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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
to
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Commission File Number: 0-21202
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BROCK INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
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GEORGIA 58-1588291
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2859 PACES FERRY ROAD, SUITE 1000, ATLANTA GEORGIA 30339
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (770) 431-1200
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 24, 1997: approximately $10,998,988.
Number of shares of Common Stock outstanding as of March 24, 1997:
4,950,792.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held May 6, 1997 are incorporated by reference
into Part III of this Report. Other than those portions specifically
incorporated by reference herein, the 1996 Annual Report to Shareholders and
the Proxy Statement for the Annual Meeting of Shareholders to be held on May 6,
1997 are not deemed to be filed as part of this Report.
PART I
ITEM 1. BUSINESS.
This section and other parts of this Form 10-K contain forward-looking
statements that involve uncertainties and risk. Brock International's results
may differ from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to,
those items discussed below and the details in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GENERAL
Brock International, Inc. designs, develops, markets and supports
TakeControl(TM) 97 and the Brock Activity Manager(TM) (BAM) product lines.
TakeControl '97 is a windows based integrated client/server sales and
marketing solution that supports sales and marketing automation needs in
multiple industries. The BAM product line is a traditional UNIX character base
sales, marketing and customer service solution. Both product lines assist
companies to optimize their revenues, relationships and results. From the
Company's inception, the Brock system was designed to take advantage of the
open systems concept to run on multiple hardware platforms and operating
systems. The Company has further developed its systems to support various
relational database management systems, networks, communication devices and
architectures -- including client/server, shared multi-user and standalone.
The Company refers to this open systems strategy and the inherent technical
flexibility of the Company's system as "environmental independence." The
system's ToolShop(TM) is licensed with the software applications and
facilitates rapid customization and installation. Brock's software products
operate on a wide range of hardware platforms, including Hewlett-Packard
Corporation, IBM, Sun Microsystems, Data General and others, and personal
computers operating on LANs.
Brock International, Inc. was launched in October 1984 as Brock
Control Systems. Founded by Richard T. Brock, the Company was a pioneer in the
sales automation market and an early developer of enterprise customer
management systems. The Company went public at the end of March 1993. In
February 1996 the Company changed its name to Brock International Inc., to
reflect its growing worldwide market reach. Since its inception, the Company
has licensed thousands of users in hundreds of enterprises throughout the
Americas, Europe and the Pacific Rim.
Restructuring
Under the direction of new president and chief executive officer R.
Douglas MacIntyre(1), the Company implemented a restructuring plan in December
1996 and completed the restructuring of operations in January 1997. Designed
to restore financial health and lay the foundation for future growth, the plan
called for a reduced cost structure that included the termination of 41
employees and realignments throughout the Company.
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(1) R. Douglas MacIntyre assumed the role of President & Chief Executive Officer
on December 5, 1996
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COMPANY STRATEGY
The Company believes that the sales automation industry faces
significant challenges as it matures from an industry fueled by the acceptance
of technology-inspired early adopters and moves into a more widely accepted
mainstream market. Based on this assumption and the Company's own awareness of
the marketplace for sales automation solutions, management believes that there
is a significant need for focused customer care. In response to this
development, the Company has created an implementation strategy that
reengineers the steps and processes for successful implementation of sales
automation projects. With the Brock implementation approach, the Company's
Professional Services Organization performs a business analysis prior to
implementation to assess the customer's desired results, confirms expectations
and refines an overall analysis of the customer's needs. In addition, the
company has developed a complementary service offering called "Rapid
Implementation Options" (RIO(R)), that emphasizes "time to benefit." The
purpose of RIO is to provide a fixed-fee, fixed delivery solution that will
allow a company to quickly recognize the benefit and value of the newly
licensed software solution.
While no industry standard exists for such implementation approaches,
several companies are focused specifically on providing such implementations
and are attempting to establish their implementation methodology as accepted
industry standards. Examples of such companies include Cambridge Technology
Partners and Andersen Consulting, each of whom have created specific operating
units focused on the delivery of sales automation solutions. Neither
organization is viewed by the company as a competitor. In the event that a
sales automation implementation strategy other than the Company's
implementation approach becomes the clearly established and widely accepted
industry standard, the Company may need to change or abandon its implementation
strategy in favor of the newly established strategy, or may be forced to align
itself with such companies, or be faced with the obstacle of selling against
other vendors whom rely on third party implementation services.
The Company's objective is to build its reputation as a leading
provider of multi-user, enterprise-wide sales and marketing solutions. Brock's
growth strategy emphasizes the following components: (i) Providing
value-added enhancements and services to existing customers (ii) Shifting focus
to mid-size implementations (iii) Providing fixed-fee Rapid Implementations
(iv) Expanding the product line (v) Leveraging Strategic Alliances and (vi)
Expanding International Operations
Providing value-added services and enhancements to existing customers.
Brock focuses on providing value to its existing customers by offering
an array of post-sale consulting, training and support services and software
enhancements. Because the Company's customers use the Brock system to support
strategic and mission-critical aspects of their businesses, a high level of
customer service is critical to customer satisfaction in the Company's market.
Management believes that the Company's commitment to service and support has
been and will continue to be a significant element of its business strategy.
Brock's Professional Services Organization provides consulting and technical
assistance to the Company's customers through fee-based consulting, system
installation and customization, training and system support services. The
Company seeks to differentiate itself from its competitors by offering superior
customer service.
Shifting focus to mid-size implementations
The Company has positioned itself to focus on providing sales
automation solutions to mid-size implementations. Brock has reduced its cost
structure and changed its sales and marketing approach to target organizations
that are typically greater than $25 million in revenue. According to a recent
IDC study the mid-market is forecasted to exceed a 30% growth rate.
Expanding Product Line
The Company seeks to augment its TakeControl and BAM product
lines through either internal development or acquisition.
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Leverage Strategic Alliances.
The sales performance solutions the Company delivers to customers are
a combination of Brock's and various strategic alliance partners. The Company
seeks to select strategic partners who are best in-class providers of hardware,
software, telephony and consulting. Alliance partners provide value-added
offerings to supplement functionality or joint marketing and lead generation
opportunities or system integration expertise. The Company has also developed
interfaces with many complementary software offerings like Microsoft Schedule+,
Microsoft Word, Microsoft Access and Borland's ReportSmith. The Company
expects to continue to seek out and interface with other complementary
offerings. For example, Brock is a Microsoft Solutions Provider and part of
the Oracle Cooperative Application Initiative.
Expanding International Operations
In 1996, the Company derived approximately 33% of its total revenues
from the international segment of its business. This compares with
approximately 21% and 22% of its revenues in 1995 and 1994, respectively.
Management believes that Brock is positioned to take advantage of the
international market opportunity over the next several years. The ToolShop
facilitates easy translation of the system's applications, menus, screens and
reports into many foreign languages without the need for source code
alterations. The Company's strategy for expanding its international operations
involves maintaining a core group of trained affiliates, primarily with
non-exclusive territorial rights, whose commitment to customer service and
support Brock carefully evaluates and monitors. The Company has established a
network of sixteen international affiliates located in Australia, Belgium,
Brazil, Canada, France, Germany, Israel, Italy, Mexico, New Zealand, Spain,
South Africa, Sweden and The United Kingdom, and it continues to seek qualified
international affiliates. While the Company's experience with its
international affiliates has been good, a reduction in sales by any one of the
affiliates or a termination of its relationship with the Company could have an
adverse effect on the Company's international operations. Prior to being
authorized to market Brock products, potential international affiliates are
required to participate in Company-sponsored certification sessions.
SOFTWARE PRODUCTS
Brock's system consists of two families of software applications, the
TakeControl '97 series and the Brock Activity Manager series. Both series
feature integrated modules that address the complete sales cycle: lead
generation, lead qualification, account management (both in-house sales and
field sales), order processing and post-sale customer support. The TakeControl
product is an integrated client/server sales, marketing and customer service
solution. The system's open architecture, modular design and use of relational
databases offer customers an integrated approach to enterprise-wide information
management, yet allow customers to automate a single departmental function
first and then expand incrementally to company-wide applications by adding
modules and users.
TakeControl Software Architecture
The TakeControl product series was developed specifically for the
client/server model of computing in a nomadic user environment, and takes
advantage of several technologies including the Company's application
development environment, ToolShop, Microsoft Windows GUI, and a variety of
relational databases, including Microsoft SQL Server and Access, Oracle and
Informix.
An important feature of the TakeControl series and the Brock Activity
Manager series is that customers' system administrators can readily change
applications, menus, screens and database access methods, design reports and
create new user interfaces. ToolShop is provided with each license and
includes a number of tools for changing functional elements of the system.
This tool can be used to create specific applications and scripts for
telemarketing and customer service, as well as to build unique customizations
or add-on enhancements.
The modules of the TakeControl series and Brock Activity Manager
series are described below. The Company typically markets integrated sales and
marketing solutions tailored to a customer's unique business requirements.
Customer Service requirements are fulfilled via TakeControl service and support
templates.
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Marketing/Call Center. This tailored solution allows users to
generate, track, manage and report on leads as they develop through each stage
of the sales cycle by using sophisticated database marketing tools provided as
part of the module. In-house sales, telesales and field sales professionals can
use the Marketing module to maintain account information and comprehensive
account histories. This module can also minimize compatibility problems
between prospect lists (which may arrive in a wide variety of formats) and the
customer's shared database by: (i) eliminating duplicates, (ii) converting data
in text fields of a prospect list to correspond with the format of the database
in which the data will reside, (iii) coding each new record to specify its
source, and (iv) tagging records that are missing key information (such as the
company name, telephone number, sales representative's name or prospect
identification number) so that the missing information can be entered manually.
The Marketing module enables users to create targeted direct mailing lists and
telemarketing call queues. The module contains extensive reporting features to
allow managers to effectively monitor the sales and marketing process. This
module also allows companies to capture, qualify and respond quickly and
appropriately to incoming calls received in response to marketing programs, to
make outbound calls using a customized campaign script and to manage their own
telemarketing calling process by prioritizing the leads to be called in an
order specified by chosen criteria. The module contains "call guides" that
allow tele-marketers to gather data from and provide information to prospects
while creating a lead "history" for later analysis. The call guides are not
rigid scripts with fixed sequences of questions, but instead provide a way to
exchange specific information with a prospect while following the natural flow
of conversation. The call guides track the information that is necessary to
complete a prospect's qualification and flag missing information so that
tele-marketers can quickly and easily pinpoint the information that is still
needed. Once the information about a lead has been entered, the software
applies criteria pre-defined by the customer to automatically determine whether
a lead is qualified for additional marketing or sales efforts.
This message is reinforced by automatic generation of follow-up
letters. The customer can use the module to develop a selection of
ready-to-send "smart" form letters that can be personalized by adding specific
references to the conversation at strategic points in the letter. The module
thereby encourages the generation of timely, well-crafted and personalized
follow-up letters. Additionally, customers can interface with a variety of
telephony systems for automated call handling.
Sales. This solution provides the mobile or inside sales professional
with the functionality of a sophisticated sales and marketing system on a
laptop or stationary computer. It gives the remote sales professional a
complete set of sales performance tools for opportunity management, account
management and sales planning and forecasting. The module features a
centralized relational database with integral functions to manage lead
qualification, opportunity management, strategic selling, activity scheduling,
reporting, forecasting and sales analysis and integrates with corporate
information systems facilitating the flow of information across the sales,
marketing and customer service departments. Sales reps have access to a sales
reference library and can access information on objection handling, pricing,
competitors and prospect histories. The module provides a sophisticated data
synchronization facility that permits the sales professional to easily make
updates to the corporate database and his or her local database to ensure data
integrity and consistency. Information from the master database located at
corporate headquarters can also be selectively downloaded to the remote sales
professional's portable computer. This information can be individualized by
region, area, territory or prospect. This data synchronization facility
functions as an automatic backup of information for all field sales operations,
and allows the sales process to proceed with minimum disruption and without the
loss of continuity if a sales professional leaves or if data on the remote
computer is lost.
Customer Service. These templates enable companies to focus on and
improve customer satisfaction by reliably capturing and tracking incoming
customer calls, prioritizing customers' problems and assigning problems to the
correct customer service representative for an appropriate and timely response.
It is designed for use both by customer support departments servicing external
customers and for internal help desks providing internal technical support.
