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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 0-21202
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FIRSTWAVE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
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)
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
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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 23, 1998: approximately $16,091,160.
Number of shares of Common Stock outstanding as of March 23, 1998: 5,104,041.
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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 on May 7, 1998 are incorporated by reference into Part
III of this Report. Other than those portions specifically incorporated by
reference herein, the 1997 Annual Report to Shareholders and the Proxy Statement
for the Annual Meeting of Shareholders to be held on May 7, 1998 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. Firstwave Technologies, Inc.'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
Effective March 1, 1998, the Company changed its name from Brock International,
Inc. to Firstwave Technologies, Inc. The name change results from the
acquisition of Netgain(TM) Corporation and expansion strategies including the
launch of a new product suite, Netgain(TM) Enterprise. Firstwave embraces the
entrepreneurial spirit and advanced technology of the energetic Netgain team,
while leveraging Brock's strengths as an established international company.
Firstwave Technologies, Inc. provides innovative customer information software
to global enterprises selling through multiple channels. The company markets
three product lines: Netgain(TM) Enterprise, Takecontrol(R) and Firstwave for
Unix. Its Netgain Enterprise suite of Internet-based customer information
software is the first to extend the sales team to include indirect channels and
other business partners. Netgain will be available in 1998. Takecontrol is a
Windows based integrated client/server sales, marketing and customer support
solution that supports sales and marketing automation needs in multiple
industries. The Unix product line is a traditional UNIX character base sales,
marketing and customer service solution. All product lines assist companies in
optimizing customer relationships and revenues. Firstwave's software products
operate on a wide range of hardware platforms, including Hewlett-Packard
Corporation, IBM, Sun Microsystems, Digital Equipment Corporation and others,
and personal computers.
COMPANY STRATEGY
Firstwave's vision is leading the market toward a new customer information
platform based on Internet technologies. The current generation of customer
information systems was designed to bridge communication gaps between a
company's internal departments such as marketing, sales and technical support.
Due to limitations of client/server technologies, these systems have not
extended critical information to indirect channels and other partners who exist
outside the boundaries of today's corporations. These partners include
suppliers, resellers, dealers, systems integrators and other sales influencers
throughout the `extended enterprise'. Because Netgain Enterprise uses the
Internet as its platform, the knowledge and experience of the entire sales team
is combined for a more focused, unified effort. Firstwave believes the ability
to deploy a Customer Information System application through a standard web
browser creates an entirely new and viable channel management opportunity. By
having a solution that enables a virtual team-selling environment, Netgain Sales
users, as well as their business partners, will be better positioned to win
against their competition.
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The revenues and relationships of the Company's existing business provide a
sound platform for launching new products and services. However, the Company
will remain dedicated to the thousands of people who are currently using
Firstwave products in 20 countries. The Company is committed to continued
support and development of the products it is selling today. The Company will
continue to maintain our Unix products, provide award-winning Takecontrol(R)
client/server applications, support Year 2000 requirements, remain compatible
with the most popular database managers and operating systems, and provide
personal service whenever customers need it.
PROVIDING VALUE-ADDED SERVICES AND ENHANCEMENTS TO EXISTING CUSTOMERS.
Firstwave focuses on providing value to its existing customers by offering an
array of post-sale consulting, training, and support services. Because the
Company's customers use Firstwave products 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. Firstwave's
Professional Services Organization provides consulting and technical assistance
to the Company's customers through fee-based consulting, system installation and
configuration, training and system support services. The Company seeks to
differentiate itself from its competitors by offering superior customer service.
NETGAIN ENTERPRISE IMPLEMENTATION
Firstwave's strategy is to offer complete implementation packages with a focus
on rapid implementation. In addition, the company is offering a certification
plan to third party systems integrators and consulting firms that will allow
them to provide Netgain implementation services.
LEVERAGE STRATEGIC ALLIANCES.
The sales performance solutions the Company delivers to customers are a
combination of Firstwave'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 Outlook,
Microsoft Word, Microsoft Access and Seagate's Crystal Reports. The Company
expects to continue to integrate with other complementary offerings.
EXPANDING INTERNATIONAL OPERATIONS
In 1997, the Company derived approximately 34% of its total revenues from the
international segment of its business. This compares with approximately 33% and
21% of its revenues in 1996 and 1995, respectively. Management believes that
Firstwave is positioned to take advantage of the international, enterprise
Internet market opportunity over the next several years. The Netgain
architecture 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, who demonstrate commitment to customer service and support.
The Company has established a network of international affiliates serving
customers in 20 different countries and it continues to seek qualified
international affiliates. Prior to being authorized to market Firstwave
products, potential international affiliates are required to participate in
Company-sponsored certification sessions.
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SOFTWARE PRODUCTS
Firstwave's systems consist of three families of software applications, the
Takecontrol series, the Unix series and the soon to be released Netgain series.
All products feature integrated modules that address the complete sales cycle:
lead generation, lead qualification, account management (both in-house sales and
field sales), and post-sale customer support. The Takecontrol product is an
integrated client/server sales, marketing and customer service solution. The
Unix product is a character-based Unix system. The systems' open architecture,
modular design and use of relational databases provide 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.
In 1998 Firstwave will introduce, according to a phased delivery schedule, an
additional product line, Netgain Enterprise, also a customer information system
suite, but designed and built for optimal performance on Internet/Intranet
infrastructures.
TAKECONTROL SOFTWARE ARCHITECTURE
The Takecontrol product series was developed specifically for the client/server
model of computing in an occasionally connected environment. The product takes
advantage of many technologies including the Company's application development
environment, ToolShop, standard Microsoft Windows GUI, Internet protocols, and a
variety of relational databases, including Microsoft SQL Server and Access,
Oracle, Sybase and Informix.
Firstwave system administrators can readily modify applications, menus, screens
and database access methods from within the product. ToolShop is provided with
each license and includes tools for building unique customizations, add-on
enhancements and integrated applications to legacy systems.
The modules of the Takecontrol series are described below.
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
using sophisticated database marketing tools. In-house sales, telesales and
field sales professionals can use the Marketing module to organize and
coordinate the effective use of imported lists and/or internal data through
campaign and project management. Shared and/or dedicated telemarketing call
queues and targeted direct mailing lists allow representatives to maintain
account information and comprehensive account histories in addition to
generating new leads. The module contains extensive reporting features to allow
managers to effectively monitor marketing and telemarketing efforts. The
Takecontrol Web module captures leads directly from the Internet and a flexible
but powerful filter application pre-qualifies the incoming leads prior to
inclusion in the customer's database.
Sales. This solution provides the mobile or inside sales professional with
sophisticated sales and marketing system on a laptop or desktop 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.
Customer Service. Companies can 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. Cases are tracked and
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monitored based on severity and can be automatically escalated based on customer
specific criteria. The module's problem-tracking database, an on-line
information source containing all known support problems with their proven
solutions, provides information to customer service representatives for solving
technical, training and documentation-related problems. The Customer
Support/Help Desk module also includes extensive reporting capabilities so
managers can monitor the volume of call activity, response time and customer
service representative productivity. The Web Support module allows customers to
access and add to their case information via the Internet thereby reducing
telephone call overhead.
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. Firstwave's services consist of (i) education and training services,
(ii) implementation, (iii) customization, and (iv) technical support services.
EDUCATION AND TRAINING
Firstwave'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. Firstwave 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 curriculum for Netgain consists of Netgain Sales and Netgain Workbench. The
classes may be conducted at Firstwave, the customer site or via the web. Netgain
Sales is intended for individuals who will use the application to create and
maintain customer relationships through all phases of the sales cycle. Netgain
Workbench is for individuals who will setup, maintain and administer the Netgain
Sales application. All participants of the Workbench class will be administered
certification tests upon completion of the course.
The Company's core curriculum consists of: Takecontrol Application classes for
each module, ToolShop Design Environment I & II, Systems Management for
Client/Server, Data Synchronization Configuration and Unix Activity Manager
Essentials. The core courses provide information on system and database
administration and the use of Firstwave 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 purpose of Professional Services is to facilitate the customer's successful
implementation and full utilization of Firstwave software products and to
accelerate the implementation process. The organization also provides value to
its customers by assisting them in the transition to Internet applications, open
systems and client/server architectures. Firstwave 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 tailoring, application
development, data conversion, systems interconnectivity, project management and
other special processing requirements related to the implementation of Netgain,
the Takecontrol series and the Firstwave for Unix series. Professional services
are charged on a time and expenses basis.
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CUSTOMER SUPPORT
Firstwave'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 Firstwave employees. Each
customer support representative has immediate access to the customer's account
history while engaged in resolving the customer's problem. In addition to
hotline telephone services, customer support also includes the provision of
updates and enhancements of Firstwave products and related documentation.
The Company routinely monitors the effectiveness of its Customer Support Group.
Firstwave has implemented a system in which the customer assigns a priority to
each call placed to the support team. For classes conducted at customer sites,
the Company charges a per-day rate for a set number of attendees. 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. 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
Software revenues consist of license fees for the Takecontrol and Unix series.
The Company also receives revenues from third-party software. Customers pay a
license fee for the software based upon the number of licensed users.
Firstwave'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
classes conducted at customer sites, the Company charges a per-day rate for a
set number of attendees.
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. 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,
marketing, and service 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
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smaller companies as well. The Company has licensed its products to thousands of
customers in hundreds of enterprises since its inception.
SALES AND MARKETING
The Company markets and sells its products and services to the North American
marketplace through direct and indirect channels. Internationally the products
and services are sold through indirect channels. The U.S. direct channel is
supported by 18 sales and marketing professionals as of December 31, 1997.
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 end-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. Leads that are not sufficiently
qualified for sales follow-up are kept in the database and regularly contacted
by the market development organization.
In addition the marketing department is 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.
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. Firstwave 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
The Company plans to propel growth with innovative products based on the Netgain
architecture. In conjunction with a new corporate identity campaign, the Company
is launching Netgain Enterprise(TM), the first enterprise customer information
system built specifically to leverage Internet technologies. Firstwave's primary
market is major companies selling through multiple channels. Netgain fits these
organizations better than the current generation of client/server systems. It is
designed to support all revenue-oriented people in a customer's extended
enterprise - including customer service and marketing professionals, managers,
the direct sales force, indirect channels, distributors, dealers, suppliers, and
other business partners. Netgain is highly intuitive and easy to use, and the
architecture facilitates a dramatically lower total cost of ownership for
customers.
