-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ucgpump8KwKt0ozMniBWw0l80dAMknqKNUpAmGueZPts97hEFjhIlA67WbszuCGd RNYcYV9nK81HmgCJLhrGVg== 0000950144-00-003991.txt : 20000411 0000950144-00-003991.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950144-00-003991 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTWAVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000897078 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 581588291 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21202 FILM NUMBER: 583423 BUSINESS ADDRESS: STREET 1: 2859 PACES FERRY RD STREET 2: STE 1000 CITY: ATLANTA STATE: GA ZIP: 30339 BUSINESS PHONE: 7704311200 MAIL ADDRESS: STREET 1: 2859 PACES FERRY RD STREET 2: STE 1000 CITY: ATLANTA STATE: GA ZIP: 30339 FORMER COMPANY: FORMER CONFORMED NAME: BROCK INTERNATIONAL INC DATE OF NAME CHANGE: 19960227 FORMER COMPANY: FORMER CONFORMED NAME: BROCK CONTROL SYSTEMS INC DATE OF NAME CHANGE: 19930208 10-K405 1 FIRSTWAVE TECHNOLOGIES INC 1 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 [FEE REQUIRED] For the fiscal year ended December 31, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________to_________. Commission File Number: 0-21202 ------- FIRSTWAVE(R) TECHNOLOGIES, INC. ------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1588291 - ------------------------------------------------------------------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2859 PACES FERRY ROAD, SUITE 1000, ATLANTA, GEORGIA 30339 - ------------------------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 431-1200 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 23, 2000: approximately $54,846,723. Number of shares of Common Stock outstanding as of March 23, 2000: 5,799,811. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 2000 are incorporated by reference into Part III of this Report. Other than those portions specifically incorporated by reference herein, the 1999 Annual Report to Shareholders and the Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2000 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(R) 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 Firstwave Technologies, Inc. provides Internet-based customer relationship management (eCRM) solutions to companies located throughout the world. The Company markets and supports three product lines: Firstwave eRM, Takecontrol(R), and Firstwave for Unix. Firstwave eRM is a seamlessly integrated, web-based suite of applications created to fulfill and manage the e-business relationship needs of a company in the areas of sales, marketing, and support. Firstwave eRM manages a company's customer life cycle management, from prospecting targets in a pre-sales environment to post sales service and account management. The sales application was released as Netgain(TM) Sales in September 1998 and the marketing and support applications were integrated with the sales application to form one integrated application, Firstwave eRM, in December 1999. Takecontrol is a Microsoft(R) Windows-based, integrated client/server CRM solution that meets the need to automate marketing, sales and customer service operations for companies in multiple industries. The Firstwave for Unix product line is a traditional UNIX, character-based CRM solution. COMPANY STRATEGY Firstwave continues its vision of creating an Internet-centric CRM platform that leverages the Internet to bring value to companies by lowering their total cost of ownership while enhancing their relationships with customers, prospects and partners. Unlike web-based systems, web-enabled or client server, CRM applications historically are costly and take months to implement, are expensive to maintain and do not provide the flexibility within the product that is demanded today. Additionally, users of traditional CRM products find them complex and difficult to use, resulting in a low user acceptance rate. Firstwave strives to create a user-friendly environment for its users, offering a web site address to hit over the Internet for application access and an easy web-based interface once inside the application. Firstwave's Internet-based applications are also extended to a customer's channel and business partners outside the internal offices with granular security measures in place allowing those partners to see only what that company chooses to allow them to see. Web-enabled or client server CRM applications have limited partner capabilities. Management believes that the future of CRM applications must be built around the Internet (tying in all customer management functions including marketing, sales and support), be designed with the ability to customize a product to fit a company or partner's needs and have the ability to be remotely hosted. In the past year Firstwave has dedicated its Development resources to accomplish that vision. 2 3 The Company's Internet-based product suite, Firstwave eRM, provides marketing, sales and support capabilities using Internet technologies. Users can market to targets utilizing campaign management functionality within the eMarketing application and turn them over as leads to the sales team. The sales team, using the eSales application, can then manage their opportunities and accounts efficiently with added value in order to close sales. Those new customers are then managed through the eSupport application, where any support issues can be tracked and resolved quickly and effectively by using a customized knowledge base and escalation procedures. Firstwave has also developed a tool set, eWorkbench, that allows for extensive customizations to the Firstwave eRM product suite. Management believes this tool set is the strongest and most effective in the industry. Features of eWorkbench include the ability to set security levels for different users including sales representatives, marketing representatives, customer support personnel and business partners outside the company and the capability to change the look and feel of the application. Business objects within the application are also easily changed within eWorkbench. Management's belief in the rise of the Application Service Provider (ASP) model has led to the development of an ASP optimized-architecture. This architecture, released in the 3.1 version, allows ASPs to host multiple companies and multiple applications on a single server, a critical requirement for the success of the ASP model. Management believes that more companies, especially in Firstwave's target market of mid-size companies, may choose to have Firstwave eRM hosted remotely using a lease vs. purchase approach. The Company has recently begun marketing its products for this model, which when implemented, should provide recurring revenue for the Company and eliminate many of the difficulties a company has in implementing and maintaining a software application in-house. Management believes Internationalization of the Company's product suite is the next step in becoming an international presence in the eCRM industry and will provide a key differentiator from the Company's competitors. The application suite has multi-lingual and multi-currency capabilities. The Company supports Oracle database technology and the Linux and Unix operating systems for Firstwave eRM. The Company currently supports the integration of Firstwave eRM data with Personal Digital Assistants. With the advent of wireless technology and the anticipated improvement of wireless connection speeds, the Company believes the demand for this technology will increase. The Company is committed to its Internet product vision and strengthening the client base significantly in the near-term. The Company remains dedicated to its existing customers of Firstwave eRM, Takecontrol and Firstwave for UNIX and continues to pursue best-of-breed distributors on a global level while staying on the cutting edge of the world's most current technologies, including database managers and operating systems. PROVIDING VALUE AND ENHANCEMENTS TO EXISTING CUSTOMERS As a core business strategy, Firstwave is committed to its existing customers by providing value through post-sales consulting, training, support services and product enhancements. Impeccable customer service is critical to the success of Firstwave and its reputation as a customer-centric company in the CRM industry. The Company seeks to differentiate itself from its competitors not only through product features and technology, but also through an often-overlooked yet critical business function - customer service. LEVERAGE STRATEGIC ALLIANCES The CRM solutions delivered by the Company are a combination of Firstwave's direct selling efforts and those of various strategic alliance partners. By leveraging the expertise of our partners, the Company is able to focus on its core competency of providing innovative web based solutions. The Company's goal is to select strategic partners who are "best in-class" providers of hardware, software, telephony, and 3 4 consulting. In addition, Firstwave strongly supports a domestic and international distribution network committed to developing the market and promoting sales of the Company's products. BUSINESS PARTNER SUPPORT The Firstwave Business Partner program ensures that the Company achieves its goal by accommodating any opportunity regardless of size or complexity. The Company wants to ensure our partners are well equipped with the skills and tools necessary to help them tackle any of these opportunities. These relationships enable Firstwave to continue to improve service levels so customers can enjoy quick results and seamless integration of Firstwave eRM solutions. INTERNATIONAL OPERATIONS In addition to its corporate headquarters in Atlanta, Georgia, Firstwave maintains an office in London, England and the Company's global network of distributors provides an international footprint in over 35 countries. Through a distributorship with Asia Pathways Pte Ltd, effective February 2000, Firstwave has established a more formal presence in Asia. Management believes with the development of an internationalized product suite and a presence in a growing market for customer relationship management products, the Company will open a new channel for revenue. SOFTWARE PRODUCTS Firstwave actively markets three software applications: Firstwave eRM, Takecontrol and Firstwave for UNIX. Firstwave eRM consists of eMarketing, eSales, and eSupport and allows companies to build a secure and synchronized view of their customers, channels, prospects and partners with one completely integrated application. The eRM application suite is a 100% web-based application that can be rapidly deployed and highly customized. The Company believes that Internet technology, the ability for a product to be customized easily and a quick implementation of a customer relationship management application are essential criteria for success in today's CRM marketplace. Firstwave eSales extends the sales team to include inside users, mobile users, remote users and indirect channel partners. It allows a company's extended sales organization to manage existing customers and prospects for new business and encourages cross-selling and up-selling opportunities. The current status of a company's sales pipeline can be traced real-time and customized reports can be created to provide senior management with information needed to make key decisions. As in eMarketing, data accumulated through the eSales application is available to users of other applications within the eRM suite. Firstwave eMarketing delivers critical marketing information as part of the comprehensive web-based suite. It empowers a company's marketing organization to target an audience, manage campaigns, generate qualified leads and turn them over to sales to close deals, thereby synthesizing its marketing with sales and support data for a single secure and synchronized view of customers, channels, prospects and partners. Firstwave eSupport delivers critical support information as part of its comprehensive web-based suite. It enhances the support process and revenue stream by facilitating one-call issue resolution, allowing better opportunities for cross-selling and up-selling to existing customers and enhancing the maintenance collection process. eSupport tracks issues and enhancements, manages and supports customer needs and service agreements and provides for the escalation of issues to more senior support levels. 4 5 ERM ARCHITECTURE Firstwave eRM's object-oriented, open architecture, eFramework, has a significant impact on usability, customization and deployment of the eRM product suite. Metadata technology is used to configure the application and to capture customizations. This means that Firstwave eRM is able to support users' business processes without changing underlying source code. SERVICES The Company seeks to differentiate itself from other providers of marketing, sales and support software by offering an array of specialized professional services on a fee basis. Firstwave's services consist of (1) education and training services, (2) implementation and customizations, and (3) customer support services. EDUCATION AND TRAINING Firstwave's comprehensive customer training program is designed to accommodate the diverse needs of its customers. Courses are held on a regularly scheduled basis at the Company's Atlanta headquarters, its London, England office 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 current curriculum for Firstwave eRM consists of Firstwave End User Training, System Administrator Training and Customization Training (Level 1 and Level 2). The classes may be conducted at Firstwave, the customer site or via the Internet. End User Training is intended for individuals who will use any application within the Firstwave eRM suite. System Administrator Training is for technical and administrative professionals who will be required to setup, maintain and administer the Firstwave eRM application. Customization Training is for technical and administrative professionals who will be responsible for the customization of Firstwave eRM. In order for distributors or customers to become fully certified application integrators, they must attend all training sessions, including both levels of Customization Training. IMPLEMENTATION AND CUSTOMIZATIONS Firstwave's Professional Services Organization (PSO) is chartered to facilitate the customers' successful implementation and utilization of Firstwave products and to accelerate the implementation process. Firstwave uses its professional services organization as a logical extension of its sales force and believes that its professional services organization differentiates the Company from most of its competitors. Typical services provided include systems analysis and design, installation planning and coordination, database configuration, screen and report tailoring, application development, data conversion, systems interconnectivity, project management training and other special processing requirements related to the implementation of Firstwave eRM. Standard professional services are offered to clients during the initial sales process and PSO can be contracted for assistance with future enhancement projects. Pricing is determined by the scope of the client requirements. CUSTOMER SUPPORT Firstwave's customer support group uses Firstwave products to track individualized service. It provides Firstwave representatives with access to a problem-tracking database that includes an online 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 technical issues. In addition to hotline telephone services, customer support also includes the provision of updates and enhancements of Firstwave products and related documentation. 