When a customer identification number is entered into the system, the module
automatically generates an electronic call slip that contains the company's
name, telephone number, the contact's name and the date and time of the call.
The call slip can be automatically routed to a customer service representative
either on a first-come/first-serve basis or to a specific customer service
representative based on the nature of the problem involved. The module's
problem-tracking database, an on-line information file containing all known
support problems with their proven solutions, provides information to customer
service
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representatives for solving technical, training and documentation-related
problems. The module closes the problem-solving loop by generating a detailed
verification letter at the end of each call concerning the resolution of each
problem, which provides the customer with a record of the resolution for future
reference. The Customer Support/Help Desk module also includes extensive
reporting capabilities so managers can monitor the volume of call activity,
response time and individual customer service representative productivity.
SERVICES
Management believes that the need for expertise in installing,
customizing and using sales, marketing and customer service systems will grow
as the sophistication of software solutions increases due to product evolution
and as software is increasingly employed as a strategic sales tool. The
Company seeks to differentiate itself from other providers of sales, marketing
and customer service software by offering an array of specialized professional
services on a fee basis. Brock's services consist of (i) education and training
services, (ii) customization (iii) customer support services.
Education and Training.
Brock's comprehensive customer training program is designed to
accommodate the diverse needs of its customers and includes a series of
five-day "core" classes, as well as one-, two- and three-day "elective" courses
targeted at specific needs identified by the Company's customer base. Courses
are held on a regularly scheduled basis at the Company's Atlanta headquarters
and at customer sites upon request. Brock charges its customers for education
and training services on a per-attendee basis with a minimum daily charge. For
classes conducted at customer sites, the Company charges a per-day rate for a
set number of attendees.
The Company's core curriculum consists of: TakeControl Application
classes for each module, ToolShop Design Environment I & II, Brock Systems
Management for Client/Server, Data Synchronization Configuration and Brock
Activity Manager Essentials. The core courses provide information on system
and database administration and the use of Brock application and development
tools, including the ToolShop, to tailor the standard modules. Shorter
elective classes include such topics as Capabilities Overview for Managers and
End-User Training.
Professional Services Organization.
The Professional Services Organization's purpose is to facilitate the
customer's successful implementation and full utilization of the Brock system
and to accelerate the customization process. The organization also provides
value to its customers by assisting them in the transition to open systems and
client/server architectures. Brock uses its Professional Services Organization
as a logical extension of its sales force and believes that having an
established Professional Services Organization differentiates the Company from
most of its competitors. Typical services provided include systems analysis,
specification development, installation planning and coordination,
installation, database configuration, screen and report customization,
application development, data conversion, systems interconnectivity, project
management and other special processing requirements related to the
implementation of the TakeControl series and the Brock Activity Manager series.
The Professional Services Organization provides on-site planning, coordination
and installation assistance to each customer in conjunction with the initial
software license agreement for a Brock system. Professional services are
thereafter charged on a time and expenses basis.
Customer Support
Brock's Customer Support Group uses the Customer Support module to
provide individualized customer support. The use of the Customer Support/Help
Desk module provides customer support representatives with access to a problem-
tracking database that includes an on-line problem-solving library for quick
resolution of inquiries and technical problems and maintains a library of
product enhancement requests from customers and Brock employees. Each customer
support representative has immediate access to the customer's account history
while engaged in resolving the customer's problem. Management believes that
the Company gains valuable insight into its customers' needs and the overall
utility of its product by
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being a user of that product and by tracking customer needs and problems with
the Customer Support/Help Desk module. In addition to hotline telephone
services, customer support also includes the provision of updates and
enhancements of Brock products and related documentation.
The Company routinely monitors the effectiveness of its
Customer Support Group. Brock has implemented a system in which the customer
assigns a priority to each call placed to the support team. The Customer
Support Group strives to respond to 95% of their calls within one hour. The
Company also provides "How Are We Doing?" surveys each week to
randomly-selected customers to evaluate the quality and effectiveness of its
Technical Support Group, as well as its timeliness. Management believes that
the emphasis the Company places on the customer support function further
differentiates it from most other sales and marketing software providers.
After a 90-day period of free maintenance and support included with
the initial license, customer support is offered as part of an annual
maintenance fee and therefore generally is not charged separately on an hourly
or other basis.
SOURCES OF REVENUE, PRICING AND MATERIAL TERMS OF LICENSING AGREEMENTS
The Company generates revenues from four different sources. Software
revenues, consist of license fees for the TakeControl series and the Brock
Activity Manager series and revenues from third-party software consisting
primarily of relational databases sold as an integral part of the Brock system.
Customers pay a license fee for the software based upon the number of licensed
users. Brock's pricing is structured so that the licensing of greater numbers
of users within a customer's organization results in a decreasing per-user cost
to that customer.
The Company grants non-exclusive, non-transferable, perpetual licenses
that are site- and computer-specific. The license agreement specifies that the
Company will provide its software in object code format and that the Company
will retain the source code.
The second component of the Company's revenues is services, consisting
of professional consulting and training services. Consulting services are
charged on an hourly basis and billed weekly pursuant to customer work orders.
Training services are charged on a per-attendee basis with a minimum daily
charge. For on-site training a flat fee is charged for the class itself. In
addition to these service agreements the Company also offers fixed-fee, fixed
delivery Rapid Implementation Options.
The Company's maintenance revenues are derived from the provision of:
(i) customer support in the form of "hotline" telephone services and (ii)
updates and enhancements of products and related documentation. After a 90-day
period of free maintenance included with the initial license, customers are
provided maintenance and support services for an annual fee. This fee is
billed monthly, quarterly, or annually and is subject to changes in pricing
upon 90 days' notice to the customer.
The "other" category of revenues consists of miscellaneous other
revenues, including certain reimbursable travel charges.
CUSTOMERS
The Company markets its product as a cross-industry solution for sales
and marketing information management. The wide range of companies that use one
or more modules demonstrates the broad applicability of the Company's product
lines. The Company currently has systems installed in many industries,
including manufacturing, financial services, communications, computers and
software, travel and hospitality and retail. While the Company's customer base
includes many Fortune 1000 companies, the Company's per-user-pricing strategy
makes its products economical for smaller companies as well. Brock's domestic
target market consists of mid-sized business organizations with annual revenues
exceeding $25 million, which represent a target market of approximately 80,000
businesses in the United States. The Company has licensed its products to
thousands of customers in hundreds of enterprises since its inception. None of
Brock's customers generated more than 10% of its revenues in any of the
Company's last three fiscal years.
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SALES AND MARKETING
The Company markets and sells its products and services to the U.S.
and Canadian marketplace through direct and indirect channels. The U.S. direct
channel is supported by 29 sales and marketing professionals as of December 31,
1996. The sales cycle for new customers averages six months after lead
generation and typically includes a session defining the prospect's
requirements, which is sometimes followed by sessions demonstrating a
customized version of the system tailored to the prospect's needs. Sales
representatives are assisted by a team of applications consultants to provide
assistance for customized presentations.
The Company's marketing department is responsible for generating leads
through advertising, public relations, trade shows and seminars, strategic
partnerships and direct mail. The marketing department is also an user of the
Company's products for database marketing, telemarketing and lead tracking and
analysis. The telemarketing organization assists the account executives with
lead qualification and territory management. The Company's system automatically
assigns merit points for lead qualification and only when the lead is qualified
is it turned over to the Company's sales department for immediate follow-up.
Leads that are not sufficiently qualified for sales follow-up are kept in the
database and regularly contacted by the market development organization.
The marketing department is also responsible for market positioning
and strategy, product management, market research and competitive analysis and
provides competitive, customer and prospect input into the Company's product
development efforts. The Company's 1997 annual customer conference will be held
for three days in September and is an opportunity for customers to attend
training sessions, workshops and presentations, and to interact with other
users and Company employees. European and Australian Customer Conferences are
held in alternating cities internationally in October.
STRATEGIC ALLIANCES
The Company believes that additional sales can be gained from
maintaining strategic alliances, primarily in the form of lead referral and
co-marketing arrangements, with various vendors of hardware, relational
databases and other software. Brock presently maintains such relationships
with Microsoft, IBM, Oracle and others. The Company also serves as a
value-added reseller of Informix, Oracle and Sybase databases. While
management believes that the Company's current relationships with these vendors
are strong, there can be no assurance that one or more of these companies will
not begin to market sales and marketing software products in competition with
the Company or otherwise discontinue their relationships with or support of the
Company.
PRODUCT INNOVATION AND DEVELOPMENT
In its product innovation and development activities, the Company
seeks to respond to developing trends already identified and embraced by the
marketplace, as opposed to expending development efforts on unproven or
unaccepted technologies. For example, the Company's products are designed to
exploit proven advanced technologies such as client/server architectures,
relational database management systems, graphical user interfaces and
application development tools. The system's environmental independence gives
the Company the flexibility to evaluate a wide range of new opportunities to
expand the current scope of its products. New opportunities, whether
technology-driven or application-oriented, are evaluated for technical
feasibility and market acceptance prior to development. Although the Company
devotes substantial resources to product innovation and development, there can
be no assurance that the Company will be successful in developing and
marketing, on a timely basis, product enhancements or new products that respond
to technological advances by others or that its new products will adequately
and competitively address the needs of the marketplace.
To facilitate the evaluation and development of new products, the
Company uses a product management methodology that combines the expertise of
Product Management, Product Development and Professional Services departments.
These departments work cooperatively to assess market demand, prioritize
development plans and evaluate technology alternatives. The collective input
and expertise of each department
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provides management with a more accurate understanding of all issues that
influence the Company's product development and marketing strategies. This
approach enables the Company to optimize its product management efforts and
respond quickly to changes in the marketplace. Brock also receives direct
customer input into the product development process.
The Company's current product development efforts are focused on
enhancing the competitiveness of its product line, including development of the
next release of the TakeControl software, continued development of the
TakeControl application templates and research into expanding the Company's
product lines. Set forth below is a summary of recent development activity.
Ongoing System Enhancements.
In 1996, the Company released version 9.05 of ToolShop and version
3.04 of the TakeControl series, including TakeControl Sales, Marketing/Call
Center, Field Sales, Customer Support/Help Desk and Consumer Relations. This
release was the first release of a two-stage plan that provided enhanced
support for international character sets. The Company typically releases a new
version of its system approximately every 12 months, and seeks, in developing
new releases, to enhance the ease with which the system can be installed,
implemented and updated.
TakeControl '97
Previously named ToolShop 9.1 and TakeControl 3.1, a single name
TakeControl '97 was chosen to reflect both the design environment and the
multi-tiered client server software application. The primary focus for the
TakeControl '97 release was practicality and control. The release scheduled
for first quarter 1997, included, but was not limited to, the following key
enhancements: (i) International Support enabling multiple languages and
business vernaculars to be viewed from a single version of source code. (ii)
Team Selling enhancements that provide conflict resolution for shared data,
facilitate data distribution and territory re-alignments in team selling
environments. (iii) Enhanced OpenSync(TM), data-synchronization, including an
improved graphical data distribution builder and "What's New" OpenSync form
that identifies changes that occurred during data synchronization. (iv)
WebOpenSync(TM) a web-based data synchronization technology that enables data
synchronization via Internet web pages. In addition to these enhancements
significant focus was placed in improving performance of the application and
ease of use in the development environment. (v) User Interface improvements.
COMPETITION
The current market for sales, marketing and customer service
automation software is extremely competitive. The Company faces competition
from a variety of software vendors including sales automation and customer
support software vendors and software tools vendors. Although Brock
International believes its past success has been to due in part to its early
entry in the sales automation market with an open client/server solution,
virtually all of Brock's competitor's now offer software products based on a
client/server architecture. As a result, competitive differentiators now
include subtler product features/enhancements, multi-national support, product
extendibility, support and price.
In the sales automation software market, Brock International faces
significant competition from Siebel, Aurum, Onyx and Pivotal Software and to a
lesser degree other companies such as Vantive, Scopus and Saratoga. In this
market, primary competitive factors include breadth and completeness of the
customer interaction solution offered by each vendor, the technological
architecture--including the underlying development environment used to
construct the software application and the flexibility to customize to specific
business needs and the ability to implement the solution and support the
customer.
In the integrated, multi-national client/server segment of the market
in which the Company competes, there are an increasing number of vendors vying
for market share. In addition, the sophistication of such solutions can
require a professional services staff for the product to be effectively
implemented, customized and supported if the customer does not have such
qualified staff in-house or available for the project.
