ServiceWare Loss or (y) a Molloy
Holder (or its successor or assigns) in the case of a Covered Molloy Loss
(b) Neither ServiceWare nor any Molloy Holder shall be entitled to any
indemnity for any Covered ServiceWare Loss or Covered Molloy Loss, as the case
may be, to the extent that the existence of such loss, the breach of covenant or
warranty or the falsity of the representation upon which such loss would be
based is disclosed in the Molloy Disclosure Schedule (in the case of a Covered
ServiceWare Loss) or the ServiceWare Disclosure Schedule (in the case of a
Covered Molloy Loss) or which is disclosed in a written notice furnished to the
indemnified party prior to the Closing; provided, however, that any such
misrepresentation or breach of warranty or covenant so disclosed after the
execution and delivery of this Agreement and prior to the Closing shall not
affect the right of ServiceWare or Molloy, as the case may be, to elect not to
close the transactions contemplated by this Agreement to the extent provided in
Article VII hereof (it being understood and agreed that if, despite such right
of the ServiceWare or Molloy to elect not to close by reason
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of the misrepresentation or breach so disclosed, ServiceWare or Molloy
nevertheless elects to close, thereby waiving such misrepresentation or breach,
ServiceWare or the Molloy Holder, as the case may be, shall thereafter have no
indemnity right by reason of any such misrepresentation or breach of warranty or
covenant).
(c) In the event that the effect of any misrepresentation of Molloy or
ServiceWare or any breach of warranty or covenant of Molloy or ServiceWare
contained in this Agreement or any document executed and delivered pursuant
hereto is that the amount of assets of Molloy or ServiceWare has been overstated
or the amount of liabilities of Molloy or ServiceWare has been understated as of
the end of any fiscal period, the Covered ServiceWare Losses or Covered Molloy
Losses, as the case may be, caused by such overstatement or understatement shall
in no event exceed the net amount of such overstatement and/or understatement,
without adjustment for estimated impacts on future earnings.
(d) In the event of any Covered ServiceWare Loss, the Molloy Holders
shall be entitled to credit or offset against any such liability an amount equal
to (i) any windfall and other contingent assets of Molloy, and the amount of any
windfall reduction of non-cancellable contractual obligations payable by Molloy
(without a corresponding loss of benefit) resulting from an occurrence prior to
the Closing Date, which in any such case is not recorded as an asset or
liability on the Molloy Balance Sheet and in respect of which ServiceWare or the
Continuing Corporation derives a financial benefit after the Closing Date, and
(ii) the net overstated liabilities of Molloy. In the event of any Covered
Molloy Loss, ServiceWare shall be entitled to credit or offset against any such
liability an amount equal to (i) any windfall and other contingent assets of
ServiceWare, and the amount of any windfall reduction of non-cancellable
contractual obligations payable by ServiceWare (without a corresponding loss of
benefit) resulting from an occurrence prior to the Closing Date, which in any
such case is not recorded as an asset or liability on the ServiceWare Balance
Sheet and in respect of which ServiceWare or the Continuing Corporation derives
a financial benefit after the Closing Date, and (ii) the net overstated
liabilities of ServiceWare.
(e) It is specifically understood and agreed that in the event a
misrepresentation or breach of warranty or covenant is discovered by ServiceWare
or a Molloy Holder after the Closing, the remedy of the ServiceWare or such
Molloy Holder, as the case may be, shall be limited to the indemnity forth in
this Article IX and such party shall not be entitled to a rescission of this
Agreement or any other damages.
Section 9.06. Notice and Defense. If at any time ServiceWare shall
receive notice of any Covered ServiceWare Loss, ServiceWare shall promptly give
written notice thereof to the Representative, and if at any time any Molloy
Holder shall receive notice of any Covered Molloy Loss, such Molloy Holder shall
promptly give written notice thereof to the Representative and to ServiceWare;
provided that a delay in giving notice shall only relieve the indemnifying party
of liability to the extent such indemnifying party suffers actual prejudice
because of the delay. Any such notice shall set forth with reasonable
specificity (i) the basis under this Agreement, and the facts that otherwise
form the basis, of such claim, (ii) an estimate of the amount of such claim
(which estimate shall not be conclusive of the final amount of such claim) and
an explanation of the calculation of such estimate, including a statement of any
significant assumptions employed therein,
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and (iii) the date on and manner in which the party delivering such notice
became aware of the existence of such claim. With respect to any claim giving
rise to a Covered ServiceWare Loss, ServiceWare shall have the right, but not
the obligation to participate at its own expense in a defense of such claim by
counsel of its own chosing, but the Representative shall be entitled to control
the defense; provided, however, that the Representative shall not, without the
consent of ServiceWare, which consent shall not unreasonably be withheld,
settle, compromise, pay or discharge the same except by order of a court of
competent jurisdiction. With respect to any claim giving rise to a Covered
Molloy Loss, the Representative shall have the right, but not the obligation to
participate at the expense of the Molloy Holders in a defense of such claim by
counsel of its own chosing, but ServiceWare shall be entitled to control the
defense; provided, however, that ServiceWare shall not, without the consent of
the Representative, which consent shall not unreasonably be withheld, settle,
compromise, pay or discharge the same except by order of a court of competent
jurisdiction. If the indemnified party does not consent to any bona fide
settlement or compromise proposed by the indemnifying party, the indemnifying
party shall be liable for indemnification hereunder only to the lesser of the
final judgment against the indemnified party or the amount proposed to be paid
in the settlement.
ARTICLE X
MISCELLANEOUS
Section 10.01 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, by
facsimile (which is confirmed) or mailed by registered certified mail (return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to ServiceWare or Sub, to
ServiceWare, Inc.
333 Allegheny Ave.
Oakmont, PA 15139
Attn: Chief Executive Officer
Fax: 412-826-0577
with a copy to:
Morgan, Lewis & Bockius LLP
One Oxford Center, 32nd floor
Pittsburgh, PA 15219
Attention: Marlee S. Myers, Esquire
Fax: 412-560-3399
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(b) if to Molloy, to
Molloy Group, Inc.
Four Century Drive
Parsippany, NJ 07054
Attention: Bruce Molloy
Fax:
with a copy to
Golenbock, Eiseman, Assor & Bell
437 Madison Avenue
New York, NY 10022
Attn: Lawrence M. Bell
Fax: 212-754-0330
Section 10.02 Interpretation. When a reference is made in this
Agreement to Articles, Sections, such reference shall be to an Article or a
Section of this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include," "includes" or "including" are used in this Agreement they
shall be deemed to be followed by the words "without limitation." The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available.
Section 10.03 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 10.04 Entire Agreement; No Third Party Beneficiaries. This
Agreement (including the documents and the instruments referred to herein) (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Sections 6.09 and 9.02, are
not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder.
Section 10.05 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to any applicable conflicts of law.
Section 10.06 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned (whether by operation of
law or otherwise) by Molloy without the prior written consent of ServiceWare or
by ServiceWare or Sub without the prior written consent of Molloy. Subject to
the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.
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IN WITNESS WHEREOF, ServiceWare, Sub and Molloy have caused this Agreement to be
signed by their respective officers thereunto, duly authorized as of the date
first written above.
SERVICEWARE, INC.
By:
------------------------------------
Title:
---------------------------------
MOLLOY ACQUISITION CORPORATION
By:
------------------------------------
Title:
---------------------------------
MOLLOY GROUP, INC.
By:
------------------------------------
Title:
---------------------------------
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EXHIBITS AND SCHEDULES
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
A-1 Form of Molloy Principal Stockholder Agreement
A-2 Form of ServiceWare Principal Shareholder Agreement
B Amended and Restated Articles of Incorporation of ServiceWare
C [Reserved]
D Form of Molloy Holders' Representation Letter
E Series D Convertible Preferred Stock Purchase Agreement
F Shareholders' Agreement of ServiceWare
G Registration Rights Agreement of ServiceWare
H Consulting Agreement between ServiceWare and Bruce Molloy
I Assignment of Patent from Bruce Molloy to ServiceWare
J License Agreement between ServiceWare and Bruce Molloy
K Noncompetition Agreement
L Opinion of Golenbock, Eiseman, Assor & Bell
M Opinion of Morgan, Lewis & Bockius LLP
</TABLE>
Schedules
---------
1 Schedule of Projected Molloy Bookings
Molloy Disclosure Schedule
ServiceWare Disclosure Schedule
Annexes
-------
A Molloy Representatives
B Allocation Schedule
46
<PAGE> 1
Exhibit 10.3
COMMERCIAL LEASE
MADE this 31st day of May, 1995, by and between SIBRO Enterprises hereinafter
called "LESSOR" and ServiceWare, Incorporated hereinafter called "TENANT."
1. DEMISE AND TERM: LESSOR, hereby leases to TENANT for the term of Ten Years,
commencing on the 1st day of April, 1996, and ending on the 31st day of March,
2006, (the "TERM") the following described premises in its proposed condition:
Term:
See Item #1 -- Addendum #1
New three story office building located at the corner of Allegheny Avenue
and Washington Avenue to be constructed. See Item #2 of Addendum #1
attached and hereby made a part of this Lease.
(the "PREMISES"). TENANT also has a nonexclusive license for the benefit of
TENANT, its employees, agents and invitees for access to and from the leased
premises through the building and over property of LESSOR appurtenant thereto,
and to use those parts of the building designated by LESSOR for use by TENANTS
including but not limited to toilet rooms, elevators and unrestricted parking
areas, if any.
2. RENEWAL: TENANT, if not in default under this lease, may extend the Term of
this lease by written notice to the LESSOR received no later than three months
before the expiration of the previous Term, for an additional period of Five
year(s) at the renewal Rent stated below, under the terms of this same lease.
3. RENT: The TENANT covenants to pay as Rent the total sum of One Million Nine
Hundred Sixty-One Thousand Two Hundred Eighty Dollars ($1,961,280.00), payable
in installments of See Item #3 -- Addendum #1 Dollars (See Item #3 Addendum #1)
per month, in advance without demand on or before the first day of each month at
the office of the LESSOR. In the event of renewal of this lease, Total rent for
Five year(s) will be One Million One Hundred Ninety-One Thousand Seven Hundred
Fifty Dollars ($1,191,750.00), payable in installments of Nineteen Thousand
Eight Hundred Sixty Two and 50 Cents Dollars ($19,862.50) per month without
demand in advance on or before the first day of each month.
The TENANT shall pay all Rent when due and payable, without any setoff,
deduction or prior demand therefor whatsoever. Any payment by TENANT or
acceptance by LESSOR of a lesser amount than shall be due from TENANT to LESSOR
shall be treated as payment on account. The acceptance by LESSOR of a check for
a lesser amount with an endorsement or statement thereon, or upon any letter
accompanying such check, that such lesser amount is payment in full, shall be
given no effect, and LESSOR may accept such check without prejudice to any
other rights or remedies which LESSOR may have against TENANT.
The TENANT waives to the LESSOR the benefit of all laws now or hereafter in
force, in this State or elsewhere exempting property from liability for rent or
for debt, including but not limited to Act No. 20 approved April 6, 1951,
entitled "The Landlord And Tenant Act of 1951."
4. LATE CHARGES: Any provision of this lease to the contrary notwithstanding,
TENANT shall pay a late charge in the amount of Five percent (5%) of the
outstanding delinquent balance for any payment of Rent or Additional Rent not
made within ten (10) days after the due date thereof to cover the extra expense
involved in handling late payments. This charge is in addition to any other
rights or remedies of the LESSOR.
5. ADDITIONAL RENT: TENANT shall pay as additional rental for the PREMISES,
all gas and electricity used thereon, all garbage collection charges, all
sanitary sewer charges or assessments, and all water rents assessed on the
premises whether by meter rate or flat rate as due. On failure of TENANT to pay
the same when due, LESSOR shall enforce payment thereof in the same manner as
rent in arrears. *See Item #4 -- Addendum #1
6. CONDITION OF PREMISES; USE OF PREMISES: The TENANT hereby agrees to
maintain and keep the PREMISES during the term of this lease in good repair,
including but not limited to water pipes, their connection and all plumbing
fixtures. The TENANT also agrees to keep the PREMISES, including the common
areas of the building, property of the LESSOR appurtenant thereto, and
sidewalks free of rubbish, and in such condition as the Board of Health may
require. TENANT further agrees to keep all sidewalks free from snow and ice.
<PAGE> 2
All repairs, except those specific repairs set forth below which are the
responsibility of the LESSOR, shall be made by the TENANT at its own expense. If
the LESSOR pays for the same or any part thereof, it will be Additional Rent
payable forthwith.
TENANT further agrees not to make any alterations or improvements to the
PREMISES without the consent of LESSOR, or to remove any additions or
improvements whether made by the LESSOR or TENANT, nor to post bills or erect
billboards or signs, without the written consent of the LESSOR, under penalty of
instant forfeiture of this lease and the terms hereof.
The TENANT covenants to use the PREMISES only for OFFICE and to surrender
the same in as good order as they now are, reasonable wear and tear and
accidents by fire alone excepted.
The LESSOR shall be responsible for making only the following repairs:
(1) See Item #5 - Addendum #1
(2) structural repairs to exterior walls, structural columns and structural
floors which collectively enclose the PREMISES (excluding, however, storefronts)
and the roof over the PREMISES: provided TENANT shall give LESSOR notice of the
necessity for such repairs and that such repairs did not arise from nor were
they caused by the negligence or willful acts of TENANT, its agents,
concessionaires, officers, employees, licensees, invitees, or contractors.
7. ASSIGNMENTS AND SUB-LETTING: The TENANT hereby agrees not to assign this
lease voluntarily or involuntarily, nor to sub-let the premises or any part
thereof, without the written consent of the LESSOR, under penalty of instant
forfeiture of this lease. See Item #6 - Addendum #1
8. COMPLIANCE WITH PUBLIC LAWS: The TENANT further agrees to perform, fully
obey and comply with all ordinances, rules, regulations and laws of all public
authorities, boards and officers relating to said premises, or any part thereof,
for any purpose or use in violation of any law, statute or ordinance, whether
federal, state or municipal, during the term of said lease or any renewal
thereof.
9. TERMINATION; VACATING THE PREMISES: This lease shall terminate at the
end of the Term or any renewal thereof without the necessity of any notice from
either LESSOR or TENANT to terminate the same, and TENANT hereby expressly
waives all right to any notice which may be required under any laws now or
hereafter enacted and in force in Pennsylvania, including The Landlord And
Tenant Act of 1951, Act of April 6, 1951, as amended. TENANT covenants and
agrees to give up quiet and peaceful possession without further notice from said
Lessor or agent.
10. SECURITY DEPOSIT: The Tenant contemporaneously with the first Rent
installment, agrees to deposit with the LESSOR ONE HUNDRED THOUSAND DOLLARS
($100,000) which sum shall be held by the Lessor, without liability for
interest, as security for the full faith and performance by Tenant of all of the
terms, covenants and conditions of this lease by said Tenant to be kept and
performed during the Term or any renewal thereof. See Item #15 - Addendum #1
If Rent becomes overdue and is unpaid, or any other sum payable by the
TENANT to the LESSOR shall be overdue and unpaid, then the LESSOR may at its
discretion, appropriate and apply any portion of the deposit to the payment of
such sum. It is also within the LESSOR'S discretion to use such deposit to
compensate for loss or damage suffered or sustained by LESSOR due to a failure
of the TENANT to keep and perform any of the other terms, covenants and
conditions of this lease. Should the entire deposit, or any portion thereof, be
applied to LESSOR for the above stated purposes, then TENANT shall remit a
sufficient amount in cash to restore said security to the original sum
deposited. Failure to do so within 10 days of the LESSOR'S written demand will
result in breach.
Should TENANT comply with all of the terms of this lease, the deposit will
be returned to TENANT in full within 30 days of the expiration of the term.
11. DISTRAINT: As additional security, TENANT acknowledges the LESSOR'S
right to distrain, hold and sell with due legal notice all property on or to be
brought on the premises in order to satisfy unpaid Rent, expenses, and
Additional Rent. Any attempt by TENANT to remove said property while rents
remain overdue will be deemed fraudulent and will result in the acceleration of
rent, thereby causing all rent for the entire term to become due and payable.