ONGOING SYSTEM ENHANCEMENTS
Firstwave was the first enterprise class customer information systems vendor to
integrate Microsoft(R) Outlook(TM) 97 with a sales & marketing automation
solution. This year Firstwave released Takecontrol(R)'97.1, which includes
integration into the popular Microsoft Office 97 application suite and
Microsoft's newest desktop information manager, Outlook 97.
Firstwave also released Takecontrol(R)'98, a major upgrade to its award winning
flagship product. This release added several innovative capabilities to the full
function Takecontrol suite. Some of the major
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enhancements include year 2000 compliance, a web-based marketing encyclopedia
and graphical, funnel management capabilities. Following industry guidelines
supplied by industry analysts Firstwave added year 2000 compliance to the
product. This enables customers to properly handle date information and ensures
all existing data is processed properly for the new millennium. Takecontrol'98
also incorporated a web-based, marketing encyclopedia add-on module called
NewsSt@nd. This intelligent-agent technology monitors and gathers customer,
partner and competitive information and delivers it to the end user
automatically. NewsSt@nd provides the right information at the right time,
giving the sales representatives an edge over the competition. Another feature
added to Takecontrol '98 was Takecontrol Web(TM). This feature enhances the
current marketing application by allowing companies to automatically qualify
leads generated through their website. For example, lead information from
prospects visiting a company's web-site is automatically transferred to the
appropriate contact in sales or marketing for further qualification. Takecontrol
Web also leverages existing customer support investments by allowing users to
log questions, view case information and communicate with support reps, all via
the Internet. New graphical, funnel management capability has also been added.
Sales representatives can graphically display their pipeline in the new sales
funnel. This new feature displays account progression at user defined stages and
provides drill-down capabilities. Managers and sales representatives have easy
access to their pipelines, enabling them to focus on opportunities approaching
the closing stage.
COMPETITION
The Company faces competition from a variety of software vendors, including
sales automation and customer support software vendors and software tools
vendors.
In the sales automation software market, the Company faces competition from
Siebel, Aurum, Onyx, Pivotal Software and Vantive. 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 customer information systems 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.
The Company's products compete on the basis of product flexibility,
customization capability, application features, platform configurations, value,
and customer 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
Firstwave 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
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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, 1997, the Company employed 78 persons, including 18 sales and
marketing professionals, 34 service and support representatives, 14
administrative personnel and 12 persons involved in product innovation and
development. 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. Effective January 1,
1998, as a result of the acquisition of Netgain Corporation, the Company added
10 additional employees, including 9 persons involved with product innovation
and development and 1 sales person.
ITEM 2. PROPERTIES.
As of December 31, 1997 the Company's headquarters and principal operations were
located in approximately 50,000 square feet of leased office space, of which,
approximately 20,000 square feet was subleased. The office building is 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.
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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>
1997 First Second Third Fourth 1996 First Second Third Fourth
- ---------------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 4.50 $ 6.5000 $ 5.75 $ 5.2500 High $ 11.25 $ 8.75 $ 7.50 $ 4.875
Low $ 3.00 $ 2.1875 $ 4.50 $ 3.4375 Low $ 6.25 $ 6.50 $ 4.25 $ 2.875
- ---------------------------------------------------------------------- ---------------------------------------------------------
</TABLE>
As of December 31, 1997 there were approximately 104 shareholders of record and
approximately 1725 persons or entities that hold common stock in nominee name.
There were no dividends declared during 1997 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)
1997 1996 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 15,848 $ 23,222 $ 28,001 $ 30,697 $ 25,465
Income (loss) before income taxes (1,377) (10,115) (4,928) 737 4,407
Income tax (provision) benefit (133) 1,055 1,837 (192) (1,549)
Net income (loss) (1,510) (9,060) (3,091) 545 2,858
Basic net income (loss) per common share (0.30) (1.81) (0.63) 0.11 0.69
Diluted net income (loss) per common share (0.30) (1.81) (0.63) 0.11 0.66
Total assets 14,286 18,367 26,045 29,127 27,591
Total non current liabilities - 125 - 960 906
Common stock subject to repurchase $ 300 $ - $ - $ - $ -
Weighted average common and common
share equivalents 5,035 5,000 4,932 4,960 4,339
</TABLE>
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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 1996 to 1997. Certain percentage columns do not add to 100% due to
rounding.
<TABLE>
<CAPTION>
Year Ended December 31, % Change
----------------------------------------- ------------
(in thousands) 1997 1996 1996 to 1997
- ------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Software $ 5,239 33.1% $ 9,834 42.3% -46.7%
Services 4,810 30.4% 7,267 31.3% -33.8%
Maintenance 5,189 32.7% 5,143 22.1% 0.9%
Other 610 3.8% 978 4.2% -37.6%
-------------------- ------------------- ------
Net revenues 15,848 100.0% 23,222 100.0% -31.8%
-------------------- ------------------- ------
Costs and expenses
Cost of revenues
Software 675 4.3% 4,883 21.0% -86.2%
Services 3,528 22.3% 5,908 25.4% -40.3%
Maintenance 1,687 10.6% 2,002 8.6% -15.7%
Other 606 3.8% 895 3.9% -32.3%
Sales and marketing 6,012 37.9% 10,083 43.4% -40.4%
Product development 2,003 12.6% 2,010 8.7% -0.3%
General & administrative 2,186 13.8% 6,027 26.0% -63.7%
In process research and
development 696 4.4% 0 0.0% 100.0%
Restructuring 0 0.0% 1,598 6.9% -100.0%
-------------------- ------------------- ------
Operating loss (1,545) -9.7% (10,184) -43.8% -84.8%
-------------------- ------------------- ------
Interest income net 168 1.1% 69 0.3% 143.5%
-------------------- ------------------- ------
Loss before income taxes $ (1,377) -8.7% $(10,115) -43.6% -86.4%
-------------------- ------------------- ------
</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.
11
<PAGE> 12
1997 COMPARED TO 1996
The Company implemented a restructuring plan in December 1996 that was designed
to restore financial health and lay the foundation for future growth. See Note
12 of Notes to Financial Statements for details and information regarding
one-time expenses associated with the restructuring. The plan for 1997 was to
stabilize operating performance, leverage assets, make progress toward
profitability each quarter, while developing the capacity for future growth. The
Company accomplished these goals during 1997. While revenues decreased from
1996, they, along with expense reductions, were on target with the plan. The
reduction in personnel and enhancements in expense management included in the
restructuring plan are the primary reasons for the overall decreases in
expenses.
Total revenues decreased 31.8% from $23,222,000 in 1996 to $15,848,000 in 1997
as a result of decreased software, services and other revenues. Software
revenues decreased 46.7% from $9,834,000 in 1996 to $5,239,000 in 1997 primarily
as a result of fewer licenses sold to new customers. Revenues from international
software licenses decreased 39.4% from $5,471,000 in 1996 to $3,314,000 in 1997,
and decreased as a percentage of total revenues from 23.6% in 1996 to 20.9% in
1997. However, total revenues from international sources, which includes
maintenance, software license fees and customizations, remained consistent at
33.9% of total revenues in 1997 compared to 33.3% in 1996.
Services revenues decreased 33.8% from $7,267,000 in 1996 to $4,810,000 in 1997
primarily due to the decrease in software license revenues. Maintenance revenues
increased slightly from $5,143,000 in 1996 to $5,189,000 in 1997. Other revenues
decreased 37.6% from $978,000 in 1996 to $610,000 in 1997 primarily due to
decreases in certain reimbursable travel charges.
While revenues declined on an annual basis, the Company showed improvement in
the fourth quarter of 1997 when compared to third quarter 1997 and fourth
quarter 1996. Fourth quarter 1997 total revenues increased 38.2% over third
quarter 1997 and 3.1% over fourth quarter 1996. Software revenues for fourth
quarter 1997 increased 161.5% over third quarter 1997 and 41.5% over fourth
quarter 1996 as a result of increased international revenue.
Costs of software revenues decreased 86.2% from $4,883,000 in 1996 to $675,000
in 1997 and, as a percentage of software revenues, decreased from 49.7% in 1996
to 12.9% in 1997. The decreases were primarily due to an adjustment in 1996 of
approximately $2,583,000 to write down remaining capitalized software to net
realizable value, as well as, the associated decrease in the amount of
amortization of capitalized software costs from $2,080,000 in 1996 to $419,000
in 1997. 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 40.3% from $5,908,000 in 1996 to
$3,528,000 in 1997 due to decreases in service personnel, and personnel related
costs. Costs of revenues for services as a percentage of services revenues
decreased from 81.3% in 1996 to 73.3% in 1997. Costs of revenues for maintenance
decreased 15.7% from $2,002,000 in 1996 compared to $1,687,000 in 1997. Costs of
revenues for maintenance as a percentage of maintenance revenues also decreased
from 38.9% in 1996 compared to 32.5% in 1997. Costs of other revenues decreased
32.3% from $895,000 in 1996 to $606,000 in 1997 due to a decrease in certain
reimbursable travel charges.
Sales and marketing expenses decreased 40.4% from $10,083,000 in 1996 to
$6,012,000 in 1997, and decreased as a percentage of total revenues from 43.4%
in 1996 compared to 37.9% for 1997. The decrease is primarily due to decreases
in sales commissions consistent with decreases in software license revenues and
decreases in personnel and personnel related costs including travel.
The Company's product innovation and development expense, net of costs
capitalized, including the write-off of in process research and development
costs of $696,000, increased 34.3% from $2,010,000 in 1996 to $2,699,000 in
1997, and increased as a percentage of total revenues from 8.7% in 1996 to 17.0%
in 1997. The Company capitalized additional product development
12
<PAGE> 13
expenditures of $2,657,000 in 1996. No additional capitalization was recorded
during 1997 because development activities qualifying for capitalization were
immaterial. The increase in net cost is primarily due to the combination of no
new costs being capitalized and the in process research and development one time
charge of $696,000 related to the acquisition of Netgain Corporation during
fourth quarter 1997. See Note 13 of Notes to Financial Statements. The
acquisition of Netgain Corporation has given the Company capacity for future
growth.