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The Company's products compete on the basis of product flexibility,
customization capability, application features, platform configurations, value,
name recognition and technical support service. Management believes the
Company's products compete favorably with respect to these factors. Some of
the Company's existing competitors, as well as a number of potential market
entrants, have larger technical staffs, larger marketing and sales
organizations and greater financial resources than the Company. Certain of the
Company's competitors also provide cross-industry solutions, while others focus
on specific markets such as the pharmaceutical industry. There can be no
assurance that the Company will be able to achieve the innovative product
development necessary to maintain competitive advantage.
PROPRIETARY RIGHTS AND LICENSES
Brock employs an on-line code management system, which requires
successful accessing of a series of permission levels prior to modifying the
source code, to protect the proprietary nature of its intellectual property.
The Company also depends upon a combination of trade secret, copyright and
trademark laws, license agreements, non-disclosure and other contractual
provisions with customers and employees to protect its proprietary rights in
its products. The Company also maintains confidentiality agreements with its
employees. Because the Company's product allows customers to customize their
applications without altering the source code, the source code for the
Company's products is neither licensed nor provided to customers, although the
Company has contractually agreed in certain instances to have its source code
held in escrow by a third party. Notwithstanding these precautions, it may be
possible for unauthorized persons to copy aspects of the Company's products or
to obtain information that the Company regards as proprietary. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.
EMPLOYEES
As of December 31, 1996, the Company employed 144 persons, including
29 sales and marketing professionals, 57 service and support representatives,
21 administrative personnel and 37 persons involved in product innovation and
development(2). Management believes that the Company's future growth and
success will depend on its ability to retain and to continue to attract highly
skilled and motivated personnel in all areas of its operations.
Item 2. Properties.
As of December 31, 1996 the Company's headquarters and principal
operations are located in approximately 50,000 square feet of leased office
space located in metropolitan Atlanta, Georgia.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Report, the Company was not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
__________________________________
(2) These employee numbers do not reflect the restructuring plan initiated in
December of 1996.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ Stock Market, Inc..
The following table shows the price range of the Company's Common
Stock (high and low bid information) for the indicated fiscal quarters. The
prices represent quotations between dates and do not necessarily represent
actual transactions and do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------
<S> <C> <C> <C>
High $ 11.25 $ 8.75 $ 7.50 $ 4.875
Low $ 6.25 $ 6.50 $ 4.25 $ 2.875
- ------------------------------------------------------------------
1995 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------
High $ 7.50 $ 8.75 $ 9.25 $ 11.00
Low $ 5.75 $ 6.50 $ 7.50 $ 6.75
- -------------------------------------------------------------------
</TABLE>
As of December 31, 1996 there were approximately 77 shareholders of
record and approximately 1600 persons or entities who hold common stock in
nominee name. There were no dividends declared during 1995 or 1996.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data about the
Company for each of the last five fiscal years. The information presented
below has been derived from the Company's audited Financial Statements.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
(In thousands, except per share amounts)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues . . . . . . . . . . . . . . $ 23,222 $28,001 $30,697 $25,465 $17,030
Income (Loss) Before Income Taxes . . . (10,115) (4,928) 737 4,407 2,662
Income Tax (Provision) Benefit(1) . . . 1,055 1,837 ( 192) (1,549) --
Net Income (Loss) . . . . . . . . . . . (9,060) (3,091) 545 2,858 2,662
Net Income (Loss) Per Common Share . . . (1.81) (.63) .11 .66 --
Total Assets(2) . . . . . . . . . . . . 18,367 26,045 29,127 27,591 9,027
Total Non-Current Liabilities(2) . . . . $ 125 -- $ 960 $ 906 $ 2,122
Weighted Average Common and
Common Share Equivalents . . . . . . 5,000 4,932 4,960 4,339 --
Unaudited Pro Forma Data(1):
Income Before Income Taxes . . . . . . . $2662
Provision for Income Taxes . . . . . . . (1,023)
Net Income . . . . . . . . . . . . . . . 1,639
Net Income Per Common Share(3) . . . . . $ .51
Weighted Average Common and
Common Share Equivalents(3) . . . . . 3,211
</TABLE>
________________
(1) The Company was treated as an S Corporation for income tax purposes from its
inception through December 31, 1992. The pro forma information set forth above
has been computed as if the Company were subject to federal and state income
taxes for all periods presented, based on the tax laws in effect during the
respective periods.
(2) The Company's Total Assets increased and its Total Non-Current Liabilities
decreased substantially in 1993 due to the consummation of the Company's
initial public offering ("IPO") of 2,472,500 shares of its Common
11
<PAGE> 12
Stock (including the underwriters' over-allotment option of 322,500 shares) at
a price of $11.00 per share. A portion of the proceeds of the offering were
used to make a distribution of earnings previously taxed to the Company's
pre-IPO shareholders and to repay indebtedness to a bank and the Company's
principal shareholder.
(3) Pro forma Net Income Per Common Share is based on the weighted average
number of shares of Common Stock and common stock equivalents used in the
calculation of Net Income Per Common Share plus the 302,364 shares that the
Company would have had to issue at the IPO price (i) to pay the distribution of
earnings to the Company's pre-IPO shareholders and (ii) to repay all of the
Company's indebtedness to a bank and the Company's principal shareholder.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Financial Statements and Notes thereto of the Company presented elsewhere
herein.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
financial data and the percentages of the Company's net revenues represented by
each line item presented. It also sets forth the percentage change in each
line item presented from 1995 to 1996. Certain percentage columns do not add
to 100% due to rounding.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
Percentage Change
(in thousands) 1996 1995 1995 to 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Software $ 9,834 42.3% $11,720 41.9% -16.1%
Services 7,267 31.3 9,717 34.7 -25.2%
Maintenance 5,143 22.1 5,104 18.2 0.8%
Other 978 4.2 1,460 5.2 -33.0%
--------- ------ ------- ------ -----
Net revenues 23,222 100.0 28,001 100.0 -17.1%
Costs and expenses
Cost of revenues
Software 4,883 21.0 2,477 8.8 97.1%
Services 5,908 25.4 7,968 28.5 -25.9%
Maintenance 2,002 8.6 2,014 7.2 -.6%
Other 895 3.9 1,419 5.1 -36.9%
Sales and marketing 10,083 43.4 12,045 43.0 -16.3%
Product development 2,010 8.7 1,794 6.4 12.0%
General and
Administrative 6,027 26.0 5,625 20.1 7.1%
Restructuring 1,598 6.9 0 0.0 N/A
--------- ------ ------- ------ -----
Operating Income (Loss) (10,184) -43.8 (5,341) -19.1% 90.7%
Interest income-net 69 .3 413 1.5
--------- ------ ------- ------
Income (Loss) before income
taxes $ (10,115) -43.6% $(4,928) -17.6% 105.3%
========== ====== ======= ====== =====
</TABLE>
In general, competition in the software industry has increasingly been
characterized by shortening product cycles. No assurance can be given that the
Company will be immune to this trend. If the product cycle for the Company's
systems proves to be shorter than management anticipates, the Company's pricing
structure and revenues could be impaired. In addition, in order to remain
competitive, the Company may be required to expend a greater percentage of its
revenues on product innovation and development than has historically been the
case. In either case, the Company's gross profit margins and results of
operations could be materially adversely affected.
12
<PAGE> 13
1996 COMPARED TO 1995
Total revenues decreased 17.1% from $28,001,000 in 1995 to $23,222,000
in 1996 as a result of decreased software, services and other revenues.
Software revenues decreased 16.1% from $11,720,000 in 1995 to $9,834,000 in
1996 primarily as a result of fewer licenses sold to new customers. Revenues
from international software licenses increased 51.0% to $5,471,000 in 1996 from
$3,624,000 in 1995, and increased as a percentage of total revenues to 23.6% in
1996 from 12.9% in 1995. The increases were primarily attributable to
additional penetration of international markets. The total revenues from
international sources, which includes maintenance, software license fees and
customizations, also increased to 33.3% of total revenues in 1996 from 20.5% in
1995.
Services revenues decreased 25.2% from $9,717,000 in 1995 to
$7,267,000 in 1996 primarily due to the decrease in software license revenues
and the Company's commitment to enhance customer satisfaction, which, in
certain instances resulted in providing services free of charge or at reduced
rates. Maintenance revenues remained fairly constant in 1996 at $5,143,000
compared to $5,104,000 in 1995. Other revenues decreased 33.0% to $978,000 in
1996 from $1,460,000 in 1995 primarily due to decreases in certain reimbursable
travel charges.
Costs of software revenues increased 97.1% from $2,477,000 in 1995 to
$4,883,000 in 1996 and, as a percentage of software revenues, increased from
21.1% in 1995 to 49.7% in 1996. The increases were primarily a result of an
adjustment of approximately $2,583,000 to write down remaining capitalized
software to net realizable value, as well as, an increase in the amount of
amortization of capitalized software costs from $1,798,000 in 1995 to
$2,080,000 in 1996, offset by a decrease in third party software costs from
$546,000 in 1995 to $126,000 in 1996. Costs of software revenues include costs
of third-party software, amortization of capitalized software costs, and costs
of packaging and documentation materials and related media costs.
Costs of revenues for services decreased 25.9% from $7,968,000 in 1995
to $5,908,000 in 1996 due to decreases in service personnel, and personnel
related costs. Costs of revenues for services as a percentage of services
revenues remained consistent at 81.3% in 1996 compared to 82.0% in 1995. Costs
of revenues for maintenance remained consistent at $2,002,000 in 1996 compared
to $2,014,000 in 1995. Costs of revenues for maintenance as a percentage of
maintenance revenues also remained fairly consistent at 38.9% in 1996 compared
to 39.5% in 1995. Costs of other revenues decreased 36.9% from $1,419,000 in
1995 to $895,000 in 1996 due to a decrease in certain reimbursable travel
charges.
Sales and marketing expenses decreased 16.3% to $10,083,000 in 1996
from $12,045,000 in 1995, but remained fairly consistent as a percentage of
total revenues at 43.4% for 1996 compared to 43.0% for 1995. The decrease is
primarily due to decreases in travel expenses, personnel and personnel related
costs, and decreased advertising campaigns.
The Company's product innovation and development expenditures
increased 7.1% from $4,356,000 in 1995 to $4,667,000 in 1996, and increased as
a percentage of total revenues from 15.6% in 1995 to 20.1% in 1996. The
capitalized portions of these amounts were $2,562,000 and $2,657,000 in 1995
and 1996, respectively. Product development expense increased 12.0% from
$1,794,000 in 1995 to $2,010,000 in 1996. The increase is primarily due to an
increase in contract services related to new product development. The
capitalized portion of the total product development expenditures decreased
slightly from 58.8% in 1995 to 56.9% in 1996.
General and administrative expenses increased 7.1% to $6,027,000 in
1996 from $5,625,000 in 1995. As a percentage of total revenues, general and
administrative expenses increased to 26.0% in 1996 from 20.1% in 1995. These
increases resulted primarily from a one time charge of $646,000 to loss on
assets resulting from write off of obsolete or unused assets, offset by a
decrease in personnel and personnel related costs.
During the fourth quarter of 1996, The Company implemented a
restructuring plan designed to enhance overall competitiveness, productivity
and efficiency through the reduction of overhead costs. As a result, the
Company incurred $1,598,000 in restructuring costs in 1996. The costs consist
of severance and other costs of $492,000 associated with 41 employees company
wide affected by the reduction of the workforce, $635,000 of costs associated
with non-cancelable office space leases, and $471,000 relating to abandonment
of a software product prior to release. See Note 12 of Notes to Financial
Statements.
13
<PAGE> 14
Interest income decreased 53.8% to $225,000 in 1996 from $487,000 in
1995, due to decreased interest on the net proceeds remaining from the
Company's initial public offering on March 31, 1993. Interest expense
increased 110.8% in 1996 to $156,000 from $74,000 in 1995, due to the
borrowings against the Company's line of credit and equipment note payable. The
line of credit has a limit of $2,500,000 and had balances of $1,975,000 and
$985,000 at December 31, 1996 and 1995 respectively. See Note 4 of Notes to
Financial Statements.