5 6 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. The Company also provides surveys each month to randomly selected customers to evaluate the quality and responsiveness of its support efforts. 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 REVENUES, PRICING AND MATERIAL TERMS FOR LICENSING AGREEMENTS Software revenues consist of license fees for Firstwave eRM, Takecontrol and Firstwave for Unix. The Company also receives revenues from third-party software and various distributor agreements. Customers generally pay a license fee for the software based upon the number of licensed users. Firstwave eRM also offers customers several pricing alternatives that reflect the various ways it may be deployed across the Internet throughout the extended enterprise. Perpetual licenses are available on a per user model. Subscription pricing through remote hosting services will provide organizations the opportunity to deploy the application without the need for a high capital outlay. Remote hosting services will also allow organizations to deploy the applications without the need for internal hardware infrastructure or system administrative capabilities. Takecontrol and Firstwave for Unix offer a pricing model based on concurrent users. The second component of the Company's revenues is services, which consists 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. Actual travel expenses are billed as incurred. The Company's maintenance revenues are derived from the provision of: (1) customer support in the form of customer services via communication channels, and (2) updates and enhancements of products and related documentation. Customers are provided maintenance and support 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. CUSTOMERS The Company markets its products as a cross-industry solution for those companies looking for an integrated marketing, sales and support solution. Systems have been installed in many industries, including technology, manufacturing, financial services, communications, travel, hospitality and retail. The Company has licensed its products for thousands of users located in 13 countries with more than 200 customers currently subscribing to maintenance services. SALES AND MARKETING The Company markets and sells its product and services through direct sales and indirect channels to the North American marketplace. International marketing and selling is accomplished by direct selling through the Company's United Kingdom office and indirectly through Firstwave distributors. The North American and International direct channel is supported by 19 sales and marketing professionals as of December 31, 1999. The North American Sales department, overseen by a senior level sales executive, consists of Business Development Representatives (BDR) and Account Executives (AE). The BDRs initiate contact with leads and qualify them using the telephone and the Internet as primary tools. Qualified leads are turned over to AEs. The Firstwave sales team conducts an Internet demonstration of the product, scopes the 6 7 requirements of the potential customer with professional services, assists in providing a cost justification for the purchase and provides references before closing business. The Company's marketing department is responsible for generating leads and promoting brand awareness and mind share among CRM industry professionals and companies seeking a solution from this market. Primary marketing functions include web-based direct marketing, traditional direct marketing, advertising, public and analyst relations and other Internet-based marketing initiatives. The Marketing department accomplishes many of its goals and objectives through use of Firstwave eMarketing, an application included in the Company's flagship product, Firstwave eRM. Additionally, the Marketing department is responsible for product positioning and strategy, general product marketing activities, market research and competitive analysis, and provides competitive customer and prospect input into the Company's product development efforts. PRODUCT INNOVATION AND DEVELOPMENT The Company plans to further the growth of Firstwave eRM by using it as a basis for companies wanting to incorporate an Internet-based, integrated CRM solution into their business processes. Firstwave's architecture, eFramework, with its object orientation, adherence to Microsoft standards, incorporation of emerging web technologies and ASP optimization, facilitates this approach. The Internet technology embedded within eFramework also allows information residing in Firstwave eRM to be accessed by wireless Personal Digital Assistants (PDA's). The technology will be taken international this year as the next version of Firstwave eRM contains internationalization features, allowing the product to support multiple languages as well as have multiple currency capabilities. Relational database management systems supported by Firstwave are Microsoft SQL Server, Oracle and Microsoft Access. In June 1999, the Company released 3.0 version of Firstwave eRM, which contained the extensive tool set, eWorkbench, for customizations. Firstwave partnered with Sterling Software in September of 1999, enabling the Company to provide a best-of-breed reporting tool for Firstwave users. At the end of 1999, Firstwave released the integrated application, Firstwave eRM, complete with marketing, sales and support. COMPETITION The Company faces competition from a multitude of software vendors, including existing CRM vendors, new web-based CRM vendors and ERP vendors who have penetrated the CRM industry through acquisitions or product development. The primary competitors for the Company are Onyx, Pivotal and SalesLogix. These companies have a middle market focus and offer comprehensive "full solution" packages which include marketing, sales, and support. These companies also have integrated some Internet technology into their products and have customization capabilities within their product sets. The ASP model is also being evaluated by the afore-mentioned companies. YouCentric, formerly SalesVision, and Silknet are other CRM vendors who are viewed as competitors of the Company due to the Internet technology used in their products. Both companies, it should be noted, do have an upper-tier market strategy compared to the Company's middle market focus with its product. Siebel Systems, due to its large international presence and market share, is also a competitor of the Company. There are also hundreds of vendors addressing the needs evident in this industry, including specialists who provide cross-industry solutions and vertically focused solutions, such as pharmaceuticals or finance. 7 8 The Company competes on product flexibility, Internet technology, product intuitiveness, off-site hosting options, distributor strategies, value, and heavy emphasis on customer and partner service and support. Management believes the Company competes favorably with respect to these factors. There can be no assurance that the Company will be able to achieve the innovative product development and marketshare necessary to maintain competitive advantage. PROPRIETARY RIGHTS AND LICENSES The Company depends upon a combination of trade secret, copyright and trademark laws, license agreements, non-disclosure and other contractual provisions with customers and employees to protect its proprietary rights in its products. The Company also maintains confidentiality agreements with its employees. Because the Company's product allows customers to customize their applications without altering the source code, the source code for the Company's products is neither licensed nor provided to customers, although the company has contractually agreed in certain instances to have its source code held in escrow by a third party. Notwithstanding these precautions, it may be possible for unauthorized persons to copy aspects of the Company's products or to obtain information that the Company regards as proprietary. There can be no assurance that these protections will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. EMPLOYEES As of December 31, 1999, the Company employed 93 persons, including 19 sales and marketing professionals, 37 service and support representatives, 16 administrative personnel and 21 persons involved in product innovation and development. Management believes that the Company's future growth and success will rely on its ability to retain and attract highly skilled and motivated personnel in all areas of its operations. ITEM 2. PROPERTIES. As of December 31, 1999 the Company's headquarters and principal operations were located in approximately 30,000 square feet of leased office space. The office building is located in metropolitan Atlanta, Georgia. The Company also has operations located outside London, England in approximately 6,000 square feet of leased office space. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company may be 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. 8 9 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 close 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.
1999 First Second Third Fourth 1998 First Second Third Fourth - ------------------------------------------------- ------------------------------------------------- High $3.25 $2.50 $8.63 $4.25 High $5.63 $5.13 $5.13 $3.88 Low $1.75 $1.38 $1.50 $1.94 Low $4.31 $4.25 $2.50 $1.63 - ------------------------------------------------- -------------------------------------------------
As of December 31, 1999 there were approximately 107 shareholders of record and approximately 4,200 persons or entities that hold common stock in nominee name. There were no common stock dividends declared during 1999 or 1998. 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.
For the Year Ended December 31, (In thousands, except per share amounts) 1999 1998 1997 1996 1995 --------------------------------------------------------------------- Net revenues $ 11,193 $ 14,537 $ 15,848 $ 23,222 $ 28,001 Loss before income taxes (1,912) (3,034) (1,377) (10,115) (4,928) Income tax (provision) benefit (40) (91) (133) 1,055 1,837 Net loss (1,952) (3,125) (1,510) (9,060) (3,091) Net loss applicable to common shareholders (2,075) (3,125) (1,510) (9,060) (3,091) Basic and diluted net loss per share (0.40) (0.61) (0.30) (1.81) (0.63) Total assets 12,023 11,322 14,286 18,367 26,045 Total non current liabilities -- -- -- 125 -- Common stock subject to repurchase $ -- $ -- $ 300 $ -- $ -- Basic and diluted weighted average shares outstanding 5,250 5,125 5,035 5,000 4,932
9 10 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 1998 to 1999. Certain percentage columns do not add to 100% due to rounding.
Year Ended December 31, ------------------------------------------------ % Change (in thousands) 1999 1998 1998 to 1999 - ------------------------------------------------------------------------------------------------------ Revenues Software $ 2,430 21.7% $ 3,528 24.3% -31.1% Services 3,422 30.6% 5,035 34.6% -32.0% Maintenance 4,923 44.0% 5,431 37.4% -9.4% Other 418 3.7% 543 3.7% -23.0% -------- -------- Net revenues 11,193 100.0% 14,537 100.0% -23.0% -------- -------- Costs and expenses Cost of revenues Software 920 8.2% 744 5.1% 23.7% Services 2,400 21.4% 3,566 24.5% -32.7% Maintenance 1,494 13.3% 1,643 11.3% -9.1% Other 395 3.5% 500 3.4% -21.0% Sales and marketing 3,612 32.3% 5,983 41.2% -39.6% Product development 1,618 14.5% 2,080 14.3% -22.2% General & administrative 2,789 24.9% 3,233 22.2% -13.7% -------- -------- Operating loss (2,035) -18.2% (3,212) -22.1% -36.6% -------- -------- Interest income net 123 1.1% 178 1.2% -30.9% -------- -------- Loss before income taxes $ (1,912) -17.1% $ (3,034) -20.9% -37.0% -------- --------
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. 10 11 1999 COMPARED TO 1998 The year ended December 31, 1999 was a year of transition for the Company, from a software company that was dependent on its legacy product, Takecontrol, to an Internet business being driven by its web-based product, Firstwave eRM (formerly known as Netgain Sales). Although the year began with declining revenues from existing product lines, the Company had innovative new products in development which were released throughout the year. During 1999 the Company gained industry recognition, new business partners, renewed investor interest, and a growing revenue stream from a suite of new products. Total revenues decreased 23.0% from $14,537,000 in 1998 to $11,193,000 in 1999 mainly due to decreases in software and services revenues. Software revenue decreased 31.1% from $3,528,000 in 1998 to $2,430,000 in 1999 primarily as a result of declining sales related to the Takecontrol product and a slower than expected ramp-up in sales related to the Firstwave eRM product. Also, the Company chose to price the new product at introductory prices resulting in a lower average deal price compared to the Takecontrol product. Revenues from international software licenses decreased 53.6% from $2,848,000 in 1998 to $1,321,000 in 1999, and decreased as a percentage of total revenues from 19.6% in 1998 to 11.8% in 1999 due to decreased sales by International distributors. During 1999 international license revenues were primarily from system expansions of existing Takecontrol customers. Release of an internationalized (language and currency) version of Firstwave eRM is expected in 2000. Although international license revenue decreased, total revenues from international sources, which includes maintenance, software license fees and customizations remained consistent at 52.5% of total revenues in 1999 compared to 52.7% in 1998, due to additional revenues provided by Firstwave UK. During 1999 Firstwave UK was a wholly owned subsidiary for the entire twelve month period compared to eight months during 1998 following the April 30, 1998 acquisition. Services revenues decreased 32.0% from $5,035,000 in 1998 to $3,422,000 in 1999. The decrease in services revenue is consistent with the decrease in software license revenue as the Company typically provides separate implementation and training services at the time of software sales. Maintenance revenues remained strong in 1999 with a decrease of only 9.4% from $5,431,000 in 1998 to $4,923,000 in 1999 primarily as the result of declining sales of the Takecontrol product. Costs of software revenues increased 23.7% from $744,000 in 1998 to $920,000 in 1999 and, as a percentage of software revenues, increased from 21.1% in 1998 to 37.9% in 1999. The increases were primarily due to increased amortization costs in 1999 related to releases of Firstwave eRM. Costs of software revenues include costs of third-party software, amortization of capitalized software, and costs of packaging, media and documentation materials. Costs of revenues for services decreased 32.7% from $3,566,000 in 1998 to $2,400,000 in 1999. The decrease is related to decreases in the number of service personnel and related costs due to changes implemented by management as a result of lower services and license revenues. Costs of revenues for services as a percentage of services revenues remained constant at 70.1% in 1999 compared to 70.8% in 1998. Costs of revenues for maintenance decreased 9.1% from $1,643,000 in 1998 to $1,494,000 in 1999. The decrease in maintenance cost is primarily due to decreased royalty costs related to decreased maintenance revenues generated by international distributors. Costs of revenues for maintenance as a percentage of maintenance revenues remained constant at 30.3%. Sales and marketing expenses decreased 39.6% from $5,983,000 in 1998 to $3,612,000 in 1999, and decreased as a percentage of total revenues from 41.2% in 1998 to 32.3% for 1999. The decrease is primarily due to decreases in sales commissions to third party distributors as a result of decreased software license revenues. The Company has also made changes to its marketing plan, decreasing costs in trade shows and travel by using the Company's website and other automated approaches to obtain sales leads. The Company's product innovation and development expenditures, which includes amounts capitalized, increased 52.6% from $2,280,000 in 1998 to $3,479,000 in 1999, and increased as a percentage of total 11 12 revenues from 15.7% in 1998 to 31.1% in 1999. Software development costs capitalized increased from $200,000 in 1998 to $1,861,000 in 1999. These increases are related to continued development of Firstwave eRM. The Company expects that the additional versions of Firstwave eRM will further improve the product's viability in the CRM market. General and administrative expenses decreased 13.7% from $3,233,000 in 1998 to $2,789,000 in 1999 primarily due to lower administrative expenses related to overall reduced staff levels and decreases in professional services and bad debt expense. The year over year decrease is inclusive of the additional costs associated with maintaining the London office and demonstrates the Company's effective implementation of cost cutting initiatives. Interest income decreased 30.9% from $178,000 in 1998 to $123,000 in 1999 due to fluctuations in invested cash balances. 