All goods so removed may be followed for 30 days and seized for the collection
of unpaid amounts. See Item #8 - Addendum #1
12. DEFAULT; BREACH: It is further agreed that if the said TENANT shall
default in the payment of any installment of Rent or Additional Rent; or shall
remove or attempt to remove or express or declare an intention to remove any of
the goods and chattels from the premises, or should an execution be issued
against the TENANT, bankruptcy proceeding be begun by or against said TENANT, or
an assignment be made by TENANT for the benefit of creditors, or a receiver
appointed for TENANT, then and in such case the entire Rent for the balance of
the said Term shall become immediately due and payable. In case of such
assignment, bankruptcy proceedings, appointment of a receiver, or of a sale on
legal process of TENANT'S goods, LESSOR shall have the right to demand and
receive the Rent for the balance of the Term, or renewal term which shall be
first paid out of the proceeds of such assignment, bankruptcy or receiver's
proceedings or sale on legal process, any law, usage or custom to the contrary
notwithstanding. See Item #9 - Addendum #1
<PAGE> 3
15. LESSOR NOT LIABLE FOR INJURY OR DAMAGE TO PERSONS OR PROPERTY: The LESSOR
shall not be liable for any injury or damage to any person or to any property at
any time on said PREMISES or building from any cause whatever that may at any
time exist from the use or condition of the PREMISES or building from any cause,
during the Term or any renewal thereof. See Item #12 Addendum #1
16. INCREASED TAXES: In the event the taxes, including those imposed by any
municipality, County, or School District, levied and assessed against the real
estate of which the PREMISES are a part are increased beyond that imposed for
the year 1996, whether occasioned by an increase in millage or an increase in
assessment or otherwise, the TENANT shall pay as Additional Rent its
proportionate share of the increased taxes during the Term of this lease or any
renewal thereof.
17. EXCLUSIVITY OF LESSOR'S REMEDIES: The receipt of rent after default, or
after judgment or after execution, shall not deprive the LESSOR of other
actions against the Tenant for possession or for rent or for damages, and all
such remedies are non-exclusive and can be exercised concurrently or separately
as LESSOR desires. The LESSOR may use the remedies herein given or those
prescribed by law, or both, and the LESSOR or Agent may enter at will to inspect
the premises, to take or send persons on said property, seeking to rent or
purchase, make repairs or improvements and post notices of "To Let" and "For
Sale."
18. SUCCESSORS AND ASSIGNS: All rights and liabilities herein given to or
imposed upon either of the parties hereto, shall extend to the heirs, executors,
administrators, successors and assigns of such party.
19. CONDEMNATION CLAUSE: In the event that all or part of the PREMISES is taken
by eminent domain or conveyed in lieu thereof, if the leased PREMISES cannot
reasonably be used by TENANT for their intended purpose, then this lease will
terminate effective as of the date that the condemning authority shall take
possession of the same.
20. TENANT'S WAIVER OF DAMAGES AND EXCEPTIONS: TENANT hereby wives all claims
against LESSOR by reason of a taking of the PREMISES and assigns to LESSOR any
rights and damages to which TENANT might otherwise be entitled for condemnation
of the leasehold estate created by this lease; except that TENANT shall be
entitled to make any claim against the condemning authority for relocation
damages, damages for tenant improvements and any other payments lawfully due
tenants as such, without diminution of the sums due LESSOR.
21. FIRE CLAUSE: The TENANT hereby agrees to notify LESSOR of any damages to the
leased PREMISES by fire or other hazard and also of any dangerous or hazardous
condition within the leased PREMISES immediately upon the occurrence of such
fire or other hazard or discovery of such condition.
Upon occurrence of a fire, repairs shall be made by LESSOR as soon as
reasonably may be done unless the costs of repairing the PREMISES exceed 25% of
the replacement cost of the building in which case the LESSOR may, at its
option, terminate this lease by giving TENANT written notice of termination with
forty-five (45) days of the date of the occurrence.
<PAGE> 4
If the LESSOR does not terminate this Lease pursuant to the paragraph
above, then LESSOR has forty-five (45) days after the date of occurrence to
give written notice to TENANT setting forth its unqualified commitment to make
all necessary repairs or replacements, the projected date of commencement of
such repairs, and the LESSOR'S best good faith estimate of the date of
completion of the same.
If the LESSOR fails to give such notice, or if the date of completion is
more than 90 days after the date of occurrence, then the TENANT may, at its
option, terminate this lease and the LESSOR will be obliged to refund to the
TENANT any rent allocable to the period subsequent to the date of the fire.
22. WAIVER OF NONPERFORMANCE: Failure of the LESSOR to exercise any of its
rights under this lease upon nonperformance by the TENANT of any condition,
covenant or provision herein contained shall not be considered a waiver
thereof, nor shall any waiver of nonperformance of any such condition, covenant
or provision by the LESSOR be construed as a waiver of the rights of the LESSOR
as to any subsequent defective performance or nonperformance hereunder.
23. PAROL EVIDENCE CLAUSE: This instrument constitutes the final, fully
integrated expression of the agreement between the LESSOR and the TENANT. As
such, it cannot be modified or amended in any way except in writing signed by
the LESSOR and TENANT.
24. SUBORDINATION. This lease is subordinate to the lien of all present or
future mortgages which affect the leased PREMISES and to all renewals,
modifications, replacements and extensions thereof. This clause shall be
self-operative, but in any event TENANT hereby agrees to execute promptly and
deliver any estoppel certificate or other assurances that LESSOR may request in
furtherance hereof; provided, however, that in the event of foreclosure of any
such mortgage or modification TENANT shall attorn to the purchaser in
foreclosure or who shall be named in any deed in lieu of foreclosure and shall
recognize such purchaser as the LESSOR under this lease; and provided, further,
that so long as TENANT is not in default hereunder, this lease shall remain in
full force and effect.
25. SEVERABILITY CLAUSE. If any term, covenant, condition, or provision of
this lease is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated.
26. PENNSYLVANIA LAW TO APPLY. This lease shall be construed under and in
accordance with the laws of the Commonwealth of Pennsylvania.
In Witness Whereof, the undersigned LESSOR and TENANT hereto execute this
lease as of the day and date first above written.
WITNESS/ATTEST
[sig] SIBRO ENTERPRISES (LESSOR)
- ------------------------------- -----------------
By [sig]
- ------------------------------- ----------------------------
Title [illegible]
-------------------------
[sig] Jeff Pepper for (LESSEE)
- ------------------------------- -----------------
SERVICEWARE, INC. (LESSEE)
- ------------------------------- -----------------
By Jeff Pepper
- ------------------------------- ----------------------------
Title President/CEO
-------------------------
LEASE
From
To
Rent $ per
Payable
Expires
Assigns to
Renewed to
Renewed to
Renewed to
=======================
- ---------------------------------------------
P. O NALY CO. 427 FOURTH AVE., PGH., PA 15219
<PAGE> 5
May 31, 1995
ServiceWare, Inc.
Lease
ADDENDUM #1
Item #1 - SIBRO intends to complete construction of Phase I Building by
April 1, 1996, however, acknowledges ServiceWare's desire to
occupy as soon as possible and will put forth every effort to
complete Phase I Building by December 31, 1995. In turn,
ServiceWare agrees that the commencement date of the "Lease" will
begin within 30 days of notification that space is ready for
occupancy.
Item #2 - SIBRO Enterprises ("SIBRO") will construct a three story office
building located at the corner of Allegheny Avenue and Washington
Avenue substantially in accord with the portion of the attached
diagram (Exhibit "A") labeled Phase I (the Phase I Building). The
Phase I Building will have a total gross area of approximately
19,000 square feet (three floors of approximately 6,480 square
feet per floor).
ServiceWare, Inc. ("ServiceWare") will lease the entire building
exclusive of approximately 2,400 square feet of the first floor
reserved for a restaurant to be located in the north end of the
building and adjacent space of 1980 square feet as shown on
Exhibit "A".
ServiceWare may elect to lease the approximate 4080 square feet
of commercial space on first floor of Phase I Building adjacent
to the lobby for a period of ninety (90) days from the date of
the execution of the Lease at $13.00 per square foot.
Item #3 - Rent for leased space in Phase I Building shall be as follows:
(Based on gross area of 18.620 S.F.)
ANNUAL MONTHLY SF/GA
------ ------- -----
1. 4/1/96 Through 3/31/98 177,060 14,755.00 13.00
2. 4/1/98 Through 3/31/001 183,870 15,322.50 13.50
3. 4/1/2001 Through 3/31/006 211,110 17,592.50 13.50
4. 4/1/2006 Through 3/31/011 238,350 19,862.50 17.50
(Item #4 is in reference to Tenant's 5 year option)
<PAGE> 6
Base Building Standards Schedule and Specifications shall meet
with the approval of ServiceWare. See Exhibit "B" attached.
Item #4 - Section 5 - Lessor agrees to provide separate meters for gas,
water and electricity for each Tenant (exclusive of any approved
sub-tenant of ServiceWare).
Item #5 - Section 6 Para. 1 - Lessor shall be responsible for the
replacement of carpeting, plumbing, heating, ventilating and air
conditioning equipment servicing the premises if and to the
extent installed by the Lessor, and replacement is caused by
normal wear and tear and not caused by the negligence or willfull
acts of the Tenant, its Agents, Consessionaires, Officers,
Employees, Licensees, Invitees or Contractors.
Item #6 - Section 7 - Lessor Agrees that consent to assign or sub-let the
premises shall not be unreasonably withheld.
Item #7 - Section 10 - Lessor agrees that intent of this Section excludes
normal wear and tear relative to this section only.
Item #8 - Section 11 - Relative to this section only Lessor and Tenant
mutually agree that "entire term" be limited to the remaining
term of the Lease or five (5) years (whichever is less, and that
Lessor may follow all goods removed for a period of ninety (90)
days in lieu or thirty (30) days as stated.
Item #9 - Section 12 - Relative to this section only, Lessor and Tenant
mutually agree that a grace period of thirty (30) days shall be
granted by the Lessor to the Tenant relative to only payment of
any installment of rent or additional rent due. All other
conditions of this paragraph shall remain in effect.
Item #10 - Section 13 - DELETED
Item #11 - Section 14 - DELETED
Item #12 - Add "except for the Lessors gross negligence or willfull
misconduct".
<PAGE> 7
Item #13 - Lessor agrees to permit Tenant to run computer network cable at
Tenants expense. Lessor further agrees to furnish approximately sixty
(60) receptacles that will accomodate the cable and provide adequate
space in wiring raceways to receive the cable. Tenant agrees to
furnish necessary information to Lessor on a timely basis in order TO
NOT cause delays in construction.
Item #14 - Lessor and Tenant mutually agree and understand that rents as stated
in Item #3 of Addendum #1 are based on Base Building Standards
(Exhibit "B") and if Tenant for any reason elects to upgrade these
standards it shall be done at Tenant's expense. It is also agreed and
understood that Tenant shall make decisions on any upgrades in and
expeditious manner in order TO NOT cause delays in design and or
construction.
Item #15 - As a form of guaranteeing the Lease, Tenant shall provide the
following to the Lessor:
1) ServiceWare, within 30 days of the signing of the Lease, agrees
to deposit with SIBRO One Hundred Thousand Dollars ($100,000.00)
which sum shall be held by SIBRO (without liability for
interest) for a period of one year from date of occupancy of
building by ServiceWare. The security deposit will be reduced
to Fifty Thousand Dollars ($50,000.00) on the first year
anniversary date of occupancy and shall be held by SIBRO
(without liability for interest) for the balance of the term of
the Lease.
2a) ServiceWare, at the signing of the Lease, agrees to provide
SIBRO with 10,000 stock options for ServiceWare's common stock
at the option price of $1.42. Options shall be exercisable for a
period of five (5) years.
2b) As an additional incentive to SIBRO to expedite the occupancy
date of the building ServiceWare agrees to offer SIBRO
additional stock options at $1.42 in accordance with the
following:
1) Additional 10,000 options if occupancy is available within
seven (7) months of signing of the Lease and receipt of
$100,000.00 security deposit.
<PAGE> 8
2) Additional 5,000 options if occupancy is available within
nine (9) months of signing of the Lease and receipt of
$100,000.00 security deposit.
3. ServiceWare also agrees to fully cooperate with SIBRO with the
procurement of a Payment Bond. Such cooperation shall include
but not limited to furnishing ServiceWare's current financial
information as may be required by the Bonding Company. Cost of
such Payment Bond shall be at SIBRO's expense.
Item #16a - All repairs and maintenance, shall be made by ServiceWare at its own
expense except the following:
1) Structural repairs to exterior walls
2) Structural repairs to structural columns
3) Structural repairs to structural floors
4) Repairs to roof
Item #16b - SIBRO agrees to assist ServiceWare in the coordination of all
maintenance and repairs as may be required. SIBRO's assistance shall
include recommendation of various maintenance contractors,
soliciting of bids, review and awarding of such bids, etc.
ServiceWare shall make all final decisions regarding the awarding of
such bids, etc.
Item #17 - If fire or casualty render the premises untentable through no fault
of the tenant, there shall be a pro-rata reduction in the rent for
the time the premises (or part thereof) is untentable.
Item #18a - ServiceWare will have first option to lease any and all future Phase
II and Phase III space as indicated on Exhibit "A". Rents per Square
Foot for Phase II and Phase III shall not exceed an escalation
figure of six percent (6%) per year over rents as established in
Item #3 of this Addendum.
Item #18b - SIBRO agrees to construct Phase II Building on a timely basis based
on the following conditions:
1) Lease for Phase I is in full effect and ServiceWare is in good
standing with the terms and conditions of Phase I Lease.
<PAGE> 9
2) ServiceWare occupies all available space in Phase I Building.
3) ServiceWare's written commitment to leasing a minimum of 9000
square feet of second and third floors of Phase II Building as
evidenced by an executed Lease that is mutually agreeable to both
parties.
Item #18c - SIBRO agrees to construct Phase III Building on a timely basis
based on the following conditions:
1) Lease for Phase I and Phase II are in full effect and
ServiceWare is in good standing with the terms and conditions of
Phase I and Phase II Leases.
2) ServiceWare occupies all available space in Phase I and Phase II
Buildings.
3) ServiceWare's written commitment to leasing a minimum of
sixty-seven percent (67%) of available footage of Phase III
Building as evidenced by an executed Lease that is mutually
agreeable to both parties.
Item #19 - ServiceWare agrees to lease office space they presently occupy in
Allegheny Plaza I at the rental rate as set forth in ServiceWare's
present lease until such time Phase I Building is available for
occupancy at which time ServiceWare will be released from their
lease at Allegheny Plaza I at no cost to ServiceWare. It is further
agreed and understood that ServiceWare will have first option at any
additional space that may become available in Allegheny Plaza I for
$12.00 per square foot. ServiceWare agrees to notify Landlord of
their decision to exercise their option within seven days of being
notified of upcoming available space.
Item #20 - SIBRO agrees to furnish ServiceWare with one parking space per 250
square feet of net useable leased space for Phases I and II.
Item #21 - ServiceWare shall furnish a Corporate Resolution to SIBRO empowering
their President, Mr. Jeff Pepper, to enter into a long term lease.
<PAGE> 10
Item #22a -- Construction of Phase I Building will begin within three (3) days
of executed lease and approved Architectural Drawings.
Item #23 -- ServiceWare shall be afforded the opportunity to review
preliminary architectural designs and SIBRO agrees to fairly
consider ServiceWares input as long as such consideration are
reasonable and do not cause financial impact on the cost of the
building or delays in the completion date.
Item #24 -- SIBRO agrees that if ServiceWare does not take entire space on
second or third floor of Phase II and additional tenants (other
than approved sublets or assigns of ServiceWare) occupy a portion
of the space, that the rent for the common areas as well as all
utilities shall be pro-rated for such tenants directly
proportionate to the square footage leased.
Tenants on first floor shall be excluded from such pro-ration if
they have independent facilities (toilets, etc.) and are
separately metered.
SIGNED: ACCEPTED:
/s/ Vincent J. Siciliano /s/ Jeff Pepper
- ------------------------------------ ----------------------------------------
Vincent J. Siciliano Jeff Pepper
Partner, SIBRO Enterprises President, ServiceWare, Inc.