1995 COMPARED TO 1994
Total revenues decreased 8.8% from $30,697,000 in 1994 to $28,001,000
in 1995 as a result of decreased software sales, services and other revenues
offset by an increase in maintenance revenues. Software revenues decreased
19.6% from $14,571,000 in 1994 to $11,720,000 in 1995, primarily as a result of
fewer licenses sold to new and existing customers. Revenues from international
software licenses decreased 29.8% from $5,166,000 in 1994 to $3,624,000 in
1995, and decreased as a percentage of total revenues from 16.8% in 1994 to
12.9% in 1995. The decreases were primarily attributable to fewer licenses
sold to international markets. The total revenues from international sources,
which include maintenance, software license fees and customizations, also
decreased from 22.0% of total revenues in 1994 to 20.5% in 1995.
Services revenues decreased 3.1% from $10,025,000 in 1994 to
$9,717,000 in 1995 primarily due to the decrease in software license revenues
and the Company's commitment to enhance customer satisfaction, which led to the
provision of services at reduced charges, or, in some cases at no charge.
Maintenance revenues increased 12.8% from $4,526,000 in 1994 to $5,104,000 in
1995 as a result of the increase in the Company's installed base of systems.
Other revenues decreased 7.3% from $1,575,000 in 1994 to $1,460,000 in 1995
primarily due to decreases in certain reimbursable travel charges.
Costs of software revenues increased 12.0% from $2,212,000 in 1994 to
$2,477,000 in 1995 and, as a percentage of software revenues, increased from
15.2% in 1994 to 21.1% in 1995. These increases were a result of an increase in
the amount of amortization of capitalized software costs from $744,000 in 1994
to $1,798,000 in 1995 offset by a decrease in third party software costs from
$1,286,000 in 1994 to $546,000 in 1995. The increase in amortization is due to
a revision in the estimate of the useful life as disclosed in Note 3 of Notes
to Financial Statements. Costs of software revenues include costs of
third-party software, amortization of capitalized software costs, and costs of
packaging and documentation materials and related media costs.
Costs of revenues for services increased 23.3% from $6,460,000 in 1994
to $7,968,000 in 1995 due to the Company's commitment to enhance customer
satisfaction. Costs of revenues for services as a percentage of services
revenues increased from 64.4% in 1994 to 82.0% in 1995. Costs of revenues for
maintenance decreased 11.4% from $2,274,000 in 1994 to $2,014,000 in 1995
primarily due to a restructuring of personnel in the product development
departments. Costs of revenues for maintenance as a percentage of maintenance
revenues decreased from 50.2% in 1994 to 39.5% in 1995. Costs of other
revenues decreased 3.5% from $1,471,000 in 1994 to $1,419,000 in 1995 due to a
decrease in certain reimbursable travel charges.
Sales and marketing expense increased 11.2% from $10,835,000 in 1994
to $12,045,000 in 1995, and increased as a percentage of total revenues from
35.3% in 1994 to 43.0% in 1995. The increase is primarily due to increased
travel expenses and personnel costs offset by a decrease in commissions expense
resulting from decreased software license revenues.
The Company's product innovation and development expenditures
increased 82.5% from $2,387,000 in 1994 to $4,356,000 in 1995, and increased as
a percentage of total revenues from 7.8% in 1994 to 15.6% in 1995. The
capitalized portions of these amounts were $1,679,000 and $2,562,000 in 1994
and 1995, respectively. Product development expense increased 153.4% from
$708,000 in 1994 to $1,794,000 in 1995. The increase is primarily due to an
increase in personnel and a decrease in the capitalized portion of the total
product development expenditures from 70.3% in 1994 to 58.8% in 1995.
Commencing January 1, 1995, capitalized software costs have generally been
amortized over the lesser of the anticipated software revenue period or three
years.
General and administrative expenses decreased 11.4% from $6,346,000 in
1994 to $5,625,000 in 1995. As a percentage of total revenues, general and
administrative expenses decreased from 20.7% in 1994 to 20.1% in 1995. These
decreases resulted from a decrease in the additions to the Allowance for
Doubtful Accounts from $2,152,000 in
14
<PAGE> 15
1994 to $1,753,000 in 1995, offset by an increase in write-offs that were taken
in 1995 of $1,692,000 from $1,082,000 in 1994.
Interest income increased 40.8% from $346,000 in 1994 to $487,000 in
1995, due to interest on the net proceeds remaining from the Company's initial
public offering on March 31, 1993. The Company incurred interest expense of
$74,000 in 1995 due to the borrowings against the Company's line of credit.
This line of credit has a limit of $2,500,000 and borrowings outstanding were
$985,000 as of December 31, 1995. No interest expense was incurred in 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash of $1,104,000 and
marketable securities of $5,843,000. Cash provided by (used in) operating
activities was $172,000 and ($1,340,000) for 1996 and 1995, respectively. Cash
used in investing activities was $714,000 and $297,000 for 1996 and 1995,
respectively. Cash used to purchase property and equipment was $869,000 and
$1,335,000, respectively, for 1996 and 1995. Cash provided by financing
activities was $1,363,000 and $1,222,000 for 1996 and 1995, respectively. The
Company's line of credit of $2,500,000 had borrowings of $1,975,000 and
$985,000 at December 31, 1996 and 1995, respectively. The Company also had
borrowings outstanding on a note payable of $208,000.
The Company paid down its line of credit in March of 1997, and is
contemplating other financial arrangements, but no agreements are currently in
process. The Company believes that funds generated from operations, cash on
hand and with the restructuring plan implemented in the Fourth Quarter of 1996,
operations for 1997 can be sufficiently funded. The Company has no material
commitments for capital expenditures. Management does not believe that
inflation has historically had a material effect on the Company's results of
operations.
15
<PAGE> 16
QUARTERLY RESULTS
The tables below set forth certain unaudited operating results for
each of the eight quarters in the two-year period ended December 31, 1996.
This information has been prepared by the Company on the same basis as the
Financial Statements appearing elsewhere in this document and includes all
adjustments necessary to present fairly this information when read in
conjunction with the Company's Financial Statements and Notes thereto. The
Company's operating results for any one quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
1996 QUARTER ENDED
------------------
March 31, June 30, Sept 30, Dec 31,
--------- -------- -------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Software $3,223 $2,377 $2,532 $1,702
Services 2,339 1,875 1,495 1,558
Maintenance 1,351 1,310 1,245 1,237
Other 312 256 202 208
---- ---- ---- ----
Net revenues 7,225 5,818 5,474 4,705
Costs and expenses
Cost of revenues
Software 607 511 541 3,224
Services 1,821 1,609 1,305 1,173
Maintenance 536 510 477 479
Other 301 194 196 205
Sales and marketing 2,879 2,393 2,779 2,032
Product development 514 576 436 484
General and
Administrative 843 1,051 1,316 2,817
Restructuring 0 0 0 1,598
--- ----- ----- -----
Operating income (loss) (276) (1,026) (1,576) (7,307)
Interest (expense) income 11 35 19 4
--- --- --- ---
Net income (loss) before taxes (265) (991) (1,557) (7,303)
Tax benefit 94 387 574 0
--- --- --- -----
Net (loss) $ (171) $ (604) $ (983) (7,303)
====== ====== ====== =======
Net (loss) per share $(0.03) $(0.12) $ (.20) $(1.46)
======= ======= ======= =======
Weighted average shares 5,000 4,950 5,000 5,000
====== ===== ===== ======
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-------------------
March 31, June 30, Sept 30, Dec 31,
-------- -------- -------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Software $ 2,031 $2,558 $2,542 $4,589
Services 2,776 2,217 2,154 2,570
Maintenance 1,237 1,321 1,311 1,235
Other 489 319 317 335
------- ------ ------ ------
Net revenues 6,533 6,415 6,324 8,729
Costs and expenses
Cost of revenues
Software 691 628 555 603
Services 2,371 1,938 1,834 1,825
Maintenance 495 523 526 470
Other 468 318 310 323
Sales and marketing 2,667 3,141 2,689 3,548
Product development 418 446 480 450
General and
Administrative 1,946 1,035 1,268 1,376
------- ------ ------ ------
Operating income (loss) (2,523) (1,614) (1,338) 134
Interest(expense)income 123 127 91 72
------- ------ -- ------
Net income before taxes (2,400) (1,487) (1,247) 206
Benefit (Provision) for taxes 892 549 457 (61)
------- ------ ------ ------
Net income (loss) $(1,508) $ (938) $ (790) $ 145
======== ======= ====== ======
Net income (loss) per share $ (0.31) $(0.19) $(0.16) $ 0.03
======= ====== ====== ======
Weighted average shares 4,900 4,900 4,935 4,968
======= ====== ====== ======
</TABLE>
The Company operates with a minimal backlog, and quarterly revenues
and operating results therefore depend on the volume and timing of the signing
of license agreements and product deliveries during the quarter, which are
difficult to forecast. If revenues do not meet the Company's expectations in a
quarter, the negative impact on net income may be magnified by its inability to
adjust spending quickly enough to compensate for the revenue shortfall.
Brock's future operating results may fluctuate as a result of these and other
factors, such as customer buying patterns, the timing of new product
introductions and product upgrade releases, the Company's hiring plans, the
scheduling of sales and marketing programs, sales and bonus plans, and new
product development.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information included under Item 14 (a) (1) and (2)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brock International, Inc.