General and administrative expenses decreased 63.7% from $6,027,000 in 1996 to
$2,186,000 in 1997. As a percentage of total revenues, general and
administrative expenses decreased from 26.0% in 1996 to 13.8% in 1997. These
decreases resulted from decreases in bad debt expense consistent with the
decrease in revenue, a favorable settlement of a legal dispute which resulted in
a $603,000 credit to G&A expense during the third quarter of 1997, rent expense
related to reduction in office space as a result of restructuring, and decreases
in personnel and related costs.
Interest income decreased 7.6% from $225,000 in 1996 to $208,000 in 1997, due to
decreased interest on invested cash balances. Interest expense decreased 74.4%
from $156,000 in 1996 to $40,000 in 1997, due to the March 1997 payment in full
of the outstanding line of credit balance and equipment note payable.
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.
13
<PAGE> 14
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.
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.
14
<PAGE> 15
BALANCE SHEET
Net accounts receivable decreased 26.0% from $4,120,000 at December 31, 1996 to
$3,047,000 at December 31, 1997 as a result of the collection of outstanding
receivables and the decrease in revenues during 1997. The line of credit,
short-term note, and long term note all decreased 100% with the March 21, 1997
payment of all outstanding balances. Accrued restructuring costs decreased 70.7%
from $1,111,000 at December 31, 1996 to $325,000 at December 31, 1997 as a
result of payments made. The remaining accrual is primarily related to costs
associated with non-cancelable leases, which will amortize over the remaining
life of the leases.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash of $174,000 and marketable
securities of $4,795,000. Cash provided by operating activities was $663,000 and
$172,000 for 1997 and 1996, respectively. Cash provided by (used in) investing
activities was $284,000 and ($714,000) for 1997 and 1996, respectively. Cash
used to purchase property and equipment was $261,000 and $869,000, respectively,
for 1997 and 1996. Cash (used in) provided by financing activities was
($1,877,000) and $1,363,000 for 1997 and 1996, respectively. The Company had no
line of credit agreement or notes payable at December 31, 1997.
In March 1998, the Company executed a $3,000,000 line of credit arrangement with
a bank. The line of credit bears interest at the prime rate plus 1% and reduces
to the prime rate upon the Company's attainment of quarterly income objectives.
The line of credit is a one year agreement and expires March 1999.
Funds generated from operations and the net proceeds from the Company's initial
public offering, were sufficient to finance the Company's operations during
1997. The Company believes that funds generated from operations, cash on hand,
and the newly established line of credit agreement will sufficiently fund the
operations for 1998 and beyond. The Company has no material commitments for
capital expenditures. The Company's product line is currently Year 2000
compatible. A review of Year 2000 compatibility for the Company's internal
systems revealed some internal systems are not yet Year 2000 compliant, however,
the cost to comply has been determined to be immaterial. 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, 1997. 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>
1997 QUARTER ENDED
---------------------------------------------------
March 31, June 30, Sept 30, Dec 31,
---------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Software $ 719 $ 1,191 $ 921 $ 2,408
Services 1,265 1,336 1,204 1,005
Maintenance 1,264 1,380 1,254 1,291
Other 160 173 131 146
----------------------------------------------------
Net revenues 3,408 4,080 3,510 4,850
----------------------------------------------------
Costs and expenses
Cost of revenues
Software 55 143 156 321
Services 956 972 828 772
Maintenance 460 472 364 391
Other 158 171 131 146
Sales and marketing 933 1,511 1,368 2,200
Product development 524 400 587 492
General & administrative 1,129 699 67 291
In process research and
development 0 0 0 696
----------------------------------------------------
Operating income/(loss) (807) (288) 9 (459)
Interest income net 8 44 46 70
----------------------------------------------------
Income/(loss) before taxes (799) (244) 55 (389)
Tax provision 0 0 0 (133)
----------------------------------------------------
Net income/(loss) $ (799) $ (244) $ 55 $ (522)
====================================================
Basic and diluted net income/(loss) per share $ (0.16) $ (0.05) $ 0.01 $ (0.10)
====================================================
Weighted average shares 4,951 4,955 5,345 5,035
====================================================
</TABLE>
16
<PAGE> 17
<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 & administrative 843 1,051 1,316 2,817
Restructuring 0 0 0 1,598
-----------------------------------------------------
Operating loss (276) (1,026) (1,576) (7,307)
Interest income net 11 35 19 4
-----------------------------------------------------
Loss before taxes (265) (991) (1,557) (7,303)
Tax benefit 94 387 574 0
-----------------------------------------------------
Net loss $ (171) $ (604) $ (983) $(7,303)
=====================================================
Basic and diluted net loss per share $ (0.03) $ (0.12) $ (0.20) $ (1.46)
=====================================================
Weighted average shares 5,000 4,950 5,000 5,000
-----------------------------------------------------
</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. The
Company'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, hiring, 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 Firstwave Technologies, Inc.
In our opinion, the financial statements listed in the index appearing under
item 14 (a) (1) and (2) on page 38 present fairly, in all material respects, the
financial position of Firstwave Technologies, Inc. at December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, 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
January 30, 1998, except as to Note 15, which is as of March 16, 1998
18
<PAGE> 19
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
<S> <C> <C>
Current assets
Cash and cash equivalents $ 174 $ 1,104
Marketable securities 4,795 5,843
Accounts receivable, less allowance for doubtful 3,047 4,120
accounts of $703 and $1,971
Deferred tax asset 459 834
Prepaid expenses and other 177 130
-------- --------
Total current assets 8,652 12,031
Property and equipment, net 1,938 2,906
Software development costs, net 1,089 1,508
Intangible asset 245 -
Deferred tax asset 2,362 1,922
-------- --------
$ 14,286 $ 18,367
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ - $ 1,975
Current portion of note payable - 83
Accounts payable 868 1,012
Accrued restructuring costs 325 1,111
Sales tax payable 263 378
Deferred revenue 1,545 1,464
Accrued employee compensation and benefits 614 680
Other accrued liabilities 19 97
-------- --------
Total current liabilities 3,634 6,800
Note payable - 125
Common stock subject to repurchase 300 -
-------- --------
3,934 6,925
-------- --------
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; 5,033,027 and 4,936,555 shares
issued and outstanding 9 9
Additional paid-in capital 19,329 18,909
Unrealized loss on marketable securities (14) (14)
Retained deficit (8,972) (7,462)
-------- --------
10,352 11,442
Commitments and contingencies (Note 9)
-------- --------
$ 14,286 $ 18,367
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Net revenues
Software $ 5,239 $ 9,834 $ 11,720
Services 4,810 7,267 9,717
Maintenance 5,189 5,143 5,104
Other 610 978 1,460
-------- -------- --------
15,848 23,222 28,001
Cost and expenses
Cost of revenues
Software 675 4,883 2,477
Services 3,528 5,908 7,968
Maintenance 1,687 2,002 2,014
Other 606 895 1,419
Sales and marketing 6,012 10,083 12,045
Product development 2,003 2,010 1,794
General and administrative 2,186 6,027 5,625
In process research and development 696 - -
Restructuring costs - 1,598 -
-------- -------- --------
Operating loss (1,545) (10,184) (5,341)
Interest expense (40) (156) (74)
Interest income 208 225 487
-------- -------- --------
Loss before income taxes (1,377) (10,115) (4,928)
Income tax benefit (provision) (133) 1,055 1,837
-------- -------- --------
Net loss $ (1,510) $ (9,060) $ (3,091)
======== ======== ========
Net loss per share
Basic $ (0.30) $ (1.81) $ (.63)
======== ======== ========
Diluted $ (0.30) $ (1.81) $ (.63)
======== ======== ========
</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, 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
Exercise of common stock options 88,899 - 281 - - 281
Employee stock purchases 7,573 - 25 - - 25
Issuance of stock options - - 114 - - 114
Net loss (1,510) (1,510)
-----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 5,033,027 $ 9 $ 19,329 $ (14) $ (8,972) $ 10,352
===================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,510) $ (9,060) $(3,091)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,565 3,431 2,958
Write down of software development costs to net realizable value - 2,583 -
Write off in process research and development 696 - -
Loss on disposal of fixed assets 142 646 -
Noncash interest on marketable securities (194) (222) (307)
Provision for bad debts 22 1,837 1,753
Deferred income taxes (65) (1,130) (1,822)
Stock compensation 114
Changes in assets and liabilities (net of acquisition)
(Increase) decrease in accounts receivable 1,051 2,135 (1,022)
(Increase) decrease in prepaid expenses and other (46) 40 584
Increase (decrease) in accounts payable (148) 55 (868)
Increase (decrease) in accrued restructuring (786) 1,111 -
Increase (decrease) in sales tax payable (115) (255) 36
Increase (decrease) in deferred revenue 81 (507) 390
Increase (decrease) in accrued employee compensation and benefits (66) (446) 2
Increase (decrease) in other accrued liabilities (78) (46) 47
-------- -------- -------
Total adjustments 2,173 9,232 1,751
-------- -------- -------
Net cash provided by (used in) operating activities 663 172 (1,340)
-------- -------- -------
Cash flows from investing activities
Software development costs - (2,186) (2,562)
Acquisition of Netgain (697) - -
Purchases of property and equipment (net of acquisition) (261) (869) (1,335)
Purchase of marketable securities (18,513) (15,710) (1,661)
Proceeds from sale of marketable securities 19,755 18,051 5,261
-------- -------- -------
Net cash provided by (used in) investing activities 284 (714) (297)
-------- -------- -------
Cash flows from financing activities
Exercise of common stock options 281 59 140
Proceeds from employee stock purchase plan 25 106 97
Borrowings under line of credit - 2,990 2,485
Repayments of borrowings under line of credit (1,975) (2,000) (1,500)
Borrowings under note payable - 250 -
Repayments of note payable (208) (42) -
-------- -------- -------
Net cash provided by (used in) financing activities (1,877) 1,363 1,222
-------- -------- -------
Net increase (decrease) in cash (930) 821 (415)
Cash and cash equivalents, beginning of year 1,104 283 698
-------- -------- -------
Cash and cash equivalents, end of year $ 174 $ 1,104 $ 283
======== ======== =======
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 84 $ 157 $ 28
======== ======== =======
Cash paid for income taxes $ 198 $ 73 $ 56
======== ======== =======
Non-cash investing activities
Stock issued in connection with the acquisition of Netgain $ 300 $ - $ -
======== ======== =======
</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
Firstwave Technologies, 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. to
reflect its growing worldwide market reach. Effective March 1998, the
Company changed its name from Brock International Inc. to Firstwave
Technologies, 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
services is recorded as performed. 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 affiliates
agreements, international affiliates collect license fees and
maintenance revenues on behalf of the Company, and generally remit 50%
of standard license fees and maintenance revenues they produce. The
Company recognizes international sales at the gross license amount,
with the amount paid to the affiliates 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.