1998 COMPARED TO 1997 Total revenues decreased 8.3% from $15,848,000 in 1997 to $14,537,000 in 1998 mainly due to decreases in software revenue offset by increases in services and maintenance revenues. Software revenue decreased 32.7% from $5,239,000 in 1997 to $3,528,000 in 1998 primarily as a result of fewer Takecontrol licenses sold to new customers. Revenues from international software licenses decreased 14.1% from $3,314,000 in 1997 to $2,848,000 in 1998, and decreased as a percentage of total revenues from 20.9% in 1997 to 19.6% in 1998 due to decreased sales by Asia and Pacific Rim distributors. Total revenues from international sources, which includes maintenance, software license fees and customizations, increased from 33.9% of total revenues in 1997 to 52.7% of total revenues in 1998 due to additional revenues provided by Firstwave UK and decreased domestic Takecontrol software licenses. Services revenues increased 4.7% from $4,810,000 in 1997 to $5,035,000 in 1998 primarily due to the additional services revenues provided by Firstwave UK. Maintenance revenues remained strong with a 4.7% increase from $5,189,000 in 1997 to $5,431,000 in 1998. Costs of software revenues increased 10.2% from $675,000 in 1997 to $744,000 in 1998 and, as a percentage of software revenues, increased from 12.9% in 1997 to 21.1% in 1998. The increases were primarily due to increased amortization costs in 1998 which included twelve months of Takecontrol amortization, compared to ten months of amortization in 1997 after a February 1997 release. Costs of software revenues include costs of third-party software, amortization of capitalized software costs, and costs of packaging and documentation materials and related media costs. Costs of revenues for services increased 1.1% from $3,528,000 in 1997 to $3,566,000 in 1998 due to the addition of Firstwave UK service personnel. Costs of revenues for services as a percentage of services revenues decreased from 73.3% in 1997 to 70.8% in 1998. Costs of revenues for maintenance decreased 2.6% from $1,687,000 in 1997 compared to $1,643,000 in 1998 primarily due to decreased international maintenance revenues. Costs of revenues for maintenance as a percentage of maintenance revenues also decreased from 32.5% in 1997 compared to 30.3% in 1998. Sales and marketing expenses decreased slightly from $6,012,000 in 1997 to $5,983,000 in 1998, but increased as a percentage of total revenues from 37.9% in 1997 compared to 41.2% for 1998. The decrease in total expense is primarily due to decreases in sales commissions consistent with decreases in software license revenues offset by the addition of Firstwave UK personnel and costs associated with marketing materials for the new corporate identity and new product launch. The Company's product innovation and development expense including write-off of in process research and development cost, net of costs capitalized, decreased 22.9% from $2,699,000 in 1997 to $2,080,000 in 1998, and decreased as a percentage of total revenues from 17.0% in 1997 to 14.3% in 1998. The decrease in net cost is primarily due to the in-process research and development one time charge of $696,000 related to the acquisition of Netgain Corporation during the fourth quarter of 1997, offset by 12 13 additional development personnel and personnel related costs in 1998 associated with the development of the Netgain product line. The Company capitalized additional product development expenditures of $200,000 during the fourth quarter of 1998 related to releases of version 1.1 and 2.0 of Netgain Sales. General and administrative expenses increased 47.9% from $2,186,000 in 1997 to $3,233,000 in 1998. As a percentage of total revenues, general and administrative expenses increased from 13.8% in 1997 to 22.2% in 1998. These increases resulted primarily from the addition of Firstwave UK and its London office, offset by domestic decreases in rent expense due to subleasing excess office space. Professional fees increased in 1998 due to the one-time favorable settlement of a legal dispute that resulted in a $603,000 credit to general and administrative expense during the third quarter of 1997. Interest income decreased 13.9% from $208,000 in 1997 to $179,000 in 1998, due to decreased interest on invested cash balances. BALANCE SHEET Net accounts receivable decreased 38.4% from $3,146,000 at December 31, 1998 to $1,937,000 at December 31, 1999 primarily due to lower revenues. Property and equipment decreased 38.6% from $1,501,000 at December 31, 1998 to $922,000 at December 31, 1999 due to year to date depreciation and disposals, offset by additional fixed asset purchases. Intangible assets, which represents goodwill related to the 1998 acquisition of Firstwave UK, decreased 26.1% from $644,000 at December 31, 1998 to $476,000 at December 31, 1999 due to amortization. Capitalized software increased 149.1% from $770,000 at December 31, 1998 to $1,918,000 at December 31, 1999 due to additional capitalization of $1,861,000 in development costs net of $713,000 in amortization. Accounts payable decreased 57.9% from $1,354,000 at December 31, 1998 to $570,000 at December 31, 1999 consistent with the decrease in operating expenses. Accrued employee compensation and benefits decreased 39.1% from $284,000 at December 31, 1998 to $173,000 at December 31, 1999 due to compensation and benefits associated with fewer employees. Dividends payable at December 31, 1999 were $123,000 related to the issuance of preferred stock during 1999. There were no dividends payable in the comparable period of 1998. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had cash and cash equivalents of $2,029,000 and investments of $1,631,000. The Company historically has been financed from operations and sales of equity instruments. The Company had no line of credit payable or notes payable outstanding at December 31, 1999. During 1999, the Company renewed its $3,000,000 line of credit agreement with its bank for another one-year term. The line of credit, which expires September 15, 2000, bears interest at prime rate but increases to prime plus .50% if the Company fails to attain certain quarterly financial targets. The line of credit is secured by the assets of the Company. The Company issued 20,000 shares of Series A Preferred Stock for $2.0 million during the second quarter of 1999 and 500,000 shares of unregistered restricted Common Stock for $1.5 million during the third quarter of 1999. Management believes that its present liquidity position, recent equity infusions and the expected cash flow from operations are sufficient to finance the Company's operations during 2000 and beyond. The Company has no material commitments for capital expenditures. Management does not believe that inflation has historically had a material effect on the Company's results of operations. 13 14 YEAR 2000 The Company's current product lines are year 2000 compliant. All of the Company's customers were notified of the availability of a year 2000 compliant version of the Company's product and the Company assisted its customers in migrating to current product versions as requested. Although the Company has designed and tested the most current versions of its products to be year 2000 compliant, there can be no assurance that they do not contain undetected errors or other defects associated with year 2000 date functions. As of December 31, 1999 all internal systems had been addressed and the Company was completely year 2000 compliant. There have been no material issues related to year 2000 in the Company's products or internal systems as of March 23, 2000. QUARTERLY FINANCIAL DATA (UNAUDITED) The table below sets forth certain unaudited operating results for each of the eight quarters in the two-year period ended December 31, 1999. 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.
Quarter ended 3/31/99 6/30/99 9/30/99 12/31/99 3/31/98 6/30/98 9/30/98 12/31/98 --------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Net revenues $ 3,462 $ 2,700 $ 2,543 $ 2,488 $ 3,610 $ 3,738 $ 3,762 $ 3,427 Operating loss (854) (397) (433) (351) (610) (725) (855) (1,022) Net loss (840) (396) (402) (314) (573) (717) (826) (1,009) Net loss applicable to common shareholders (840) (426) (447) (362) (573) (717) (826) (1,009) Basic and diluted loss per share (0.16) (0.08) (0.08) (0.06) (0.11) (0.14) (0.16) (0.20)
14 15 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 consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 31 present fairly, in all material respects, the financial position of Firstwave Technologies, Inc. and its subsidiary at December 31, 1999 and 1998, and the results of their operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index under Item 14(a)2 on page 31 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule 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. PricewaterhouseCoopers LLP Atlanta, Georgia January 31, 2000 15 16 CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1999 1998 ASSETS Current assets Cash and cash equivalents $ 2,029 $ 2,245 Investment securities, held to maturity 1,631 -- Accounts receivable, less allowance for doubtful accounts of $345 and $425 1,937 3,146 Deferred tax asset 200 200 Prepaid expenses and other assets 289 195 -------- -------- Total current assets 6,086 5,786 Property and equipment, net 922 1,501 Software development costs, net 1,918 770 Intangible asset 476 644 Deferred tax asset 2,621 2,621 -------- -------- $ 12,023 $ 11,322 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 570 $ 1,354 Sales tax payable 152 265 Deferred revenue 1,519 1,581 Accrued employee compensation and benefits 173 284 Dividends payable 123 -- Other accrued liabilities 78 78 -------- -------- Total current liabilities 2,615 3,562 -------- -------- Commitments and contingencies Shareholders' equity Preferred stock, no par; 1,000,000 shares authorized; 20,000 shares issued and outstanding; $100 per share liquidation preference 2,000 -- Common stock, stated value, $.0019 per share; 10,000,000 shares authorized; 5,740,283 and 5,151,322 shares issued and outstanding 11 10 Additional paid-in capital 21,574 19,813 Cumulative translation account (5) 34 Accumulated deficit (14,172) (12,097) -------- -------- 9,408 7,760 -------- -------- $ 12,023 $ 11,322 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 16 17 CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 Net revenues Software $ 2,430 $ 3,528 $ 5,239 Services 3,422 5,035 4,810 Maintenance 4,923 5,431 5,189 Other 418 543 610 -------- -------- -------- 11,193 14,537 15,848 Costs and expenses Cost of revenues Software 920 744 675 Services 2,400 3,566 3,528 Maintenance 1,494 1,643 1,687 Other 395 500 606 Sales and marketing 3,612 5,983 6,012 Product development 1,618 2,080 2,003 General and administrative 2,789 3,233 2,186 In process research and development -- -- 696 -------- -------- -------- Operating loss (2,035) (3,212) (1,545) Interest income, net 123 178 168 -------- -------- -------- Loss before income taxes (1,912) (3,034) (1,377) -------- -------- -------- Income tax provision (40) (91) (133) -------- -------- -------- Net loss $ (1,952) $ (3,125) $ (1,510) -------- -------- -------- Dividends on preferred stock (123) -- -- -------- -------- -------- Net loss applicable to common shareholders $ (2,075) $ (3,125) $ (1,510) ======== ======== ======== Basic and diluted net loss per share $ (0.40) $ (0.61) $ (0.30) ======== ======== ======== Basic and diluted weighted average shares outstanding 5,250 5,125 5,035 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 17 18 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
UNREALIZED COMPRE- COMMON STOCK PREFERRED STOCK ADDITIONAL GAIN/(LOSS) HENSIVE ------------------- ----------------- PAID-IN ON INVESTMENT INCOME SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES (LOSS) -------- -------- ------- ------- ---------- -------------- ---------- Balance at December 31, 1996 4,936,555 $ 9 -- $ -- $ 18,909 $(14) $ -- Exercise of common stock options 88,899 -- 281 -- -- Employee stock purchases 7,573 -- 25 -- -- Issuance of stock options -- -- 114 -- -- Net loss -- -- -- -- -- -- -- --------- ------ ------ ------ -------- ---- ------- Balance at December 31, 1997 5,033,027 9 -- -- 19,329 (14) -- Exercise of common stock options 34,511 -- 112 -- -- Employee stock purchases 6,081 -- 19 -- -- Issuance of stock options -- -- 7 -- -- Issuance of stock in connection with Net gain acquisition 77,703 1 346 -- -- Realized loss on investment securities -- -- -- 14 -- Comprehensive loss Net loss -- -- -- -- (3,125) Foreign currency translation adjustment -- -- -- -- 34 ------- Comprehensive loss (3,091) ------- --------- ------ ------ ------ -------- ---- Balance at December 31, 1998 5,151,322 10 -- -- 19,813 -- Series A convertible preferred stock 20,000 2,000 Exercise of common stock options 84,066 243 -- -- Employee stock purchases 4,895 9 -- -- Issuance of stock and warrants 500,000 1 1,509 -- -- Comprehensive loss Net loss -- -- -- -- -- -- (2,075) Foreign currency translation adjustment -- -- -- -- -- -- (39) ------- Comprehensive loss $(2,114) ------- --------- ------ ------ ------ -------- ---- Balance at December 31, 1999 5,740,283 $ 11 20,000 $2,000 $ 21,574 $ -- --------- ------ ------ ------ -------- ---- Accumulated other comprehensive Accumulated income/(loss) deficit Total ------------- ------- ------- Balance at December 31, 1996 $ -- $(7,462) $ 11,442 Exercise of common stock options -- -- 281 Employee stock purchases -- -- 25 Issuance of stock options -- -- 114 Net loss -- (1,510) (1,510) ------ ------- ------- Balance at December 31, 1997 -- (8,972) 10,352 Exercise of common stock options -- -- 112 Employee stock purchases -- -- 19 Issuance of stock options -- -- 7 Issuance of stock in connection with Net gain acquisition -- -- 347 Realized loss on investment securities -- -- 14 Comprehensive loss Net loss -- (3,125) (3,125) Foreign currency translation adjustment 34 -- 34 Comprehensive loss ------ ------- ------- Balance at December 31, 1998 34 (12,097) 7,760 Series A convertible preferred stock 2,000 Exercise of common stock options -- -- 243 Employee stock purchases -- -- 9 Issuance of stock and warrants -- -- 1,510 Comprehensive loss Net loss -- (2,075) (2,075) Foreign currency translation adjustment (39) -- (39) Comprehensive loss ------ -------- ------- Balance at December 31, 1999 $ (5) $(14,172) $ 9,408 ------ -------- -------