6/3/95 6/3/95
- ------------------------------------ ----------------------------------------
Date Date
CORPORATE SEAL
<PAGE> 11
EXHIBIT A
[FLOOR PLAN]
<PAGE> 12
EXHIBIT "B"
Lessor's Work: The Building Standard interior finishes shall be provided by the
Lessor as follows:
Unit Allowances:
1) Partitions - Interior Partition - 40 L.F. per 1000 S.F.
of useable space
Demising Partition - As required
2) Corridor - Suite Entrance Door - 1 Per Floor
3) Interior Doors - 1 Per 25 L.F. of interior
partition
4) Carpet - All Floors
5) Acoustical Tile Ceiling - All Ceilings
6) Flourescent Light Fixture - 12 per 1000 S.F. of
useable space
7) Wall Light Switch - 4 per 1000 S.F. of
useable space
8) Wall Duplex Electrical Outlet - 7 per 1000 S.F. of
useable space
9) Air Conditioning Zone - Building Standards
NOTES:
1) Partitions Ceiling height drywall system painted in Building
Standard colors.
2) Doors Prefinished solid core 3'-0" x 6'-8"
3) Door Hardware a) Interior - Building Standard latch sets
b) Corridor - Building Standard with one lock set,
exposed closure and two sets of keys.
4) Ceilings Suspended acoustical tile 2' x 4' grid lay in type.
5) Floors Loading - 70 PSF (including partitions) live load
6) Floor Covering Building Standard carpet in all areas.
(22 ounce 15 yr. warranty).
<PAGE> 13
EXHIBIT "B"
7) Lighting Furnish and install Building Standard 2' x 4' recessed
troffer fixtures with parabolic lenses.
8) Electric Furnish and install duplex electric receptacles.
Dedicated and special lines at tenants expense.
9) Telephone Tenant to furnish and install.
10) Electric Service The service capacity of electricity at electric closets
shall be 1.25 watts average per square foot.
11) H.V.A.C. For normal office useage, furnish and install the
complete heating, ventilating and air conditioning
system.
a) Design Criteria - Roof U-Valve .08
Wall U-Valve .20
b) Design Temperatures:
1) Outside Winter Temp. @ 0 Degrees:
75 Degrees
2) Outside Summer Temp. @ 75/55 Degrees:
91/73 Degrees
Additional work shall be at tenants expense.
1) Lightning Protection - To be determined (negotiable).
2) Operable Windows - Additional cost over fixed to be determined
(negotiable).
APPROVAL
/s/ JEFF PEPPER
- ---------------------------------
ServiceWare, Inc.
<PAGE> 14
May 31, 1995
ADDENDUM #2
Item #1 If Phase I Building is not ready for occupancy within thirteen (13)
months after signing of Lease and receipt of $100,000.00 security
deposit through the gross negligence of SIBRO, SIBRO agrees to
reimburse ServiceWare any rents paid on ServiceWare's then existing
facilities until such time Phase I Building is ready for occupancy.
Item #2 After the seventh anniversary date of Phase I Lease, ServiceWare may
elect to terminate the Lease for Phase I based on the following
conditions:
a) Lease is in full effect and ServiceWare is in good standing with
the terms and conditions of the Lease.
b) One Hundred Eighty (180) days written notice of intent to
terminate.
c) Certified check in the amount equal to six months current rent made
payable to SIBRO Enterprises to accompany written notice.
SIGNED: ACCEPTED:
/s/ Vincent J. Siciliano /s/ Jeff Pepper
- ---------------------------------- ----------------------------------
Vincent J. Siciliano Jeff Pepper
Partner, SIBRO Enterprises President, ServiceWare, Inc.
6/3/95 6/3/95
- ---------------------------------- ----------------------------------
Date Date
CORPORATE SEAL
<PAGE> 15
May 31, 1995
ServiceWare, Inc.
Lease
ADDENDUM #1
Item #1 - SIBRO intends to complete construction of Phase I Building by
April 1, 1996, however, acknowledges ServiceWare's desire to
occupy as soon as possible and will put forth every effort to
complete Phase I Building by December 31, 1995. In turn,
ServiceWare agrees that the commencement date of the "Lease" will
begin within 30 days of notification that space is ready for
occupancy.
Item #2 - SIBRO Enterprises ("SIBRO") will construct a three story office
building located at the corner of Allegheny Avenue and Washington
Avenue substantially in accord with the portion of the attached
diagram (Exhibit "A") labeled Phase I (the Phase I Building). The
Phase I Building will have a total gross area of approximately
18,000 square feet (three floors of approximately 6,000 square
feet per floor).
ServiceWare, Inc. ("ServiceWare") will lease the entire building
exclusive of approximately 2,400 square feet of the first floor
reserved for a restaurant to be located in the north end of the
building and adjacent space of 1980 square feet as shown on
Exhibit "A".
ServiceWare may elect to lease the approximate 1980 square feet
of commercial space on first floor of Phase I Building adjacent
to the lobby for a period of ninety (90) days from the date of
the execution of the Lease at $13.00 per square foot.
Item #3 - Rent for leased space in Phase I Building shall be as follows:
(Based on gross area of 13.620 S.F.)
ANNUAL MONTHLY SF/GA
------ ------- -----
1. 4/1/96 Through 3/31/98 177,060 14,755.00 13.00
2. 4/1/98 Through 3/31/001 183,870 15,322.50 13.50
3. 4/1/2001 Through 3/31/006 211,110 17,592.50 13.50
4. 4/1/2006 Through 3/31/011 238,350 19,862.50 17.50
(Item #4 is in reference to Tenant's 5 year option)
<PAGE> 16
Base Building Standards Schedule and Specifications shall meet with
the approval of ServiceWare. See Exhibit "B" attached.
Item #4 -- Section 5 -- Lessor agrees to provide separate meters for gas,
water and electricity for each Tenant (exclusive of any approved
sub-tenant of ServiceWare).
Item #5 -- Section 6 Para. 1 -- Lessor shall be responsible for the
replacement of carpeting, plumbing, heating, ventilating and air
conditioning equipment servicing the premises if and to the extent
installed by the Lessor, and replacement is caused by normal wear
and tear and not caused by the negligence or willfull acts of the
Tenant, its Agents, Consessionaires, Officers, Employees,
Licensees, Invitees or Contractors.
Item #6 -- Section 7 -- Lessor agrees that consent to assign or sub-let the
premises shall not be unreasonably withheld.
Item #7 -- Section 10 -- Lessor agrees that intent of this Section excludes
normal wear and tear relative to this section only.
Item #8 -- Section 11 -- Relative to this section only Lessor and Tenant
mutually agree that "entire term" be limited to the remaining term
of the Lease or five (5) years (whichever is less) and that Lessor
may follow all goods removed for a period of ninety (90) days in
lieu of thirty (30) days as stated.
Item #9 -- Section 12 -- Relative to this section only, Lessor and Tenant
mutually agree that a grace period of thirty (30) days shall be
granted by the Lessor to the Tenant relative to only payment of any
installment of rent or additional rent due. All other conditions of
this paragraph shall remain in effect.
Item #10 -- Section 13 -- DELETED
Item #11 -- Section 14 -- DELETED
Item #12 -- Add "except for the Lessors gross negligence or willfull
misconduct".
<PAGE> 17
Item #13 - Lessor agrees to permit Tenant to run computer network cable at
Tenants expense. Lessor further agrees to furnish approximately
sixty (60) receptacles that will accommodate the cable and provide
adequate space in wiring raceways to receive the cable. Tenant
agrees to furnish necessary information to Lessor on a timely basis
in order TO NOT cause delays in construction.
Item #14 - Lessor and Tenant mutually agree and understand that rents as stated
in Item #3 of Addendum #1 are based on Base Building Standards
(Exhibit "B") and if Tenant for any reason elects to upgrade these
standards it shall be done at Tenant's expense. It is also agreed
and understood that Tenant shall make decisions on any upgrades in
and expeditious manner in order TO NOT cause delays in design and or
construction.
Item #15 - As a form of guaranteeing the Lease, Tenant shall provide the
following to the Lessor:
1) ServiceWare, within 30 days of the signing of the Lease, agrees
to deposit with SIBRO One Hundred Thousand Dollars ($100,000.00)
which sum shall be held by SIBRO (without liability for interest)
for a period of one year from date of occupancy of building by
ServiceWare. The security deposit will be reduced to Fifty
Thousand Dollars ($50,000.00) on the first year anniversary date
of occupancy and shall be held by SIBRO (without liability for
interest) for the balance of the term of the Lease.
2a) ServiceWare, at the signing of the Lease, agrees to provide
SIBRO with 10,000 stock options for ServiceWare's common stock
at the option price of $1.42. Options shall be exercisable for a
period of five (5) years.
2b) As an additional incentive to SIBRO to expedite the occupancy
date of the building, ServiceWare agrees to offer SIBRO
additional stock options at $1.42 in accordance with the
following:
i) Additional 10,000 options if occupancy is available within
seven (7) months of signing of the Lease and receipt of
$100,000.00 security deposit.
<PAGE> 18
2) Additional 5,000 options if occupancy is available within
nine (9) months of signing of the Lease and receipt of
$100,000.00 security deposit.
3. ServiceWare also agrees to fully cooperate with SIBRO with the
procurement of a Payment Bond. Such cooperation shall include but
not limited to furnishing ServiceWare's current financial
information as may be required by the Bonding Company. Cost of
such Payment Bond shall be at SIBRO's expense.
Item #16a - All repairs and maintenance, shall be made by ServiceWare at its
own expense except the following:
1) Structural repairs to exterior walls
2) Structural repairs to structural columns
3) Structural repairs to structural floors
4) Repairs to roof
Item #16b - SIBRO agrees to assist ServiceWare in the coordination of all
maintenance and repairs as may be required. SIBRO's assistance
shall include recommendation of various maintenance contractors,
soliciting of bids, review and awarding of such bids, etc.
ServiceWare shall make all final decisions regarding the awarding
of such bids, etc.
Item #17 - If fire or casualty render the premises untentable through no
fault of the tenant, there shall be a pro-rata reduction in the
rent for the time the premises (or part thereof) is untentable.
Item #18a - ServiceWare will have first option to lease any and all future
Phase II and Phase III space as indicated on Exhibit "A". Rents
per Square Foot for Phase II and Phase III shall not exceed an
escalation figure of six percent (6%) per year over rents as
established in Item #3 of this Addendum.
Item #18b - SIBRO agrees to construct Phase II Building on a timely basis
based on the following conditions:
1) Lease for Phase I is in full effect and ServiceWare is in good
standing with the terms and conditions of Phase I Lease.
<PAGE> 19
2) ServiceWare occupies all available space in Phase I
Building.
3) ServiceWare's written commitment to leasing a minium of 9000
square feet of second and third floors of Phase II Building
as evidenced by an executed Lease that is mutually agreeable
to both parties.
Item #18c - SIBRO agrees to construct Phase III Building on a timely basis
based on the following conditions:
1) Lease for Phase I and Phase II are in full effect and
ServiceWare is in good standing with the terms and
conditions of Phase I and Phase II Leases.
2) ServiceWare occupies all available space in Phase I and
Phase II Buildings.
3) ServiceWare's written commitment to leasing a minimum of
sixty-seven percent (67%) of available footage of Phase III
Building as evidenced by an executed Lease that is mutually
agreeable to both parties.
Item #19 - ServiceWare agrees to lease office space they presently occupy in
Allegheny Plaza I at the rental rate as set forth in
ServiceWare's present lease until such time Phase I Building is
available for occupancy at which time ServiceWare will be
released from their lease at Allegheny Plaza I at no cost to
ServiceWare. It is further agreed and understood that ServiceWare
will have first option at any additional space that may become
available in Allegheny Plaza I for $12.00 per square foot.
ServiceWare agrees to notify Landlord of their decision to
exercise their option within seven days of being notified of
upcoming available space.
Item #20 - SIBRO agrees to furnish ServiceWare with one parking space per
250 square feet of net useable leased space for Phases I and II.
Item #21 - ServiceWare shall furnish a Corporate Resolution to SIBRO
empowering their President, Mr. Jeff Pepper, to enter into a long
term lease.
<PAGE> 20
Item #22a - Construction of Phase 1 Building will begin within three (3) days
of executed lease and approved Architectural Drawings.
Item #23 - ServiceWare shall be afforded the opportunity to review preliminary
architectural designs and SIBRO agrees to fairly consider
ServiceWares input as long as such considerations are reasonable
and do not cause financial impact on the cost of the building or
delays in the completion date.
Item #24 - SIBRO agrees that if ServiceWare does not take entire space on
second or third floor of Phase II and additional tenants (other
than approved sublets or assigns of ServiceWare) occupy a portion
of the space, that the rent for the common areas as well as all
utilities shall be pro-rated for such tenants directly
proportionate to the square footage leased.
Tenants on first floor shall be excluded form such pro-ration if
they have independent facilities (toilets, etc.) and are separately
metered.
SIGNED: ACCEPTED:
/s/ Vincent J. Siciliano /s/ Jeff Pepper
- -------------------------------- -------------------------------
Vincent J. Siciliano Jeff Pepper
Partner, SIBRO Enterprises President, ServiceWare, Inc.
6/3/95 6/3/95
- -------------------------------- --------------------------------
Date Date
CORPORATE SEAL
<PAGE> 21
EXHIBIT A
[FLOOR PLAN]
<PAGE> 22
EXHIBIT "B"
Lessor's Work: The Building Standard interior finishes shall be provided by
the Lessor as follows:
Unit Allowances:
1) Partitions - Interior Partition - 40 L.F. per 100 S.F. of useable space
Demising Partition - As required
2) Corridor - Suite Entrance Door - 1 Per Floor
3) Interior Doors - 1 Per 25 L.F. of interior partition
4) Carpet - All Floors
5) Acoustical Tile Ceiling - All Ceilings
6) Flourescent Light Fixture - 12 per 1000 S.F. of usable space
7) Wall Light Switch - 4 per 1000 S.F. of usable space
8) Wall Duplex Electrical Outlet - 7 per 1000 S.F. of useable space
9) Air Conditioning Zone - Building Standards
NOTES:
1) Partitions Ceiling height drywall system painted in Building
Standard colors.
2) Doors Prefinished solid core 3'-0" x 6'-8"
3) Door Hardware a) Interior - Building Standard latch sets
b) Corridor - Building Standard with one lock set,
exposed closure and two sets of keys.
4) Ceilings Suspended acoustical tile 2' x 4' grid lay in type.
5) Floors Loading - 70 PSF (including partitions) live load
6) Floor Covering Building Standard carpet in all areas. (22 ounce 15 yr.
warranty).
<PAGE> 23
EXHIBIT "B"
7) Lighting Furnish and install Building Standard 2' X 4' recessed
troffer fixtures with parabolic lenses.
8) Electric Furnish and install duplex electric receptacles.
Dedicated and special lines at tenants expense.
9) Telephone Tenant to furnish and install.
10) Electrical Service The service capacity of electricity at electric closets
shall be 1.25 watts average per square foot.
11) H.V.A.C. For normal office useage, furnish and install the
complete heating, ventilating and air conditioning
system.
a) Design Criteria - Roof U-Valve .08
Wall U-Valve .20
b) Design Temperatures:
1) Outside Winter Temp. @ 0 Degrees:
75 Degrees
2) Outside Summer Temp. @ 75/55 Degrees:
91/73 Degrees
Additional work shall be at tenants expense.
1) Lightning Protection - To be determined (negotiable).
2) Operable Windows - Additional cost over fixed to be determined
(negotiable).
APPROVAL
/s/ Jeff Pepper
- ----------------------
ServiceWare, Inc.
<PAGE> 24
May 31, 1995
ADDENDUM #2
Item #1 If Phase I Building is not ready for occupancy within thirteen (13)
months after signing of Lease and receipt of $100,000.00 security
deposit through the gross negligence of SIBRO, SIBRO agrees to
reimburse ServiceWare any rents paid on ServiceWare's then existing
facility until such time Phase I Building is ready for occupancy.
Item #2 After the seventh anniversary date of Phase I Lease, ServiceWare may
elect to terminate the Lease for Phase I based on the following
conditions:
a) Lease is in full effect and ServiceWare is in good standing with
the terms and conditions of the Lease.
b) One Hundred Eighty (180) days written notice of intent to
terminate.
c) Certified check in the amount equal to six months current rent
made payable to SIBRO Enterprises to accompany written notice.