Advanced billings for services and maintenance contracts are recorded
as deferred revenue in the accompanying balance sheet.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 invests in marketable
securities including government securities with high credit standing
and A1P1 rated commercial paper. Credit risk from concentration of
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, 1997 and 1996, 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 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
24
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share is presented in accordance with FAS
128, "Earnings per Share", which provides for new accounting
principles used in the calculation of earnings per share and was
effective for financial statements for both interim and annual periods
ended after December 15, 1997. The Company has restated the basic and
diluted net loss per common share for all periods presented to give
effect to FAS 128. Basic net loss per common share is based on the
weighted average number of shares of common stock outstanding during
the period. Stock options were the only securities issued which would
have been included in the diluted earnings per share calculation had
they not been antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued FAS 130,
"Reporting for Comprehensive Income", and FAS 131, "Disclosure about
Segments of an Enterprise and Related Information". In October 1997,
the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition". All three statements are effective for fiscal years
beginning after December 15, 1997, and are not expected to have a
material impact on the Company's financial statements.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Computer hardware and other equipment $ 3,672 $ 4,114
Furniture and fixtures 1,289 1,294
Purchased software 1,027 1,000
------- -------
5,988 6,408
Less: Accumulated depreciation and amortization (4,050) (3,502)
------- -------
$ 1,938 $ 2,906
======= =======
</TABLE>
Depreciation and amortization of property and equipment totaled
approximately $1,146,000, $1,351,000, and $1,160,000, in 1997, 1996 and
1995, respectively.
3. PRODUCT DEVELOPMENT EXPENDITURES
Product development expenditures are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Total development expenditures $ 2,003 $ 4,667 $ 4,356
Less: Additions to capitalized software
development, before amortization - 2,657 2,562
------- ------- -------
Product development expense $ 2,003 $ 2,010 $ 1,794
======= ======= =======
</TABLE>
The activity in the capitalized software development account is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year, net $ 1,508 $ 3,985 $ 3,221
Additions - 2,657 2,562
Amortization expense (419) (2,080) (1,798)
Discontinuance of product prior to release - (471) -
Write-down to net realizable value - (2,583) -
------- ------- -------
Balance at end of year, net $ 1,089 $ 1,508 $ 3,985
======= ======= =======
</TABLE>
26
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
Note payable to bank due in monthly principal installments
of $6,944; interest due monthly; interest fixed at 9.25%
per annum
Paid in full March 1997 $ - $ 208
Less: Current portion - 83
------------- ------------
$ - $ 125
============= ============
</TABLE>
In July 1995, the Company executed a $2,500,000 line of credit
arrangement with a bank. At December 31, 1996, $1,975,000 of borrowings
were outstanding on the line of credit. On March 21, 1997, the Company
paid off the outstanding line of credit balance and equipment note
payable and interest of $2,199,000 and the agreements were terminated.
The line of credit agreement required that the Company pay a quarterly
fee of .375% on the unused portion of the line of credit and accrued
interest at the prime rate.
27
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. INCOME TAXES
The components of the (benefit) provision for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Current
Federal $ - $ - $ -
State - - -
Foreign 198 73 56
Deferred
Federal (55) (938) (1,590)
State (10) (178) (303)
Foreign - (12) -
------- ------- -------
$ 133 $(1,055) $(1,837)
======= ======= =======
</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,
1997 1996 1995
<S> <C> <C> <C>
Federal statutory tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit (5.5) (2.8) (4.7)
Change in valuation allowance 37.2 29.6 4.0
Non taxable interest income - - (3.4)
Foreign income taxes 14.4 0.1 1.0
Other (2.4) (3.4) (0.2)
------ ---- ----
9.7% (10.5)% (37.3)%
------ ------- --------
</TABLE>
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, deferred tax (assets) liabilities are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Gross deferred tax liabilities
Capitalization of software development costs $ 413 $ 572
Depreciation 371 148
------- -------
784 720
======= =======
Gross deferred tax assets
Net operating loss carryforwards (5,764) (5,219)
Tax credit carryforwards (876) (618)
In process research and development (216) -
Accrued restructuring (79) -
Allowance for doubtful accounts receivable (341) (748)
Accrued commissions expense (10) (34)
Accrued vacation expense (26) (46)
Other (3) (6)
------- -------
(7,315) (6,671)
Valuation allowance 3,710 3,195
------- -------
Net deferred tax assets (3,605) (3,476)
------- -------
(2,821) (2,756)
Less: Current portion 459 834
------- -------
$(2,362) $(1,922)
======= =======
</TABLE>
At December 31, 1997, the Company has foreign tax credit and general
business tax credit carryforwards of approximately $588,000 and
$245,000, respectively, which will expire in years 1998 through 2011
and alternative minimum tax credits of approximately $43,000. The
Company also has net operating loss carryforwards of approximately
$15,184,000 which will expire in years 2009 through 2012.
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 1997, the Company recorded an increase in the
valuation allowance of approximately $515,000. Management's estimate of
the valuation allowance could be affected in the near term based on
taxable income generated in future years.
29
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 five-year period
thereafter as specified by the individual grant agreements. Vesting may
accelerate based on Company performance criteria as specified by the
individual grant agreements. Options previously granted to
non-management directors under a formula, as specified by the Option
Plan, become exercisable in one-fourth increments on the first, second,
third and fourth anniversaries of the date of grant. Options expire ten
years after the date of grant.
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. Pursuant
to the plan, if any option expires or terminates without being
exercised, the Board may grant options with respect to those
unpurchased shares to the same Optionee or to another employee of the
Company. On July 22, 1993, the Company filed a Form S-8 with the SEC
for the registration of 310,196 shares related to this plan.
At December 31, 1996, 25,619 options which were issued prior to the
adoption of the Option Plan were outstanding and fully vested. During
1997 these options were terminated and reissued.
30
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
SHARES PER SHARE
<S> <C> <C>
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 3.13 - 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 3.13 - 8.00
Granted 424,119 2.31 - 4.94
Exercised (88,899) 3.13 - 3.25
Canceled or expired (205,662) 2.75 - 8.00
---------- --------------
Outstanding at December 31, 1997 1,029,876
==========
</TABLE>
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 cancelled 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 could not 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.
31
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. EMPLOYEE STOCK PURCHASE PLAN
On January 9, 1995, the Company filed a Form S-8 with the Securities
and Exchange Commission, (SEC), for the registration of the Firstwave
Technologies, 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 1997 and 1996, 7,573 and 18,498
shares, respectively, were issued under the plan. At December 31, 1997,
options to purchase an additional 2,025 shares were outstanding.
8. STOCK COMPENSATION
The Company has adopted the disclosure only provisions of FAS 123,
"Accounting for Stock-Based Compensation". 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 1997, 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, except share data):
<TABLE>
<CAPTION>
1997 1997 1995
<S> <C> <C> <C> <C>
Net loss As reported $(1,510) $(9,060) $(3,091)
Pro forma (1,842) (9,185) (3,178)
Net loss per share
Basic As reported (0.30) (1.81) (0.63)
Pro forma (0.37) (1.84) (0.64)
Diluted As reported (0.30) (1.81) (0.63)
Pro forma (0.37) (1.84) (0.64)
</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 1997 and 1996,
respectively: dividend yield of 0% for all years; expected volatility
of 52% and 47% risk-free interest rate of 6.32% and 6.18%; and expected
life of 4.5 years for all years.
32
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, compensation expense of $5,000
was recorded related to the extension of the option exercise period of
a terminated employee and $109,000 in expense was recorded related to
options granted to a non-employee in accordance with FAS 123.
A summary of the status of the Company's stock option grants as of
December 31, 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 925,937 $ 7.24 512,338 $ 9.10
Granted 398,500 3.32 1,781,003 5.80
Exercised (88,899) 3.21 (9,242) 6.47
Forfeited (205,662) 3.38 (1,358,162) 7.89
---------- ---------- ---------- ---------
Outstanding at end of year 1,029,876 3.20 925,937 7.24
========== ==========
Options exercisable at end of year 148,984 99,104
Weighted-average fair value of
options granted during the year $ 1.67 $ 2.76
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contactual Exercise Exercisable Exercise
Exercise Price at 12/31/97 Life Price at 12/31/97 Price
-------------------------------------------------------- --------------------------------
<C> <C> <C> <C> <C> <C>
$2.313 to $4.9375 1,029,876 9.2 years $ 3.20 148,984 $ 3.25
</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 1997 and 1996,
respectively: dividend yield of 0% for all quarters; an expected life
of 90 days for all quarters; an expected volatility of 52% and 47%
respectively, and risk free interest rates ranging from 5.81 to 5.04.
The weighted average fair value of employee purchase rights granted in
1997 and 1996 was $1.08 and $1.79, respectively.
33
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under non-cancelable
lease agreements expiring on various dates through 2000. At December
31, 1997, future minimum rentals for non-cancelable leases are as
follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING ANNUAL
DECEMBER 31, RENTALS
<S> <C>
1998 $ 988
1999 660
2000 470
----------
$ 2,118
==========
</TABLE>
Total rent expense under these and other agreements was approximately
$627,000, $1,036,000 and $1,119,000 for the years ended December 31,
1997, 1996 and 1995, 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. During 1997
the Company settled a legal dispute resulting in receipt of $970,000
which included $367,000 in outstanding accounts receivable with the
remaining $603,000 credited to general and administrative expense.