The accompanying notes are an integral part of these consolidated financial statements. 18 19 CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 Cash flows from operating activities Net loss $(1,952) $(3,125) $ (1,510) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 1,670 1,741 1,565 Write off in process research and development -- -- 696 (Gain)/loss on disposal of fixed assets 71 (13) 142 Provision for bad debts 81 83 22 Deferred income taxes -- -- (65) Stock compensation 10 7 114 Changes in assets and liabilities (net of acquisition) Accounts receivable 1,119 (182) 1,051 Prepaid expenses and other assets (94) 121 (46) Accounts payable (783) 146 (148) Accrued restructuring -- (325) (786) Sales tax payable (112) 2 (115) Deferred revenue (62) (114) 81 Accrued employee compensation and benefits (111) (361) (66) Other accrued liabilities -- 59 (78) ------- ------- -------- Total adjustments 1,789 1,164 2,367 ------- ------- -------- Net cash provided by (used in) operating activities (163) (1,961) 857 ------- ------- -------- Cash flows from investing activities Software development costs (1,861) (200) -- Business acquisitions -- (246) (697) Purchases of property and equipment,net (309) (496) (261) Purchase of investment securities (1,631) (9,394) (16,155) Proceeds from sale of investment securities -- 9,408 19,755 ------- ------- -------- Net cash provided by (used in) investing activities (3,801) (928) 2,642 ------- ------- -------- Cash flows from financing activities Proceeds from issuance of preferred stock 2,000 -- -- Proceeds from issuance of common stock 1,500 -- -- Exercise of common stock options 243 112 281 Proceeds from employee stock purchase plan 9 19 25 Borrowing from/(repayment to) line of credit, net -- -- (1,975) Proceeds from/(repayments to) note payable, net -- -- (208) ------- ------- -------- Net cash provided by (used in) financing activities 3,752 131 (1,877) ------- ------- -------- Effect of exchange rate changes on cash (4) 34 -- Net increase (decrease) in cash (216) (2,724) 1,622 Cash and cash equivalents, beginning of year 2,245 4,969 3,347 ------- ------- -------- Cash and cash equivalents, end of year $ 2,029 $ 2,245 $ 4,969 ------- ------- -------- Supplemental disclosure of cash flow information Cash paid during the year for interest $ -- $ 1 $ 84 ------- ------- -------- Cash paid for income taxes $ 40 $ 91 $ 198 ------- ------- --------
The accompanying notes are an integral part of these consolidated financial statements. 19 20 NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Firstwave Technologies, Inc. (the "Company") is a provider of Internet customer relationship management solutions. The Firstwave eRM (Internet Relationship Management) Suite is a seamlessly integrated, 100% web-based suite of applications created to fulfill and manage the e-business relationship needs of a company in the areas of sales, marketing, and support. 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. The Company accrues for estimated warranty costs at the time it recognizes revenue. Services revenue is recognized as services are performed. Maintenance revenue is recognized on a pro rata basis over the term of the maintenance agreements. International revenues are generated by independent distributors who offer licenses of the Company's products in specific geographic areas. Under the terms of the Company's international distributor agreements, international distributors collect license fees and maintenance revenues on behalf of the Company, and generally remit 50% to 60% 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 distributors reflected as a selling expense. The Company's international maintenance fees are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue. International revenues also include revenue from Firstwave Technologies UK, Ltd., a wholly owned subsidiary. The Company's adoption of American Institute of Certified Public Accountants Statement of Position, 97-2, Software Revenue Recognition, as of January 1, 1998 did not have a material impact on its financial statements. Advanced billings for services and maintenance contracts are recorded as deferred revenue in the accompanying balance sheet. CONSOLIDATION The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiary, Firstwave Technologies UK, Ltd. All significant intercompany profits, transactions, and balances have been eliminated in consolidation. 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 investment securities and trade receivables. The Company invests in marketable securities including government securities with high credit ratings and commercial paper. Credit risk from concentration of trade receivables is minimized as a result of the 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. 20 21 NOTES TO FINANCIAL STATEMENTS INVESTMENT SECURITIES In accordance with FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company classifies its investment securities as held-to-maturity based on their intent and ability to hold the securities and accordingly, the Company recorded the investment securities at cost. The investment securities will mature in February, 2000. 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 six 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 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 possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies. 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. FOREIGN CURRENCIES Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date and the effects of foreign currency translation adjustments are included as a component of stockholders' equity. BASIC AND DILUTED NET LOSS PER COMMON SHARE Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options and convertible preferred stock would have been included in the diluted net loss per share calculation had they not been antidilutive. Net loss applicable to common shareholders includes a charge for dividends related to the Company's outstanding convertible preferred stock. 21 22 NOTES TO FINANCIAL STATEMENTS 2. ACQUISITIONS On April 30, 1998 the Company acquired its largest international distributor, Co-cam UK. Based in London, Co-cam UK now operates as Firstwave Technologies UK, Ltd. The transaction was an asset purchase from PMS Creative Ltd., a wholly owned subsidiary of Policy Management Systems Corporation. The purchase price of approximately $426,000 was payable in cash in four quarterly installments beginning July 31, 1998 after an initial payment at closing of approximately $85,000. The excess of cost over the estimated fair value of the net assets acquired was $455,000 (including cost of acquisition of approximately $180,000) and was accounted for as goodwill which is being amortized over five years. 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 at December 31, 1997). The shares subject to repurchase were registered by the Company in February 1998 at which time the repurchase feature automatically terminated. 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 which was accounted for as goodwill and is being amortized over five years. The acquisition was accounted for using the purchase method of accounting. Brock Acquisition, Inc. changed its name to Netgain Inc. and was subsequently merged with the Company. In addition, 200,000 shares of the Company's common stock were placed in escrow as of December 31, 1997 to be issued to the former shareholders of Netgain Corporation upon attainment of certain future revenue targets for the sale of Netgain products. Such targets were not achieved and accordingly these shares were not issued. In July 1998, the Company issued 9,714 additional shares of its common stock valued at $46,433 to four of the former shareholders of Netgain Corporation to settle matters directly related to the acquisition. This amount has been recorded as goodwill in the accompanying financial statements. The following presents the unaudited pro forma consolidated results of operations as if both acquisitions had occurred as of January 1, 1997. (in thousands, except per share data):
DECEMBER 31, 1998 1997 Unaudited Revenues $ 15,489 $ 19,656 Net loss (3,345) (2,123) Basic and diluted net loss per share (.65) (.42)
3. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows (in thousands):
DECEMBER 31, 1999 1998 Computer hardware and other equipment $ 3,377 $ 4,140 Furniture and fixtures 1,037 979 Purchased software 1,106 1,098 ------- ------- 5,520 6,217 Less: Accumulated depreciation and amortization (4,598) (4,716) ------- ------- $ 922 $ 1,501 ======= =======
22 23 NOTES TO FINANCIAL STATEMENTS Depreciation and amortization of property and equipment totaled approximately $808,000, $1,119,000, and $1,146,000 in 1999, 1998 and 1997, respectively. 4. PRODUCT DEVELOPMENT EXPENSES Product development expenses are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 Total development expenses $3,479 $2,280 $2,003 Less: Additions to capitalized software development before amortization 1,861 200 -- ------ ------ ------ Product development expenses $1,618 $2,080 $2,003 ====== ====== ======
The activity in the capitalized software development account is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 Balance at beginning of year, net $ 770 $ 1,089 $ 1,508 Additions 1,861 200 -- Amortization expense (713) (519) (419) ------- ------- ------- Balance at end of year, net $ 1,918 $ 770 $ 1,089 ======= ======= =======
5. BORROWINGS In March 1998, the Company and its bank executed a $3,000,000 line of credit arrangement. The line of credit, which expires September 15, 2000, bears interest at prime rate but increases to prime plus .50% if the Company fails to attain certain quarterly financial targets. The line of credit agreement is secured by the assets of the Company. There were no borrowings against the line of credit as of December 31, 1999. 6. SHAREHOLDERS' EQUITY During the third quarter of 1999, the Company issued, in a private placement to an institutional accredited investor, 500,000 unregistered restricted shares of authorized Common Stock at $3.00 per share for an aggregate amount of $1,500,000. During the second quarter of 1999, the Company issued 20,000 shares of Series A Convertible Preferred Stock in a private placement to two officers. The Company received $1,000,000 in March 1999 and $1,000,000 in April 1999 related to this offering. The Preferred Stock has voting rights and accumulates dividends at a rate of 9% payable annually when declared by the Board of Directors and are convertible into Common Stock of the Company at anytime after April 25, 2000, at a conversion rate of $2.06 per share of Common Stock. The preferred stock has a liquidation preference of $100 per share plus all accrued and unpaid dividends and becomes redeemable at $100 per share at the option of the Board of Directors after April 26, 2001. At December 31, 1999 23 24 NOTES TO FINANCIAL STATEMENTS there were $123,000 dividends payable related to the Preferred Stock, which were paid in January 2000. 7. INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 Current Foreign $40 $ 91 $ 198 Deferred Federal -- -- (55) State -- -- (10) Foreign -- -- -- --- ---- ----- $40 $ 91 $ 133 === ==== =====
The difference between the provision for income taxes at the statutory federal income tax rate of 34% and the Company's effective tax rate is as follows:
YEAR ENDED DECEMBER 31, 1999 1998 1997 Federal statutory tax rate -34.0% -34.0% -34.0% State income taxes, net of federal benefit -4.0% -3.1% -5.5% Change in valuation allowance 12.9% 32.2% 37.2% Foreign income taxes 2.1% 2.9% 14.4% Other 25.0% 4.9% -2.4% ----- ---- ---- 2.1% 2.9% 9.7% ===== ==== ====
24 25 NOTES TO FINANCIAL STATEMENTS At December 31, 1999 and 1998, deferred tax (assets) liabilities are comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 Gross deferred tax liabilities Capitalization of software development costs $ 728 $ 293 Depreciation 231 213 Other 93 -- ------- ------- 1,052 506 ------- ------- Gross deferred tax assets Net operating loss carryforwards (8,046) (7,195) Tax credit carryforwards (288) (288) In process research and development (229) (247) Allowance for doubtful accounts receivable (151) (162) Accrued expenses (50) (38) Other (72) (114) ------- ------- (8,836) (8,044) Valuation allowance 4,963 4,717 ------- ------- (3,873) (3,327) Net deferred tax assets (2,821) (2,821) Less: Current portion 200 200 ------- ------- $(2,621) $(2,621) ======= =======
At December 31, 1999, the Company has alternative minimum tax credit and general business tax credit carryforwards of approximately $43,000 and $245,000, respectively, which will expire in years 2008 through 2011. The Company also has net operating loss carryforwards of approximately $20,870,000 which expire in years 2009 through 2014. 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. Management's estimate of the valuation allowance could be affected in the near term based on results of operations in future periods. 8. STOCK OPTION PLANS In February 1993, the Board of Directors adopted a Stock Option Plan (the "Option Plan"). The Company has reserved 1,200,000 shares of common stock for 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 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 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. 25 26 NOTES TO FINANCIAL STATEMENTS At December 31, 1999, 417,073 options were available for grant and 623,447 options were outstanding related to the Option Plan. A summary of stock option activity is as follows:
EXERCISE WEIGHTED WEIGHTED PRICE AVG EXERCISE AVERAGE SHARES PER SHARE PRICE FAIR VALUE $ $ $ Outstanding at December 31, 1996 900,318 3.13 - 8.00 7.24 Granted 424,119 2.31 - 4.94 3.32 1.83 Exercised (88,899) 3.13 - 3.25 3.21 Canceled or expired (205,662) 2.75 - 8.00 3.38 --------- Outstanding at December 31, 1997 1,029,876 2.31 - 4.94 3.20 Granted 461,500 1.88 - 5.00 3.53 2.10 Exercised (34,511) 3.25 3.25 Canceled or expired (399,818) 2.50 - 5.00 3.48 --------- Outstanding at December 31, 1998 1,057,047 1.88 - 5.00 3.35 Granted 634,200 1.59 - 5.00 3.26 2.31 Exercised (67,398) 2.56 - 5.00 3.14 Canceled or expired (1,000,402) 1.59 - 5.00 3.22 --------- Outstanding at December 31, 1999 623,447 1.59 - 5.00 3.49 ========= Options exercisable at December 31, 1999 112,295 3.59 =========
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED OUTSTANDING WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE 1999 Life Price 1999 Price $1.59 - $3.25 230,897 8.11 $2.48 75,583 $2.99 $3.69 - $4.00 292,700 9.53 3.82 0 - $4.69 - $5.00 99,850 7.72 4.82 36,712 4.81 ------- -------- $1.59 - $5.00 623,447 8.71 3.49 112,295 3.59 ======= ========
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 was 62,500 options per year from the date of grant. The vesting period for the remaining 250,000 options was the earlier of the year 2002 or, if the Company's stock price reached certain targets, vesting would occur in blocks of 50,000 options for each target price met. The option exercise price equaled the market price on the date of grant and, correspondingly, compensation expense was not recognized. As of December 31, 1999, 125,000 of these options had been 26 27 NOTES TO FINANCIAL STATEMENTS exercised and 375,000 were cancelled as of December 31, 1999 when the officer was no longer employed by the Company. 9. EMPLOYEE STOCK PURCHASE PLAN The Company has reserved 70,000 shares of common stock for issuance under its Employee Stock Purchase Plan ("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 was 85% of the lower of the fair market value of the common stock at either the beginning or end of the quarter. Effective April 1, 1998, the exercise price is 85% of the fair market value of the common stock on the last business day of each quarter. No compensation expense is recorded in connection with this plan. During 1999 and 1998, 4,895 and 6,081 shares, respectively, were issued under the ESP. At December 31, 1999, 53,627 shares had been issued cumulatively under the plan and options to purchase 404 shares were outstanding. 10. 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 1999, 1998 and 1997 consistent with the provisions of FAS 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 Net loss applicable to common shareholders As reported $ (2,075) $ (3,125) $ (1,510) Pro forma (2,267) (3,478) (1,825) Net loss per share Basic and diluted As reported (0.40) (0.61) (0.30) Pro forma (0.43) (0.68) (0.36)