SIGNED: ACCEPTED:
/s/ Vincent J. Siciliano /s/ Jeff Pepper
________________________________ ____________________________
Vincent J. Siciliano Jeff Pepper
Partner, SIBRO Enterprises President, ServiceWare, Inc.
6/3/95 6/3/95
________________________________ ____________________________
Date Date
CORPORATE SEAL
<PAGE> 25
No. 36 C COMMERCIAL LEASE
(C) 1988 P.O. Naly Co. Fgh, PA 15219
COMMERCIAL LEASE
MADE this 1st day of August 1996, by and between
hereinafter called "LESSOR" and
hereinafter called "TENANT."
1. DEMISE AND TERM: LESSOR, hereby leases to TENANT for the term of NINE YEARS &
NINE MONTHS on the 1st day of August, 1996, and ending the 31st day of MARCH
2006 (the "TERM") the following described premises in its present condition:
INDOOR PARKING GARAGE - PHASE I. LOCATED AT THE CORNER OF ALLEGHENY AVE AND
WASHINGTON AVE WITH PROVISIONS FOR TWO (2) HANDICAP SPACES AND AN ADDITIONAL
SIXTEEN (16) PARKING SPACES FOR A TOTAL OF EIGHTEEN PARKING SPACES.
(the "PREMISES"), TENANT also has a nonexclusive license for the benefit of
TENANT, its employees, agents and invitees for access to and from the leased
premises through the building and over property of LESSOR appurtenant thereto,
and to use those parts of the building designated by LESSOR for use by TENANTS
including but not limited to toilet rooms, elevators and unrestricted parking
areas, if any.
2. RENEWAL: TENANT, if not in default under this lease, may extend the Term of
this lease by written notice to the LESSOR received no later than three months
before the expiration of the previous Term, for an additional period of FIVE
year(s) at the renewal Rent stated below, under the terms of this same lease.
3. RENT: The TENANT covenants to pay as Rent the total sum of TWO HUNDRED AND
THIRTY-TWO THOUSAND Dollars ($232,000.00), payable in installments of TWO
THOUSAND Dollars $(2,000.00) per month, in advance without demand on or before
the first day of each month, at the office of the LESSOR. In the event of
renewal of this lease, monthly rent for FIVE year(s) will be ONE HUNDRED AND
EIGHTY THOUSAND Dollars ($180,000.00) annually, payable in installments of THREE
THOUSAND Dollars ($3,000.00) per month without demand in advance on or before
the first day of each month.
The TENANT shall pay all Rent when due and payable, without any setoff,
deduction or prior demand therefor whatsoever. Any payment by TENANT or
acceptance by LESSOR of a lessor amount than shall be due from TENANT to LESSOR
shall be treated as payment on account. The acceptance by LESSOR of a check for
a lesser amount with an endorsement or statement thereon, or upon any letter
accompanying such check, that such lesser amount is payment in full, shall be
given no effect, and LESSOR may accept such check without prejudice to any other
rights or remedies which LESSOR may have against TENANT.
The TENANT waives to the LESSOR the benefit of all laws now or hereafter in
force, in this State or elsewhere exempting property from liability for rent or
for debt, including but not limited to Act No. 20 approved April 6, 1951,
entitled "The Landlord And Tenant Act of 1951."
4. LATE CHARGES: Any provision of this lease to the contrary notwithstanding,
TENANT shall pay a late charge in the amount of FIVE percent (.5%) of the
outstanding delinquent balance for any payment of Rent or Additional Rent not
made within ten (10) days after the due date thereof to cover the extra expense
involved in handling late payments. This charge is in addition to any other
rights or remedies of the LESSOR.
5. ADDITIONAL RENT: TENANT shall pay as additional rental for the PREMISES, all
gas and electricity used thereon, all garbage collection charges, all sanitary
sewer charges or assessments, and all water rents assessed on the premises
whether by meter rate or flat rate as due. On failure of TENANT to pay the same
when due, LESSOR shall enforce payment thereof in the same manner as rent in
arrears. ALL UTILITIES TO BE PAID BY LESSEE.
6. CONDITION OF PREMISES; USE OF PREMISES: The TENANT hereby agrees to maintain
and keep the PREMISES during the term of this lease in good repair, including
but not limited to water pipes, their connections and all plumbing fixtures. The
TENANT also agrees to keep the PREMISES, including the common areas of the
building, property of the LESSOR appurtenant thereto, and sidewalks free of
rubbish, and in such condition as the Board of Health may require. TENANT
further agrees to keep all sidewalks free from snow and ice.
<PAGE> 26
All repairs, except those specific repairs set forth below which are the
responsibility of the LESSOR, shall be made by the TENANT at its own
expense. If the LESSOR pays for the same or any part thereof, it will be
Additional Rent payable forthwith.
TENANT further agrees not to make any alterations or improvements to the
PREMISES without the consent of LESSOR, or to remove any additions or
improvements whether made by the LESSOR or TENANT, nor to post bills or erect
billboards or signs, without the written consent of the LESSOR, under penalty
of instant forfeiture of the lease and the terms hereof.
The TENANT convenants to use the PREMISES only for parking of vehicles and
to surrender the same in as good order as they now are, reasonable wear and
tear and accidents by fire alone expected.
The LESSOR shall be responsible for making only the following repairs:
(1) repairs to any sprinkler system or heating, ventilating or
air-conditioning system serving the PREMISES, by LESSEE.
(2) structural repairs to exterior walls, structural columns and
structural floors which collectively enclose the PREMISES (excluding, however,
storefronts) and the roof over the PREMISES; provided TENANT shall give LESSOR
notice of the necessity for such repairs and that such repairs did not arise
from not were they caused by the negligence or willfull acts of TENANT, its
agents, concessionaires, officers, employees, licensees, invitees, or
contractors.
7. ASSIGNMENTS AND SUB-LETTING: The TENANT hereby agrees not to assign this
lease voluntarily or involuntarily, not to sub-let the premises or any part
thereof, without the written consent of the LESSOR, under penalty of instant
forfeiture of this lease.
8. COMPLIANCE WITH PUBLIC LAWS: The TENANT further agrees to perform, fully
obey and comply with all ordinances, rules, regulations and laws of all public
authorities, beards and officers relating to said premises, or any part
thereof, for any purpose or use in violation of any law, statute or ordinance,
whether federal, state or municipal, during the term of said lease or any
renewal thereof.
9. TERMINATION: VACATING THE PREMISES: This lease shall terminate at the end of
the Term or any renewal thereof without the necessity of any notice from either
LESSOR or TENANT to terminate the same, and TENANT hereby expressly waives all
right to any notice which may be required under any laws now or hereinafter
enacted and in force in Pennsylvania, including The Landlord And Tenant Act of
1961, Act of April 6, 1951, as amended. TENANT convenants and agrees to give up
quiet and peaceful possession without further notice from said Lessor or Agent.
10. SECURITY DEPOSIT: The TENANT, contemporaneously with the first Rent
installment, agrees to deposit with the LESSOR -0- Dollars ($-0-) which sum
shall be held by the Lessor, without liability for interest, as security for
the full faith and performance by Tenant of all of the terms, covenants and
conditions of this lease by said Tenant to be kept and performed during the
Term or any renewal thereof.
If Rent becomes overdue and is unpaid, or any other sum payable by the
TENANT to the LESSOR shall be overdue and unpaid, then the LESSOR may at its
discretion, appropriate and apply any portion of the deposit to the payment of
such sum. It is also within the LESSOR'S discretion to use such deposit to
compensate for loss or damage suffered or sustained by LESSOR due to a failure
of the TENANT to keep and perform any of the other terms, covenants and
conditions of this lease. Should the entire deposit, or any portion thereof, be
applied by LESSOR for the above stated purposes, then TENANT shall remit a
sufficient amount in cash to restore said security to the original sum
deposited. Failure to do so within 10 days of the LESSOR'S written demand will
result in breach.
Should TENANT comply with all of the terms of this lease, the deposit will
be returned to TENANT in full within 30 days of the expiration of the term.
11. DISTRAINT: As additional security, TENANT acknowledges the LESSOR'S right
to distrain, hold and sell with due legal notice all property on or to be
brought on the premises in order to satisfy unpaid Rent, expenses, and
Additional Rent. Any attempt by TENANT to remove said property while rents
remain overdue will be deemed fraudulent and will result in the acceleration of
rent, thereby causing all rent for the entire term to become due and payable.
All goods so removed may be followed for 80 days and seized for the collection
of unpaid amounts.
12. DEFAULT: BREACH: It is further agreed that if the said TENANT shall default
in the payment of any installment of Rent or Additional Rent; or shall remove
or attempt or express or declare an intention to remove any of the goods and
chattals from the premises, or should an execution be issued against the
TENANT, bankruptcy proceeding be begun by or against said TENANT, or an
assignment be made by TENANT for the benefit of creditors, or a receiver
appointed for TENANT, then and in such case the entire Rent to the balance of
the said Term shall become immediately due and payable. In case of such
assignment, bankruptcy proceedings, appointment of a receiver, or of a sale on
legal process of TENANT'S goods, LESSOR shall have the right to demand and
receive the Rent for the balance of the Term, or renewal term which shall be
first paid out of the proceeds of such assignment, bankruptcy or receiver's
proceedings or sale on legal process, any law, usage or custom to the contrary
notwithstanding.
<PAGE> 27
15. LESSOR NOT LIABLE FOR INJURY OR DAMAGE TO PERSONS OR PROPERTY: The LESSOR
shall not be liable for any injury or damage to any person or to any property
at any time on said PREMISES or building from any cause whatever that may at
any time exist from the use or condition of the PREMISES or building from any
cause, during the Term or any renewal thereof.
16. INCREASED TAXES: In the event the taxes, including those imposed by any
municipality, County, or School District, levied and assessed against the real
estate of which the PREMISES are a part are increased beyond that imposed for
the year 1996, whether occasioned by an increase in mileage or an increase in
assessment or otherwise, the TENANT shall pay as Additional Rent its
proportionate share of the increased taxes during the Term of this lease or any
renewal thereof.
17. EXCLUSIVITY OF LESSOR'S REMEDIES: The receipt of rent after default, or
after judgment or after execution, shall not deprive the LESSOR of other
actions against the Tenant for possession or for rent or for damages, and all
such remedies are non-exclusive and can be exercised concurrently or separately
as LESSOR desires. The LESSOR may use the remedies herein given or those
prescribed by law, or both, and the LESSOR or Agent may enter at will to
inspect the premises, to take or send persons on said property, seeking to rent
or purchase, make repairs or improvements and post notices of "To Let" and "For
Sale."
18. SUCCESSORS AND ASSIGNS: All rights and liabilities herein given to or
imposed upon either of the parties hereto, shall extend to the heirs,
executors, administrators, successors and assigns of such party.
19. CONDEMNATION CLAUSE: In the event that all or a part of the PREMISES is
taken by eminent domain or conveyed in lieu thereof. If the leased PREMISES
cannot reasonably be used by TENANT for their intended purpose, then this lease
will terminate effective as of the date that the condemning authority shall
take possession of the same.
20. TENANT'S WAIVER OF DAMAGES AND EXCEPTIONS: TENANT hereby waives all claims
against LESSOR by reason of a taking of the PREMISES and assigns to LESSOR any
rights and damages to which TENANT might otherwise be entitled for condemnation
of the leasehold estate created by this lease; except that TENANT shall be
entitled to make any claim against the condemning authority for relocation
damages, damages for tenant improvements and any other payments lawfully due
tenants as such, without diminution of the sums due LESSOR.
21. FIRE CLAUSE: The TENANT hereby agrees to notify LESSOR of any damages to
the leased PREMISES by fire or other hazard and also of any dangerous or
hazardous condition within the leased PREMISES immediately upon the occurrence
of such fire or other hazard or discovery of such condition.
Upon occurrence of a fire, repairs shall be made by LESSOR as soon as
reasonably may be done unless the costs of repairing the PREMISES exceed 25% of
the replacement cost of the building in which case the LESSOR may, at its
option, terminate this lease by giving TENANT written notice of termination
with forty-five (45) days of the date of the occurrence.
<PAGE> 28
If the LESSOR does not terminate this Lease pursuant to the paragraph
above, then LESSOR has forty-five (45) days after the date of occurrence to give
written notice to TENANT setting forth its unqualified commitment to make all
necessary repairs or replacements, the projected date of commencement of such
repairs, and the LESSOR'S best good faith estimate of the date of completion of
the same.
If the LESSOR fails to give such notice, or if the date of completion is
more than 30 days after the date of occurrence, then the TENANT may, at its
option, terminate this lease and the LESSOR will be obliged to refund to the
TENANT any rent allocable to the period subsequent to the date of the fire.
22. WAIVER OF NONPERFORMANCE: Failure of the LESSOR to exercise any of its
rights under this lease upon nonperformance by the TENANT of any condition,
covenant or provision herein contained shall not be considered a waiver thereof,
nor shall any waiver of nonperformance of any such condition, covenant or
provision by the LESSOR be construed as a waiver of the rights of the LESSOR as
to any subsequent defective performance or nonperformance hereunder.
23. PAROL EVIDENCE CLAUSE: This instrument constitutes the final, fully
integrated expression of the agreement between the LESSOR and the TENANT. As
such, it cannot be modified or amended in any way except in writing signed by
the LESSOR and TENANT.
24. SUBORDINATION: This lease is subordinate to the lien of all present or
future mortgages which affect the leased PREMISES and to all renewals,
modifications, replacements and extensions thereof. This clause shall be
self-operative but in any event TENANT hereby agrees to execute promptly and
deliver any estoppel certificate or other assurances that LESSOR may request in
furtherance hereof; provided, however, that in the event of foreclosure of any
such mortgage or modification TENANT shall attorn to the purchaser in
foreclosure or who shall be named in any deed in lieu of foreclosure and shall
recognize such purchaser as the LESSOR under this lease; and provided, further,
that so long as TENANT is not in default hereunder, this lease shall remain in
full force and effect.
25. SEVERABILITY CLAUSE: If any term, covenant, condition, or provision of this
lease is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated.
26. PENNSYLVANIA LAW TO APPLY: This lease shall be construed under and in
accordance with the laws of the Commonwealth of Pennsylvania.
In Witness Whereof, the undersigned LESSOR and TENANT hereto execute this lease
as of the day and date first above written.
Sibro Enterprises (LESSOR)
- ------------------------ ----------------------------------------
By Vincent Suiliani
- ------------------------ ----------------------------------------
Title Partner
----------------------------------------
(LESSEE)
- ------------------------ ----------------------------------------
Jeff Pepper (LESSEE)
- ------------------------ ----------------------------------------
By ServiceWare Inc.
- ------------------------ ----------------------------------------
Title President
- ------------------------ ----------------------------------------
LEASE
From
To
Rent $ per
Payable
Expire
Assigned to
Reserved to
Renewal to
Reserved to
P.Onaly Co., 427 Fourth Ave., Pgh., PA 15218
<PAGE> 29
[ELECTRICAL SCHEMATIC]
<PAGE> 30
ADDENDUM TO LEASE
BETWEEN
SIBRO ENTERPRISES
BY V-J CORPORATION, AGENT
AND
SERVICEWARE, INCORPORATED
The provisions of this Addendum shall be attached to, incorporated fully
therein, and made a part of the Lease between SIBRO Enterprises, Lessor, by V-J
CORPORATION, AGENT, and ServiceWare, Incorporated, dated May 31, 1995.
Demise and Term: Lessor, hereby leases to Tenant for the term of nine years and
five months commencing on the first day of November, 1996 and ending on the
31st day of March, 2006 (the term) the following described premises in its
proposed condition:
New three story office building located at 333 Allegheny Avenue known as
Phase II and presently under construction. The leased space referenced more
specifically by this Addendum is the Third Floor representing 4,860 SF,
more or less, the Second Floor representing 4,860 SF, more or less and the
Garage Level representing 4,860 SF more or less.
ServiceWare will have first option to lease all available space on First
Floor.