In our opinion, the financial statements listed in the index appearing under
item 14 (a) (1) and (2) on page 37 present fairly, in all material respects,
the financial position of Brock International, Inc. at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Atlanta, Georgia
February 3, 1997, except as to Note 13, which is as of March 21, 1997
18
<PAGE> 19
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,104 $ 283
Marketable securities 5,843 7,854
Accounts receivable, less allowance for doubtful
accounts of $1,971 and $1,415 4,120 8,092
Deferred tax asset 834 652
Prepaid expenses and other 130 170
--------- ---------
Total current assets 12,031 17,051
Property and equipment, net 2,906 4,035
Software development costs, net 1,508 3,985
Deferred tax asset 1,922 974
--------- ---------
$ 18,367 $ 26,045
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,975 $ 985
Current portion of note payable 83 -
Accounts payable 1,012 957
Accrued restructuring costs 1,111 -
Sales tax payable 378 633
Deferred revenue 1,464 1,971
Accrued employee compensation and benefits 680 1,126
Other accrued liabilities 97 143
--------- ---------
Total current liabilities 6,800 5,815
Note payable 125 -
--------- ---------
6,925 5,815
--------- ---------
Shareholders' equity
Preferred stock, no par; 1,000,000 shares
authorized; and no shares issued or outstanding
Common stock, stated value .0019 per share; 10,000,000
shares authorized; 4,936,555 and 4,908,815 shares issued
and outstanding 9 9
Additional paid-in capital 18,909 18,744
Unrealized loss on marketable securities (14) (121)
Retained (deficit) earnings (7,462) 1,598
-------- ---------
11,442 20,230
Commitments and contingencies (Note 9)
$ 18,367 $ 26,045
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Net revenues
Software $ 9,834 $ 11,720 $ 14,571
Services 7,267 9,717 10,025
Maintenance 5,143 5,104 4,526
Other 978 1,460 1,575
---------- ----------- -----------
23,222 28,001 30,697
Cost and expenses
Cost of revenues
Software 4,883 2,477 2,212
Services 5,908 7,968 6,460
Maintenance 2,002 2,014 2,274
Other 895 1,419 1,471
Sales and marketing 10,083 12,045 10,835
Product development 2,010 1,794 708
General and administrative 6,027 5,625 6,346
Restructuring costs 1,598 - -
---------- ----------- -----------
Operating (loss) income (10,184) (5,341) 391
Interest expense (156) (74) -
Interest income 225 487 346
---------- ----------- -----------
(Loss) income before income taxes (10,115) (4,928) 737
Income tax benefit (provision) 1,055 1,837 (192)
---------- ----------- -----------
Net (loss) income $ (9,060) $ (3,091) $ 545
========== =========== ===========
Net (loss) income per share
Primary $ (1.81) $ (.63) $ .11
========== =========== ===========
Fully diluted $ (1.81) $ (.63) $ .11
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL LOSS ON RETAINED
------------------ PAID-IN MARKETABLE EARNINGS
SHARES AMOUNT CAPITAL SECURITIES (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 4,681,371 $ 9 $16,275 $ - $4,144 $20,428
Exercise of common stock options 193,300 - 2,232 - - 2,232
Unrealized loss on marketable securities - - - (261) - (261)
Net income - - - - 545 545
--------- --- ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1994 4,874,671 9 18,507 (261) 4,689 22,944
Exercise of common stock options 17,564 - 140 - - 140
Employee stock purchases 16,580 - 97 - - 97
Unrealized gain on marketable securities - - - 140 - 140
Net loss - - - - (3,091) (3,091)
--------- --- ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1995 4,908,815 9 18,744 (121) 1,598 20,230
Exercise of common stock options 9,242 - 59 - - 59
Employee stock purchases 18,498 - 106 - - 106
Unrealized gain on marketable securities - - - 107 - 107
Net loss - - - - (9,060) (9,060)
--------- --- ------- ----- ------- -------
BALANCE AT DECEMBER 31, 1996 4,936,555 $ 9 $18,909 $ (14) $(7,462) $11,442
========= === ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
STATEMENT OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net(loss) income $ (9,060) $ (3,091) $ 545
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 3,431 2,958 1,576
Write-down of software development costs to net realizable value 2,583 - -
Loss on disposal of fixed assets 646 - -
Noncash interest on marketable securities (222) (307) (343)
Provision for bad debts 1,837 1,753 2,152
Deferred income taxes (1,130) (1,822) (534)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 2,135 (1,022) (1,641)
Decrease (increase) in prepaid expenses and other 40 584 (552)
Increase (decrease) in accounts payable 55 (868) (261)
Increase in accrued restructuring 1,111 - -
(Decrease) increase in sales tax payable (255) 36 (25)
(Decrease) increase in deferred revenue (507) 390 (65)
(Decrease) increase in accrued employee compensation and benefits (446) 2 (84)
(Decrease) increase in other accrued liabilities (46) 47 (599)
--------- ------- --------
Total adjustments 9,232 1,751 (376)
--------- ------- --------
Net cash provided by (used in) operating activities 172 (1,340) 169
--------- ------- --------
Cash flows from investing activities
Software development costs (2,186) (2,562) (1,679)
Purchases of property and equipment (869) (1,335) (2,320)
Purchase of marketable securities (15,710) (1,661) (1,000)
Proceeds from sale of marketable securities 18,051 5,261 2,310
--------- ------- --------
Net cash used in investing activities (714) (297) (2,689)
--------- ------- --------
Cash flows from financing activities
Exercise of common stock options 59 140 2,232
Proceeds from employee stock purchase plan 106 97 -
Borrowings under line of credit 2,990 2,485 -
Repayments of borrowings under line of credit (2,000) (1,500) -
Borrowings under note payable 250 - -
Repayments of note payable (42) - -
--------- ------- --------
Net cash provided by financing activities 1,363 1,222 2,232
--------- ------- --------
Net increase (decrease) in cash 821 (415) (288)
Cash and cash equivalents, beginning of year 283 698 986
--------- ------- --------
Cash and cash equivalents, end of year 1,104 $ 283 $ 698
========= ======= ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 157 $ 28 $ -
========= ======= ========
Cash paid for income taxes $ - $ - $ 655
========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Brock International, Inc. (the "Company") provides computer-based systems
to automate customers' business activities, including sales lead
generation and monitoring, account management, and post-sale customer
support. Effective February 1996, the Company changed its name from Brock
Control Systems, Inc. to Brock International, Inc.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of the product when
the Company has no significant obligations remaining and collection of the
resulting receivable is probable. Revenue from software customizations is
recorded as services are provided. Maintenance revenue is recognized on a
pro rata basis over the terms of the maintenance agreements.
International sales revenues are generated by independent affiliates who
offer licenses of the Company's products in specific geographic areas.
Under the terms of the Company's international affiliate agreements,
international affiliates collect license fees and maintenance revenues on
behalf of the Company, are generally entitled to retain 50% of the license
fees and maintenance revenues they produce and remit the balance to the
Company. The Company recognizes international sales at the gross license
amount, with the amount paid to the affiliate reflected as a selling
expense. The Company's international maintenance fees are reflected as
maintenance revenues, with the amount retained by affiliates shown as a
cost of maintenance revenue.
The Company provides a 90-day free maintenance period that is included as
part of its initial license agreement with a customer. In accordance with
AICPA Statement of Position (SOP), 91-1, "Revenue Recognition", the
Company recognizes the revenue related to the 90-day period commencing
upon product shipment and accrues a related estimated cost to provide such
services. Revenues for other services that are included in the initial
license agreement, such as planning, installation/implementation and
training, are also recognized upon product shipment, with estimated costs
being accrued.
The Company has a no refund policy. The Company allows its licensees, on
a limited basis, to exchange software designed to operate on one platform
for the same software designed to run on a different platform. In
accordance with SOP 91-1 and Statement of Financial Accounting Standard
(FAS) No 48, "Revenue Recognition When Right of Return Exists", the
Company considers these transactions to be exchanges rather than returns,
and therefore does not provide an allowance for returns.
Advanced billings for software customizations and maintenance contracts
are recorded as deferred revenue in the accompanying balance sheet.
23
<PAGE> 24
ACCOUNTING ESTIMATES
The preparation of 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 date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of marketable securities
and trade receivables. The Company restricts investment of marketable
securities to government securities with high credit standing. Credit
risk on trade receivables is minimized as a result of the large and
diverse nature of the Company's customer base.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investment instruments
with an original maturity of three months or less.
MARKETABLE SECURITIES
In accordance with FAS 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company has classified its securities as
available-for-sale based on their intent and ability to hold the
securities and accordingly, unrealized holding gains and losses are
presented as a separate component of shareholders' equity.
At December 31, 1996 and 1995, marketable equity and debt securities,
including tax free federal, state and municipal bonds, have been
categorized as available for sale and are carried at fair value based on
quoted market prices.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization for financial reporting
purposes are recorded using the straight-line method over estimated useful
lives ranging from three to five years. Expenditures for maintenance and
repairs are charged to expense as incurred.
SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist principally of salaries and
certain other expenses related to development and modifications of
software products capitalized in accordance with the provisions of FAS 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". Capitalization of such costs begins only upon
establishment of technological feasibility as defined in FAS 86 and ends
when the resulting product is available for sale. All costs incurred to
establish the technological feasibility of software products are
classified as research and development and are expensed as incurred.
Software development costs which are capitalized are subsequently reported
at the lower of
24
<PAGE> 25
unamortized cost or net realizable value. Amortization of capitalized
software costs is provided at the greater of the ratio of current product
revenue to the total of current and anticipated product revenue or on a
straight-line basis over the estimated economic life of the software,
which is not more than three years. It is reasonably possible that those
estimates of anticipated product revenues, the remaining estimated
economic life of the product, or both will be reduced significantly in the
near term due to changing technologies. As a result, the carrying amount
of capitalized software costs may be reduced materially in the near term.
During the fourth quarter of 1996, the Company recorded an adjustment to
write-down capitalized software development costs (see Note 3).
INCOME TAXES
The Company accounts for income taxes utilizing the liability method and
deferred income taxes are determined based on the estimated future tax
effects of differences between the financial reporting and income tax
basis of assets and liabilities given the provisions of the enacted tax
laws.
STOCK-BASED COMPENSATION
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations and to elect the disclosure option of FAS 123, "Accounting
for Stock-Based Compensation". Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
NET (LOSS) INCOME PER SHARE
Net (loss) income per share is computed using the weighted average number
of common shares and common share equivalents outstanding during 1996,
1995 and 1994 of 5,000,000, 4,932,000, and 4,960,000, respectively.
Common share equivalents consist of the Company's common shares issuable
upon the exercise of stock options using the treasury stock method. The
Company's stock options are excluded from the calculation of net loss per
share for all periods in which their inclusion is anti-dilutive.
25
<PAGE> 26
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Computer hardware and other equipment $ 4,114 $ 4,666
Furniture and fixtures 1,294 1,176
Purchased software 1,000 1,285
--------- ----------
6,408 7,127
Less: Accumulated depreciation and amortization (3,502) (3,092)
--------- ----------
$ 2,906 $ 4,035
========= ==========
</TABLE>
Depreciation and amortization of property and equipment totaled
approximately $1,351,000, $1,160,000, and $832,000 in 1996, 1995 and 1994,
respectively.
3. PRODUCT DEVELOPMENT EXPENDITURES
Product development expenditures are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Total development expenditures $ 4,667 $ 4,356 $ 2,387
Less: Additions to capitalized software
development, before amortization 2,657 2,562 1,679
--------- --------- ----------
Product development expense $ 2,010 $ 1,794 $ 708
========= ========= ==========
</TABLE>
The activity in the capitalized software development account is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year, net $ 3,985 $ 3,221 $ 2,286
Additions 2,657 2,562 1,679
Amortization expense (2,080) (1,798) (744)
Discontinuance of product prior to release (471) - -
Write-down to net realizable value (2,583) - -
---------- --------- ----------
Balance at end of year, net $ 1,508 $ 3,985 $ 3,221
========= ========= ==========
</TABLE>
During the fourth quarter of 1996, the Company wrote off capitalized
software costs of approximately $471,000 related to its restructuring (see
Note 12). In addition, during the fourth quarter of 1996, the Company
recorded an adjustment of approximately $2,583,000 to write down remaining
capitalized software costs to net realizable value.
26
<PAGE> 27
Effective January 1, 1995, the Company revised its estimate of the useful
life of capitalized software from five years to three years due to
accelerating technological trends. The effect of this change increased
amortization expense for the year ended December 31, 1995, by
approximately $400,000 and increased the net loss by approximately
$248,000 or $.05 per share.
4. BORROWINGS
Long-term debt at December 31, 1996 consists of the following (in
thousands):
<TABLE>
<S> <C>
Note payable to bank due in monthly principal instalments
of $6,944; interest due monthly; interest fixed at 9.25%
per annum; final payment of all unpaid principal and interest
on June 1, 1999 $ 208
Less: Current portion 83
-------
$ 125
=======
</TABLE>
Aggregate annual principal maturities of long-term debt at December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997 $ 83
1998 83
1999 42
----
$208
====
</TABLE>
In July 1995, the Company executed a $2,500,000 line of credit arrangement
with a bank under which $1,975,000 and $985,000 of borrowings were
outstanding at December 31, 1996 and 1995, respectively. The line of
credit bears interest at prime (8.25% at December 31, 1996) and expires in
July 1997. The agreement requires that the Company pay a quarterly fee of
.375% on the unused portion of the line of credit.
The credit agreement requires that the Company, in addition to other
restrictions, maintain a zero balance on the line for a consecutive 60 day
period and maintain a minimum amount of marketable securities and tangible
net worth, as stated in the agreement (see Note 13).
27
<PAGE> 28
5. INCOME TAXES
The components of the (benefit) provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Current
Federal $ - $ - $ (392)
State - - (92)
Foreign 73 56 142
Deferred
Federal (938) (1,590) 449
State (178) (303) 85
Foreign (12) - -
---------- -------- ---------
$ (1,055) $ (1,837) $ 192
========== ======== =========
</TABLE>
The difference between the (benefit) provision for income taxes at the
statutory federal income tax rate of 34% and the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Federal statutory tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit (2.8) (4.7) 2.7
Change in valuation allowance 29.6 4.0 -
Non taxable interest income - (3.4) (16.0)
Other (3.3) 0.8 5.3
----- ----- -----
(10.5)% (37.3)% 26.0%
===== ===== =====
</TABLE>
28
<PAGE> 29
At December 31, 1996 and 1995, deferred tax (assets) liabilities are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Gross deferred tax liabilities
Capitalization of software development costs $ 572 $ 1,513
Depreciation 148 239
---------- ----------
720 1,752
========== ==========
Gross deferred tax assets
Net operating loss carryforwards (5,219) (2,427)
Tax credit carryforwards (618) (475)
Allowance for doubtful accounts receivable (748) (538)
Accrued commissions expense (34) (54)
Accrued vacation expense (46) (44)
Other (6) (37)
---------- ----------
(6,671) (3,575)
Valuation allowance 3,195 197
---------- ----------
(3,476) (3,378)
----------- ----------
Net deferred tax assets (2,756) (1,626)
Less: Current portion 834 652
---------- ----------
$ (1,922) $ (974)
========== ==========
</TABLE>
At December 31, 1996, the Company has foreign tax credit and general
business tax credit carryforwards of approximately $390,000 and $185,000,
respectively, which will expire in years 1998 through 2008 and alternative
minimum tax credits of approximately $43,000. The Company also has net
operating loss carryforwards of approximately $13,748,000 which will
expire in years 2009 through 2011.