The fair value of each option grant and the employees' purchase rights is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used in 1999, 1998 and 1997, respectively: dividend yield of 0% for all years; expected volatility of 92%, 71%, and 52%, risk-free interest rate ranging from 4.78% to 6.32% and expected life of 4.5 years for grants in all years and 90 days for stock purchase rights for all quarters. In accordance with FAS 123, for the years ended December 31, 1999, 1998 and 1997, $10,000, $7,000 and $109,000 respectively, was recorded to expense related to options and warrants granted to non-employees. 27 28 NOTES TO FINANCIAL STATEMENTS 11. COMMITMENTS AND CONTINGENCIES The Company leases office space, equipment and automobiles under noncancelable lease agreements expiring on various dates through 2005. At December 31, 1999, future minimum rentals for noncancelable leases are as follows (in thousands):
MINIMUM YEAR ENDING ANNUAL DECEMBER 31, RENTALS 2000 $ 1,050 2001 $ 1,029 2002 $ 991 2003 $ 962 2004 $ 775 2005 $ 483 -------- $ 5,290 ========
Net rent expense under these and other agreements was approximately $1,056,000, $619,000, and $627,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Rent expense was offset by rental income from subleased office space in the amounts of $46,000, $295,000, and $93,000, for the years ended December 31, 1999, 1998, and 1997 respectively. The Company is subject to legal proceedings and claims which may 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 the receipt of $970,000 which included $367,000 in outstanding accounts receivable with the remaining $603,000 credited to general and administrative expense. 12. 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. For each payroll period, the Company matches 30% of the lesser of (1) the participants' contribution or (2) 5% of the participants' compensation. In addition, the Company may make discretionary annual contributions. For the years ended December 31, 1999, 1998 and 1997, the Company made matching contributions of approximately $34,500, $59,100, and $66,400, respectively, to the 401(k) Plan and no discretionary contributions. 28 29 NOTES TO FINANCIAL STATEMENTS 13. SEGMENT INFORMATION During June 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 131 "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). The statement requires detailed disclosures surrounding operating segments and certain enterprise-wide disclosures. Management believes that it has only a single segment consisting of software sales with related services and support. The enterprise-wide disclosures required by FAS 131 are presented below. The Company exports its products through agreements with international distributors that it grants territorial rights. A summary of international revenues including the Company's UK subsidiary by geographic area is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 United States $ 5,318 $ 6,877 $10,470 Europe 5,026 6,341 3,962 South America 50 714 193 Australia and New Zealand 787 501 595 Asia -- 68 410 South Africa 12 36 218 ------- ------- ------- $11,193 $14,537 $15,848 ======= ======= =======
Long-lived assets of the Company are recorded primarily in the United States. However, as a result of the Co-cam acquisition (Note 2), fixed assets of $211,000, or 22.9% of the consolidated balance, are domiciled in the United Kingdom. 14. 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. As of December 31, 1996, $1,111,000 was accrued related to this restructuring. During 1998 and 1997, $325,000 and $786,000 were charged against the accrual respectively resulting in a zero balance as of December 31, 1998. 15. RELATED PARTY TRANSACTIONS During 1997 the Company entered into an agreement with a significant shareholder relating to a contract for $150,000 in professional services provided by a third party. As of December 31, 1997, there were no outstanding payables/receivables with the shareholder relating to this transaction. During 1998 and 1997, the Company incurred expense of $147,000 and $175,000, respectively, related to a third party software provider whose President was a member of the Board of Directors of the Company through April 1998. The 1998 payments were made according to a contract dated January 1, 1998. This thirty-month contract requires payments of royalties on a quarterly basis with a minimum payment of $36,750 per quarter. 29 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 9, 2000. 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 9, 2000. 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 9, 2000. 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 9, 2000. 30 31 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 - Consolidated Balance Sheet at December 31, 1999 and December 31, 1998 - Consolidated Statement of Operations for the three years ended December 31, 1999 - Consolidated Statement of Changes in Shareholders' Equity for the three years ended December 31, 1999 - Consolidated Statement of Cash Flows for the three years ended December 31, 1999 - Notes to Financial Statements 2. Financial Statement Schedules - Schedule II - Valuation and Qualifying Accounts, for the three years ended December 31, 1999 31 32
3. Exhibits 3.1 Amended and Restated Articles of Incorporation of the Company.(1) 3.2 Amended and Restated By-laws of the Company (incorporated herein by reference to Exhibit 3(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). 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. 10.3 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, GA, 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. (1) 10.4 Firstwave Technologies, Inc. Amended and Restated 1993 Stock Option Plan (incorporated herein by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.5 Tax Indemnification Agreement dated February 4, 1993 among the Company and certain of its shareholders. (2) 10.6 Form of Selective Distribution Agreement for International Distributors. (1) 10.7 Form of Software License Agreement. (1) 10.9 Computer Software License Marketing Agreement dated December 21, 1987 between the Company and Co-Cam Computer Services, Pty. Ltd. (1) 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, GA. (2) 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, GA. (2) 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, GA. (2) 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, GA.(3) 10.14 Firstwave Technologies, Inc. Employee Stock Purchase Plan. (incorporated herein by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-8 (Registration No. 333-55971) (7) 10.15 Option Agreement, dated July 25, 1997, between the Company and Netgain Corporation.(4) 10.17 Seventh Amendment to Lease Agreement dated as of January 20, 1998 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, GA. (6) 10.18 Eighth Amendment to Lease Agreement dated as of May 8, 1998 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, GA. (5)
32 33 10.19 First Amendment to Firstwave Technologies, Inc. 1993 Stock Option Plan (incorporated herein by reference to Exhibit 4(c) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.20 First Amendment to Firstwave Technologies, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55971)). (7) 10.21 Board of Directors Compensation Plan (incorporated herein by reference to Exhibit 4(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.22 Ninth Amendment to Lease Agreement dated as of February 3, 2000 between the Company and National Office Partners Limited Partnership relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA. 10.23 Tenth Amendment to Lease Agreement dated as of February 28, 2000 between the Company and National Office Partners Limited Partnership relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA. 13 1999 Annual Report to Shareholders. 23 Consent of Independent Accountants. See page immediately preceding the signature page to this Report. 27 Financial Data Schedule (for SEC use only).
(1)Incorporated herein by reference to exhibit of the same number in the Company's Registration Statement on Form S-1 (Registration No. 33-57984). (2)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1993. (3)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1994. (4)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-Q for the quarter ended June 30, 1997. (5) Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1998. (6)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1997. (7)Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. (b) Form 8-K: None 33 34 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference the Registration Statements on Form S-3 (No. 333-46319, and No. 333-83417) and the Registration Statements on Form S-8 (No. 33-66456, No. 33-75374, No. 33-81102, No. 33-88304, No. 333-55939 and No. 333-55971) of Firstwave Technologies, Inc. of our report dated January 31, 2000 appearing on page 15 of this Form 10-K. PricewaterhouseCoopers LLP Atlanta, Georgia March 29, 2000 34 35 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 27, 2000 By: /s/ Richard T. Brock --------------------------------------- Richard T. Brock 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 27, 2000 /s/ Richard T. Brock ------------------------------------------- Richard T. Brock President and Chief Executive Officer (Principal Executive Officer) Date: March 27, 2000 /s/ Judith A. Vitale ------------------------------------------- Judith A. Vitale Vice President Finance and Administration (Principal Financial and Accounting Officer) Date: March 27, 2000 /s/ James R. Porter ------------------------------------------- James R. Porter Chairman Date: March 27, 2000 /s/ Roger A. Babb ------------------------------------------- Roger A. Babb Director Date: March 27, 2000 /s/ John F. Keane ------------------------------------------- John F. Keane Director Date: March 27, 2000 /s/ Michael T. McNeight ------------------------------------------- Michael T. McNeight Director 35 36 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1999 (THOUSANDS OF DOLLARS)
BALANCE AT BALANCE AT BEGINNING CHARGED TO ACCOUNTS END OF COSTS AND WRITTEN OF DESCRIPTION PERIOD EXPENSES OFF/RELEASED PERIOD ----------- ------ -------- ------------ ---------- Allowance for doubtful accounts $ 425 $ 81 $ 161 $ 345 ========== ============ ========== ========== Tax asset valuation allowance $ 4,717 $ 246 $ 0 $ 4,963 ========== ============ ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998 (THOUSANDS OF DOLLARS)
BALANCE AT BALANCE AT BEGINNING CHARGED TO ACCOUNTS END OF COSTS AND WRITTEN OF DESCRIPTION PERIOD EXPENSES OFF/RELEASED PERIOD ----------- ------ -------- ------------ ------ Allowance for doubtful accounts $ 703 $ 66 $ 344 $ 425 ========== ========== ========= ========== Tax asset valuation allowance $ 3,710 $ 1,007 $ 0 $ 4,717 ========== ========== ========= ==========
FOR THE YEAR ENDED DECEMBER 31, 1997 (THOUSANDS OF DOLLARS)
BALANCE AT BALANCE AT BEGINNING CHARGED TO ACCOUNTS END OF COSTS AND WRITTEN OF DESCRIPTION PERIOD EXPENSES OFF/RELEASED PERIOD ----------- ------ -------- ------------ ------ Allowance for doubtful accounts $ 1,971 $ 22 $ 1,290 $ 703 ========== ========== ========= ========= Tax asset valuation allowance $ 3,195 $ 515 $ 0 $ 3,710 ========== ========== ========= =========
36 37 EXHIBIT INDEX 37 38 EXHIBIT INDEX
Exhibit Page Number Description Number - ------ ----------- ------ 3.1 Amended and Restated Articles of Incorporation of the Company.(1) N/A 3.2 Amended and Restated By-laws of the Company (incorporated herein by N/A reference to Exhibit 3(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). 4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated N/A Articles of Incorporation and Amended and Restated By-Laws of the Company defining rights of holders of Common Stock of the Company. 10.3 Lease dated January 30, 1988 between the Company and Atlanta Overlook N/A Associates #3 concerning the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA, 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. (1) 10.4 Firstwave Technologies, Inc. Amended and Restated 1993 Stock Option N/A Plan (incorporated herein by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.5 Tax Indemnification Agreement dated February 4, 1993 among the Company N/A and certain of its shareholders.(2) 10.6 Form of Selective Distribution Agreement for International N/A Distributors. (1) 10.7 Form of Software License Agreement.(1) N/A 10.9 Computer Software License Marketing Agreement dated December 21, 1987 N/A between the Company and Co-Cam Computer Services, Pty. Ltd. (1) 10.10 Third Amendment to Lease Agreement dated as of March 10, 1993 between N/A the Company and State of California Public Employees Retirement System relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA.(2) 10.11 Fourth Amendment to Lease Agreement dated as of June 24, 1993 between N/A the Company and State of California Public Employees Retirement System relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA.(2) 10.12 Fifth Amendment to Lease Agreement dated as of March 22, 1994 between N/A the Company and State of California Public Employees Retirement System relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA.(2) 10.13 Sixth Amendment to Lease Agreement dated as of September 22, 1994 N/A 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, GA.(3) 10.14 Firstwave Technologies, Inc. Employee Stock Purchase Plan. N/A (incorporated herein by reference to Exhibit 4(a) of the Company's Registration Statement on Form S-8 (Registration No. 333-55971)). (7) 10.15 Option Agreement, dated July 25, 1997, between the Company and Netgain N/A Corporation.(4) 10.17 Seventh Amendment to Lease Agreement dated as of January 20, 1998 N/A 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, GA(6)
38 39
Exhibit Page Number Description Number - ------ ----------- ------ 10.18 Eighth Amendment to Lease Agreement dated as of May 8, 1998 between N/A the Company and State of California Public Employees Retirement System relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA. (5) 10.19 First Amendment to Firstwave Technologies, Inc. 1993 Stock Option Plan N/A (incorporated herein by reference to Exhibit 4(c) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.20 First Amendment to Firstwave Technologies, Inc. Employee Stock N/A Purchase Plan (incorporated herein by reference to Exhibit 4(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55971)). (7) 10.21 Board of Directors Compensation Plan (incorporated herein by reference N/A to Exhibit 4(b) of the Company's Registration Statement on Form S-8 (Registration No. 333-55939)). (7) 10.22 Ninth Amendment to Lease Agreement dated as of February 3, 2000 40 between the Company and National Office Partners Limited Partnership relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA. 10.23 Tenth Amendment to Lease Agreement dated as of February 28, 2000 45 between the Company and National Office Partners Limited Partnership relating to the Company's principal offices located at 2859 Paces Ferry Road, Atlanta, GA. N/A 13 1999 Annual Report to Shareholders. 56 23 Consent of Independent Accountants. See page immediately preceding the 34 signature page to this Report. 27 Financial Data Schedule (for SEC use only).