<PAGE> 31
Rent Schedule for leased space in Phase II Building shall be as follows:
<TABLE>
<CAPTION>
Monthly
-------
<S> <C>
1) 11/1/96 - 4/30/97 7,403.00*
2) 5/1/97 - 3/31/98 13,325.00
3) 4/1/98 - 3/31/01 14,756.00
4) 4/1/01 - 3/31/06 18,865.00
5) 4/1/06 - 3/31/011 (5 year option) 22,353.00
</TABLE>
*Reflects six months free rent for Second Floor.
NOTE: All other terms and conditions of existing Lease dated May 31, 1995 shall
remain in effect and this Addendum shall become an integral part of existing
Lease.
The parties hereto enter into this Addendum with the intent to be legally bound
hereby, this 27th day of September, 1996.
Signed in the presence of: LESSOR:
BY V-J CORPORATION, AGENT
/s/ [Illegible] BY SIBRO ENTERPRISES
- -------------------------- ----------------------------------
BY /s/ Vincent J. Siciliano
- -------------------------- ----------------------------------
TENANT:
/s/ Molyane W. Gillespie BY /s/ Jeff Pepper
- -------------------------- ----------------------------------
BY ServiceWare, Inc.
- -------------------------- ----------------------------------
<PAGE> 1
Exhibit 10.4
FIRST AMENDMENT OF LEASE
This FIRST AMENDMENT OF LEASE is made as of the 30th day of June, 1998
between PW/MS OP SUB I, LLC, a Delaware limited liability company ("Landlord"),
having an address at PW/MS Management Co., Inc. c/o Gale & Wentworth, LLC,
Park Avenue at Morris County, 200 Campus Drive, Suite 200, Florham Park, New
Jersey 07932-1007 and THE MOLLOY GROUP, INC., a New Jersey corporation, having
an address at 4 Century Drive, Parsippany-Troy Hills, New Jersey 07054
(hereinafter called "Tenant").
WITNESSETH:
WHEREAS:
A. Centburg Realty Associates, L.P., predecessor-in-interest to Landlord,
and Tenant heretofore entered into a certain lease dated July 31, 1997, (said
lease as it may have been or may hereafter be amended is hereinafter called the
"Lease") with respect to a portion of the first (1st) floor ("Demised
Premises") in the office building known as and located at 4 Century Drive,
Parsippany-Troy Hills, New Jersey;
B. Tenant is desirous of (1) increasing the size of the Demised Premises by
the addition of some 10,187 rentable square feet ("Additional Space") on the
second (2nd) floor of the Building, as illustrated on Schedule A, attached
hereto and made a part hereof and (2) extending the expiration date of the
Lease; and
C. The parties hereto desire to further modify the Lease in certain other
respects.
NOW, THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, the parties hereto modify the Lease as follows:
1. DEFINITIONS. Except as otherwise provided in this First Amendment of
Lease, all defined terms contained in this First Amendment of Lease shall, for
the purposes hereof, have the same meaning ascribed to them in the Lease.
<PAGE> 2
2. TERM. Notwithstanding anything to the contrary contained in the Lease,
the date set for the expiration of the term thereof is hereby modified so that
the Expiration Date shall be, and the Initial Term shall end on, January 31,
2002. Landlord may deliver to Tenant a notice ("commencement Date Notice")
confirming, among other things, the revised Expiration Date. If Landlord so
delivers to Tenant's Commencement Date Notice, Tenant shall execute same and
return it to Landlord within five (5) days after Tenant's receipt thereof.
Landlord's failure to timely receive from Tenant at least one (1) fully
executed original counterpart of the Commencement Date Notice shall constitute
Tenant's express consent with and agreement to all the terms contained in the
Commencement Date Notice as prepared by Landlord.
3. ADDITIONAL SPACE. The Demised Premises shall be deemed to include the
Additional Space on July 1, 1998. As of July 1, 1998, Exhibit A to the Lease
shall be deemed supplemented by Schedule A, attached hereto and made a part
hereof.
4. RENT. The Lease is hereby amended to provide that the Tenant shall pay
minimum rent ("Minimum Rent") at the annual rate of:
(i) FOUR HUNDRED SIXTY EIGHT THOUSAND SEVEN HUNDRED THIRTY FIVE AND
00/100 DOLLARS ($468,735.00) for the period beginning on July 1, 1998
and ending on August 31, 1998, payable in advance on the first day of
each calendar month in equal monthly installments of THIRTY NINE
THOUSAND SIXTY ONE AND 25/100 DOLLARS ($39,061.25);
(ii) FOUR HUNDRED NINETY SEVEN THOUSAND FORTY SEVEN AND 00/100 DOLLARS
($497,047.11) for the period beginning on September 1, 1998 and ending
on January 31, 1999, payable in advance on the first day of each
calendar month in equal monthly installments of FORTY ONE THOUSAND
FOUR HUNDRED TWENTY AND 58/100 DOLLARS ($41,420.58);
(iii) FIVE HUNDRED SEVENTEEN THOUSAND FOUR HUNDRED TWENTY ONE AND
00/100 DOLLARS ($517,421.00) for the period beginning on February 1,
1999 and ending on August 31, 1999, payable in advance on the first
day of each calendar month in equal monthly installments of FORTY
THREE THOUSAND ONE HUNDRED EIGHTEEN AND 42/100 DOLLARS ($43,118.42);
2
<PAGE> 3
(iv) FIVE HUNDRED FORTY FIVE THOUSAND SEVEN HUNDRED THIRTY THREE AND
00/100 DOLLARS ($545,733.00) for the period beginning on September 1,
1999 and ending on August 31, 2000, payable in advance on the first day
of each calendar month in equal monthly installments of FORTY FIVE
THOUSAND FOUR HUNDRED SEVENTY SEVEN AND 75/100 DOLLARS ($45,477.75);
and
(v) FIVE HUNDRED EIGHTY FOUR THOUSAND TWO HUNDRED THIRTY TWO AND
00/100 DOLLARS ($584,232.00) for the period beginning on September 1,
2000, and ending on the Expiration Date, payable in advance on the
first day of each calendar month in equal monthly installments of
FORTY EIGHT THOUSAND SIX HUNDRED EIGHTY SIX AND 00/100 DOLLARS
($48,686.00).
5. DEMISED PREMISES. As of July 1, 1998, the Lease shall be deemed to
provide that (i) the Demised Premises contain a floor area of 24,343 rentable
square feet of which 14,156 rentable square feet are on the first (1st) floor of
the Building and 10,187 rentable square feet are on the second (2nd) floor of
the Building and (ii) Tenant's Occupancy Percentage is 24.33 percent.
6. BROKER. Tenant represents that it has had no dealings or
communications with any real estate broker or agent in connection with this
First Amendment of Lease, except for James Hersh of CB Richard Ellis. Tenant
agrees to pay, defend, indemnify and hold Landlord, its partners, directors,
officers and their affiliates and/or subsidiaries harmless from and against any
and all costs, expenses or liability (including attorney's fees, court costs
and disbursements) for any commission or other compensation claimed by any
broker or agent, except for James Hersh of CB Richard Ellis.
7. AUTHORITY. Tenant represents that the undersigned officer of the
Tenant corporation has been duly authorized on behalf of the Tenant corporation
to enter into this First Amendment of Lease in accordance with the terms,
covenants and conditions set forth herein, and, upon Landlord's request, Tenant
shall deliver an appropriate certification by the Secretary of the Tenant
corporation to the foregoing effect.
8. NO ORAL CHANGES. This First Amendment of Lease may not
3
<PAGE> 4
be changed orally, but only by a writing signed by both Landlord and Tenant.
9. PHYSICAL CONDITION. (A) Tenant acknowledges that it is in occupancy of
the Demised Premises and hereby accepts the Demised Premises, including the
Additional Space, in their "as is" physical condition and state of repair as of
July 1, 1998. In this regard, Landlord shall have no obligation to do any work,
perform any services or grant any construction allowances, except as otherwise
provided to the contrary in Section 9.(B) hereof.
(B) Landlord, at no cost to Tenant, shall, using Building standard means,
methods, materials and manpower, once (1) demise the Demised Premises and (2)
construct a new entrance to that portion of the Demised Premises on the second
(2nd) floor of the Building. As per Schedule A-1.
10. RATIFICATION. Except as expressly amended by this First Amendment of
Lease, the Lease, and all terms, covenants and conditions thereof, shall remain
in full force and effect and is hereby in all respects ratified and confirmed.
11. PARKING. At all times after July 1, 1998, Section 1.1(q) of the Lease
shall be modified to provide that Tenant's License for Allotted Parking shall
be for up to ninety six (96) cars. As of July 1, 1998, ten (10) parking spaces
of the Allotted Parking shall be Designated Spaces.
12. NO DEFAULT. Tenant confirms that (i) Landlord has fully complied with
all of its obligations contained in the Lease and (ii) no event has occurred
and no condition exists which, with the passage of time or the giving of
notice, or both, would constitute a default by Landlord under the Lease.
13. RENEWAL OPTION. As of the date hereof, Tenant shall have only one (1)
option to renew the Lease pursuant to Article 51 of the Lease for a single
additional term of five (5) years commencing on February 1, 2002 and ending on
January 31, 2007.
14. ADDITIONAL SECURITY DEPOSIT. Tenant shall deposit with Landlord on the
date hereof the sum of THIRTY THOUSAND NINE HUNDRED THIRTY FIVE AND 83/100
DOLLARS ($30,935.83) as additional
4
<PAGE> 5
security for the faithful performance and observance by Tenant of the terms,
provisions and conditions of the Lease. As of the date Landlord first holds a
security deposit from Tenant equal to SEVENTY EIGHT THOUSAND ONE HUNDRED TWENTY
TWO AND 50/100 DOLLARS ($78,122.50), Section 1.1(o) of the Lease shall be
deemed to define Security as SEVENTY EIGHT THOUSAND ONE HUNDRED TWENTY TWO AND
50/100 DOLLARS ($78,122.50), not FORTY SEVEN THOUSAND ONE HUNDRED EIGHTY SIX
AND 67/100 DOLLARS ($47,186.67).
15. NON-BINDING DRAFT. The mailing or delivery of this document or any
draft of this document by Landlord or its agent to Tenant, its agent or
attorney shall not be deemed an offer by the Landlord on the terms set forth in
this document or draft, and this document or draft may be withdrawn or modified
by Landlord or its agent at any time and for any reason. The purpose of this
section is to place Tenant on notice that this document or draft shall not be
effective, nor shall Tenant have any rights with respect hereto, unless and
until Landlord shall execute and accept this document. No representations or
promises shall be binding on the parties hereto except those representations
and promises contained in a fully executed copy of this document or in some
future writing signed by Landlord and Tenant.
16. NEW BASE YEAR FOR TAXES. For purposes of computing the additional
rent accruing on and after July 1, 1998 that is due Landlord under Section
6.1(a) of the Lease, as of July 1, 1998, (A) Section 1.1(j) of the Lease shall
be deleted and replaced with the following new Section 1.1(j): "First Operating
Year and First Tax Year shall mean the calendar year ending on December 31,
1998 and (B) Section 1.1(i) of the Lease shall be deleted and replaced with the
following new Section 1.1(i):
BASE TAXES: The amount determined by multiplying (a) the real
estate tax rate in effect on July 1, 1998 and (b) the
assessed valuation of the Real Estate for the calendar
year ending December 31, 1998, as such assessed
valuation is or may be ultimately determined by final
administrative or judicial pro-
5
<PAGE> 6
ceeding, or by abatement by an
appropriate taxing authority.
17. NEW BASE YEAR FOR BUILDING OPERATING COSTS. For purposes of computing
the additional rent accruing on and after July 1, 1998 that is due Landlord
under Section 6.2(a) of the Lease, as of July 1, 1998, Section 6.1(a) of the
Lease shall be deleted and replaced with the language recited in Paragraph
16.(A) of this First Amendment of Lease.
18. NOTICES. As of the date hereof, the following provision from Section
47.3 NOTICES of the Lease shall be deemed deleted:
Bellemead Management Co., Inc.
4 Becker Farm Road
Roseland, New Jersey 07068
Attention: Legal Department
and shall be replaced by the following new provision:
PW/MS QP SUB I, LLC
PW/MS Management Co., Inc.
c/o Gale & Wentworth, LLC
Park Avenue at Morris County
200 Campus Drive, Suite 200
Florham Park, New Jersey 07932-1007
Attention: Marc Leonard Ripp, Esq.
General Counsel
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment of
Lease to be executed on the day and year first written above.
Signed and delivered
LANDLORD:
WITNESSED BY: PW/MS OP SUB I, LLC
By: PW/MS Management Co., Inc.
By: Gale & Wentworth, LLC
/s/ Marc Leonard Ripp, Esq. /s/ Mark Yeng
- ----------------------------- -----------------------------
Marc Leonard Ripp, Esq. Mark Yeng
Corporate Secretary President
ATTESTED BY: AGENT FOR LANDLORD:
PW/MS MANAGEMENT CO., INC.
By: Gale & Wentworth, LLC
/s/ Marc Leonard Ripp, Esq. /s/ Mark Yeng
- ----------------------------- -----------------------------
Marc Leonard Ripp, Esq. Mark Yeng
Corporate Secretary President
6
<PAGE> 7
ATTESTED BY: TENANT:
THE MOLLOY GROUP, INC.
/s/ ROBERT S. BERNSTEIN By: /s/ BRUCE MOLLOY
- ------------------------------ -----------------------------
Name: Robert S. Bernstein Name: Bruce Molloy
--------------------- -----------------------
(Please Print) (Please Print)
Title: Corporate Secretary Title: CEO
Vice President & CFO ----------------------
(Please Print)
7
<PAGE> 8
SCHEDULE A
Floor Plan of 10,187 Rentable Square Foot Additional Space on the Second Floor
<PAGE> 9
SCHEDULE A
[FLOOR PLAN]
<PAGE> 10
SCHEDULE A-1
[Main Entrance/Partial Demising Wall Floor Plan]
<PAGE> 1
Exhibit 10.5
SERVICEWARE.COM, INC.
2000 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of the ServiceWare.com, Inc. 2000 Stock Incentive Plan (the
"Plan") is to promote the interests of ServiceWare.com, Inc. (the "Company"),
its subsidiaries and its stockholders by (i) attracting and retaining employees,
officers, directors, consultants and advisors of outstanding ability, (ii)
motivating such persons, by means of performance-related incentives, to achieve
long-range performance goals, and (iii) enabling such persons to participate in
the long-term growth and financial success of the Company and its subsidiaries.
The effective date of the Plan is _______________, 2000 ("Effective Date").
2. ADMINISTRATION.
(a) Subject to the following paragraphs, the Plan shall be administered
by the Company's Board of Directors (the "Board") or by a Compensation Committee
of the Board (the "Compensation Committee"). If the Board delegates to the
Compensation Committee the authority to administer the Plan, the Compensation
Committee shall be empowered to take all actions reserved to the Board under the
Plan. The Board is authorized to interpret the Plan, to prescribe, amend and
rescind rules and regulations to further the purposes of the Plan, and to make
all other determinations necessary for the administration of the Plan. All such
actions by the Board shall be conclusive, final and binding on all recipients of
grants hereunder ("participants").
(b) Following registration by the Company of its Common Stock, no par
value ("Common Stock") under Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), any Compensation Committee to which Plan
administration is delegated shall consist solely of Board members who qualify as
(i) "Non-Employee Directors" as defined under Rule 16b-3 under the Exchange Act
and (ii) "outside directors" as defined under Section 162(m) or any successor
provision of the Internal Revenue Code of 1986, as amended (the "Code") and
applicable Treasury regulations thereunder, if and to the extent such
qualification is necessary so that grants made under the Plan or the exercise of
rights thereunder will qualify for any tax or other material benefit to
participants or the Company and its subsidiaries under applicable law.
(c) Notwithstanding the foregoing, the Board may, subject to any
limitations or restrictions the Board may impose from time to time, delegate to
the Company's Chief Executive Officer the authority to administer the Plan,
including the authority to grant Options (as hereinafter defined) to employees,
consultants or advisors of the Company and its subsidiaries who are not subject,
by reason of their position with the Company or its subsidiaries, to the
requirements of Section 16 of the Exchange Act and who are not expected to be
subject to the limitations of Code Section 162(m).