FAS 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion or all
of the deferred tax assets will not be realized. A valuation allowance has
been provided for those net operating loss carryforwards and foreign tax
credits which are estimated to expire before they are utilized. During
1996, the Company recorded an increase in the valuation allowance of
approximately $2,998,000. Management's estimate of the valuation
allowance could be affected in the near term based on taxable income
generated in future years.
Although the Company became fully subject to corporate income taxation on
January 1, 1993, under applicable tax laws, the existing shareholders
continue to be liable for any tax deficiencies attributable to the
Company's operations prior to such date. Accordingly, prior to
consummation of the initial public offering, the Company and its present
shareholders entered into a Tax Indemnification Agreement that provides
for the existing shareholders to be indemnified by the Company with
respect to federal and state taxes (plus interest and penalties, as well
as any costs incurred in contesting any dispute with the taxing authority)
resulting from any adjustment to S Corporation income for any taxable year
that was taxed directly to the existing shareholders. This right of
indemnification is absolute and is not conditioned
29
<PAGE> 30
upon realization by the Company of an offsetting adjustment to the
Company's tax liability in a year in which it was not an S Corporation.
6. STOCK OPTION PLANS
In February 1993, the Board of Directors adopted a Stock Option Plan (the
"Option Plan") reserving 400,000 shares of common stock for future
issuance. During 1995 and 1994, an additional 150,000 and 250,000 shares,
respectively, were reserved for future issuance under the Option Plan.
Pursuant to the terms of the Option Plan, a committee of the Board of
Directors is authorized to grant options to key employees of the Company
who are eligible to receive options under the Option Plan. The committee
is further authorized to establish the exercise price, which for incentive
stock options will be equal to the fair market value of the stock at the
date of grant. A portion of the options granted to key employees vest on
the first anniversary of the date of grant and the remainder vest over a
two to four-year period thereafter as specified by the individual grant
agreements. Vesting may accelerate based on individual performance
criteria. Options previously granted to non-management directors under a
formula, as specified by the Option Plan, become exercisable in one-third
increments on the first, second and third anniversaries of the date of
grant. Options expire ten years after the date of grant.
A summary of stock option activity related to the Option Plan is as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 411,428 $ 11.00 - 21.50
Granted 308,150 $ 8.00
Exercised (193,300) $ 11.00
Canceled or expired (97,232) $ 11.00 - 21.50
--------- -----------------------
Outstanding at December 31, 1994 429,046 $ 8.00 - 21.50
Granted 217,350 $ 6.00 - 9.75
Exercised (14,500) $ 8.00
Canceled or expired (149,169) $ 17.25 - 21.50
--------- -----------------------
Outstanding at December 31, 1995 482,727 $ 8.00 - 19.50
Granted 1,755,384 $ 3.125 - 10.25
Exercised (5,250) $ 4.52 - 8.00
Canceled or expired (1,332,543) $ 6.50 - 21.50
--------- ----------------------
Outstanding at December 31, 1996 900,318 $ 3.125 - 8.00
========= ======================
</TABLE>
Prior to adoption of the Option Plan, certain officers and key employees
of the Company were granted nonqualified options to purchase the Company's
common shares. In each case, the exercise price of the options equaled
the estimated fair market value of the common stock on the date of grant
as determined by the Company's Board of Directors and, correspondingly,
compensation expense was not recognized.
30
<PAGE> 31
At December 31, 1996, the following options which were issued prior to
adoption of the Option Plan are outstanding and fully vested.
<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXERCISE
GRANT SHARES PRICE
----- ------ -----
<S> <C> <C>
1990 25,619 $ 3.25
</TABLE>
During the year ended December 31, 1996 and 1995, options to purchase
3,992 and 3,064, respectively, common shares granted prior to the Option
Plan were exercised.
During July and November of 1996, the Company provided holders of options
with exercise prices ranging from $6.50 to $21.50 and $4.52 to $4.75,
respectively, the election to reprice their options at the then current
market price. As a result of this election, 253,042 and 497,421 options
were canceled and reissued in July and November, respectively. Options
repriced in November included those previously repriced in July. The new
option exercise price equals the market price on the date of the repricing
and, correspondingly, compensation expense was not recognized. The
vesting period of these options remained unchanged. However, employees,
excluding officers and directors, who elected to reprice their options
cannot exercise vested options until July 1997.
In December 1996, the Company granted nonqualified stock options to an
officer of the Company to acquire up to 500,000 shares of the Company's
common stock. The vesting period for 250,000 options is 62,500 options
per year from the date of grant. The vesting period for the remaining
250,000 options is the earlier of the year 2002 or, if the Company's stock
price reaches certain targets, vesting will occur in blocks of 50,000
options for each target price met. The options exercise price equals the
market price on the date of grant and, correspondingly, compensation
expense was not recognized.
7. EMPLOYEE STOCK PURCHASE PLAN
On January 9, 1995, the Company filed a Form S-8 with the SEC for the
registration of the Brock International, Inc. Employee Stock Purchase
Plan (ESP). The ESP was effective December 30, 1994. The Company
reserved 50,000 shares of common stock for issuance under the ESP. The
ESP was designed to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code.
The ESP provides that eligible employees may contribute up to 10% of their
base earnings each quarter for an option to purchase the Company's common
stock. The exercise price of the option is 85% of the lower of the fair
market value of the common stock at either the beginning or end of the
quarter. No compensation expense is recorded in connection with this
plan. During 1996 and 1995, 18,498 and 16,580 shares, respectively, were
issued under the plan. At December 31, 1996, options to purchase an
additional 3,112 shares were outstanding.
31
<PAGE> 32
8. STOCK COMPENSATION
The Company has adopted the disclosure only provisions of FAS 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation
cost for the Company's stock option grants described above been determined
based on the fair value at the grant date for awards in 1996 and 1995
consistent with the provisions of FAS 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net (loss) As reported $ (9,060) $ (3,091)
Pro forma (9,185) (3,178)
Net loss per share
Primary As reported $ (1.81) $ (.63)
Pro forma (1.84) (.64)
Fully diluted As reported $ (1.81) $ (.63)
Proforma (1.84) (.64)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield
of 0% for all years; expected volatility of 47% for all years; risk-free
interest rate of 6.18% and 6.39%; and expected life of 4.5 years for all
years.
32
<PAGE> 33
A summary of the status of the Company's stock option grants as of December
31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 512,338 $ 9.10 461,721 $10.83
Granted 1,781,003 5.80 217,350 6.87
Exercised (9,242) 6.47 (17,564) 6.45
Forfeited (1,358,162) 7.89 (149,169) 8.82
--------- ---------
Outstanding at end of year 925,937 7.24 512,338 9.10
========= =========
Options exercisable at end of year 99,104 199,233
Weighted-average fair value of
options granted during the year $ 2.76 $ 3.29
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------
WEIGHTED
- AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING - AVERAGE NUMBER - AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
<S> <C> <C> <C> <C> <C> <C>
$3.125 to 3.25 924,437 9.9 years $ 3.20 97,604 $ 3.25
$8.00 1,500 7.5 8.00 1,500 8.00
------- --------
$3.125 to 8.00 925,937 9.9 3.21 99,104 3.32
======= ========
</TABLE>
Under the ESP, the fair value of the employees' purchase rights is
estimated using the Black-Scholes option - pricing model with the following
assumptions used for each quarter of 1996 and 1995, respectively: dividend
yield of 0% for all quarters; an expected life of 90 days for all quarters;
an expected volatility of 47% for all quarters and risk free interest rates
ranging from 5.81 to 5.04. The weighted average fair value of employee
purchase rights granted in 1996 and 1995 was $1.79 and $1.68, respectively.
33
<PAGE> 34
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable lease
agreements expiring on various dates through 1999. At December 31, 1996,
future minimum rentals for noncancellable leases are as follows (in
thousands):
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING ANNUAL
DECEMBER 31, RENTALS
<S> <C>
1997 $ 1,056
1998 885
1999 95
---------
$ 2,036
=========
</TABLE>
Total rent expense under these and other agreements was approximately
$1,036,000, $1,119,000 and $797,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of the ultimate liability with respect to these actions will not
materially affect the financial position of the Company.
10. EMPLOYEE SAVINGS PLAN
Effective August 1, 1991, the Company established a defined contribution
plan (the "401(k) Plan") which qualifies under Section 401(k) of the
Internal Revenue Code for the benefit of eligible employees and their
beneficiaries. Employees may elect to contribute up to 20% of their
annual compensation to the 401(k) Plan. The Company made a 30%, 20% and
10% matching contribution during 1996, 1995, and 1994, respectively on the
employee's contribution, up to a maximum of 5% of the employee's annual
contribution. In addition, the Company may make discretionary annual
contributions. For the years ended December 31, 1996, 1995 and 1994, the
Company made matching contributions of approximately $78,000, $77,800 and
$17,000, respectively, to the 401(k) Plan and no discretionary
contributions.
34
<PAGE> 35
11. PRODUCT SALES
The Company exports its products through agreements with international
affiliates which it grants territorial rights. A summary of international
revenues by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Europe $ 5,495 $ 4,612 $ 5,260
South America 954 - -
Australia and New Zealand 811 1,127 1,486
Asia 381 - -
South Africa 86 - -
-------- -------- ---------
$ 7,727 $ 5,739 $ 6,746
======== ======== =========
</TABLE>
12. RESTRUCTURING
During the fourth quarter of 1996, the Company implemented a restructuring
plan ("the Plan") designed to enhance overall competitiveness,
productivity and efficiency through the reduction of overhead costs.
The Plan resulted in a pre-tax charge of approximately $1,598,000. The
charge principally reflects severance costs resulting from workforce
reductions of 41 employees and realignments throughout the Company,
write-off of certain non productive assets (including abandonment of a
software product prior to release), employee termination costs and costs
associated with non-cancellable leases net of estimated sublease rental
income.
13. SUBSEQUENT EVENT
On March 21, 1997, the Company paid off the outstanding line of credit
balance, equipment note payable and interest of $2,199,657 and the
agreements were terminated (see Note 4).
35
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to
information under the caption "Election of Directors - Director Nominee
Biographical Information," "- Executive Officers" and "- Compliance with
Section 16(a) of the Securities Exchange Act of 1934" of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 6, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
information under the captions "Election of Directors - Additional Information
Concerning the Board of Directors" and "Executive Compensation" (exclusive of
the subsections entitled "Compensation Committee Report on Executive
Compensation" and "Performance Graph") in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 6, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
information under the caption "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 6, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
information under the caption "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 6, 1997.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
- Report of Independent Accountants
- Balance Sheet at December 31, 1996 and December 31,
1995.
- Statement of Income for the three years ended
December 31, 1996.
- Statement of Changes in Shareholders' Equity for
the three years ended December 31, 1996.
- Statement of Cash Flows for the three years ended
December 31, 1996.
- Notes to Financial Statements
2. Financial Statement Schedules
- For the three years ended December 31, 1996
- Schedule II - Valuation and Qualifying Accounts
37
<PAGE> 38
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated By-laws of the Company.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles
of Incorporation and Amended and Restated By-Laws of the Company defining
rights of holders of Common Stock of the Company.
10.2 Promissory Note in the amount of up to $2,250,000 dated as of December 15,
1992 by the Company in favor of NationsBank of Georgia, N.A.*
10.3 Lease dated January 30, 1988 between the Company and Atlanta Overlook
Associates #3 concerning the Company's principal offices located at
2859 Paces Ferry Road, Atlanta, Georgia, as amended by that certain First
Amendment of Office Building Lease dated as of December 27, 1988 and as
further amended by that certain Second Amendment of Office Building Lease
dated as of October 2, 1989.*
10.4 Brock International, Inc. Amended and Restated 1993 Stock Option Plan.***
10.5 Tax Indemnification Agreement dated February 4, 1993 among the Company and
certain of its shareholders.**
10.6 Form of Selective Distribution Agreement for International Distributors.*
10.7 Form of Software License Agreement.*
10.8 Selective Distribution Agreement dated September 1, 1991 between the Company
and Co-Cam Computer Services (U.K.) Ltd.*
10.9 Computer Software License Marketing Agreement dated December 21, 1987 between
the Company and Co-Cam Computer Services, Pty. Ltd.*
10.10 Third Amendment to Lease Agreement dated as of March 10, 1993 between the
Company and State of California Public Employees Retirement System relating
to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
Georgia.**
10.11 Fourth Amendment to Lease Agreement dated as of June 24, 1993 between the
Company and State of California Public Employees Retirement System relating
to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
Georgia.**
10.12 Fifth Amendment to Lease Agreement dated as of March 22, 1994 between the
Company and State of California Public Employees Retirement System relating
to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
Georgia.**
10.13 Sixth Amendment to Lease Agreement dated as of September 22, 1994 between the
Company and State of California Public Employees Retirement System relating
to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
Georgia.***
10.14 Brock International, Inc. Employee Stock Purchase Plan.***
13 1996 Annual Report to Shareholders.