(1)Incorporated herein by reference to exhibit of the same number in the Company's Registration Statement on Form S-1 (Registration No. 33-57984). (2)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1993. (3)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1994. (4)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-Q for the quarter ended June 30, 1997. (5) Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1998. (6)Incorporated herein by reference to exhibit of the same number in the Company's Form 10-K for the year ended December 31, 1997. (7) Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. 39 40 EXHIBIT 10.22 40 EX-10.22 2 NINTH AMENDMENT TO LEASE AGREEMENT 1 EXHIBIT 10.22 NINTH AMENDMENT TO LEASE THIS NINTH AMENDMENT TO LEASE (this "Amendment"), made and entered into as of the _3rd___ day of ___February__________, 2000, by and between NATIONAL OFFICE PARTNERS LIMITED PARTNERSHIP, a Delaware limited partnership, as landlord ("Landlord"), and FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation, as tenant ("Tenant") W I T N E S S E T H T H A T: WHEREAS, Atlanta Overlook Associates #3 ("Original Landlord") and Brock Control Systems, Inc. ("Original Tenant") entered into that certain Office Building Lease Agreement (the "Lease"), dated January 30, 1988, for certain premises (the "Premises") in the building located at 2859 Paces Ferry Road, Atlanta, Georgia (the "Building"); WHEREAS, Original Landlord and Original Tenant entered into that certain First Amendment of Lease dated as of December 27, 1988 (the "First Amendment"); WHEREAS, State of California Public Employees Retirement System ("Calpers"), successor-in-interest to Original Landlord, and Original Tenant entered into that certain Second Amendment of Lease dated as of October 2, 1989 (the "Second Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Third Amendment of Lease dated as of March 10, 1993 (the "Third Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Fourth Amendment of Lease dated as of June 24, 1993 (the "Fourth Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Fifth Amendment of Lease dated as of March 22, 1994 (the "Fifth Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Sixth Amendment of Lease dated as of September 22, 1994 (the "Sixth Amendment"); WHEREAS, Original Tenant changed its name to Brock International, Inc. and Brock International, Inc. ("Brock International") assumed the obligations of Original Tenant under the Lease, as amended; WHEREAS, CALPERS and Brock International entered into that certain Seventh Amendment of Lease dated as of January 20, 1998 (the "Seventh Amendment"); WHEREAS, Brock International changed its name to "Firstwave Technologies, Inc." and Tenant assumed the obligations of Brock International under the Lease, as amended; 41 2 WHEREAS, CALPERS and Tenant entered into that certain Eighth Amendment of Lease dated as of May 8, 1998 (the "Eighth Amendment"); WHEREAS, the Lease, as modified by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment and Eighth Amendment are sometimes collectively referred to herein as the "Lease"; and WHEREAS, Landlord, as successor-in-interest to CALPERS, and Tenant desire to reduce the size of the Premises and evidence their agreements and other matters by means of this Amendment. NOW THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Lease is hereby amended and the parties hereto do hereby agree as follows: 1. Reduction Space. Effective on the earlier to occur of (i) February 28, 2000 or (ii) the date set forth in a notice from Landlord that Landlord has leased the Reduction Space (as hereinafter defined) to a third party (the "Effective Date"), Tenant shall relinquish and Landlord shall take back approximately 3,277 square feet of the Premises located on the fifteenth (15th) floor of the Building as shown on Exhibit "A" attached hereto and by this reference made a part hereof (the "Reduction Space"). As of the Effective Date, the total rentable square feet of space leased pursuant to the Lease shall be decreased to 25,216 rentable square feet which consists of the entire tenth (10th) floor of the Building, subject to the following terms and conditions: a. Tenant shall pay, and shall remain liable for, all Rent for the Reduction Space through the Effective Date. b. Tenant shall vacate the Reduction Space in accordance with the terms of the Lease. c. Effective on the Effective Date through the expiration of the initial Term of the Lease (October 31, 2000), Base Rent shall be reduced to $554,752.00 per year ($46,229.33 per month). d. Effective on the Effective Date, all references to Tenant's Share (as described in Paragraph 1.1.3 of Exhibit "B" to the Fourth Amendment) shall exclude the Reduction Space for purposes of calculating such percentage. Tenant's Share shall be 5.83% as of the Effective Date. EXCEPT AS expressly amended and modified hereby, the Lease shall otherwise remain in full force and effect, the parties hereto hereby ratifying and confirming the same. To the extent of any inconsistency between the Lease and this Amendment, the terms of this Amendment shall control. 42 3 IN WITNESS WHEREOF, the undersigned parties have duly executed this Amendment as of the day and year first above written. LANDLORD: NATIONAL OFFICE PARTNERS LIMITED PARTNERSHIP, a Delaware limited partnership By: Hines National Office Partners Limited Partnership, a Texas limited partnership general partner By: Hines Fund Management, L.L.C., a Delaware limited liability company, its general partner By: Hines Interests Limited Partnership, a Delaware limited partnership its sole member By: Hines Holdings, Inc., a Texas corporation, its general partner By: ---------------------------- Daniel MacEachron Vice President Date Executed by Landlord: -------------------------------- TENANT: FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation By: ------------------------------------------------------ Name: ---------------------------------------------------- Its: ---------------------------------------------------- (CORPORATE SEAL) Date Executed by Tenant: -------------------------------- Tenant Tax Identification Number: ---------------------- 43 4 EXHIBIT "A" Reduction Space 44 5 EXHIBIT 10.23 45 EX-10.23 3 TENTH AMENDMENT TO LEASE AGREEMENT 1 EXHIBIT 10.23 TENTH AMENDMENT TO LEASE THIS TENTH AMENDMENT TO LEASE (this "Amendment"), made and entered into as of the __28th__ day of ____February_, 2000, by and between NATIONAL OFFICE PARTNERS LIMITED PARTNERSHIP, a Delaware limited partnership, as landlord ("Landlord"), and FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation, as tenant ("Tenant") WITNESSETH THAT: WHEREAS, Atlanta Overlook Associates #3 ("Original Landlord") and Brock Control Systems, Inc. ("Original Tenant") entered into that certain Office Building Lease Agreement (the "Lease"), dated January 30, 1988, for certain premises (the "Premises") in the building located at 2859 Paces Ferry Road, Atlanta, Georgia (the "Building"); WHEREAS, Original Landlord and Original Tenant entered into that certain First Amendment of Lease dated as of December 27, 1988 (the "First Amendment"); WHEREAS, State of California Public Employees Retirement System ("Calpers"), successor-in-interest to Original Landlord, and Original Tenant entered into that certain Second Amendment of Lease dated as of October 2, 1989 (the "Second Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Third Amendment of Lease dated as of March 10, 1993 (the "Third Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Fourth Amendment of Lease dated as of June 24, 1993 (the "Fourth Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Fifth Amendment of Lease dated as of March 22, 1994 (the "Fifth Amendment"); WHEREAS, CALPERS and Original Tenant entered into that certain Sixth Amendment of Lease dated as of September 22, 1994 (the "Sixth Amendment"); WHEREAS, Original Tenant changed its name to Brock International, Inc. and Brock International, Inc. ("Brock International") assumed the obligations of Original Tenant under the Lease, as amended; 46 2 WHEREAS, CALPERS and Brock International entered into that certain Seventh Amendment of Lease dated as of January 20, 1998 (the "Seventh Amendment"); WHEREAS, Brock International changed its name to "Firstwave Technologies, Inc." and Tenant assumed the obligations of Brock International under the Lease, as amended; WHEREAS, CALPERS and Tenant entered into that certain Eighth Amendment of Lease dated as of May 8, 1998 (the "Eighth Amendment"); WHEREAS, Landlord, as successor-in-interest to CALPERS, and Tenant entered into that certain Ninth Amendment of Lease dated as of February 3, 2000 (the "Ninth Amendment"); WHEREAS, the Lease, as modified by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth Amendment, and Ninth Amendment are sometimes collectively referred to herein as the "Lease"; and WHEREAS, Landlord and Tenant desire extend the term of the Lease, amend certain other terms and conditions of the Lease, and evidence their agreements and other matters by means of this Amendment. NOW THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Lease is hereby amended and the parties hereto do hereby agree as follows: 1. Renewal Term. The term of the Lease is hereby extended for a period of five (5) years commencing on November 1, 2000 (the "Effective Date") and expiring on October 31, 2005 (the "Renewal Term"). 2. Base Rent. Effective on the Effective Date and continuing during the Renewal Term, Base Rent for the Premises shall be as follows:
Year of Base Rent per Annual Monthly Term Square Foot Base Rent Base Rent ------- ------------- --------- ---------- 11/01/00 - 10/31/01 $23.00 $579,968.00 $48,330.67
Commencing on November 1, 2001, and on each anniversary of the Effective Date thereafter during the Renewal Term, Base Rent shall increase as follows: [(Current Base Rent on a per rentable square foot basis) - (the Initial Operating Costs, calculated with respect to calendar year 2001, on a per rentable square foot basis)] x 1.025 + Initial Operating Costs on a per rentable square foot basis By way of example only, if the Initial Operating Costs are determined to be $8.00 per rentable square foot, then Base Rent commencing on November 1, 2001 shall be ($23.00 - $8.00) x 1.025 + $8.00 = $23.38 per rentable square foot. If the Initial Operating Costs are not known as of November 1, 2001, then the Base Rent adjustment shall be calculated as soon as practicable and shall be retroactive back to November 1, 2001. 47 3 On or before January 15 of each calendar year after the calendar year in which this Lease is executed (or as soon thereafter as practical), Landlord shall provide Tenant with the projected Operating Costs for such current calendar year, and Tenant shall thereafter pay the Initial Operating Costs for operating the Property and Building in excess of the Initial Operating Costs. Such projected Operating Costs in excess of the Initial Operating Costs shall be payable in advance on a monthly basis by paying one-twelfth (1/12th) of such amount during each month of such respective calendar year. If Landlord has not furnished Tenant with such comparison by January 15, Tenant shall continue to pay on the basis of the prior year's estimate until the month after such comparison is given. Landlord shall, within one hundred twenty (120) days (or as soon thereafter as practical) after each calendar year during the Term provide Tenant an unaudited statement of such year's actual Operating Costs. If actual Operating Costs are greater than projected Operating Costs, Tenant shall pay Landlord, within thirty (30) days of such statement's receipt, Tenant's Share of the difference thereof. If such year's projected Operating Costs are greater than the actual Operating Costs, Landlord shall credit Tenant, within thirty (30) days of such statement issuance, Tenant's Share of the difference between projected Operating Costs and actual Operating Costs. If this Lease commences at any time other than the first (1st) day of a calendar year or terminated at any time other than the last day of a calendar year the amount of Operating Costs due from Tenant shall be proportionately adjusted based on that portion of the year that this Lease was in effect. 3. Additional Rent. During the Renewal Term, Tenant shall pay, in accordance with the terms of Paragraph 5 and Exhibit "B" of the Seventh Amendment, Tenant's Share of increases in Operating Costs, except the Initial Operating Costs shall mean Operating Costs for the Building for calendar year 2001. 4. Notices. Section 1.5 of the Lease regarding the address of Landlord shall be amended to provide that the address of Landlord is, and all notices to Landlord shall be sent to: National Office Partners Limited Partnership c/o Hines 2839 Paces Ferry Road Suite 120 Atlanta, Georgia 30339 5. Termination Option. Notwithstanding anything to the contrary contained in the Lease, in the event that Landlord is unable to reasonably accommodate Tenant's expansion needs, or if the Termination Standard (as that term is defined below) is met and provided Tenant is not in default hereunder, Tenant shall have the option to terminate the Lease, effective on April 30, 2003 (the "Termination Date") by providing Landlord with written notice of such Termination Option election (the "Termination Notice"). Such Termination Notice shall be effective only if it is given to Landlord by July 31, 2002 (the "Termination Notice Deadline"); accordingly, if Tenant has not given its Termination Notice to Landlord prior to the Termination Notice Deadline, this Termination Option shall expire and be of no further force or effect, and Tenant shall have no right or option to terminate the Lease pursuant to 48 4 this paragraph at any time after the Termination Notice Deadline. The "Termination Standard" shall mean that Tenant satisfies two (2) out of the following three (3) requirements as of the date of Tenant's Termination Notice: (i) Tenant's shareholder's equity (as determined in accordance with generally accepted accounting principles ("GAAP") consistently applied) is $5,000,000 or less, (ii) Tenant's quick ratio (i.e. Tenant's current assets divided by Tenant's current liabilities) is less than 1.5, as determined by GAAP, and (iii) Tenant's cash, cash equivalents and investment securities are less than $2,000,000. As a condition precedent to any termination of the Lease pursuant to the provisions of this paragraph, Tenant must have delivered to Landlord, together with its Termination Notice, written certification executed by Tenant that it satisfies the Termination Standard and supporting documentation evidencing Tenant's compliance, as well as an amount as a termination fee equal to the unamortized portion (amortized at eleven percent (11%) per annum) of any tenant improvement allowance paid by Landlord to Tenant under this Amendment. It is hereby acknowledged that any such amount required to be paid by Tenant in connection with such early termination is not a penalty but a reasonable pre-estimate of the damages which would be incurred by Landlord as a result of such early termination of the Lease (which damages are impossible to calculate more precisely) and, in that regard, constitutes liquidated damages with respect to such loss. Tenant shall continue to be liable for its obligations under the Lease up to and through the Termination Date including, without limitation, additional rental that accrues pursuant to the terms of the Lease, with all of such obligations surviving the early termination of the Lease. The rights granted to Tenant under this paragraph are personal to Tenant, and in the event of any assignment of the Lease or sublease by Tenant, this Termination Option shall thenceforth be void and of no further force or effect. 