3. GRANTS.
Grants under the Plan may be in the form of options which qualify as
"incentive stock options"
<PAGE> 2
within the meaning of Code Section 422 or any successor provision ("Incentive
Stock Options"), options which do not so qualify ("Nonqualified Options" and,
collectively with Incentive Stock Options, "Options"), and stock which is
subject to certain forfeiture risks and restrictions on transferability
("Restricted Stock"). Incentive Stock Options may be granted only to employees
of the Company or its subsidiaries. Each grant of an Option shall be designated
in the applicable "Grant Instrument" (as defined in Section 5) as an Incentive
Stock Option or a Nonqualified Option, as appropriate. If, notwithstanding its
designation as an Incentive Stock Option, all or a portion of any Option grant
does not qualify under the Code as an Incentive Stock Option, the portion which
does not so qualify shall be treated for all purposes hereunder as a
Nonqualified Option.
4. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 9, the maximum aggregate
number of shares of Common Stock that may be subject to grants made under the
Plan is 3,000,000 shares [post-split] (plus any shares of Common Stock covered
by any unexercised portion of terminated stock options granted under the
ServiceWare, Inc. Amended and Restated Stock Option Plan (the "1996 Plan")),
plus an automatic annual increase on the first day of each fiscal year of the
Company beginning on or after January 1, 2001 and ending on or before December
31, 2010 equal to the lesser of (i) 1,500,000 shares, (ii) 6.25% of the shares
outstanding on the last day of the immediately preceding fiscal year, or (iii)
such lesser number of shares as is determined by the Board. The Common Stock to
be offered under the Plan shall be authorized and unissued Common Stock or
issued Common Stock which shall have been reacquired by the Company and held in
its treasury. The Common Stock covered by any unexercised portion of terminated
stock options granted under the Plan or under the 1996 Plan, or by any grant of
Restricted Stock which is forfeited, may again be subject to new grants under
the Plan. In the event the purchase price of an Option is paid in whole or in
part through the delivery of Common Stock, only the net number of shares of
Common Stock issuable in connection with the exercise of the Option shall be
counted against the number of shares remaining available for grant under the
Plan. At any time following registration by the Company of its Common Stock
under Section 12 of the Exchange Act, no participant shall receive grants in
respect of more than _______ shares of Common Stock in any calendar year
(subject to adjustment as provided in Section 9).
5. PARTICIPANTS.
The Board shall determine and designate from time to time those
employees, directors, consultants and advisors of the Company or its
subsidiaries who shall be granted Options or Restricted Stock under the Plan and
the number of shares of Common Stock to be covered by each such Option or
Restricted Stock grant; provided, that any such consultants or advisors who
receive grants under the Plan render bona fide services to the Company or its
subsidiaries that are not in connection with the offer or sale of securities in
a capital-raising transaction. In making its determinations, the Board shall
take into account the present and potential contributions of the respective
individuals to the success of the Company and its subsidiaries and such other
factors as the Board shall deem relevant in connection with accomplishing the
purposes of the Plan. Each grant shall be evidenced by a written Option or
Restricted Stock agreement or grant form ("Grant Instrument") as the Board shall
approve from time to time.
2
<PAGE> 3
6. FAIR MARKET VALUE.
For all purposes under the Plan, the term "Fair Market Value" shall
mean, as of any applicable date, (i) if the principal securities market on which
the Common Stock is traded is a national securities exchange or The Nasdaq
National Market ("NNM"), the closing price of the Common Stock on such exchange
or NNM, as the case may be, or if no sale of the Common Stock shall have
occurred on such date, on the next preceding date on which there was a reported
sale; (ii) if the Common Stock is not traded on a national securities exchange
or NNM, the closing price on such date as reported by The Nasdaq SmallCap
Market, or if no sale of the Common Stock shall have occurred on such date, on
the next preceding date on which there was a reported sale; (iii) if the
principal securities market on which the Common Stock is traded is not a
national securities exchange, NNM or The Nasdaq SmallCap Market, the average of
the bid and asked prices reported by the National Quotation Bureau, Inc.; or
(iv) if the price of the Common Stock is not so reported, the Fair Market Value
of the Common Stock as determined in good faith by the Board.
7. GRANTS OF OPTIONS.
(a) Exercise Price of Options. Incentive Stock Options shall be
granted at an exercise price of not less than 100% of the Fair Market Value on
the date of grant; provided, however, that Incentive Stock Options granted to a
participant who at the time of such grant owns (within the meaning of Code
Section 424(d)) more than 10% of the voting power of all classes of stock of the
Company (a "10% Holder") shall be granted at an exercise price of not less than
110% of the Fair Market Value on the date of grant. Nonqualified Options shall
be granted at an exercise price as determined in each case by the Board.
(b) Term and Termination of Options.
(1) The Board shall determine the term within which each
Option may be exercised, in whole or in part, provided that (i) such term shall
not exceed 10 years from the date of grant, (ii) the term of an Incentive Stock
Option granted to a 10% Holder shall not exceed 5 years from the date of grant,
and (iii) the aggregate Fair Market Value (determined on the date of grant) of
Common Stock with respect to which Incentive Stock Options granted to a
participant under the Plan or any other plan of the Company and its subsidiaries
become exercisable for the first time in any single calendar year shall not
exceed $100,000.
(2) Unless otherwise determined by the Board, all rights to
exercise Options shall terminate on the first to occur of (i) the scheduled
expiration date as set forth in the applicable Grant Instrument, (ii) 90 days
following the date of termination of employment for any reason other than the
participant's death or permanent disability (as defined in Code Section
22(e)(3)), (iii) 1 year following the date of termination of employment or
provision of services by reason of the participant's death or permanent
disability (as defined in Code Section 22(e)(3)), or (iv) as may be otherwise
provided in the event of a Change of Control as defined in Section 11; provided,
however, that in the event that a participant ceases to be employed by or to
provide services to the Company and its subsidiaries due to a termination for
"cause" (as defined in Section 7(b)(3)), all rights to exercise Options held by
such participant shall terminate immediately as of the date such participant
ceases to be employed by or to provide services to the Company or its
subsidiaries.
3
<PAGE> 4
(3) As used in this Plan, the term "cause" shall mean a
determination by the Board that the participant has engaged in conduct that is
fraudulent, disloyal, criminal or injurious to the Company or its subsidiaries,
including, without limitation, embezzlement, theft, commission of a felony or
dishonesty in the course of his or her employment or service, or the disclosure
of trade secrets or confidential information of the Company or its subsidiaries
to persons not entitled to receive such information.
(c) Payment for Shares. Full payment for shares purchased upon exercise
of Options granted under the Plan shall be made at the time the Options are
exercised in whole or in part. Payment of the purchase price shall be made in
cash or in such other form as the Board may approve, including, without
limitation, (i) by the participant's delivery to the Company of a promissory
note containing such terms as the Board may determine, (ii) by the participant's
delivery to the Company of shares of Common Stock that have been held by the
participant for at least six months prior to exercise of the Options, valued at
the Fair Market Value of such shares on the date of exercise, or (iii) if the
Common Stock is publicly traded, pursuant to a cashless exercise arrangement
with a broker on such terms as the Board may determine; provided, however, that
if payment is made pursuant to clause (i), the then par value of the purchased
shares shall be paid in cash. No shares of Common Stock shall be issued to the
participant until such payment has been made, and a participant shall have none
of the rights of a stockholder with respect to Options held by such participant.
(d) Other Terms and Conditions. The Board shall have the discretion to
determine terms and conditions, consistent with the Plan, that will be
applicable to Options, including, without limitation, performance-based criteria
for acceleration of the date on which certain Options shall become exercisable.
Options granted to the same or different participants, or at the same or
different times, need not contain similar provisions.
(e) Substitution of Options. Options may be granted under the Plan from
time to time in substitution for stock options of other entities ("Acquired
Companies") in connection with the merger or consolidation of the Acquired
Company with the Company or its subsidiaries, the acquisition by the Company or
by its subsidiaries of all or a portion of the assets of the Acquired Company,
or the acquisition of stock of the Acquired Company such that the Acquired
Company becomes a subsidiary of the Company.
8. GRANTS OF RESTRICTED STOCK.
The Board may issue or transfer shares of Common Stock to employees,
directors, consultants or advisors under a grant of Restricted Stock, upon such
terms as the Board deems applicable, including the provisions set forth below:
(a) General Requirements. Shares of Common Stock issued or transferred
pursuant to Restricted Stock grants may be issued or transferred for
consideration or for no consideration, and subject to restrictions or no
restrictions, as determined by the Board. The Board may establish conditions
under which restrictions on shares of Restricted Stock shall lapse over a period
of time or according to such other criteria (including performance-based
criteria) as the Board deems appropriate. The period of time during which the
Restricted Stock will remain subject to restrictions will be designated in the
Grant Instrument as the "Restriction Period."
4
<PAGE> 5
(b) Number of Shares. The Board shall determine the number of shares of
Common Stock to be issued or transferred pursuant to a Restricted Stock grant
and the restrictions applicable to such shares.
(c) Requirement of Employment. If a participant who has received a
Restricted Stock grant ceases to be employed by the Company and its subsidiaries
during the Restriction Period, or if other specified conditions are not met, the
Restricted Stock grant shall terminate as to all shares covered by the grant as
to which the restrictions have not lapsed, and those shares of Common Stock
shall be canceled in exchange for the purchase price, if any, paid by the
participant for such shares. The Board may provide, however, for complete or
partial exceptions to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a participant may not sell, assign, transfer, donate,
pledge or otherwise dispose of the shares of Restricted Stock. Each certificate
for a share of Restricted Stock shall contain a legend giving appropriate notice
of the applicable restrictions. The participant shall be entitled to have the
legend removed from the stock certificate covering the shares of Restricted
Stock subject to restrictions when all restrictions on such shares lapse. The
Board may determine that the Company will not issue certificates for shares of
Restricted Stock until all restrictions on such shares lapse, or that the
Company will retain possession of certificates for shares of Restricted Stock
until all restrictions on such shares lapse.
(e) Right to Vote and to Receive Dividends. During the Restriction
Period, the participant shall have the right to vote shares of Restricted Stock
and to receive any dividends or other distributions paid on such shares, subject
to any restrictions deemed appropriate by the Board.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Board. The Board may determine, as
to any or all Restricted Stock grants, that the restrictions shall lapse without
regard to any Restriction Period.
9. ADJUSTMENTS TO REFLECT CAPITAL CHANGES.
The number and kind of shares subject to outstanding grants, the
exercise price applicable to Options previously granted, and the number and kind
of shares available subsequently to be granted under the Plan shall be
appropriately adjusted to reflect any stock dividend, stock split, combination
or exchange of shares or other change in capitalization with a similar
substantive effect upon the Plan or grants under the Plan. The Board shall have
the power and sole discretion to determine the nature and amount of the
adjustment to be made in each case. The adjustment so made shall be final and
binding on all participants.
10. RIGHT OF FIRST REFUSAL; RIGHT TO REPURCHASE.
(a) At any time prior to registration by the Company of its Common
Stock under Section 12 of the Exchange Act, the Company shall have a right of
first refusal with respect to any proposed sale or other disposition by
participants (and their successors in interest by purchase, gift or other mode
of transfer) of any shares of Common Stock issued to them under the Plan which
are transferable. This
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<PAGE> 6
right of first refusal shall be exercisable by the Company in accordance with
the terms and conditions established by the Board.
(b) At any time prior to registration by the Company of its Common
Stock under Section 12 of the Exchange Act, in the event that a participant's
employment or service is terminated for cause (as defined in Section 7(b)(3)),
the Company shall have the right, exercisable within 90 days following such
termination, to repurchase any shares of Common Stock issued to such participant
under the Plan for the purchase price paid by such participant for such shares
of Common Stock.
11. DEFINITION OF CHANGE OF CONTROL.
For purposes of this Plan, a "Change of Control" shall mean the
occurrence of any of the following events:
(a) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act), other than the Company or an employee benefit plan of the
Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of more than 50% of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Voting Securities"); or
(b) the approval by the Company's stockholders of a reorganization,
merger, consolidation or recapitalization of the Company (a "Business
Combination"), other than a Business Combination in which more than 50% of the
combined voting power of the outstanding voting securities of the surviving or
resulting entity immediately following the Business Combination is held by the
persons who, immediately prior to the Business Combination, were the holders of
the Voting Securities; or
(c) the approval by the Company's stockholders of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the Company's assets; or
(d) individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, that any individual becoming a director subsequent to
such date whose election or nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board.
12. CONSEQUENCES OF A CHANGE OF CONTROL.
(a) Upon a Change of Control, (i) each outstanding Option shall be
assumed by the Acquiring Corporation (as defined below) or parent thereof or
replaced with a comparable option or right to purchase shares of the capital
stock, or equity equivalent instrument, of the Acquiring Corporation or parent
thereof, or other comparable rights (such assumed and comparable options and
rights, together, the "Replacement Options") and (ii) each share of Restricted
Stock shall be converted to a comparable restricted grant of capital stock, or
equity equivalent instrument, of the Acquiring Corporation or parent thereof or
other comparable restricted property (such assumed and comparable restricted
grants, together, the "Replacement Restricted Stock"); provided, however, that
if the
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<PAGE> 7
Acquiring Corporation or parent thereof does not agree to grant Replacement
Options and Replacement Restricted Stock, then all outstanding Options which
have been granted under the Plan and which are not exercisable as of the
effective date of the Change of Control shall automatically accelerate and
become exercisable immediately prior to the effective date of the Change of
Control, and all restrictions and conditions on any Restricted Stock shall lapse
upon the effective date of the Change of Control. In addition, all Replacement
Options issued by the Acquiring Corporation to a participant shall accelerate
and become exercisable, and all restrictions and conditions on any Replacement
Restricted Stock issued by the Acquiring Corporation to a participant shall
lapse, if the participant's employment is terminated without "cause" (as defined
in Section 7(b)(3)) in the period beginning on the effective date of the Change
of Control and ending 12 months after such date. The term "Acquiring
Corporation" means the surviving, continuing, successor or purchasing
corporation, as the case may be. The Board may determine in its discretion (but
shall not be obligated to do so) that in lieu of the issuance of Replacement
Options, all holders of outstanding Options which are exercisable immediately
prior to a Change of Control (including those that become exercisable under this
Section 12(a) and any that become exercisable under Section 12(b)) will be
required to surrender them in exchange for a payment by the Company, in cash or
Common Stock as determined by the Board, of an amount equal to the amount (if
any) by which the then Fair Market Value of Common Stock subject to unexercised
Options exceeds the exercise price of those Options, with such payment to take
place as of the date of the Change of Control or such other date as the Board
may prescribe.
(b) In the event that the Acquiring Corporation or parent thereof
agrees to grant Replacement Options and Replacement Restricted Stock pursuant to
Section 12(a) hereof, then 50% of the outstanding Options granted under the Plan
which are not exercisable as of the effective date of the Change of Control
shall automatically accelerate and become exercisable immediately prior to the
effective date of the Change of Control, and all restrictions and conditions on
50% of any Restricted Stock shall lapse upon the effective date of the Change of
Control. For purposes of this provision, the 50% acceleration and lapse
provisions shall be applied pro rata to all unvested Options, and to all
Restricted Stock, respectively, held by each participant, regardless of when
granted.
(c) Any Options that are not assumed or replaced by Replacement
Options, exercised or cashed out prior to or concurrent with a Change of Control
will terminate effective upon the Change of Control or at such other time as the
Board deems appropriate.
(d) Notwithstanding anything in the Plan to the contrary, in the event
of a Change of Control, no action described in the Plan shall be taken
(including, without limitation, actions described in subsections (a), (b) and
(c) above) if such actions would make the Change of Control ineligible for
"pooling of interests" accounting treatment or would make the Change of Control
ineligible for desired tax treatment if, in the absence of such actions, the
Change of Control would qualify for such treatment and the Company intends to
use such treatment with respect to such Change of Control.
13. TRANSFERABILITY OF OPTIONS.
Unless otherwise determined by the Board with respect to Nonqualified
Options, Options granted under the Plan shall not be transferable other than by
will or the laws of descent and distribution and are exercisable during a
participant's lifetime only by the participant.
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14. WITHHOLDING.
The Company shall have the right to deduct any taxes required by law to
be withheld in respect of grants under the Plan from amounts paid to a
participant in cash as salary, bonus or other compensation. In the Board's
discretion, a participant may be permitted to elect to have withheld from the
shares otherwise issuable to the participant, or to tender to the Company, a
number of shares of Common Stock the aggregate Fair Market Value of which does
not exceed the applicable withholding rate for federal (including FICA), state
and local tax liabilities. Any such election must be in a form and manner
prescribed by the Board.