23 Consent of Independent Accountants. See pages immediately preceding the
signature page to this Report.
24 Power of Attorney. See signature page to this Report.
27 Financial Data Schedule (For SEC use only).
</TABLE>
* Incorporated herein by reference to exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-57984).
** Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-K for the year ended December 31, 1993.
*** Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-K for the year ended December 31, 1994.
(b) Forms 8-K:
None.
38
<PAGE> 39
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-66456, No. 33-75374, No. 33-81102 and No.
33-88304) of Brock International, Inc. of our report dated February 3, 1997,
except as to Note 13, which is as of March 21, 1997, appearing on page 18
of this Form 10-K.
PRICE WATERHOUSE LLP
Atlanta, Georgia
March 24, 1997
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Brock International, Inc.
<TABLE>
<S> <C> <C>
Date: March 24, 1997 By: /s/ R. Douglas MacIntyre
------------------------------------
R. Douglas MacIntyre
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date: March 24, 1997 /s/ R. Douglas MacIntyre
---------------------------------------------
R. Douglas MacIntyre
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 1997 /s/ Judith A. Vitale
---------------------------------------------
Judith A. Vitale
Director Finance and Administration
(Principal Financial and Accounting Officer)
Date: March 24, 1997 /s/ Richard T. Brock
-------------------------
Richard T. Brock
Chairman of the Board
Date: March 24, 1997 /s/ Harry S. Gruner
---------------------------------------------
Harry S. Gruner
Director
Date: March 24, 1997 /s/ Said Mohammadioun
---------------------------------------------
Said Mohammadioun
Director
Date: March 24, 1997 /s/ James R. Porter
---------------------------------------------
James R. Porter
Director
</TABLE>
40
<PAGE> 41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO ACCOUNTS END
OF COSTS AND WRITTEN OF
DESCRIPTION PERIOD EXPENSES OFF PERIOD
----------- -------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 1,415 $ 1,837 $ 1,281 $ 1,971
======== ========= ======== =====
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO ACCOUNTS END
DESCRIPTION OF COSTS AND WRITTEN OF
----------- PERIOD EXPENSES OFF PERIOD
-------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 1,354 $ 1,753 $ 1,692 $ 1,415
========= ======== ======= ======
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1994
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO ACCOUNTS END
DESCRIPTION OF COSTS AND WRITTEN OF
----------- PERIOD EXPENSES OFF PERIOD
-------------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $ 284 $ 2,152 $ 1,082 $ 1,354
====== ======== ======= ======
</TABLE>
S-1
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
EXHIBIT IN SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED COPY
------ ----------- -------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.* N/A
3.2 Amended and Restated By-laws of the Company.* N/A
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Amended and Restated By-Laws of the Company
defining rights of holders of Common Stock of the Company. N/A
10.2 Promissory Note in the amount of up to $2,250,000 dated as of
December 15, 1992 by the Company in favor of NationsBank of Georgia, N/A
N.A.*
10.3 Lease dated January 30, 1988 between the Company and Atlanta Overlook
Associates #3 concerning the Company's principal offices located at
2859 Paces Ferry Road, Atlanta, Georgia, as amended by that certain First
Amendment of Office Building Lease dated as of December 27, 1988 and as
further amended by that certain Second Amendment of Office Building Lease
dated as of October 2, 1989.* N/A
10.4 Brock International, Inc. Amended and Restated 1993 Stock Option Plan.***
N/A
10.5 Tax Indemnification Agreement dated February 4, 1993 among the Company
and certain of its shareholders.** N/A
10.6 Form of Selective Distribution Agreement for International Distributors.* N/A
10.7 Form of Software License Agreement.* N/A
10.8 Selective Distribution Agreement dated September 1, 1991 between the
Company and Co-Cam Computer Services (U.K.) Ltd.* N/A
10.9 Computer Software License Marketing Agreement dated December 21, 1987
between the Company and Co-Cam Computer Services, Pty. Ltd.* N/A
10.10 Third Amendment to Lease Agreement dated as of March 10, 1993 between the
Company and State of California Public Employees Retirement System
relating to the Company's principal offices located at 2859 Paces Ferry
Road, Atlanta, Georgia.** N/A
10.11 Fourth Amendment to Lease Agreement dated as of June 24, 1993 between the
Company and State of California Public Employees Retirement System
relating to the Company's principal offices located at 2859 Paces Ferry
Road, Atlanta, Georgia.** N/A
10.12 Fifth Amendment to Lease Agreement dated as of March 22, 1994 between the
Company and State of California Public Employees Retirement System
relating to the Company's principal offices located at 2859 Paces Ferry
Road, Atlanta, Georgia.** N/A
10.13 Sixth Amendment to Lease Agreement dated as of September 22, 1994 between
the Company and State of California Public Employees Retirement System
relating to the Company's principal offices located at 2859 Paces Ferry
Road, Atlanta, Georgia.*** N/A
10.14 Brock International, Inc. Employee Stock Purchase Plan.***
13 1996 Annual Report to Shareholders.
23 Consent of Independent Accountants. See pages immediately preceding the
signature page to this Report. N/A
24 Power of Attorney. See signature page to this Report. N/A
27 Financial Data Schedule (For SEC use only).
</TABLE>
____________________
* Incorporated herein by reference to exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-57984).
** Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-K for the year ended December 31, 1993.
***Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-K for the year ended December 31, 1994.
<PAGE> 1
EXHIBIT 13
<PAGE> 2
BROCK
INTERNATIONAL
1996
ANNUAL REPORT
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
BROCK INTERNATIONAL, INC.
Year Ended December 31, 1996 1995 1994 1993 1992
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenues 23,222 28,001 30,697 25,465 17,030
Income (Loss) Before Taxes (10,115) (4,928) 737 4,407 2,662
Income Tax (Provision) Benefit 1,055 1,837 (192) (1,549) (1,023)
Net Income (Loss) (9,060) (3,091) 545 2,858 1,639
Net Income (Loss) Per Common Share (1.81) (.63) .11 .66 .51
Total Assets 18,367 26,045 29,127 27,591 9,027
Total Non-Current Liabilities 125 -- 960 906 2,122
Weighted Average Common and
Common Share Equivalents 5,000 4,932 4,960 4,339 3,211
- -----------------------------------------------------------------------------------------------------------
</TABLE>
TAILORABLE INTEGRATED SALES & MARKETING SOLUTIONS
<TABLE>
<S> <C>
CONTENTS
1996 Letter to Shareholders .................................... 2
Condensed Balance Sheet ........................................ 4
Condensed Statement of Income .................................. 5
Condensed Statement of Changes in Shareholders' Equity ......... 6
Report of Independent Accountants .............................. 6
Condensed Statement of Cash Flow ............................... 7
Board of Directors and Officers ................................ 8
Shareholder Information ........................ Inside Back Cover
</TABLE>
1
<PAGE> 4
1996 LETTER TO SHAREHOLDERS
1996 was a difficult year for Brock International. Operating performance was
poor: the company had a substantial loss on revenues of $23.2 million. However,
with these results came the beginning of transformation. I joined the company in
December to restore financial health and stimulate growth. We promptly
restructured operations and included $1.6 million in restructuring charges and
$4.3 million in other charges in the 1996 results. The company began 1997 with
operating expenses under control and a commitment to capitalize on the company's
strengths to revitalize the business.
REFLECTIONS ON 1996
The company progressed in many ways despite a disappointing 1996 performance.
Revenues from international software licenses grew by 51 percent and
international operations grew to one-third of total revenues during the year.
Sales and service coverage outside the United States increased to more than 160
specialists located on five continents. In early 1996, the company's name was
changed from Brock Control Systems, Inc. to Brock International, Inc. to reflect
this growing worldwide market reach.
The company committed a net $2 million to product development in 1996, releasing
Internet-enabled software as well as new versions of the TakeControl(R) and
ToolShop(R) products. We deployed the new versions extensively, added 49 new
customers, and responded to more than 95 percent of customers' technical
questions within one hour. Because of the continuing value of the company's
products and services, maintenance revenues remained constant from 1995 to 1996
at $5.1 million.
BROCK ASSETS
The company entered 1997 with assets that far exceed most of the small and
undercapitalized competitors in our fragmented marketplace. The new, lean and
efficient Brock is building on the following strengths to stem financial loss
and ignite growth:
- robust, proven sales and marketing software products
- an expansive customer base with thousands of satisfied users around the
world
- a large professional services staff and more experience than any
competitor in our market space
- a global network of 16 affiliates who tailor Brock solutions to local
needs in Europe, Asia, Australia, Africa and Latin America
MARKET OPPORTUNITY
The business functions we address - sales, marketing and customer service -- are
the next frontier of enterprise systems. With a growth rate estimated at 30 to
50 percent, this market is ripe with opportunity. In the developmental phase,
the market has been technology-driven. Vendors compete on the basis of features
rather than benefits and audacity outsells acumen; so, many companies experience
long, expensive, and frustrating implementations. As the market matures, an
emerging class of pragmatic buyers are now demanding solutions that deliver
tangible results more quickly and at a lower cost. They want software that goes
beyond automating existing sales functions to augment sales and marketing
effectiveness. They want to integrate field sales and telemarketing information
to reveal a holistic view of customer relationships throughout the enterprise.
2
<PAGE> 5
COMPETITIVE STRATEGY
Brock International will focus on these value-oriented buyers because our
strengths dovetail with their demands. We will hone our product and service
offerings for rapid implementations in progressive business-to-business
environments. We will win competitively by delivering compelling value:
- combining our sales, marketing, and customer support applications into one
product with a common database and improved functionality
- offering this complete product at a considerably lower cost than
comparable enterprise systems
- providing cost-effective service options for successful implementation of
tailored solutions more rapidly than competitive alternatives
In addition to delivering unique value, we will develop the capacity for growth
by increasing sales coverage in the United States and expanding our network of
affiliates; cultivating strategic partners who share our commitment to customer
satisfaction; and delivering additional products by development and/or
acquisition.
FINANCIAL STRATEGY
Brock begins 1997 with a plan to stabilize operations and to initiate steady
progress toward profitability. We have restructured operations and reduced
overhead so we can offer world-class products and services at advantageous
prices. We have adopted rigorous financial discipline and are carefully managing
cash. However, we are not pursuing near-term quarterly profits. Our strategy is
to build long-term value through profitable revenue growth in an explosive
market. Accordingly, we are investing in growth drivers: research and
development, sales, marketing, and customer service.
Every shareholder should know that Brock International is no longer conducting
"business as usual." Today's Brock is a new company, seasoned by trials and
energized by a fresh start in a dynamic market. We are wholly committed to
success -- for our customers, our partners, our shareholders, and ourselves. You
should not expect our financial turnaround to be quick, but you should expect it
to be substantive.