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% matching contribution during 1997 and 1996, and a 20%
matching contribution in 1995. The Company matches the employee's
contribution, up to a maximum of 5% of the employee's annual
compensation. In addition, the Company may make discretionary annual
contributions. For the years ended December 31, 1997, 1996 and 1995,
the Company made matching contributions of approximately $66,400,
$78,000, and $77,800, respectively, to the 401(k) Plan and no
discretionary contributions.
34
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
1997 1996 1995
<S> <C> <C> <C>
Europe $3,962 $5,495 $4,612
South America 193 954 -
Australia and New Zealand 595 811 1,127
Asia 410 381 -
South Africa 218 86 -
------ ------ ------
$5,378 $7,727 $5,739
====== ====== ======
</TABLE>
In 1997, revenue in one foreign country exceeded 10% of total revenue -
the United Kingdom at $1,723,000.
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 reflected 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-cancelable leases net
of estimated sublease rental income. As of December 31, 1996 $1,111,000
was accrued related to this restructuring. During 1997 $786,000 was
charged against the accrual. The charges related to $477,000 of
severance and employee termination costs and $309,000 of costs
associated with non-cancelable leases.
13. ACQUISITION
On December 31, 1997, Brock Acquisition, Inc. a wholly-owned subsidiary
of the Company acquired legal title to the net assets of Netgain
Corporation, an Internet application developer, in exchange for
$697,000 in cash and 67,989 shares of the Company's common stock valued
at $300,000 (recorded as common stock subject to repurchase in the
accompanying financial statements). After expensing $696,000 of
in-process research and development costs, the excess of cost over fair
value of net assets acquired amounted to $245,000 and will be amortized
over 5 years. The acquisition was accounted for using the purchase
method of accounting. An additional 200,000 shares of the Company's
common stock was placed in escrow as of December 31, 1997. The shares
will be issued to the former shareholders of Netgain upon attainment of
certain future revenue targets for the sale of Netgain products and if
issued, will be accounted for as additional purchase price. Brock
Acquisition, Inc. changed it's name to Netgain Inc.
and was subsequently merged with the Company.
35
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following presents the unaudited pro forma consolidated results of
operations as if the December 31, 1997 acquisition had occurred as of
January 1, 1997. Netgain operations in 1996 were not material. (in
thousands, except share data):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1997
<S> <C>
Revenues $15,848
Net Loss ($2,491)
Basic and diluted net loss per share ($0.49)
</TABLE>
14. RELATED PARTY TRANSACTIONS
During 1997 the Company entered into an agreement with a majority
shareholder relating to a contract for $150,000 in professional
services provided by a third party. The shareholder coordinated the
relationship between the Company and the third party with payments to
the third party being made by the shareholder and reimbursed by the
Company. As of December 31, 1997 there were no outstanding
payables/receivables with the shareholder relating to this transaction.
During 1997 the Company paid $175,000 to a third party software
provider whose Chief Executive Officer is a member of the board of
directors of the Company. The payments were made in accordance with an
agreement that was cancelled as of December 31, 1997. The Company
continues to use the third party software provider under the terms and
conditions of a new contract. The thirty-month contract requires
payments of royalties, based on qualified sales, on a quarterly basis,
with a minimum payment of $36,750 per quarter.
15. SUBSEQUENT EVENTS
On March 16, 1998, the Company executed a $3,000,000 line of credit
arrangement with a bank. The line of credit bears interest at the prime
rate plus 1% and reduces to the prime rate upon the Company's
attainment of quarterly income objectives. The line of credit is
secured by substantially all of the corporate assets of the Company
with a negative pledge on intellectual property.
On February 13, 1998, the Company filed a Form S-3 with the SEC to
register 67,989 Shares of its common stock to satisfy the common stock
subject to repurchase obligation related to the acquisition of Netgain.
See Note 13.
36
<PAGE> 37
- --------------------------------------------------------------------------------
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 7, 1998.
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 7, 1998.
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 7, 1998.
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 7, 1998.
37
<PAGE> 38
- --------------------------------------------------------------------------------
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, 1997 and December 31,
1996.
- Statement of Operations for the three years ended
December 31, 1997.
- Statement of Changes in Shareholders' Equity for the
three years ended December 31, 1997.
- Statement of Cash Flows for the three years ended
December 31, 1997.
- Notes to Financial Statements
2. Financial Statement Schedules
- Schedule II - Valuation and Qualifying Accounts, for
the three years ended December 31, 1997.
38
<PAGE> 39
- --------------------------------------------------------------------------------
3. Exhibits
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.***
10.15 Option Agreement, dated July 25, 1997, between the Company and
Netgain. ****
10.16 Agreement and Plan of Merger, dated December 31, 1997, among
the Company, Netgain, and Brock Acquisition, Inc. *****
10.17 Seventh Amendment to Lease Agreement dated as of January 20,
1998 between the Company and Sate of California Public
Employees Retirement System relating to the Company's
principal offices located at 2859 Paces Ferry Road, Atlanta,
GA.
13 1997 Annual Report to Shareholders.
23 Consent of Independent Accountants. See pages immediately
preceding the signature page to this Report.
27 Financial Data Schedule (for SEC use only).
39
<PAGE> 40
- --------------------------------------------------------------------------------
*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.
****Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-Q for the quarter ended June 30, 1997.
*****Incorporated herein by reference to exhibit of the same number in the
Company's Form 8-K dated January 13, 1998
(b) Form 8-K:
Form 8-K dated January 13, 1998.
40
<PAGE> 41
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 Firstwave Technologies, Inc. of our report dated January 30, 1998,
except as to Note 15, which is as of March 16, 1998, appearing on page 18 of
this Form 10-K.
PRICE WATERHOUSE LLP
Atlanta, Georgia
March 26, 1998
41
<PAGE> 42
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.
Firstwave Technologies, Inc.
Date: March 24, 1998 By: /s/ R. Douglas MacIntyre
---------------------------------------
R. Douglas MacIntyre
President and Chief Executive Officer
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.
Date: March 24, 1998 /s/ R. Douglas MacIntyre
---------------------------------------
R. Douglas MacIntyre
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 1998 /s/ Judith A. Vitale
---------------------------------------
Judith A. Vitale
Director Finance and Administration
(Principal Financial and Accounting
Officer)
Date: March 24, 1998 /s/ Richard T. Brock
---------------------------------------
Richard T. Brock
Chairman of the Board
Date: March 24, 1998 /s/ John F. Keane
---------------------------------------
John F. Keane
Director
Date: March 24, 1998 /s/ Said Mohammadioun
---------------------------------------
Said Mohammadioun
Director
Date: March 24, 1998 /s/ James R. Porter
---------------------------------------
James R. Porter
Director
42
<PAGE> 43
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO ACCOUNTS END
OF COSTS AND WRITTEN OF
DESCRIPTION PERIOD EXPENSES OFF/RELEASED PERIOD
----------- ------ -------- ------------ ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $1,971 $ 22 $1,290 $ 703
====== ====== ====== ======
Tax asset valuation allowance $3,195 $ 515 $ 0 $3,710
====== ====== ====== ======
</TABLE>
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/RELEASED PERIOD
----------- ------ -------- ------------ ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $1,415 $1,837 $1,281 $1,971
====== ====== ====== ======
Tax asset valuation allowance $ 197 $2,998 $ 0 $3,195
====== ====== ====== ======
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO ACCOUNTS END
OF COSTS AND WRITTEN OF
DESCRIPTION PERIOD EXPENSES OFF/RELEASED PERIOD
----------- ------ -------- ------------ ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $1,354 $1,753 $1,692 $1,415
====== ====== ====== ======
Tax asset valuation allowance $ 0 $ 197 $ 0 $ 197
====== ====== ====== ======
</TABLE>
43
<PAGE> 44
EXHIBIT INDEX
44
<PAGE> 45
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 N/A
Company.*
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.*** N/A
10.15 Option Agreement, dated July 25, 1997, between the Company and
Netgain **** N/A
10.16 Agreement and Plan of Merger, dated December 31, 1997, among
the Company, Netgain, and Brock Acquisition, Inc.***** N/A
10.17 Seventh Amendment to Lease Agreement dated as of January 20,
1998 between the Company and Sate of California Public
Employees Retirement System relating to the Company's
principal offices located at 2859 Paces Ferry Road, Atlanta,
GA. ***** 47
13 1997 Annual Report to Shareholders 56
23 Consent of Independent Accounts. See pages immediately
preceding the signature page to this Report. 41
27 Financial Data Schedule (for SEC use only).
</TABLE>
45
<PAGE> 46
*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.
****Incorporated herein by reference to exhibit of the same number in the
Company's Form 10-Q for the quarter ended June 30, 1997.
*****Incorporated herein by reference to exhibit of the same number in the
Company's Form 8-K dated January 13, 1998
46
<PAGE> 1
EXHIBIT 10.17
47
<PAGE> 2
EXHIBIT 10.17
SEVENTH AMENDMENT TO LEASE
THIS SEVENTH AMENDMENT TO LEASE (the "Seventh Amendment"), is made this
20 day of January, 1998 by and between STATE OF CALIFORNIA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM (as "Landlord") and BROCK INTERNATIONAL, INC. (as "Tenant").
W I T N E S S E T H:
WHEREAS, Atlanta Overlook Associates #3 ("AOA") and Tenant did enter
into that certain Lease Agreement (the "Original Lease"), dated as of January
30, 1988, for space in that certain building known as "Overlook III" (the
"Building"); and
WHEREAS, AOA and Tenant did enter into that certain First Amendment of
Office Building Lease (the "First Amendment"), dated as of December 27, 1988;
and
WHEREAS, Landlord and Tenant did enter into that certain Second
Amendment of Office Building Lease (the "Second Amendment"), dated as of October
2, 1989; and
WHEREAS, Landlord and Tenant did enter into that certain Third
Amendment of Office Building Lease (the "Third Amendment"), dated as of March
10, 1993; and
WHEREAS, Landlord and Tenant did enter into that certain Fourth
Amendment of Office Building Lease (the "Fourth Amendment"), dated as of June
24, 1993; and
WHEREAS, Landlord and Tenant did enter into that certain Fifth
Amendment of Office Building Lease (the "Fifth Amendment"), dated as of March
22, 1994; and
WHEREAS, Landlord and Tenant did enter into that certain Sixth
Amendment of Office Building Lease (the "Sixth Amendment"), dated as of
September 22, 1994; and
WHEREAS, Brock Control Systems, Inc. did change its name to Brock
International, Inc. and Brock International, Inc. did assume the obligations of
Brock Control Systems, Inc. under the Original Lease, as amended; and
WHEREAS, the Original Lease, as modified by the First Amendment, Second
Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth
Amendment are sometimes herein referred to as the Lease; and
WHEREAS, Landlord and Tenant desire to modify and amend the Lease, in
the manner and for the purposes herein set forth.