15. CONSTRUCTION OF THE PLAN.
The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely by the Board. Any determination by the Board shall be
final and binding on all participants. The Plan shall be governed in accordance
with the laws of the State of Delaware, without regard to the conflict of law
provisions of such laws.
16. NO RIGHT TO GRANT; NO RIGHT TO EMPLOYMENT.
No person shall have any claim of right to be granted an Option or
Restricted Stock under the Plan. Neither the Plan nor any action taken hereunder
shall be construed as giving any employee any right to be retained in the employ
of the Company or any of its subsidiaries or as giving any consultant, advisor
or director of the Company or any of its subsidiaries any right to continue to
serve in such capacity.
17. GRANTS NOT INCLUDABLE FOR BENEFIT PURPOSES.
Income recognized by a participant pursuant to the provisions of the
Plan shall not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974) or group insurance or other benefit
plans applicable to the participant which are maintained by the Company or any
of its subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Board.
18. NO STRICT CONSTRUCTION.
No rule of strict construction shall be implied against the Company,
the Board or any other person in the interpretation of any of the terms of the
Plan, any grant made under the Plan or any rule or procedure established by the
Board.
19. CAPTIONS.
All Section headings used in the Plan are for convenience only, do not
constitute a part of the Plan, and shall not be deemed to limit, characterize or
affect in any way any provisions of the Plan, and all provisions of the Plan
shall be construed as if no captions had been used in the Plan.
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<PAGE> 9
20. SEVERABILITY.
Whenever possible, each provision in the Plan and every grant under the
Plan shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Plan or any grant under the Plan
shall be held to be prohibited by or invalid under applicable law, then such
provision shall be deemed amended to accomplish the objectives of the provision
as originally written to the fullest extent permitted by law, and all other
provisions of the Plan and every other grant under the Plan shall remain in full
force and effect.
21. LEGENDS.
All certificates for Common Stock delivered under the Plan shall be
subject to such transfer and other restrictions as the Board may deem advisable
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange or quotation system upon which the
Common Stock is then listed or quoted and any applicable federal or state
securities laws, and the Board may cause a legend or legends to be put on any
such certificates to make appropriate references to such restrictions.
22. AMENDMENT.
The Board may, by resolution, amend or revise the Plan, except that
such action shall not be effective without stockholder approval if such
stockholder approval is required to maintain the compliance of the Plan and/or
grants made to directors, executive officers or other persons with Rule 16b-3
promulgated under the Exchange Act or any successor rule. The Board may not
modify any Options previously granted under the Plan in a manner adverse to the
holders thereof without the consent of such holders, except in accordance with
the provisions of Sections 9, 12 or 23.
23. MODIFICATION FOR GRANTS OUTSIDE THE U.S.
The Board may, without amending the Plan, determine the terms and
conditions applicable to grants of Options or Restricted Stock to participants
who are foreign nationals or employed outside the United States in a manner
otherwise inconsistent with the Plan if the Board deems such terms and
conditions necessary in order to recognize differences in local law or
regulations, tax policies or customs.
24. EFFECTIVE DATE; TERMINATION OF PLAN.
The Plan's Effective Date is _________________, 2000. The Plan shall
terminate on _______________, 2010, unless it is earlier terminated by the
Board. Termination of the Plan shall not affect previous grants under the Plan.
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<PAGE> 1
Exhibit 10.6
SERVICEWARE.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
SERVICEWARE.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the ServiceWare.com, Inc.
Employee Stock Purchase Plan:
I. Purpose and History
1.1 The purpose of the Plan is to provide employees of the Company and its
Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company. It is the Company's intention that the Plan qualify as an
"Employee Stock Purchase Plan" under Code Section 423. Accordingly, the
provisions of the Plan should be construed to extend and limit
participation in a manner consistent with the requirements of that Code
section and any regulations or rulings thereunder.
1.2 The Plan was adopted by the Board on __________, 2000.
II. Definitions
The following words and phrases, when used in this Plan, unless their
context clearly indicates otherwise, shall have the following meanings:
2.1 "Administrator" means any individual(s), committee or entity appointed
by the Board, with such authority and power as the Board may determine,
to administer the terms of the Plan. The Administrator may, in turn,
delegate all or a portion of its authority to one or more individuals
to perform administrative functions under the Plan. If the Board does
not appoint an Administrator, then references to "Administrator" in
this Plan shall be deemed references to the Board.
2.2 "Board" means the Company's Board of Directors.
2.3 "Change in Control" means the occurrence of any of the following
events:
(a) the acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Exchange Act), other than
the Company or an employee benefit plan of the Company, of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 50% of the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(b) the approval by the Company's stockholders of a
reorganization, merger, consolidation or recapitalization of
the Company (a "Business Combination"), other than a Business
Combination in which more than 50% of the combined voting
power of the outstanding voting securities of the surviving or
resulting
2
<PAGE> 3
entity immediately following the Business Combination is held
by the persons who, immediately prior to the Business
Combination, were the holders of the Voting Securities; or
(c) the approval by the Company's stockholders of a complete
liquidation or dissolution of the Company, or a sale of all or
substantially all of the Company's assets; or
(d) individuals who, as of the effective date of the Plan,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, that any individual becoming a director subsequent
to such date whose election or nomination for election by the
Company's stockholders was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Common Stock" means the Company's Common Stock.
2.6 "Company" means ServiceWare.com, Inc., a [Delaware] corporation.
2.7 "Compensation" means all cash compensation paid to an Employee by the
Company and includes commissions, bonuses, overtime, incentive
compensation, incentive payments and any other forms of cash
compensation as determined by the Administrator.
2.8 "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case
of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Administrator; provided, that such leave is for
a period of not more than ninety (90) days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to Company policy adopted from time
to time; or (iv) in the case of transfers between locations of the
Company or between the Company and its Designated Subsidiaries.
2.9 "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.
2.10 "Designated Subsidiaries" means the Subsidiaries that have been
designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan (as set forth on Appendix A);
provided, however, that the Board shall only have the discretion to
designate a Subsidiary if the issuance of options to such Subsidiary's
Employees under the Plan would not cause the Company to incur adverse
accounting charges or cause the Plan not to qualify under Code Section
423.
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<PAGE> 4
2.11 "Employee" means any person, including an Officer, who is customarily
employed for at least twenty (20) hours per week and more than five (5)
months in a calendar year by the Company or one of its Designated
Subsidiaries.
2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.13 "Fair Market Value" of stock (including Common Stock) means (i) if the
principal securities market on which the stock is traded is a national
securities exchange or The Nasdaq National Market ("NNM"), the closing
price of the stock on such exchange or NNM, as the case may be, or if
no sale of the stock shall have occurred on such date, on the next
preceding date on which there was a reported sale; (ii) if the stock is
not traded on a national securities exchange or NNM, the closing price
on such date as reported by The Nasdaq SmallCap Market, or if no sale
of the stock shall have occurred on such date, on the next preceding
date on which there was a reported sale; (iii) if the principal
securities market on which the stock is traded is not a national
securities exchange, NNM or The Nasdaq SmallCap Market, the average of
the bid and asked prices reported by the National Quotation Bureau,
Inc.; or (iv) if the price of the stock is not so reported, the fair
market value of the stock as determined in good faith by the Board.
2.14 "Offering Date" means the first business day of each Offering Period of
the Plan.
2.15 "Offering Period" means each six (6) month period commencing on June 1
or December 1 during a calendar year. An Offering Period commencing on
June 1 shall end on the next November 30 and an Offering Period
commencing on December 1 shall end on the next May 31. Notwithstanding
the foregoing, the first Offering Period under the Plan shall commence
on the effective date of the Registration Statement on Form S-1 for the
initial public offering of the Company's Common Stock (the "IPO Date")
and continue until November 30, 2000.
2.16 "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
2.17 "Plan" means the ServiceWare.com, Inc. Employee Stock Purchase Plan.
2.18 "Purchase Date" means the last day of each Offering Period under the
Plan.
2.19 "Purchase Price" means, with respect to an Offering Period, an amount
equal to eighty- five percent (85%) of the Fair Market Value of a Share
on the Offering Date or on the Purchase Date for such Offering Period,
whichever is lower; provided, however, that in the event (i) there is
any increase in the number of Shares available for issuance under the
Plan (including without limitation an automatic increase pursuant to
Section 11.1 below or as a result of a stockholder-approved amendment
to the Plan), (ii) all or a portion of such additional Shares are to be
issued with respect to an Offering Period that is underway at the time
of such increase ("Additional Shares"), and (iii) the Fair Market Value
of a Share on the date of such increase (the "Approval Date Fair Market
Value") is higher than the Fair Market Value on the Offering Date for
such Offering
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<PAGE> 5
Period, then in such instance the Purchase Price with respect to
Additional Shares shall be eighty-five percent (85%) of the Approval
Date Fair Market Value or the Fair Market Value of a Share on the
Purchase Date, whichever is lower.
2.20 "Share" means a share of Common Stock, as adjusted in accordance with
Article 17 of the Plan.
2.21 "Subsidiary" means a corporation, domestic or foreign, of which not
less than fifty percent (50%) of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now exists or
is hereafter organized or acquired by the Company or a Subsidiary.
III. Eligibility
3.1 Eligible Employees. Any person who is an Employee as of the Offering
Date of a given Offering Period shall be eligible to participate in
such Offering Period under the Plan, subject to the requirements of
Section 4.1 and the limitations imposed by Code Section 423(b).
3.2 Excluded Employees. Notwithstanding any Plan provisions to the
contrary, no Employee shall be granted an option under the Plan if: (i)
immediately after the grant, such Employee (or any other person whose
stock would be attributed to such Employee pursuant to Code Section
424(d)) would own capital stock of the Company and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the
Company or of any subsidiary corporation (as defined in Code Section
424(f)); or (ii) such option would permit his or her rights to purchase
stock under all employee stock purchase plans (described in Code
Section 423) of the Company and its Subsidiaries to accrue at a rate
which exceeds twenty-five thousand dollars ($25,000) of the Fair Market
Value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
IV. Participation
4.1 Employee Participation. An eligible Employee may become a participant
in the Plan by completing a subscription agreement on the form provided
by the Company and filing it with the Administrator prior to the
applicable Offering Period, unless a later time for filing the
subscription agreement is set by the Administrator for all eligible
Employees with respect to a given Offering Period. The subscription
agreement shall set forth the percentage of a participant's
Compensation (subject to Section 5.1 below) to be paid as Contributions
under the Plan.
4.2 Payroll Deductions. Payroll deductions shall commence as of the first
payroll following the Offering Date for an Offering Period (or as soon
as administratively practicable thereafter) and shall end on the last
payroll paid on or prior to the Purchase
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<PAGE> 6
Date for an Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in
Article 9.
V. Method of Payment of Contributions
5.1 Amount of Payroll Deductions. A participant shall elect to have payroll
deductions made during an Offering Period in an amount not less than
one percent (1%) and not more than fifteen percent (15%) of such
participant's Compensation during an Offering Period (with such
deductions to be made ratably on each applicable pay date during the
Offering Period, except as otherwise permitted by the Administrator in
its discretion). All payroll deductions made by a participant shall be
credited to his or her account under the Plan. A participant may not
make any additional payments into such account.
5.2 Change and Discontinuation of Payroll Deduction Election. A participant
may discontinue his or her participation in the Plan as provided in
Article 9, or on one occasion only during an Offering Period may
increase and on one occasion only during such Offering Period may
decrease the rate of his or her Contributions with respect to the
Offering Period by completing and filing a new subscription agreement
with the Administrator. Any such change in the payroll deduction rate
shall be effective as soon as administratively practicable after the
Administrator receives the new subscription agreement from the
participant.
5.3 Limit on Payroll Deductions. Notwithstanding the foregoing, to the
extent necessary to comply with Code Section 423(b)(8) and Section 3.2
herein, a participant's payroll deductions may be decreased during any
Offering Period scheduled to end during the current calendar year to
zero percent (0%) at such time that the aggregate of all payroll
deductions accumulated with respect to such Offering Period and any
other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall resume at the elected rate set forth
in such participant's subscription agreement at the beginning of the
first Offering Period that is scheduled to end in the following
calendar year, unless terminated by the participant as provided in
Article 9.
VI. Grant of Option
6.1 Grant of Option. On each Offering Date, each eligible Employee
participating in such Offering Period shall be granted an option to
purchase the number of Shares determined by dividing such Employee's
Contributions accumulated prior to the Purchase Date for such Offering
Period and retained in the participant's account as of such Purchase
Date by the applicable Purchase Price. There is no limit on the number
of Shares that a participant may purchase under the Plan; provided,
however, that the Board may impose a limit on the number of Shares a
participant may purchase under the Plan at any time; provided, further,
that such purchase shall be subject to the limitations set forth in
Section 3.2 and Article 11.
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<PAGE> 7
VII. Exercise of Option
7.1 Exercise of Option. Unless a participant withdraws from the Plan as
provided in Article 9, his or her option for the purchase of Shares
will be exercised automatically on the Purchase Date for an Offering
Period, and the maximum number of full Shares subject to the option
will be purchased at the applicable Purchase Price with the accumulated
Contributions in his or her account. No fractional Shares shall be
issued under the Plan. The Shares purchased upon exercise of an option
hereunder shall be deemed to be transferred to the participant on the
Purchase Date. During his or her lifetime, a participant's option to
purchase Shares hereunder is exercisable only by him or her.
VIII. Delivery
8.1 Delivery of Shares. As soon as administratively practicable after the
Purchase Date for an Offering Period, the Administrator shall arrange
the delivery to each participant, as appropriate, of a certificate
representing the Shares purchased upon exercise of his or her option.
As an alternative, the Administrator may make arrangements with a
brokerage firm to establish a brokerage account for each participant,
to which Shares purchased for the participant upon exercise of his or
her option shall be credited and held for the participant. Any payroll
deductions accumulated in a participant's account which are not
sufficient to purchase a full Share shall be retained in the
participant's account for the subsequent Offering Period, subject to
earlier withdrawal by the participant as provided in Article 9 below.
Any other amounts left over in a participant's account after a Purchase
Date shall be returned to the participant.
IX. Withdrawal and Termination of Employment
9.1 Voluntary Withdrawal of Participation. A participant may withdraw all
Contributions credited to his or her account under the Plan at any time
prior to a Purchase Date by giving written notice to the Administrator
(partial withdrawals are not permitted). All of the participant's
Contributions credited to his or her account will be paid to him or her
as soon as administratively practicable after receipt of his or her
withdrawal notice and his or her option for the current period will be
automatically terminated. In addition, no further Contributions for the
purchase of Shares will be made during the Offering Period on the
participant's behalf.
9.2 Withdrawal Upon Termination of Employment. Upon termination of the
participant's Continuous Status as an Employee prior to the Purchase
Date of an Offering Period for any reason, including retirement or
death, the Contributions credited to his or her account will be
returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Article 13, and his or her
option will terminate automatically.
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<PAGE> 8
9.3 Involuntary Withdrawal of Participation. In the event an Employee fails
to remain in Continuous Status as an Employee of the Company
customarily employed for at least twenty (20) hours per week and more
than five (5) months in a calendar year during an Offering Period in
which the Employee is a participant, he or she will be deemed to have
elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option
will be terminated.
9.4 Effect of Withdrawal. A participant's withdrawal from an Offering
Period will not have any effect upon his or her eligibility to
participate in a succeeding Offering Period or in any similar plan
which may hereafter be adopted by the Company.
X. Interest
10.1 Interest Accrual. No interest shall accrue on the Contributions of a
Plan participant.