Sincerely,
/s/ R. Douglas MacIntyre
-----------------------------
R. Douglas MacIntyre
President and Chief Executive
Officer
3
<PAGE> 6
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(in thousands, except share and per share data) December 31, 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,104 $ 283
Marketable securities 5,843 7,854
Accounts receivable, less allowance for doubtful
accounts of $1,971 and $1,415 4,120 8,092
Deferred tax asset 834 652
Prepaid expenses and other 130 170
- ---------------------------------------------------------------------------------------------
Total current assets 12,031 17,051
Property and equipment, net 2,906 4,035
Software development costs, net 1,508 3,985
Deferred tax asset 1,922 974
$ 18,367 $ 26,045
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
Current liabilities
Line of credit $ 1,975 $ 985
Current portion of note payable 83 --
Accounts payable 1,012 957
Accrued restructuring costs 1,111 --
Sales tax payable 378 633
Deferred revenue 1,464 1,971
Accrued employee compensation and benefits 680 1,126
Other accrued liabilities 97 143
- ---------------------------------------------------------------------------------------------
Total current liabilities 6,800 5,815
Note Payable 125 --
- ---------------------------------------------------------------------------------------------
6,925 5,815
Preferred stock, no par, 1,000,000 shares
authorized and no shares issued or outstanding
Common stock, stated value $.0019 per share; 10,000,000
shares authorized; 4,936,555 and 4,908,815 shares issued
and outstanding 9 9
Additional paid-in capital 18,909 18,744
Unrealized loss on marketable securities (14) (121)
Retained (deficit) earnings (7,462) 1,598
- ---------------------------------------------------------------------------------------------
11,442 20,230
- ---------------------------------------------------------------------------------------------
$ 18,367 $ 26,045
- ---------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------
For the year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Software $ 9,834 $ 11,720 $ 14,571
Services 7,267 9,717 10,025
Maintenance 5,143 5,104 4,526
Other 978 1,460 1,575
- ------------------------------------------------------------------------------------------------
23,222 28,001 30,697
- ------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of revenues
Software 4,883 2,477 2,212
Services 5,908 7,968 6,460
Maintenance 2,002 2,014 2,274
Other 895 1,419 1,471
Sales and marketing 10,083 12,045 10,835
Product development 2,010 1,794 708
General and administrative 6,027 5,625 6,346
Restructuring costs 1,598 -- --
- ------------------------------------------------------------------------------------------------
Operating (loss) income (10,184) (5,341) 391
Interest expense (156) (74) --
Interest income 225 487 346
- ------------------------------------------------------------------------------------------------
(Loss) income before income taxes (10,115) (4,928) 737
Income tax benefit (provision) 1,055 1,837 (192)
Net (loss) income (9,060) $ (3,091) $ 545
- ------------------------------------------------------------------------------------------------
Net (loss) income per share
Primary $ (1.81) $ (.63) $ .11
- ------------------------------------------------------------------------------------------------
Fully diluted $ (1.81) $ (.63) $ .11
- ------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------
UNREALIZED
ADDITIONAL LOSS ON RETAINED
COMMON STOCK PAID-IN MARKETABLE EARNINGS
SHARES AMOUNT CAPITAL SECURITIES (DEFICIT) TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 4,681,371 $ 9 16,275 -- $ 4,144 20,428
- ------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 193,300 -- 2,232 -- -- 2,232
Unrealized loss on marketable securities -- -- -- $ (261) -- (261)
Net income -- -- -- -- 545 545
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 4,874,671 $ 9 18,507 $ (261) $ 4,689 22,944
- ------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 17,564 -- 140 -- -- 140
Employee stock-purchases 16,580 -- 97 -- -- 97
Unrealized loss on marketable securities -- -- -- 140 -- 140
Net loss -- -- -- -- (3,091) (3,091)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 4,908,815 $ 9 $18,744 $ (121) $ 1,598 $20,230
- ------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 9,242 -- 59 -- -- 59
Employee stock-purchases 18,498 -- 106 -- -- 106
Unrealized loss on marketable securities -- -- -- 107 -- 107
Net loss -- -- -- -- (9,060) (9,060)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 4,936,555 $ 9 $18,909 $ (14) $(7,462) $11,442
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BROCK INTERNATIONAL, INC.
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Brock International, Inc. as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
appearing under item 14(a)(1) and (2) on page 37 in the Company's Annual Report
on Form 10-K; and in our report dated February 3, 1997 we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of December
31, 1996 and 1995 and the related condensed statements of income, of changes in
shareholders' equity and of cash flows for each of the three years in the period
ended December 31, 1996, when read in conjunction with the financial statements
from which it has been derived, is fairly stated in all material respects in
relation thereto.
Price Waterhouse LLP
Atlanta, Georgia
February 3, 1997
6
<PAGE> 9
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOW
- -----------------------------------------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------------------------------------
For the year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $ (9,060) $ (3,091) $ 545
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 3,431 2,958 1,576
Write-down of software development costs to
net realizable value 2,583 -- --
Loss on disposal of fixed assets 646 -- --
Noncash interest on marketable securities (222) (307) (343)
Provision for bad debts 1,837 1,753 2,152
Deferred income taxes (1,130) (1,822) (534)
Changes in assets and liabilities
Decrease (increase) in accounts receivable 2,135 (1,022) (1,641)
Decrease (increase) in prepaid expenses and other 40 584 (552)
Increase (decrease) in accounts payable 55 (868) (261)
Increase in accrued restructuring 1,111 -- --
Increase (decrease) in sales tax payable (255) 36 (25)
Decrease (increase) in deferred revenue (507) 390 (65)
Decrease (increase) in accrued employee
compensation and benefits (446) 2 (84)
Decrease (increase) in other accrued liabilities (46) 47 (599)
- -----------------------------------------------------------------------------------------------------
Total adjustments 9,232 1,751 (376)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 172 (1,340) 169
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Software development costs (2,186) (2,562) (1,679)
Purchases of property and equipment (869) (1,335) (2,320)
Purchase of marketable securities (15,710) (1,661) (1,000)
Proceeds from sale of marketable securities 18,051 5,261 2,310
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (714) (297) (2,689)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Exercise of common stock options 59 140 2,232
Proceeds from employee stock purchase plan 106 97 --
Borrowings under line of credit 2,990 2,485 --
Repayments of borrowings under line of credit (2,000) (1,500) --
Borrowings under note payable 250 -- --
Repayments of note payable (42) -- --
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,363 1,222 2,232
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 821 (415) (288)
Cash and cash equivalents, beginning of year 283 698 986
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,104 $ 283 $ 698
- -----------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 157 $ 28 $ --
- -----------------------------------------------------------------------------------------------------
Cash paid for income taxes $ -- $ -- $ 655
- -----------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
BOARD OF DIRECTORS AND OFFICERS
OFFICERS
R. DOUGLAS MACINTYRE
President and Chief Executive Officer
JAMES A. BYRNES
Vice President, Sales
JUDITH A. VITALE
Director of Finance and Administration
WAYNE P. WEBB
Vice President, International Operations
DIRECTORS
RICHARD T. BROCK, CHAIRMAN
Mr. Brock founded Brock International, Inc. in 1984 to answer the call of
businesses needing a solution to automate their sales, marketing and customer
service processes. Mr. Brock's ideas and vision helped create an industry that
is becoming a top priority of businesses worldwide. Mr. Brock also founded and
served as chief executive officer of Management Control Systems, Inc., now a
division of CLR Professional Software. Mr. Brock received his master of business
administration degree from Louisiana State University and his bachelor of
science degree from Spring Hill College. Mr. Brock is also a Certified Public
Accountant.
R. DOUGLAS MACINTYRE
Mr. MacIntyre serves as president and chief executive officer of Brock
International since joining the company in December 1996. From 1994 until that
time, Mr. MacIntyre served as president and chief executive officer and director
of Dun & Bradstreet Software. From 1990 to 1993, Mr. MacIntyre served as
president, chief operating officer and director of Software 2000, and from 1980
to 1990 he held various management positions at Management Science America, Inc.
He is chairman of HomeCom Communications and immediate past president of the
American Software Association. Mr. MacIntyre received his bachelor of science
degree from the U.S. Military Academy at West Point, and a master of science
degree in business administration from Boston University.
SAID MOHAMMADIOUN
Mr. Mohammadioun has over 25 years of experience in the computer industry. He is
currently chief executive officer of Synchrologic Inc., a company in the
client/server tools market. He also serves on the board of Intelliquest
Communications Inc., Software Builders, Inc., and Advisory Board of College of
Computing at The Georgia Institute of Technology. From 1990 to 1995, he was vice
president of Lotus Development Corporation, running various product divisions.
Mr. Mohammadioun was founder and chief executive officer of Samna Corporation
from 1982 until it was acquired by Lotus in 1990. Mr. Mohammadioun received his
bachelor and master degrees in electrical engineering from Georgia Institute of
Technology and a master of business administration from Georgia State
University.
HARRY S. GRUNER
Since November 1992, Mr. Gruner has been a general partner of JMI Equity Fund, a
private equity investment partnership. From 1986 until 1992, Mr. Gruner was a
Principal in the technology group for Alex. Brown & Sons, Inc. Mr. Gruner is
also director of Hyperion Software, Inc., the META Group, Inc., Jackson Hewitt,
Inc., Optika Imaging, Inc., V-ONE Corporation and numerous other privately held
companies. Mr. Gruner holds a master of business administration from Harvard
Business School and a bachelor of art from Yale University.
JAMES R. PORTER
Mr. Porter has served since September 1985 as president and chief executive
officer of Triad Systems Corp., a provider of business and information
management solutions for the retail hardlines industry and the automotive
aftermarket. Previously, he served in executive capacities at Informatics
General Corporation and United Systems International. Mr. Porter serves on the
board of directors for the Information Technology Association of America and
Silicon Valley Bank of San Jose. Mr. Porter earned his bachelor of science
degree in engineering from Texas A&M and attended Harvard Graduate School of
Business. He is a member of the Texas A&M University Engineering School Advisory
Council.
8
<PAGE> 11
SHAREHOLDER INFORMATION
Corporate Headquarters
Brock International, Inc.
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, GA 30339
TRANSFER AGENT AND REGISTRAR
First Union of North Carolina
Shareholder Services Group
Two First Union Center
Charlotte, NC 28288-1154
Information Contact:
Mr. Patrick Edwards
704-383-1973
ANNUAL SHAREHOLDERS MEETING
Tuesday, May 6, 1997
from 2:30 p.m. to 4:00 p.m.
Brock International Headquarters
2859 Paces Ferry Road, Suite 1000
Atlanta, GA 30339
770-431-1200
CORPORATE COUNSEL
Powell, Goldstein, Frazer & Murphy
Atlanta, Georgia
FORM 10K
A copy of the Company's Annual Report on Form 10K for the fiscal year ended
December 31, 1996, as filed with the Securities and Exchange Commission, will be
sent to all stockholders. Additional copies will be sent upon request in writing
to:
Judith A. Vitale
Director of Finance and Administration
Brock International, Inc.
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, GA 30339
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Atlanta, Georgia
STOCK LISTING
NASDAQ Symbol: BROC
PRODUCT INQUIRIES
For more information about the Company's products and services, e-mail Brock at
[email protected] or call 800-221-0775 or 770-431-1200 or visit Brock's web site at
http://www.broc.com
The following table shows the price range of the Company's Common Stock (high
and low bid information) for the indicated fiscal quarters. The prices represent
quotations between dealers and do not necessarily represent actual transactions
and do not include retail mark-ups, mark-downs or commissions. As of December
31, 1996 there were approximately 77 shareholders of record and approximately
1,600 persons or entities who hold common stock in nominee name.
<TABLE>
<CAPTION>
- ----------------------------------------------------
Fiscal 1996 First Second Third Fourth
- ----------------------------------------------------
<S> <C> <C> <C> <C>
High $11.25 $ 8.75 $ 7.50 $ 4.875
Low $ 6.25 $ 6.50 $ 4.25 $ 2.875
- ----------------------------------------------------
Fiscal 1995 First Second Third Fourth
- ----------------------------------------------------
High $ 7.50 $ 8.75 $ 9.25 $11.00
Low $ 5.75 $ 6.50 $ 7.50 $ 6.75
- ----------------------------------------------------
</TABLE>
CREDITS:
Design and Production: Barry W. Gregg -- Disk Functional Design
Print Management: Mary Barton Productions
(C)1997 Brock International, Inc. All rights reserved. TakeControl is a
trademark of Brock International, Inc. All other trademarks and registered
trademarks are property of their respective holders.
<PAGE> 12
BROCK INTERNATIONAL
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, Georgia 30339
800.221.0775
770.431.1200
FAX 770.431.1201
e-mail [email protected]
http://www.broc.com
1996 ANNUAL REPORT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,104
<SECURITIES> 5,843
<RECEIVABLES> 4,120
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,031
<PP&E> 2,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,367
<CURRENT-LIABILITIES> 6,800
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 11,433
<TOTAL-LIABILITY-AND-EQUITY> 18,367
<SALES> 9,834
<TOTAL-REVENUES> 23,222
<CGS> 4,883
<TOTAL-COSTS> 13,688
<OTHER-EXPENSES> 19,718
<LOSS-PROVISION> 1,837
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> (10,115)
<INCOME-TAX> (1,055)
<INCOME-CONTINUING> (9,060)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,060)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