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein, and for Ten and No/100 Dollars ($10.00) and other good and
valuable consideration, paid by the parties hereto to one another, the receipt
and sufficiency of which are hereby acknowledged by the parties hereto, the
parties hereto hereby covenant and agree as follows:
1. Extension of Lease Term. The Lease Term is hereby extended for
twenty-four (24) months (the "Renewal Term") so that the Lease shall now expire
on October 31, 2000 unless earlier terminated in accordance with the terms
thereof. Any reference in the Lease to the Term shall mean the period ending on
October 31, 2000.
48
<PAGE> 3
2. Base Rent. The Base Rent during the Renewal term, shall be as
follows:
<TABLE>
<CAPTION>
PER RSF PER
-----------
PERIOD ANNUM BASE RENT
------ ---------------
<S> <C>
11/01/98 - 10/31/00 $22.00
</TABLE>
Such Base Rent shall be paid by Tenant at the time and in the manner
that Base Rent is paid under the Lease. The aforesaid charges do not include any
other charges which might otherwise be due from Tenant under the terms and
conditions of the Lease.
3. Reduction of Premises. (a) Effective November 1, 1998, the Premises
will be reduced from 48,350 rentable square feet to 25,216 rentable square feet
(hereinafter referred to as the "Reduced Premises"), which is more particularly
shown as outlined on Exhibit "A" attached hereto and incorporated herein by
reference.
(b) The Base Rent for the Reduced Premises shall be determined in
accordance with Paragraph 2 above.
4. Tenant's Share. (a) Tenant's Share as described in Paragraph 1.1.3
of Exhibit "B" of the Fourth Amendment shall be adjusted accordingly and, from
and after November 1, 1998, Tenant's Share shall be (subject to further
adjustments as provided in the Lease) 5.83%.
5. Escalation. Effective November 1, 1998 Paragraph 3 (Increases in
Operating Costs) of the Fourth Amendment is hereby deleted in its entirety, and
the following paragraphs are inserted in lieu thereof:
(i) In addition to the Base Rent, Tenant agrees to pay as
Additional Rent to Landlord, Tenant's Share of Estimated Operating Costs (as
such terms are defined in Exhibit "B" attached to this Seventh Amendment, and by
this reference incorporated herein) in excess of the Operating Costs for the
Building for 1998, on a per square foot per annum basis and adjusted as required
herein (the Initial Operating Costs"), which Additional Rent shall be due in
twelve (12) equal installments in each Lease Year. All subsequent payments of
Tenant's Share of Operating Costs shall be due and payable without demand,
deduction or set off in advance on or before the first day of each month of the
Lease Term. During any Lease Year within the Lease Term that is less than twelve
(12) full months, any amount to be paid with respect to such period shall be
proportionately adjusted based on that portion of the Lease Year that this Lease
is in effect.
(ii) On or before December 15 of each Lease Year (or as soon
thereafter as is practical), Landlord shall provide Tenant with Landlord's
estimate of Tenant's Share of Estimated Operating Costs for the following Lease
Year. Beginning on January 1, 1999 and continuing on the first (1st) day of
January each year thereafter, the amount of Tenant's Share of Estimated
Operating Costs shall be adjusted to the amount set forth in Landlord's notice.
As promptly as practicable after the end of each Lease Year, Landlord shall
compute the actual Operating Costs for the previous Lease Year. If Tenant's
Share of the actual Operating Costs is greater than the amount Tenant paid to
Landlord as Tenant's Share of the Estimated Operating Costs for the previous
Lease Year, Tenant shall, within fifteen (15) days after receipt of notice of
Tenant's Share of actual Operating Costs, pay to Landlord as Additional Rent an
amount equal to the difference between Tenant's Share of actual Operating Costs
and Tenant's Share of Estimated Operating Costs. If Tenant's Share of the actual
Operating Costs for any Lease Year is less than the amount Tenant paid to
Landlord as Tenant's Share of Estimated Operating Costs for such Lease Year,
such excess amount shall be applied against the installment of Additional Rent
next coming due until the same has been fully applied.
49
<PAGE> 4
6. Tenant Improvements. (a) Tenant hereby takes and accepts the Reduced
Premises "as is, where is", with no representation or warranty by Landlord as to
the fitness or suitability of the Expansion Space for Tenant's purpose.
(b) If Tenant desires any additional work in the Reduced Space, then
the work will be provided subject to Landlord's prior consent only, and by
Landlord at Tenant's sole cost and expense. Such amount will be paid to Landlord
within thirty (30) days after demand therefor is made by Landlord.
7. Expansion Rights. So long as no event of default on the part of
Tenant then exists, and subject to any other current right to an expansion
option, renewal option, first right to lease or other such right granted to a
tenant of the Building or a tenant of any other building within Overlook prior
to the date this Seventh Amendment is executed, and so long as there is no
sublease of any portion of the Premises or any assignment of the Lease, Landlord
shall not at any time lease the space consisting of approximately 3,277 rentable
square feet on the fifteenth (15th) floor of the Building, (the "Offer Space" as
more particularly described in Exhibit "A"), without first giving notice to
Tenant of the proposed lease with a bona fide prospect of such space (the
"Availability Notice"). Such notice shall contain all of the material, economic
terms of the proposed lease. Tenant must elect to lease the Offer Space, or not
to lease such Offer Space, within five (5) business days of the notice from
Landlord, by giving notice to Landlord of Tenant's intent to exercise this first
right of refusal, on the terms offered to Tenant as specified in Landlord's
notice. If Landlord does not receive such notice from Tenant within said five
(5) business days, Tenant shall be deemed to have elected not to lease the space
in question, Tenant shall have no further rights to said space, and Landlord
shall be free to lease the space to another party.
(b) Tenant shall have the right to lease the Offer Space offered at the
then prevailing market base rental rate and leasehold improvement allowance as
determined by Landlord in its sole, good faith judgment, and indicated by
Landlord in the Availability Notice. If Tenant elects to exercise this right to
lease, Tenant shall deliver notice of such exercise to Landlord. Upon such
notice by Tenant, Tenant shall be bound to lease said portion of said floor on
the same terms and conditions as under the Lease, but at the rental rate and
other terms as set forth in the Availability Notice. Such lease as to the Offer
Space shall commence on the earlier date to occur of (i) Tenant's occupancy of
the Offer Space in question, or (ii) sixty (60) days from the date of Tenant's
notice to elect to lease such Offer Space.
8. Brokerage. LASALLE PARTNERS MANAGEMENT LIMITED ("LASALLE") HAS
REPRESENTED LANDLORD IN THIS TRANSACTION AND SHALL BE PAID A COMMISSION BY
LANDLORD IN CONNECTION WITH THIS LEASE UNDER A SEPARATE AGREEMENT. Tenant
warrants that it has had no dealings with any broker or agent in connection with
the negotiation or execution of this Amendment, and Tenant agrees to indemnify
Landlord against all costs, expenses, attorneys' fees or other liability for
commissions or other compensation or charges claimed by any broker or agent
claiming the same by, through or under Tenant.
9. No Other Modifications. Except as set forth herein to the contrary,
all of the terms and conditions of the Lease shall remain in full force and
effect and shall govern and control Tenant's lease from Landlord of the
Premises. Tenant acknowledges and agrees that the Lease is in full effect in
accordance with its terms.
10. Transfers, Successors and Assigns. This Seventh Amendment shall
inure to the benefit of and shall be binding upon Landlord, Tenant and their
respective transfers, successors and assigns.
11. Georgia Law. This Seventh Amendment shall be construed and
interpreted under and pursuant to the laws of the State of Georgia.
12. Exhibit. This Seventh Amendment includes Exhibit "A" and Exhibit
"B" (three pages, attached).
50
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have caused this Seventh Amendment to be
executed under seal and delivered on the date and year first above written.
"LANDLORD"
State of California Public Employees' Retirement
System, an agency of the State of California
By: LaSalle Advisors Limited, its Agent
By:
---------------------------------------------
"TENANT"
Brock International, Inc.
By:
---------------------------------------------
its:
-----------------------------------
Attest:
-------------------------------------------
its:
-----------------------------------
(CORPORATE SEAL)
51
<PAGE> 6
EXHIBIT "A"
Attached to and made part of
Lease Agreement dated: January 20, 1998
Landlord: State of California Public Employees' Retirement System
Tenant: Brock International, Inc.
"Reduced Premises"
25,216 RSF
OVERLOOK III
------------
10th Floor
52
<PAGE> 7
"Offer Space"
3,277 RSF
OVERLOOK III
------------
15 Floor
53
<PAGE> 8
Exhibit "B"
Attached to and made part of
Lease Amendment dated: January 20, 1998
Landlord: State of California Public Employees' Retirement System
Tenant: Brock International, Inc.
1. Reimbursement for Operating Costs.
1.1 Definitions. The definitions set forth in this Section 1.1 shall be applied
whenever any of the following terms are used in this Special Stipulation 1.
1.1.1 Operating Costs: shall mean all costs paid by Landlord or its
representatives in connection with the ownership, management,
maintenance, operation, leasing, insuring, repairing, redecorating,
cleaning and securing of the Building, as determined by Landlord to be
necessary or appropriate, including, without limitation, all of the
following costs:
1.1.1.1 All wages, salaries, commissions and related expenses
of all on-site and off-site agents, employees and contractors
engaged in the management, operation, maintenance, repair,
redecoration, cleaning, and security of the Building, plus the
costs of all management, maintenance, and security offices in
the Building.
1.1.1.2 All supplies and materials used and labor charges
incurred in the management, operation, maintenance, repair,
redecoration, cleaning and security of the Building.