6. Reduction Option. Provided that Tenant is not in default hereunder, Tenant shall have a one-time option (the "Reduction Option") to reduce the size of the Premises by excluding therefrom a portion equal to approximately 12,237 rentable square feet as shown on Exhibit "A" attached hereto (the "Excluded Space"). Such Reduction Option shall be subject to the following terms and conditions: a. The Reduction Option shall be effective as of April 30, 2003 (the "Reduction Date"), and Tenant shall exercise the Reduction Option by providing Landlord with written notice (the "Reduction Notice") thereof on or before July 31, 2002 (the "Reduction Notice Deadline"), including specificity as to square footage and location of the Excluded Space. Such Reduction Notice shall be effective only if it is given to Landlord by the Reduction Notice Deadline; accordingly, if Tenant has not given its Reduction Notice to Landlord prior to the Reduction Notice Deadline, this Reduction Option shall expire and be of no further force or effect, and Tenant shall have no right or option to reduce the size of the Premises pursuant to this paragraph at any time after the Reduction Notice Deadline. If Tenant fails to timely exercise the Reduction Option, it shall lapse unexercised and Tenant shall have no further right to reduce the size of the Premises pursuant hereto. b. Within thirty (30) days after Tenant's exercise of the Reduction Option hereunder, Landlord and Tenant agree to enter into an amendment to the Lease to 49 5 document such exercise, which amendment, in addition to the matters outlined above, shall adjust the area of the Premises and all other provisions of the Lease which are affected by a reduction in the size of the Premises. c. Should Tenant fail to enter into an amendment, as set forth above, Landlord may at its option treat such failure as a failure to properly exercise Tenant's Reduction Option and the Reduction Option shall be void and of no further force and effect. d. As a condition precedent to Tenant's exercise of its Reduction Option, Tenant must have delivered to Landlord, together with the Reduction Notice, an amount equal to the unamortized portion of any tenant improvement allowance (amortized at eleven percent (11%) per annum). It is hereby acknowledged that any such amount required to be paid by Tenant in connection with such reduction of the Premises is not a penalty but a reasonable pre-estimate of the damages which would be incurred by Landlord as a result of such reduction of the Premises (which damages are impossible to calculate more precisely) and, in that regard, constitutes liquidated damages with respect to such loss. e. Tenant shall also be responsible for all costs and expenses incurred by Landlord for any necessary construction, (including, without limitation, constructing a demising wall, electricity and plumbing) as a result of the separation of the Excluded Space from the Premises and Tenant shall be responsible for correcting any code violations within the Premises solely caused by the separation of the Excluded Space from the Premises. To the extent that additional common corridors are required due to the separation of the Excluded Space from the Premises, Landlord and Tenant will share equally in the cost of constructing such common corridors. f. If Tenant elects to exercise the Reduction Option, Tenant agrees that it shall not lease any space in any other building in Atlanta, Georgia without first providing Landlord with the right to lease to Tenant similar space on the terms and conditions of a new lease at another building. g. The rights granted to Tenant under this paragraph are personal to Tenant, and in the event of any assignment of the Lease or sublease by Tenant, this Reduction Option shall thenceforth be void and of no further force or effect. In the event that Tenant exercises this Reduction Option, the Right of First Offer (as defined below) of Tenant as set forth hereinbelow shall be void immediately upon the delivery of the Reduction Notice from Tenant to Landlord. 7. Right of First Offer. a. So long as no event of default on the part of Tenant then exists, and subject to any current right to an expansion option, renewal option, first right to lease or other such right granted to a tenant of the Building prior to the date this Amendment 50 6 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 all or any portion of the space located on the eleventh (11th) floor of the Building as it becomes available (the "Offer Space"), as more particularly described on Exhibit A, without first giving notice to tenant of the proposed lease with a bona fide prospect for 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 within ten (10) days of the notice from Landlord, by giving notice to Landlord of Tenant's notice. If Landlord does not receive such notice from Tenant within said ten (10) 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 is 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. 8. Tenant Improvement Allowance. Landlord shall provide to Tenant an improvement allowance up to $6.00 per rentable square foot of the Premises (the "Allowance") to be used towards refurbishment work in the Premises. Landlord agrees that it shall refurbish the Premises at Landlord's sole cost and expense (subject to reimbursement from, but not to exceed, the Allowance), in a good and workmanlike manner substantially in accordance with construction drawings and plans to be mutually agreed upon by Landlord and Tenant. Otherwise, Tenant hereby accepts the Premises "AS IS" (except as otherwise provided herein). Except for the Allowance, Tenant shall be responsible for all costs and expenses of refurbishing the Premises (including, without limitation, a five percent (5%) construction management fee payable to Landlord calculated on all costs and expenses of construction). 9. Extension Option. So long as the Lease is in full force and effect and Tenant is not in default thereunder, Tenant shall have the option (the "Extension Option") to extend the term for the entire Premises for an additional period of five (5) years (the "Extension Period") subject to the following terms and conditions: a. Tenant shall not have the right to assign the Extension Option to any sublessee or assignee of the Premises, nor may such sublessee or assignee exercise or enjoy the benefit of such Extension Option. b. Tenant shall have given Landlord written notice of its exercise of the Extension Option on or before nine (9) months prior to the expiration of the Renewal Term. 51 7 c. The Extension Option shall only be applicable to the entire Premises, as it may have expanded or contracted from time to time pursuant to the terms of the Lease. d. The terms and conditions of the Lease, as amended from time to time, shall remain in full force and effect during any Extension Period except that the term "Base Rent" shall be modified to mean the rent charged at the Prevailing Market Rate (as hereinafter defined). e. "Prevailing Market Rate" shall mean the then prevailing market rate for rent for leases in similar quality buildings in the market for space comparable to the Premises taking into account such factors offered to third party tenants for comparable space as the base services year for pass-through expenses, the value of the tenant improvements already in place in the Premises at the commencement of the Extension Period, rent concessions, tenant improvement allowances, lease commissions saved or incurred, and moving allowances. f. Within thirty (30) days after the establishment of the Prevailing Market Rate, Landlord and Tenant agree to enter into an amendment to the Lease to evidence the exercise of the Extension Option. If Landlord and Tenant are unable to agree upon the Prevailing Market Rate within such 30-day period, then Tenant's exercise of this Extension Option shall be void and the Lease shall expire at the end of the Renewal Term. 10. Parking. Landlord shall provide Tenant with four (4) unreserved parking spaces per 1,000 usable square feet of the Premises at no charge during the Renewal Term. Landlord shall provide Tenant with eight (8) reserved parking spaces in the Overlook III parking facility at no charge during the Renewal Term. Tenant shall have the right to park in the Building parking facilities in common with other tenants of the Building. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in use of the parking facilities. Landlord reserves the right in its absolute discretion to determine whether the parking facilities are becoming overburdened and to allocate and assign parking spaces among Tenant and other tenants, and to reconfigure the parking area and modify the existing ingress to and egress from the parking area as Landlord shall deem appropriate. 11. Deletions and Modifications. Sections 49, 50, 51, 53 and 57 of the Lease; Section 307 of the First Amendment; Sections 6, 8 and 10 of the Fourth Amendment; Section 3 of the Fifth Amendment; Sections 4 and 5 of the Sixth Amendment; and Sections 5 and 7 of the Seventh Amendment shall each be deleted in its entirety. Section 7 of the Fourth Amendment shall be modified by deleting the phrase "in excess of thirty-five thousand (35,000)" and inserting in lieu thereof the phrase "the entire 10th floor consisting of twenty-five thousand two hundred sixteen (25,216)". 12. Brokers. Landlord and Tenant hereby represent and warrant to the other that neither it nor 52 8 its officers or agents nor anyone acting on its behalf has dealt with any real estate broker other than Hines Properties, Inc. who represented Landlord and CB Richard Ellis who represented Tenant in the negotiating or making of this Amendment, and Landlord and Tenant hereby agree to indemnify and hold the other party, its agents, employees, partners, directors, shareholders and independent contractors harmless from all liabilities, costs, demands, judgments, settlements, claims, and losses, including reasonable attorneys' fees and costs, incurred by such party in conjunction with any such claim or claims of any other broker or brokers claiming to have interested the Tenant in the Building or Premises or claiming to have caused Tenant to enter into this Amendment, except as disclosed hereinabove. 13. Tenant hereby agrees that there are, as of the date hereof, regardless of the giving of notice and the passage of time, or both, no defaults or breaches on the part of Landlord or Tenant under the Lease. 14. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Lease. 15. This Amendment represents the entire agreement between the parties hereto. Landlord and Tenant agree that there are no collateral or oral agreements or understandings between them with respect to the Premises or the Building. This Amendment supersedes all prior negotiations, agreements, letters or other statements with respect to this modification of the Lease. EXCEPT AS expressly amended and modified hereby, the Lease shall otherwise remain in full force and effect, the parties hereto hereby ratifying and confirming the same. To the extent of any inconsistency between the Lease and this Amendment, the terms of this Amendment shall control. 53 9 IN WITNESS WHEREOF, the undersigned parties have duly executed this Amendment as of the day and year first above written. LANDLORD: NATIONAL OFFICE PARTNERS LIMITED PARTNERSHIP, a Delaware limited partnership By: Hines National Office Partners Limited Partnership, a Texas limited partnership general partner By: Hines Fund Management, L.L.C., a Delaware limited liability company, its general partner By: Hines Interests Limited Partnership, a Delaware limited partnership its sole member By: Hines Holdings, Inc., a Texas corporation, its general partner By: -------------------------------- Daniel MacEachron Vice President Date Executed by Landlord: ----------------------------------- TENANT: FIRSTWAVE TECHNOLOGIES, INC., a Georgia corporation By: ----------------------------------------------------- Name: --------------------------------------------------- Its: --------------------------------------------------- (CORPORATE SEAL) Date Executed by Tenant: -------------------------------- Tenant Tax Identification Number: ---------------------- 54 10 EXHIBIT "A" EXCLUDED SPACE 55 11 EXHIBIT 13 56 EX-13 4 1999 ANNUAL REPORT TO SHAREHOLDERS 1 [FIRSTWAVE LOGO] FIRSTWAVE TECHNOLOGIES, INC. 1999 ANNUAL REPORT 2 FINANCIAL HIGHLIGHTS
For the Year Ended December 31, -------------------------------------------------------------------- (In thousands, except per share amounts) 1999 1998 1997 1996 1995 -------------------------------------------------------------------- Net revenues ..................................... $ 11,193 $ 14,537 $ 15,848 $ 23,222 $ 28,001 Loss before income taxes ......................... (1,912) (3,034) (1,377) (10,115) (4,928) Income tax (provision) benefit ................... (40) (91) (133) 1,055 1,837 Net loss ......................................... (1,952) (3,125) (1,510) (9,060) (3,091) Net loss applicable to common shareholders ....... (2,075) (3,125) (1,510) (9,060) (3,091) Basic and diluted net loss per share ............. (0.40) (0.61) (0.30) (1.81) (0.63) Total assets ..................................... 12,023 11,322 14,286 18,367 26,045 Total non current liabilities .................... -- -- -- 125 -- Common stock subject to repurchase ............... $ -- $ -- $ 300 $ -- $ -- Basic and diluted weighted average shares outstanding ..................... 5,250 5,125 5,035 5,000 4,932
TABLE OF CONTENTS
Letter to Shareholders ......................................................... 2 Report of Independent Accountants .............................................. 4 Condensed Consolidated Balance Sheet ........................................... 5 Condensed Consolidated Statement of Operations ................................ 6 Condensed Consolidated Statement of Changes in Shareholders' Equity ............ 7 Condensed Consolidated Statement of Cash Flows ................................. 8 Board of Directors ............................................................. 9 Officers ....................................................................... 9 Shareholder Information ........................................................ 10
1 3 LETTER TO SHAREHOLDERS I am excited to report that Firstwave Technologies begins 2000 with industry recognition, new business partners, renewed investor interest and a growing revenue stream from a suite of new products. In my CEO letter of June 30, 1999, I outlined the challenges that I felt Firstwave was facing and how we needed to address them in order to become a successful Company in the Customer Relationship Management (CRM) industry. In the eight months since that letter, Firstwave has become a formidable challenger once again in a competitive, yet lucrative, industry and the future of our 15-year-old company is brighter than ever. During the past year, Firstwave has attracted talented employees with dynamic ideas and "start up company" energy. We renewed our focus on customers and their business requirements and reflected these market needs in our development efforts. We took a "pay now" as opposed to "pay later" approach, choosing to focus on the development of our web-based product suite, Firstwave eRM, and investing less in the marketing and selling of the product. Our rewards are an Internet-based relationship management product suite with technology and customization tools that we believe are the best in the industry. In January 2000, we received an award from a leading industry analyst for providing the "BEST INTERNET-BASED CRM SOLUTION" with our Firstwave eRM suite. The last quarter of 1999 represented a major transition period from a software company that was dependent on its legacy products to an Internet business being driven by its web-based product. Although posted revenues of $11.2 million for 1999 represented a decline over 1998 revenues, our 4th quarter license revenue for Firstwave eRM increased by 304% over 3rd quarter 1999 from $112,000 to $452,000. We gained 10 new clients in the 4th quarter, including our first international eRM customers in Canada and the United Kingdom. NEW PARTNERSHIPS HAVE INCREASED OUR MARKET PRESENCE In 1999, we established "best-of-breed" partnerships with emerging companies Breakaway Solutions, Cereus Technology Partners and Intuitive Manufacturing Systems (IMS). These relationships provide exposure to many qualified prospects. For example, our relationship with IMS introduces our application suite to more than 600 IMS customer companies and 100 IMS distributors. We believe this channel will provide opportunities for growth revenues. INCREASED INVESTOR INTEREST The investor interest in Firstwave has increased dramatically and is evident when reviewing the average volume over the last two quarters of 1999. At the beginning of the third quarter, an average of 6,400 shares was traded on a daily basis. Our average daily volume as of March 23, 2000 was over 103,000 shares. This provides liquidity for investors and renews institutional interest in our stock. 