XI. Shares
11.1 Shares Available Under the Plan. Subject to adjustment as provided in
Article 17, the maximum number of Shares that initially shall be made
available for sale under the Plan shall be 500,000 Shares. In addition,
on the first day of each of the Company's fiscal years, the aggregate
number of Shares reserved for issuance under the Plan shall be
increased automatically by the number of Shares purchased under the
Plan in the preceding fiscal year; provided, that the aggregate number
of Shares reserved under the Plan shall not exceed 1,000,000 Shares. If
the Board determines that, on a given Purchase Date, the number of
Shares with respect to which options are to be exercised may exceed the
number of Shares available for sale under the Plan on such Purchase
Date, the Board may in its sole discretion provide: (x) that the
Company shall make a pro rata allocation of the Shares available for
purchase on the Purchase Date, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Shares
on such Purchase Date, and continue subsequent Offering Periods; or (y)
that the Company shall make a pro rata allocation of the Shares
available for purchase on the Purchase Date in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion
to be equitable among all participants exercising options to purchase
Shares on such Purchase Date, and thereafter terminate the Plan
pursuant to Article 18 below.
11.2 Voting of Shares. The participant shall have no interest or voting
right in Shares covered by his or her option until such option has been
exercised.
11.3 Registration of Shares. Shares to be delivered to a participant under
the Plan will be registered in the name of the participant or in the
name of the participant and his or her spouse (or, where applicable, in
the name of a broker or other nominee or custodian for the benefit of
the participant or the participant and his or her spouse).
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<PAGE> 9
XII. Administration
12.1 Plan Administration. The Board shall supervise and administer the Plan
and shall have full power to adopt, amend and rescind any rules deemed
desirable and appropriate for the administration of the Plan and not
inconsistent with the Plan, to construe and interpret the Plan, and to
make all other determinations necessary or advisable for the
administration of the Plan. In its sole discretion, the Board may
appoint an Administrator and delegate all or a portion of its authority
to such Administrator to administer the Plan.
XIII. Designation of Beneficiary
13.1 Beneficiary Designation. A participant may file a written beneficiary
designation with the Administrator designating the beneficiary who is
to receive any Shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to
the end of an Offering Period but prior to delivery to him or her of
such Shares and cash. In addition, a participant may file a beneficiary
designation with the Administrator designating the beneficiary who is
to receive any cash from the participant's account under the Plan in
the event of such participant's death prior to the Purchase Date of an
Offering Period.
13.2 Change of Beneficiary Designation. A beneficiary designation filed
under Section 13.1 may be changed by the participant at any time by
written notice to the Administrator. In the event of the death of a
participant and in the absence of a valid designated beneficiary who is
living at the time of such participant's death, the Administrator shall
deliver such Shares and/or cash to the executor or administrator of the
estate of the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Administrator), the
Administrator, in its discretion, may deliver such Shares and/or cash
to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the
Administrator, then to such other person as the Administrator may
designate.
9
<PAGE> 10
XIV. Transferability
14.1 Transfer of Plan Benefits. Neither Contributions credited to a
participant's account nor any rights with regard to the exercise of an
option or to receive Shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way (other than by
will, the laws of descent and distribution, or as provided in Article
13) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect, except that the
Company may treat such act as a voluntary election to withdraw funds in
accordance with Article 9.
XV. Use of Contributions
15.1 Use of Contributions. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose,
and the Company shall not be obligated to segregate such Contributions
from other Company assets.
XVI. Reporting of Accounts
16.1 Reporting of Accounts. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to
participating Employees at least annually, which statements will set
forth the amounts of Contributions, the per Share Purchase Price, the
number of Shares purchased and the remaining cash balance, if any.
XVII. Adjustments Upon Changes in Capitalization;
Change in Control
17.1 Adjustment. Subject to any required action by the Company's
stockholders, the number of Shares covered by each option under the
Plan that has not yet been exercised and the number of Shares which
have been authorized for issuance under the Plan but have not yet been
placed under option (collectively, the "Reserves"), as well as the
maximum number of Shares which may be purchased by a participant in an
Offering Period, the number of Shares set forth in Section 11.1 above,
and the price per Share covered by each option under the Plan that has
not yet been exercised, shall be appropriately adjusted to reflect any
stock dividend, stock split, combination or exchange of shares or other
change in capitalization with a similar substantive effect upon the
Plan or the awards granted under the Plan. The Board shall have the
power and sole discretion to determine the nature and amount of the
adjustment to be made in each case. The adjustment so made shall be
final and binding on all participants.
17.2 Change in Control. Upon a Change of Control, each outstanding option
shall be assumed by the "Acquiring Corporation" (as defined below) or
parent thereof or replaced with a comparable option or right to
purchase shares of the capital stock, or equity equivalent instrument,
of the Acquiring Corporation or parent thereof, or other
10
<PAGE> 11
comparable rights (such assumed and comparable options and rights,
together, the "Replacement Options"); provided, however, that if the
Acquiring Corporation or parent thereof does not agree to grant
Replacement Options, then all outstanding Options which have been
granted under the Plan and which are not exercisable as of the
effective date of the Change of Control shall automatically accelerate
and become exercisable immediately prior to the effective date of the
Change of Control as described below. The term "Acquiring Corporation"
means the surviving, continuing, successor or purchasing corporation,
as the case may be. In the event that the successor corporation refuses
to grant Replacement Options, the Offering Period then in progress
shall be shortened and a new Purchase Date shall be set (the "New
Purchase Date"), as of which date the Offering Period then in progress
will terminate. The New Purchase Date shall be on or before the date of
consummation of the Change in Control and the Board shall notify each
participant in writing, at least ten (10) days prior to the New
Purchase Date, that the Purchase Date for his or her option has been
changed to the New Purchase Date and that his or her option will be
exercised automatically on the New Purchase Date, unless prior to such
date he or she has withdrawn from the Offering Period as provided in
Article 9. For purposes of this Article 17, an option granted under the
Plan shall be deemed to be assumed, without limitation, if, at the time
of issuance of the stock or other consideration upon a Change in
Control, each holder of an option under the Plan would be entitled to
receive upon exercise of the option the same number and kind of shares
of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
Change in Control if the holder had been, immediately prior to the
transaction, the holder of the number of Shares covered by the option
at such time (after giving effect to any adjustments in the number of
Shares covered by the option as provided for in this Article 17);
provided, however, that if the consideration received in the
transaction is not solely common stock of the Acquiring Corporation,
the Board may, with the consent of the Acquiring Corporation, provide
for the consideration to be received upon exercise of the option to be
solely common stock of the Acquiring Corporation or its parent equal in
Fair Market Value to the per Share consideration received by holders of
Common Stock in the transaction. Notwithstanding any other provision of
this Section, the Board may determine, in its discretion, to terminate
any Offering Period in progress immediately prior to the effective date
of a Change of Control and to return all unused Contributions to
Participants.
17.3 Liquidation and Dissolution. In the event of a dissolution or
liquidation of the Company, the Offering Period then in progress will
terminate immediately prior to the consummation of such action, unless
otherwise provided by the Board.
XVIII. Amendment or Termination; Administrative Changes
18.1 Authority to Amend or Terminate Plan. The Board may at any time and for
any reason terminate or amend the Plan; provided, that no amendment to
the Plan shall be deemed effective if and to the extent it would cause
the Plan to no longer meet the applicable requirements of Code Section
423; provided further, that to the extent necessary to comply with Rule
16b-3 under the Exchange Act, or with Code Section 423 (or any
11
<PAGE> 12
successor rule or provision or any applicable law or regulation), the
Company shall obtain stockholder approval in such a manner and to such
a degree as so required. In the event that the Plan is to be terminated
while an Offering Period is in progress, the Board may determine that
such Offering Period shall be shortened and a New Purchase Date set, as
of which date the Offering Period then in progress will terminate. In
such event, the Board shall notify each participant in writing, at
least ten (10) days prior to the New Purchase Date, that the Purchase
Date for his or her option has been changed to the New Purchase Date
and that his or her option will be exercised automatically on the New
Purchase Date, unless prior to such date he or she has withdrawn from
the Offering Period as provided in Article 9. Alternatively, the Board
may determine, in its discretion, to terminate the Offering Period in
progress at the time of the Plan's termination and to return all unused
Contributions to Participants.
18.2 Changes in Plan Administration. Without the need for Plan amendment,
the Administrator shall be entitled in its discretion to limit the
frequency and/or number of changes in the amount withheld during an
Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in
order to adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable waiting
and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for
each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or
procedures as the Administrator, in its sole discretion, determines to
be advisable.
XIX. Notices
19.1 Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the
receipt thereof.
XX. Conditions Upon Share Issuance
20.1 Conditions Upon Share Issuance. Shares shall not be issued with respect
to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, applicable state
securities laws and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As
a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of
any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the
12
<PAGE> 13
Company, such a representation is required by any of the aforementioned
applicable provisions of law.
XXI. Miscellaneous
21.1 Term of Plan and Effective Date. The Plan shall become effective upon
the IPO Date. It shall continue in effect for a term of twenty (20)
years unless sooner terminated under Article 18.
21.2 Additional Restrictions. The terms and conditions of options granted
hereunder to, and the purchase of Shares by, persons subject to Section
16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options
shall contain, and the Shares issued upon exercise thereof shall be
subject to, such additional conditions and restrictions as may be
required by Rule 16b-3 to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
21.3 Withholding. The Company shall have the right to deduct from all
amounts paid to a participant in cash as salary, bonus or other
compensation any taxes required by law to be withheld in respect of
awards granted under the Plan. In the Administrator's discretion, a
participant may be permitted to elect to have withheld from the Shares
otherwise issuable to the participant, or to tender to the Company, the
number of Shares whose Fair Market Value equals the minimum amount
required to be withheld.
21.4 Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations,
and rights relating to the Plan, shall be determined solely by the
Board. Any determination by the Board shall be final and binding on all
participants. The Plan shall be governed in accordance with the laws of
the State of [Delaware] without regard to the conflict of law
provisions of such laws.
21.5 No Right to Option; No Right to Employment. No person shall have any
claim of right to be granted an option under the Plan. Neither the Plan
nor any action taken hereunder shall be construed as giving any
employee any right to be retained in the Company's employ or any of its
subsidiaries or as giving any consultant, advisor or director any right
to continue to serve in such capacity.
21.6 Awards Not Includable for Benefit Purposes. Income recognized by a
participant pursuant to the provisions of the Plan shall not be
included in the determination of benefits under any "employee benefit
plan" (as such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974) or such other benefit plan,
policy or arrangement applicable to the participant that are maintained
by the Company or any of its subsidiaries, except as may be provided
under the terms of such plans or determined by resolution of the Board.
21.7 No Strict Construction. No rule of strict construction shall be implied
against the Company, the Board, or any other person in the
interpretation of any of the terms of
13
<PAGE> 14
the Plan, any award granted under the Plan or any rule or procedure
established by the Board.
21.8 Captions. All Section headings used in the Plan are for convenience
only, do not constitute a part of the Plan, and shall not be deemed to
limit, characterize or affect in any way any provisions of the Plan,
and all provisions of the Plan shall be construed as if no captions
have been used in the Plan.
21.9 Severability. Whenever possible, each provision in the Plan and every
option at any time granted under the Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any
provision of the Plan or any option at any time granted under the Plan
shall be held to be prohibited by or invalid under applicable law, then
such provision shall be deemed amended to accomplish the objectives of
the provision as originally written to the fullest extent permitted by
law, and all other provisions of the Plan and every other option at any
time granted under the Plan shall remain in full force and effect.
21.10 Legends. All certificates for Shares delivered under the Plan shall be
subject to such transfer and other restrictions as the Board may deem
advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange or quotation
system upon which the Common Stock is then listed or quoted and any
applicable federal or state securities law, and the Board may cause a
legend or legends to be put on any such certificates to make
appropriate references to such restrictions.
14
<PAGE> 15
APPENDIX A
DESIGNATED SUBSIDIARIES PARTICIPATING UNDER THE PLAN
[NONE DESIGNATED]
15
<PAGE> 16
SERVICEWARE.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
ServiceWare.com, Inc. Employee Stock Purchase Plan (the "Plan") for the Offering
Period from __________________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 15% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions during the Offering Period at
a rate consistent with the election stated in Item 2 of this Subscription
Agreement. I understand that all payroll deductions made by me shall be credited
to my account under the Plan and that I may not make any additional payments
into such account. I understand that all payments made by me shall be
accumulated for the purchase of Shares at the applicable purchase price
determined in accordance with the Plan. I further understand that, except as
otherwise set forth in the Plan, Shares will be purchased for me automatically
on the Purchase Date of the Offering Period unless I otherwise withdraw from the
Plan by giving written notice to the Company for such purpose.
4. I understand that I may discontinue my participation in accordance
with the Plan's terms at any time prior to a Purchase Date. I also understand
that I can increase or decrease the rate of my Contributions on one occasion
only with respect to any increase and one occasion only with respect to any
decrease during any Offering Period by completing and filing a new Subscription
Agreement, such Subscription Agreement to take effect as soon as
administratively practicable after the date it is filed with the Administrator.
Further, I may change the rate of deductions for future Offering Periods by
filing a new Subscription Agreement, and any such change will be effective as of
the beginning of the next Offering Period. In addition, I acknowledge that,
unless I discontinue my participation in the Plan, my election will continue to
be effective for each successive Offering Period.
5. I have received a copy of the complete "ServiceWare.com, Inc.
Employee Stock Purchase Plan" and a prospectus describing the Plan's terms. I
understand that my participation in the Plan is in all respects subject to the
terms of the Plan.
<PAGE> 17
6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):
_______________________________________
_______________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _______________________________________________
(First) (Middle) (Last)
(Relationship) _______________________________________________
(Address) _______________________________________________
_______________________________________________
_______________________________________________
8. I understand that if I dispose of any shares acquired by me pursuant
to the Plan within 2 years after the Offering Date of an Offering Period during
which such shares were purchased on my behalf or within 1 year after the
Purchase Date for such Offering Period, I will be treated for federal income tax
purposes as having received ordinary compensation income at the time of such
disposition in an amount equal to the excess of the fair market value of the
shares on the Purchase Date over the price which I paid for the shares,
regardless of whether I disposed of the shares at a price less than their fair
market value at the Purchase Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER
THE DATE OF ANY SUCH DISPOSITION, AND I WILL MAKE ADEQUATE PROVISION FOR
FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON
THE DISPOSITION OF THE COMMON STOCK. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the
2-year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase
price which I paid for the shares under the option, or (2) 15% of the fair
market value of the
2
<PAGE> 18
shares on the Offering Date or the Purchase Date for a particular Offering
Period, whichever is lower. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I UNDERSTAND THAT THIS TAX SUMMARY IS ONLY A SUMMARY AND IS SUBJECT TO
CHANGE. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
__________________________________
SOCIAL SECURITY #
__________________________________
DATE:
__________________________________
3
<PAGE> 19
SERVICEWARE.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my
participation in the ServiceWare.com, Inc. Employee Stock Purchase Plan (the
"Plan") for the Offering Period that began on ____________, _____. This
withdrawal covers all Contributions currently credited to my account and is
effective on the date designated below.
I understand that all Contributions credited to my account will be paid
to me as soon as administratively practicable following receipt by the
Administrator of this Notice of Withdrawal and that my option for the current
period will automatically terminate, and that no further Contributions for the
purchase of shares can be made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated: ______________________ ____________________________________
Signature of Employee
____________________________________
Social Security Number
<PAGE> 1
EXHIBIT 23
We consent to the reference of our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our report dated
January 28, 2000 with respect to the financial statements of ServiceWare.com,
Inc. and to the use of our report dated March 30, 2000 with respect to the
financial statements of Molloy Group, Inc. included in the Registration
Statement (Form S-1) and related Prospectus of ServiceWare.com, Inc. for the
registration of its common stock.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,623,033
<SECURITIES> 0
<RECEIVABLES> 3,594,951
<ALLOWANCES> 312,206
<INVENTORY> 0
<CURRENT-ASSETS> 10,362,311
<PP&E> 4,630,839
<DEPRECIATION> 2,635,341
<TOTAL-ASSETS> 26,733,903
<CURRENT-LIABILITIES> 13,124,454
<BONDS> 4,266,394
21,930,366
0
<COMMON> 5,263,743
<OTHER-SE> (16,750,163)
<TOTAL-LIABILITY-AND-EQUITY> 26,733,903
<SALES> 0
<TOTAL-REVENUES> 17,651,875
<CGS> 0
<TOTAL-COSTS> 4,487,742
<OTHER-EXPENSES> 23,053,267
<LOSS-PROVISION> 312,206
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,062,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,889,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,062,347)
<EPS-BASIC> (1.88)
<EPS-DILUTED> (1.88)
</TABLE>