1.1.1.3 All reasonable, non-capital equipment purchased or
leased for the performance of Landlord's obligations
hereunder.
1.1.1.4 All management, maintenance, cleaning, security,
advertising, promotional and other service agreements for the
Building and the equipment therein, including, without
limitation, alarm service, security service, window cleaning,
and elevator and escalator maintenance.
1.1.1.5 All accounting, legal and engineering fees and
expenses, including, without limitation, the cost of audits by
certified public accountants.
1.1.1.6 All insurance premiums, including, without limitation,
fire, casualty, extended coverage, public liability, rent
abatement, boiler, and worker's compensation insurance
applicable to the Building, Landlord's employees and
Landlord's personal property used in connection therewith.
1.1.1.7 All redecorating (including painting, wallpapering and
floor covering), maintaining and repairing of the Building,
structural or non-structural, including, without limitation,
the mechanical, electrical, heating, ventilating and air
conditioning equipment, landscape maintenance and the
replacement of trees and shrubbery (excluding any such cost
billed to and paid by individual tenants).
1.1.1.8 All removing of trash, rubbish, garbage and other
refuse from the Building, as well as removal of ice and snow
from the sidewalks, driveways and parking lots.
1.1.1.9 All amortization of capital improvements (including
accounting, legal, architectural and engineering fees incurred
in connection therewith) made to the Building subsequent to
the Commencement Date which (i) will improve operating
54
<PAGE> 9
efficiencies; (ii) may be required by any law; or (iii)
improve or enhance the health of persons in the Building or
safety of the Building.
1.1.1.10 All charges for electricity, gas, water, sewer, and
other utilities furnished to or services or privileges made
available to users of the Building.
1.1.1.11 All ad valorem property taxes covering all real and
personal property constituting a part of the Building,
including, but not limited to, all general and special
assessments of every kind.
1.1.1.12 Any costs incurred in connection with, as a part of
or as a result of the testing of indoor air quality in any
portion of the Building.
1.1.1.13 All other expenses of owning, maintaining, operating,
insuring, securing, managing, cleaning, redecorating or
repairing the Building.
1.1.2 Notwithstanding any of the foregoing to the contrary,
Operating Costs shall not include:
1.1.2.1 Costs which are directly reimbursed to Landlord by
other tenants.
1.1.2.2 Payments on mortgages or ground leases owed by
Landlord.
1.1.2.3 Costs of leasehold improvements for which Landlord has
agreed to pay.
1.1.2.4 Payment of any return on equity to any owner of the
Building.
1.1.2.5 Costs reimbursed by proceeds of insurance.
1.1.2.6 Costs of the initial construction of the Building or
any depreciation thereof.
1.1.2.7 Payments of claims, damages or expenses resulting from
any willful is conduct of Landlord or any of its authorized
representatives.
1.1.2.8 Costs of any tenant improvements or other improvements
or other services or other Operating Costs which are performed
by or incurred by Landlord for the benefit of a single tenant
rather than for the benefit of all tenants of the Building.
55
<PAGE> 1
EXHIBIT 13
56
<PAGE> 2
EXHIBIT 13
- ------------------------------------------------------------------------------
Firstwave Technologies, Inc.
ANNUAL
REPORT [LOGO]
1997
<PAGE> 3
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
FIRSTWAVE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
(In thousands, except per share data)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 15,848 $ 23,222 $ 28,001 $ 30,697 $ 25,465
Income (loss) before taxes (1,377) (10,115) (4,928) 737 4,407
Income tax (provision) benefit (133) 1,055 1,837 (192) (1,549)
Net income (loss) (1,510) (9,060) (3,091) 545 2,858
Basic net income (loss) per common share (0.30) (1.81) (0.63) .11 .69
Diluted net income (loss) per common share (0.30) (1.81) (0.63) .11 .66
Total assets 14,286 18,367 26,045 29,127 27,591
Total non-current liabilities $ - $ 125 $ - $ 960 $ 906
Weighted average common and
common share equivalents 5,035 5,000 4,932 4,960 4,339
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
CONTENTS
------------------------------------------------------------
<S> <C>
Letters to Shareholders....................................2
Condensed Balance Sheet....................................4
Condensed Statement of Operations..........................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>
First Wave Technologies, Inc. 1
<PAGE> 4
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
I am pleased to report significant progress in the pivotal first year of our
company's transformation. We have revitalized the business to begin 1998 with
stable operations, a bright future, and aggressive plans for expansion. In
support of these plans, we changed the company's name to Firstwave Technologies,
Inc. on March 1, 1998.
A YEAR OF TRANSFORMATION
In 1997 Brock began implementing a two-year turnaround plan designed to
stabilize operating performance, restore financial health, and stimulate
long-term growth. Early in the year, we restructured operations to reduce
overhead and eliminate unproductive activities. We enforced rigorous financial
discipline and managed the balance sheet carefully. Throughout the year, we
strengthened customer relationships by dedicating staff to customer care and
delivering improved products and services. While reducing overall expenses
significantly, we increased research and development investment 34 percent,
including in-process R&D. We enhanced our products with technical advances,
interfaces to the World Wide Web, new features for multi-national companies, new
capabilities to facilitate team selling, and Year 2000 compliance. We assembled
a strong management team who analyzed our markets, studied the competition,
explored emerging technologies, and developed growth strategies. At year-end, we
acquired Netgain Corp., an innovative young company with revolutionary
technology.
FINANCIAL RESULTS
Financial performance met or exceeded expectations in each quarter of 1997.
Excluding a one-time charge related to the Netgain acquisition, the company
posted consecutive quarterly operating profits in the second half of the year.
We reported the first year-over-year quarterly revenue growth in the fourth
quarter as license revenues surged 41 percent over the fourth quarter of 1996. I
believe these results signaled the transition from quarterly decline to growth -
a key indicator of financial turnaround.
As anticipated, annual revenues of $15.8 million were lower than the $23.2
million reported in 1996. Due to operating efficiencies, the net loss of $1.5
million ($.30 per share) was a major improvement over 1996. The client services
team performed especially well after restructuring. Consulting staff utilization
consistently exceeded 75 percent with gross margins greater than 20 percent.
Maintenance revenues grew and customer retention improved by 20 percent as
implementation success and customer satisfaction increased. The balance sheet
reflects the strength of a smaller, healthier company with a secure cash
position and a solid foundation for future growth.
CURRENT PRODUCT STRATEGY
We will continue improving the existing business while investing in expansion
strategies to stimulate growth. The revenue streams and customer relationships
of our existing business provide a sound platform for launching new products and
services. We remain dedicated to the thousands of people who depend on us around
the world, and we will continue to support and enhance the products we are
selling today. These full-featured products optimize sales, marketing, and
customer service functions for major companies in 20 countries. We will maintain
the Unix products, provide award-winning TakeControl(R) client/server
applications, offer Year 2000 upgrades, remain compatible with the most popular
database managers and operating systems, and provide personal service whenever
customers need it.
2 Firstwave Technologies, Inc.
<PAGE> 5
- -------------------------------------------------------------------------------
NETGAIN(TM) STRATEGY
We plan to propel growth with innovative products based on the advanced Netgain
architecture. In conjunction with a new corporate identity campaign, we are
launching Netgain Enterprise(TM), the first commercial customer information
system designed specifically to leverage Internet technologies. The present
generation of competitive products in our marketplace was built with early
client/server technology to automate direct sales forces and other internal
corporate departments. Due to technical limitations, these products have
little utility for the fast-growing class of companies who sell through
multiple channels and business partners. Netgain is ideally suited to the needs
of these progressive organizations because it is designed to support and
integrate all revenue functions of an "extended enterprise".
We anticipate mid-1998 shipments of the first product in the suite, Netgain
Sales(TM). This product is designed to help professional salespeople manage
contacts, accounts, opportunities, and activities with minimum effort for
maximum effectiveness. Modeled after the most creative web applications,
Netgain Sales is highly intuitive and easy to learn and use. Any authorized
user can securely access the system through a standard web browser. In
addition to a customer's own sales and marketing staffs, Netgain users can
include distributors, resellers, system integrators, and other partners anywhere
in the world. As a centrally managed system, Netgain can boost competitive
advantage. It speeds enterprise-wide access to critical sales information,
enables team collaboration, and provides valuable management insights. the
architecture facilitates simple installation and maintenance and quick
adaptation to changing business needs.
Netgain's unique advantage is increased sales effectiveness throughout the
extended enterprise, and the total cost of ownership is less than conventional
alternatives. We believe this product is the forerunner of a new era.
FIRSTWAVE(TM)
The new corporate identity supports our position of leadership. Existing stock
certificates remain in effect and the stock continues to trade on the NASDAQ
National Market, with a new symbol (FSTW). In Firstwave, we have formed a
dynamic new company - combining the entrepreneurial spirit and Internet
expertise of Netgain with the applications expertise and global resources of
Brock. Because of our heritage, Firstwave has a rare ability to understand
customer needs and apply emerging technologies to enhance revenues.
Thanks to our customers, employees, and friends of the company, 1997 was the
turning point we planned. We appreciate the many people who contributed to our
success. In particular, I would like to recognize the selfless service of two
directors whose contributions spanned five years: Harry Gruner left our board
in December and Said Mohammadioun will complete his service in May. In their
places, we are honored to nominate two respected information technology
industry leaders for election at the annual meeting. The insights of John
Keane and Tom McNeight will be invaluable in transforming the company into a
growth leader. On behalf of the board and all the people of our company, I thank
you for your continued confidence.