2 4 LEVERAGING OUR GROWTH POTENTIAL Last year we focused on the development of the Firstwave Internet suite. Now our human and financial resources will be shifted toward marketing and selling the application. The integrated application suite will continue to be marketed through highly effective direct marketing efforts. A revamped sales force, headed by newly promoted Debora Schum as Vice President, North American Sales, will continue to convert qualified leads into more Firstwave sales. A growing channel of resellers, partners, and Application Service Providers should give us the market coverage our product deserves. LOOKING AHEAD Our Company has a strong new sales pipeline and has a good Professional Services backlog. With the "Best Internet-Based CRM Solution" in a CRM market that is growing at an estimated 40% per year, we believe we can become one of the market leaders. Our Company has the key ingredients needed to become successful - a great product, a talented staff with great morale, and awareness in the investment community - all in a high-growth industry. I would like to extend my personal invitation for you to attend our Annual Meeting of Shareholders on May 9, 2000. In addition to routine business, we will offer demonstrations of our products and discussions with employees. On behalf of our Board of Directors, I would like to thank you for your continuing support. RICHARD T. BROCK PRESIDENT AND CHIEF EXECUTIVE OFFICER Note: This letter contains forward-looking statements. The actual results may vary and involve a number of uncertainties and risks such as potential fluctuations in quarterly results due to market demand, competition, technological developments, and the size, timing, and contractual terms of orders. 3 5 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FIRSTWAVE TECHNOLOGIES, INC.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Firstwave Technologies, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, of changes in shareholders' equity, and of cash flows for the three years then ended (not presented herein); and in our report dated January 31, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. PricewaterhouseCoopers LLP January 31, 2000 4 6 CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1999 1998 ASSETS Current assets Cash and cash equivalents $ 2,029 $ 2,245 Investment securities, held to maturity 1,631 -- Accounts receivable, less allowance for doubtful accounts of $345 and $425 1,937 3,146 Deferred tax asset 200 200 Prepaid expenses and other assets 289 195 -------- -------- Total current assets 6,086 5,786 Property and equipment, net 922 1,501 Software development costs, net 1,918 770 Intangible asset 476 644 Deferred tax asset 2,621 2,621 -------- -------- $ 12,023 $ 11,322 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 570 $ 1,354 Sales tax payable 152 265 Deferred revenue 1,519 1,581 Accrued employee compensation and benefits 173 284 Dividends payable 123 -- Other accrued liabilities 78 78 -------- -------- Total current liabilities 2,615 3,562 -------- -------- Commitments and contingencies Shareholders' equity Preferred stock, no par; 1,000,000 shares authorized; 20,000 shares issued and outstanding; $100 per share liquidation preference 2,000 -- Common stock, stated value, $.0019 per share; 10,000,000 shares authorized; 5,740,283 and 5,151,322 shares issued and outstanding 11 10 Additional paid-in capital 21,574 19,813 Cumulative translation account (5) 34 Accumulated deficit (14,172) (12,097) -------- -------- 9,408 7,760 -------- -------- $ 12,023 $ 11,322 ======== ========
5 7 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 Net revenues Software $ 2,430 $ 3,528 $ 5,239 Services 3,422 5,035 4,810 Maintenance 4,923 5,431 5,189 Other 418 543 610 -------- -------- -------- 11,193 14,537 15,848 Costs and expenses Cost of revenues Software 920 744 675 Services 2,400 3,566 3,528 Maintenance 1,494 1,643 1,687 Other 395 500 606 Sales and marketing 3,612 5,983 6,012 Product development 1,618 2,080 2,003 General and administrative 2,789 3,233 2,186 In process research and development -- -- 696 -------- -------- -------- Operating loss (2,035) (3,212) (1,545) Interest income, net 123 178 168 -------- -------- -------- Loss before income taxes (1,912) (3,034) (1,377) Income tax provision (40) (91) (133) -------- -------- -------- Net loss $ (1,952) $ (3,125) $ (1,510) -------- -------- -------- Dividends on preferred stock (123) -- -- -------- -------- -------- Net loss applicable to common shareholders $ (2,075) $ (3,125) $ (1,510) ======== ======== ======== Basic and diluted net loss per share $ (0.40) $ (0.61) $ (0.30) ======== ======== ======== Basic and diluted weighted average shares outstanding 5,250 5,125 5,035 ======== ======== ========
6 8 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
UNREALIZED COMMON STOCK PREFERRED STOCK ADDITIONAL GAIN/(LOSS) ON ---------------------- ----------------- PAID-IN INVESTMENT SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES ------ ------ ------ ------ ---------- --------------- Balance at December 31, 1996 4,936,555 $ 9 -- $ -- $ 18,909 $(14) Exercise of common stock options 88,899 -- 281 -- Employee stock purchases 7,573 -- 25 -- Issuance of stock options -- -- 114 -- Net loss -- -- -- -- -- -- --------- ------ ----- ------ -------- ---- Balance at December 31, 1997 5,033,027 9 -- -- 19,329 (14) Exercise of common stock options 34,511 -- 112 -- Employee stock purchases 6,081 -- 19 -- Issuance of stock options -- -- 7 -- Issuance of stock in connection with Netgain acquisition 77,703 1 346 -- Realized loss on investment securities -- -- -- 14 Comprehensive loss Net loss -- -- -- -- Foreign currency translation adjustment -- -- -- -- Comprehensive loss --------- ------ ----- ------ -------- ---- Balance at December 31, 1998 5,151,322 10 -- -- 19,813 -- Series A convertible preferred stock 20,000 2,000 Exercise of common stock options 84,066 243 -- Employee stock purchases 4,895 9 -- Issuance of stock and warrants 500,000 1 1,509 -- Comprehensive loss Net loss -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- Comprehensive loss ----------- ------ ----- ------ -------- ---- Balance at December 31, 1999 5,740,283 $ 11 20,000 $2,000 $ 21,574 $ -- =========== ====== ====== ====== ======== ==== COMPRE- ACCUMULATED HENSIVE OTHER INCOME COMPREHENSIVE ACCUMULATED (LOSS) INCOME/(LOSS) DEFICIT TOTAL ------- ------------- --------- ------- Balance at December 31, 1996 $ -- $ -- $ (7,462) $ 11,442 Exercise of common stock options -- -- -- 281 Employee stock purchases -- -- -- 25 Issuance of stock options -- -- -- 114 Net loss -- -- (1,510) (1,510) ------- -------- -------- ------- Balance at December 31, 1997 -- -- (8,972) 10,352 Exercise of common stock options -- -- -- 112 Employee stock purchases -- -- -- 19 Issuance of stock options -- -- -- 7 Issuance of stock in connection with Netgain acquisition -- -- -- 347 Realized loss on investment securities -- -- -- 14 Comprehensive loss Net loss (3,125) -- (3,125) (3,125) Foreign currency translation adjustment 34 34 -- 34 -------- (3,091) -------- Comprehensive loss ------- -------- ------- Balance at December 31, 1998 34 (12,097) 7,760 Series A convertible preferred stock 2,000 Exercise of common stock options -- -- -- 243 Employee stock purchases -- -- -- 9 Issuance of stock and warrants -- 1,510 Comprehensive loss Net loss (2,075) -- (2,075) (2,075) Foreign currency translation adjustment (39) (39) -- (39) ------- Comprehensive loss $(2,114) ======= ------- -------- ------- Balance at December 31, 1999 $ (5) $(14,172) $ 9,408 ======= ======== =======
7 9 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 Cash flows from operating activities Net loss $(1,952) $(3,125) $ (1,510) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 1,670 1,741 1,565 Write off in process research and development -- -- 696 (Gain)/loss on disposal of fixed assets 71 (13) 142 Provision for bad debts 81 83 22 Deferred income taxes -- -- (65) Stock compensation 10 7 114 Changes in assets and liabilities (net of acquisition) Accounts receivable 1,119 (182) 1,051 Prepaid expenses and other assets (94) 121 (46) Accounts payable (783) 146 (148) Accrued restructuring -- (325) (786) Sales tax payable (112) 2 (115) Deferred revenue (62) (114) 81 Accrued employee compensation and benefits (111) (361) (66) Other accrued liabilities -- 59 (78) ------- ------- ------- Total adjustments 1,789 1,164 2,367 ------- ------- ------- Net cash provided by (used in) operating activities (163) (1,961) 857 ------- ------- ------- Cash flows from investing activities Software development costs (1,861) (200) -- Business acquisitions -- (246) (697) Purchases of property and equipment, net (309) (496) (261) Purchase of investment securities (1,631) (9,394) (16,155) Proceeds from sale of investment securities -- 9,408 19,755 ------- ------- ------- Net cash provided by (used in) investing activities (3,801) (928) 2,642 ------- ------- ------- Cash flows from financing activities Proceeds from issuance of preferred stock 2,000 -- -- Proceeds from issuance of common stock 1,500 -- -- Exercise of common stock options 243 112 281 Proceeds from employee stock purchase plan 9 19 25 Borrowing from/(repayment to) line of credit, net -- -- (1,975) Proceeds from/(repayments to) note payable, net -- -- (208) ------- ------- ------- Net cash provided by (used in) financing activities 3,752 131 (1,877) ------- ------- ------- Effect of exchange rate changes on cash (4) 34 -- Net increase (decrease) in cash (216) (2,724) 1,622 Cash and cash equivalents, beginning of year 2,245 4,969 3,347 ------- ------- ------- Cash and cash equivalents, end of year $ 2,029 $ 2,245 $ 4,969 ------- ------- ------- Supplemental disclosure of cash flow information Cash paid during the year for interest $ -- $ 1 $ 84 ------- ------- ------- Cash paid for income taxes $ 40 $ 91 $ 198 ------- ------- -------
8 10 BOARD OF DIRECTORS JAMES R. PORTER, CHAIRMAN Mr. Porter has been a director of the Company since the Company's initial public offering in March 1993. He served from September 1985 until February 1997 as President, Chief Executive Officer and a director of Triad Systems Corporation, a provider of business and information management solutions for the retail hard lines industry and the automotive aftermarket. From February 1997 through June 1999, Mr. Porter served as Chairman of the Board of CCI/Triad and continues to serve on the CCI/Triad Board of Directors. Previously, he served as Executive Vice President of Informatics General Corporation and United Systems International. Mr. Porter serves on the Board of Regents of Pepperdine University and on the Board of Trustees of Abilene Christian University. Mr. Porter is also a director of Silicon Valley Bank, Cardone Industries, Inc., and Cellular Technical Services. Mr. Porter earned his BS from Texas A&M and attended Harvard Graduate School of Business. ROGER A. BABB Mr. Babb has been a director of the Company since March 26, 1999. He is President of Operation Simulation Associates, Inc., a software company developing power system simulation software and providing consulting services to the electric power industry, which he founded in 1983. He is also Chief Executive Officer of Babb Cellular Concrete International and Vice President of Babb Lumber Company, Inc., related building material manufacturing companies. He earned his BS in Electrical Engineering from the Georgia Institute of Technology. RICHARD T. BROCK Mr. Brock has served on the Board of Directors since the Company's inception in October 1984, and currently serves as the Company's President and Chief Executive Officer. He also served as the Company's Chief Executive Officer from October 1984 until November 1992, and from November 1994 until December 1996. Mr. Brock is the founder of Brock Capital Partners, a capital investment firm. He is also a director of Datastream Systems, Inc., a leading provider of maintenance software. Prior to founding the Company, Mr. Brock founded and served as Chief Executive Officer of Management Control Systems, Inc., now a division of Research Institute of America. Mr. Brock received an MBA from Louisiana State University and a BS from Spring Hill College. He is also a Certified Public Accountant. JOHN F. KEANE Mr. Keane has been a director of the Company since December 1997. He is Chairman of Keane, Inc., an application development, outsourcing and integration services firm, which he founded in 1965. 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 governmental markets. He is a graduate of Harvard College and Harvard School of Business. MICHAEL T. MCNEIGHT Mr. McNeight has been a director of the Company since May 1998. He has served as Vice President of Sales Operations of Internet Security Systems, Inc., a software company providing network security analysis and intrusion detection systems, since 1996. From 1995 to 1996, Mr. McNeight was Senior Vice President at TSW International, Inc., a leading supplier of plant performance and maintenance management software. From 1993 through 1994, he served as Vice President and then President and Chief Executive Officer of Aurum Software, Inc., a leading software company specializing in sales, marketing and customer support automation. He received his BA from Oklahoma State University and his MS from Texas Christian University. OFFICERS RICHARD T. BROCK President and Chief Executive Officer JUDITH A. VITALE Vice President, Finance and Administration DEBORA L. SCHUM Vice President, North American Sales 9 11 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Firstwave Technologies, Inc. Overlook III, Suite 1000 2859 Paces Ferry Road Atlanta, GA 30339 (770) 431-1200 TRANSFER AGENT AND REGISTRAR First Union National Bank Shareholder Services Administration 1525 West WT Harris Blvd., 3C3 Charlotte, NC 28288-1153 Information Contact: Mr. Patrick Edwards 704-590-7386 ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 9, 2000 at 2:00 p.m. Firstwave Technologies, Inc. Corporate Offices Overlook III, Suite 1000 2859 Paces Ferry Road Atlanta, GA 30339 CORPORATE COUNSEL Kilpatrick Stockton LLP Atlanta, GA INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Atlanta, GA STOCK LISTING NASDAQ Symbol: FSTW FORM 10-K A copy of the Company's Annual Report on Form 10K for the fiscal year ended December 31, 1999, 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 Vice President, Finance and Administration Firstwave Technologies, Inc. Overlook III, Suite 1000 2859 Paces Ferry Road Atlanta, GA 30339 PRODUCT INQUIRIES For more information about the Company's products and services, e-mail Firstwave at info@firstwave.net or call 770-431-1200/toll-free 800-540-6061. Visit Firstwave's web site at www.firstwave.net. 10 12 The following table shows the price range of the Company's Common Stock (high and low close information) for the indicated fiscal quarters. The prices represent quotations between dealers and do not necessarily represent actual transactions and do not include retail mark-ups, mark-downs or commissions. As of December 31, 1999 there were approximately 107 shareholders of record and approximately 4,200 persons or entities who hold common stock in nominee name. STOCK PRICE TABLE 1999 First Second Third Fourth - ---- -------- ----------- -------- -------- High $ 3.25 $ 2.50 $ 8.63 $ 4.25 Low $ 1.75 $ 1.38 $ 1.50 $ 1.94 1998 First Second Third Fourth - ---- ----- ------- ----- ------ High $ 5.63 $ 5.13 $ 5.13 $ 3.88 Low $ 4.31 $ 4.25 $ 2.50 $ 1.63
11 13 FIRSTWAVE TECHNOLOGIES, INC. OVERLOOK III, SUITE 1000 2859 PACES FERRY ROAD ATLANTA, GA 30339 PHONE 770-431-1200 FAX 770-431-1201 WWW.FIRSTWAVE.NET (C)2000 Firstwave Technologies, Inc. Firstwave and the Firstwave logo are registered trademarks of Firstwave Technologies, Inc. EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K OF FIRSTWAVE TECHNOLOGIES, INC. FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 2,029 1,631 1,937 0 0 6,086 922 0 12,023 2,615 0 0 2,000 11 7,397 12,023 2,430 11,193 920 5,209 8,019 (64) 0 (1,912) (40) (1,952) 0 0 0 (1,952) (.40) (.40) A/R AND PPE asset values represent net amounts.
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