Sincerely,
/s/ Doug MacIntyre
-------------------------------------
R. Douglas MacIntyre
President and Chief Executive Officer
Firstwave Technologies, Inc. 3
<PAGE> 6
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) December 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 174 $ 1,104
Marketable securities 4,795 5,843
Accounts receivable, less allowance for doubtful
accounts of $703 and $1,971 3,047 4,120
Deferred tax asset 459 834
Prepaid expenses and other 177 130
- -------------------------------------------------------------------------------------------------------------
Total current assets 8,652 12,031
Property and equipment, net 1,938 2,906
Software development costs, net 1,089 1,508
Intangible asset 245 -
Deferred tax asset 2,362 1,922
$14,286 $18,367
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------
Current liabilities
Line of credit $ - $ 1,975
Current portion of note payable - 83
Accounts payable 868 1,012
Accrued restructuring costs 325 1,111
Sales tax payable 263 378
Deferred revenue 1,545 1,464
Accrued employee compensation and benefits 614 680
Other accrued liabilities 19 97
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 3,634 6,800
Note Payable - 125
Common stock subject to repurchase 300 -
3,934 6,925
- -------------------------------------------------------------------------------------------------------------
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; 5,033,027 and 4,936,555 shares issued
and outstanding 9 9
Additional paid-in capital 19,329 18,909
Unrealized loss on marketable securities (14) (14)
Retained deficit (8,972) (7,462)
10,352 11,442
- -------------------------------------------------------------------------------------------------------------
$14,286 $18,367
- -------------------------------------------------------------------------------------------------------------
</TABLE>
4 Firstwave Technologies, Inc.
<PAGE> 7
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) For the year ended December 31,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Software $ 5,239 $ 9,834 $ 11,720
Services 4,810 7,267 9,717
Maintenance 5,189 5,143 5,104
Other 610 978 1,460
- --------------------------------------------------------------------------------------------------------
15,848 23,222 28,001
- --------------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of revenues
Software 675 4,883 2,477
Services 3,528 5,908 7,968
Maintenance 1,687 2,002 2,014
Other 606 895 1,419
Sales and marketing 6,012 10,083 12,045
Product development 2,003 2,010 1,794
General and administrative 2,186 6,027 5,625
In process research and development 696 - -
Restructuring costs - 1,598 -
- --------------------------------------------------------------------------------------------------------
Operating loss (1,545) (10,184) (5,341)
Interest expense (40) (156) (74)
Interest income 208 225 487
- --------------------------------------------------------------------------------------------------------
Loss before income taxes (1,377) (10,115) (4,928)
Income tax benefit (provision) (133) 1,055 1,837
- --------------------------------------------------------------------------------------------------------
Net loss $(1,510) $(9,060) $ (3,091)
- --------------------------------------------------------------------------------------------------------
Net loss per share
Basic $ (0.30) $ (1.81) $ (.63)
Diluted $ (0.30) $ (1.81) $ (.63)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Firstwave Technologies, Inc. 5
<PAGE> 8
- -------------------------------------------------------------------------------
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(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> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 88,899 - 281 - - 281
Employee stock purchases 7,573 - 25 - - 25
Issuance of stock options - - 114 - - 114
Net loss - - - - (1,510) (1,510)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 5,033,027 $ 9 $ 19,329 $ (14) $(8,972) $10,352
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FIRSTWAVE TECHNOLOGIES, INC.
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Firstwave Technologies, Inc. as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
appearing under item 14(a)(1) and (2) on page 38 in the Company's Annual Report
on Form 10-K (which statements are not presented herein); and in our report
dated January 30, 1998, except as to note 15 which is as of March 16, 1998, 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, 1997 and 1996 and the related condensed statements of operations,
of changes in shareholders' equity and of cash flows for each of the three years
in the period ended December 31, 1997, 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
January 30, 1998
except as to note 15 which
is as of March 16, 1998
6 Firstwave Technologies, Inc.
<PAGE> 9
- ------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOW
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(In thousands) For the year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,510) $ (9,060) $(3,091)
Adjustment to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 1,565 3,431 2,958
Write down of software development costs to
net realizable value - 2,583 -
Write off in process research and development 696 - -
Loss on disposal of fixed assets 142 646 -
Noncash interest on marketable securities (194) (222) (307)
Provision of bad debts 22 1,837 1,753
Deferred income taxes (65) (1,130) (1,822)
Stock compensation 114 - -
Changes in assets and liabilities (net of acquisition)
(Increase) decrease in accounts receivable 1,051 2,135 (1,022)
(Increase) decrease in prepaid expenses and other (46) 40 584
Increase (decrease) in accounts payable (148) 55 (868)
Increase (decrease) in accrued restructuring (786) 1,111 -
Increase (decrease) in sales tax payable (115) (225) 36
Increase (decrease) in deferred revenue 81 (507) 390
Increase (decrease) in accrued employee
compensation and benefits (66) (446) 2
Increase (decrease) in other accrued liabilities (78) (46) 47
- ----------------------------------------------------------------------------------------------------------------
Total adjustments 2,173 9,232 1,751
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 663 172 (1,340)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Software development costs - (2,186) (2,562)
Acquisition of Netgain (697) - -
Purchases of property and equipment (net of acquisition) (261) (869) (1,335)
Purchase of marketable securities (18,513) (15,710) (1,661)
Proceeds from sale of marketable securities 19,755 18,051 5,261
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 284 (714) (297)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Exercise of common stock options 281 59 140
Proceeds from employee stock purchase plan 25 106 97
Borrowings under line of credit - 2,990 2,485
Repayments of borrowings under line of credit (1,975) (2,000) (1,500)
Borrowings under note payable - 250 -
Repayments of note payable (208) (42) -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,877) 1,363 1,222
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (930) 821 (415)
Cash and cash equivalents, beginning of year 1,104 283 698
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 174 $ 1,104 $ 283
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 84 $ 157 $ 28
Cash paid for income taxes $ 198 $ 73 56
- ----------------------------------------------------------------------------------------------------------------
Non-cash investing activities
Stock issued in connection with acquisition of Netgain $ 300 $ - $ -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Firstwave Technologies, Inc. 7
<PAGE> 10
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
DIRECTORS
RICHARD T. BROCK, CHAIRMAN
Mr. Brock founded Firstwave Technologies, Inc., formerly 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 a Certified Public Accountant.
R. DOUGLAS MACINTYRE
Mr. MacIntyre serves as president and chief executive officer of Firstwave
since joining the company in December 1996. From 1994 until that time, Mr.
MacIntyre served as president and chief executive officer of Dun & Bradstreet
Software. From 1990 to 1993, Mr. MacIntyre served as president and chief
operating officer of Software 2000, and from 1980 to 1990 he held management
positions at Management Science America, Inc. He is past president of the
American Software Association ad serves on various industry and civic boards.
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. He has completed executive programs at
the Harvard, Wharton and Stanford business schools.
MICHAEL T. MCNEIGHT
Mr. McNeight is Vice President of Internet Security Systems, Inc., a software
company providing network security analysis and intrusion detection systems.
Mr. McNeight brings contemporary software industry knowledge and technical
competence. From 1993 to 1995, he was President and Chief Executive Officer of
Aurum Software, Inc., a software company specializing in sales, marketing and
customer automation. From 1979 to 1993, Mr. McNeight held management positions
with Dun & Bradstreet Software, Inc. He received his BA from Oklahoma State
University and his MS from Texas Christian University.
JOHN F. KEANE
Mr. Heane has been a director of the Company since December 1997. Mr. Keane is
chairman and chief executive officer of Keane, Inc., an application
development, outsourcing and integration services firm. Previous to this, Mr.
Keane held various positions in marketing for IBM and was a consultant for
Arthur D. Little. He serves as a director of EG&G, a global technology company
that supplies products and technical services to industrial and government
markets. He is a graduate of Harvard College and Harvard School of Business
Administration.
JAMES R. PORTER
Mr. Porter served from September, 1985, until February, 1997, as president and
chief executive officer of Triad Systems Corporation, a provider of business
and information management solutions for the retail hardlines industry and the
automotive aftermarket, and now serves as Chairman of the Board. Previously,
her served in executive capacities at Informatics General Corporation and
United Systems International. Mr. Porter serves on the board of directors for
Silicon Valley Bank, Triad Park LLC and Cellular Technologies. Mr. Porter
earned his bachelor or science degree in engineering from Texas A&M and
attended Harvard Graduate School of Business.
OFFICERS
R. DOUGLAS MACINTYRE
President and Chief Executive Officer
KENNETH D. BARWICK
Vice President of Worldwide Sales
LISA M. CAMPBELL
Vice President of Marketing
KENNETH (DUTCH) SCHULTZ
vice President of Development
STEPHEN B. SPENCE
Vice President of Client Services
JUDITH A. VITALE
Director of Finance and Administration
8 Firstwave Technologies, Inc.
<PAGE> 11
- -------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
Firstwave Technologies, 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
Thursday, May 7, 1998
from 2:00 p.m. to 3:00 p.m.
Firstwave Technologies, Inc. Corporate Offices
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, Ga 30339
770-431-1200
Corporate Counsel
Powell, Goldstein, Frazer & Murphy LLP
Atlanta, Georgia
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, 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
Firstwave Technologies, Inc.
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, GA 30339
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Atlanta, Georgia
STOCK LISTING
NASDAQ Symbol: FSTW
(formerly BROC)
PRODUCT INQUIRIES
For more information about the Company's products and services, e-mail
Firstwave at [email protected] or call 770-431-1200 or visit Firstwave's web
site at http://www.firstwave.net.
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
transaction and do not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fiscal 1997 First Second Third Forth
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High $4.50 $6.5000 $5.75 $5.2500
Low $3.00 $2.1875 $4.50 $3.4375
- -------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997 there were approximately 104 shareholders of record and
approximately 1,725 persons or entities who hold common stock in nominee name.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fiscal 1996 First Second Third Forth
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High $11.25 $8.75 $7.50 $4.875
Low $6.25 $6.50 $4.25 $2.875
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
[FIRSTWAVE LOGO]
FIRST WAVE TECHNOLOGIES, INC.
Overlook III, Suite 1000
2859 Paces Ferry Road
Atlanta, GA 30339
770.431.1200
770.431.1201 FAX
e-mail [email protected]
http://www.firstwave.net
1997 ANNUAL REPORT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRSTWAVE'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 174
<SECURITIES> 4,795
<RECEIVABLES> 3,047<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,652
<PP&E> 1,938<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,286
<CURRENT-LIABILITIES> 3,634
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 10,343
<TOTAL-LIABILITY-AND-EQUITY> 14,286
<SALES> 5,239
<TOTAL-REVENUES> 15,848
<CGS> 675
<TOTAL-COSTS> 6,496
<OTHER-EXPENSES> 10,897
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> (1,377)
<INCOME-TAX> 133
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,510)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
<FN>
<F1>A/R and PPE asset values represent net amounts
</FN>
</TABLE>
