1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1998 COMMISSION FILE NUMBER 0-21202 FIRSTWAVE TECHNOLOGIES, INC. 7372 GEORGIA 58-1588291 (Primary Std. Ind. (State of incorporation) (IRS Employer Classification Code #) Identification #) 2859 PACES FERRY ROAD, SUITE 1000 ATLANTA, GEORGIA 30339 (Address of principal executive offices) (770-431-1200) (Telephone number of registrant) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding as of May 12, 1998: Common Stock, no par value 5,130,261 Shares 2 FIRSTWAVE TECHNOLOGIES, INC. FORM 10-Q For the quarter ended March 31, 1998 INDEX -------------- Page No. --------------- Part I. Financial Information Item 1. Financial Statements Balance Sheet - December 31, 1997 and March 31, 1998 3 Statement of Operations - For the Three Months ended March 31, 1997 and March 31, 1998 4 Statement of Changes in Shareholders' Equity - For the Three Months Ended March 31, 1998 5 Statement of Cash Flows - For the Three Months Ended March 31, 1997 and March 31, 1998 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information 11 -2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRSTWAVE TECHNOLOGIES, INC. BALANCE SHEET DEC 31, MAR 31, 1997 1998 ------- ------- (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS: CASH AND MARKETABLE SECURITIES $ 4,969 $ 5,192 ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $703 AND $688, RESPECTIVELY 3,047 1,945 OTHER ASSETS 636 583 ------- ------- TOTAL CURRENT ASSETS 8,652 7,720 PROPERTY AND EQUIPMENT, NET 1,938 1,899 DEFERRED INCOME TAX BENEFIT 2,362 2,362 SOFTWARE DEVELOPMENT COSTS, NET 1,089 964 INTANGIBLE ASSET 245 232 ------- ------- $14,286 $13,177 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 868 $ 1,086 ACCRUED RESTRUCTURING COSTS 325 247 DEFERRED REVENUE 1,545 1,224 ACCRUED EMPLOYEE COMPENSATION AND BENEFITS 614 345 OTHER ACCRUED LIABILITIES 282 180 ------- ------- TOTAL CURRENT LIABILITIES 3,634 3,082 COMMON STOCK SUBJECT TO REPURCHASE 300 0 SHAREHOLDERS' EQUITY 10,352 10,095 ------- ------- $14,286 $13,177 ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. - 3 - 4 FIRSTWAVE TECHNOLOGIES, INC. STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED -------------------------- MAR 31, MAR 31, 1997 1998 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET REVENUES SOFTWARE $ 719 $ 1,319 SERVICES 1,265 889 MAINTENANCE 1,264 1,303 OTHER 160 99 ------- ------- 3,408 3,610 ------- ------- COST AND EXPENSES COST OF REVENUES SOFTWARE 55 167 SERVICES 956 719 MAINTENANCE 460 396 OTHER 158 99 SALES AND MARKETING 933 1,699 PRODUCT DEVELOPMENT 524 525 GENERAL AND ADMINISTRATIVE 1,129 615 ------- ------- 4,215 4,220 ------- ------- OPERATING LOSS (807) (610) INTEREST EXPENSE (40) 0 INTEREST INCOME 48 54 ------- ------- LOSS BEFORE INCOME TAXES (799) (556) INCOME TAX 0 (17) ------- ------- NET LOSS $ (799) $ (573) ======= ======= BASIC AND DILUTED NET LOSS PER SHARE $ (0.16) $ (0.11) ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON SHARE EQUIVALENTS 4,951 5,102 ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -4- 5 FIRSTWAVE TECHNOLOGIES, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMMON STOCK UNREALIZED ---------------------- ADD'L LOSS ON PAID-IN MARKETABLE RETAINED SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL --------- ------ ------- ---------- -------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE AT DECEMBER 31, 1997 5,033,027 $9 $19,329 $(14) $(8,972) $10,352 EMPLOYEE STOCK PURCHASE 2,025 0 3 0 3 STOCK ISSUED RELATED TO 67,989 0 300 0 300 NETGAIN ACQUISITION EXERCISE OF COMMON STOCK OPTIONS 20,757 0 6 0 6 ISSUANCE OF STOCK OPTIONS 0 7 0 7 NET LOSS (573) (573) --------- -- ------- ---- ------- ------- BALANCE AT MARCH 31, 1998 5,123,798 $9 $19,645 $(14) $(9,545) $10,095 ========= == ======= ==== ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -5- 6 FIRSTWAVE TECHNOLOGIES, INC STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED --------------------------- MAR 31, 1997 MAR 31, 1998 ------------ ------------ (IN THOUSANDS) CASH FLOWS (USED IN)/ PROVIDED BY OPERATING ACTIVITIES $ (30) $ 415 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES PURCHASES OF PROPERTY AND EQUIPMENT (3) (208) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (3) (208) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES REPAYMENTS OF BORROWINGS UNDER LINE OF CREDIT (1,975) 0 REPAYMENTS OF BORROWINGS UNDER NOTES PAYABLE (208) 0 PROCEEDS FROM EMPLOYEE STOCK PURCHASE PLAN 11 6 EXERCISE OF COMMON STOCK OPTIONS 36 10 ------- ------- NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (2,136) 16 ------- ------- UNREALIZED GAIN ON CASH EQUIVALENTS 3 0 ------- ------- INCREASE/(DECREASE) IN CASH (2,166) 223 CASH AND MARKETABLE SECURITIES, BEGINNING OF PERIOD 6,947 4,969 ------- ------- CASH AND MARKETABLE SECURITIES, END OF PERIOD $ 4,781 $ 5,192 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ------- ------- CASH PAID DURING THE PERIOD FOR INTEREST $ 84 $ 0 ======= ======= CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 0 $ 17 ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -6- 7 FIRSTWAVE TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 A. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal occurring accruals) considered necessary for a fair presentation have been included. B. ACCOUNTING POLICIES BASIC AND DILUTED NET LOSS PER COMMON SHARE Basic net loss per common share is presented in accordance with FAS 128,"Earnings per Share", which provides for new accounting principles used in the calculation of earnings per share and was effective for financial statements for both interim and annual periods ended after December 15, 1997. The Company has restated the basic and diluted net loss per common share for all periods presented to give effect to FAS 128. Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options were the only securities issued which would have been included in the diluted earnings per share calculation had they not been antidilutive. -7- 8 ITEM 2. FIRSTWAVE TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997. Effective March 1, 1998 the Company changed its name from Brock International, Inc. to Firstwave Technologies, Inc. The first quarter of 1998 yielded on-plan performance of total revenues of $3,610,000 and net loss of $573,000. This is the second consecutive quarter the Company posted year-over-year improvement in top and bottom line results. Total revenues increased 5.9% from $3,408,000 in the first quarter of 1997 to $3,610,000 in the first quarter of 1998. The Company's quarter-to-quarter revenues are significantly dependent upon the timing of the closing of license agreements. Total software revenues increased 83.4% from $719,000 in the first quarter of 1997 to $1,319,000 in the same period of 1998 due to increased international license revenues. Revenues from international license sales increased 354.9 % from $266,000 in the first quarter of 1997 to $1,210,000 in the corresponding quarter of 1998 as a result of several large system expansions in Europe and Mexico. As a percentage of total revenues, international license revenues increased from 7.8% in the first quarter of 1997 to 33.5% in first quarter of 1998. During the first quarter of 1998, revenue generated from sales in the United Kingdom exceeded 10% of total revenue at $512,000. Services revenues decreased 29.7% from $1,265,000 in the first quarter of 1997 to $889,000 in the first quarter of 1998 as a result of lower headcount and decreased domestic software license revenues. Maintenance revenues remained strong at $1,303,000 in first quarter of 1998 compared to $1,264,000 in the first quarter of 1997. Other revenues decreased 38.1% from $160,000 in the first quarter of 1997 to $99,000 in the first quarter of 1998 primarily due to decreases in certain reimbursable travel charges consistent with the decline in services revenue. -8- 9 Cost of software revenues increased 203.6% from $55,000 in the first quarter of 1997 to $167,000 in the first quarter of 1998. This increase is a result of increased amortization of capitalized software from $42,000 in the first quarter of 1997 compared to $126,000 in the first quarter of 1998. The increase in amortization resulted from the Company's release of TakeControl '97, a major upgrade, in late February 1997 which allowed only one month of amortization during the first quarter of 1997 compared to three months amortization during the first quarter of 1998. For the first three months of the year, third party software and documentation costs have increased 215.4% from $13,000 in 1997 to $41,000 in 1998 due to increased third party software expenses. Cost of software revenues include amortization of capitalized software, costs of third party software, and costs of packaging and documentation materials and related media costs. Cost of revenues for services decreased 24.8% from $956,000 in the first quarter of 1997 to $719,000 in the first quarter of 1998 due to decreases in payroll and related costs associated with a decrease in the number of service personnel from 34 employees to 26 employees. Cost of revenues for maintenance decreased 13.9% from $460,000 in the first quarter of 1997 to $396,000 in the first quarter of 1998. The decrease is primarily due to decreases in support personnel and personnel related costs. Cost of other revenues decreased 37.3% from $158,000 in the first quarter of 1997 to $99,000 in the first quarter of 1998 due to a decrease in reimbursable travel charges. Sales and marketing expense increased 82.1% from $933,000 in the first quarter of 1997 to $1,699,000 in the first quarter of 1998. The increase was primarily due to an increase in commissions associated with the increase in international license revenue and increases in payroll and payroll associated costs related to the increase in sales and marketing personnel from 16 employees at March 31, 1997 to 21 employees at March 31, 1998. During the first quarter of 1998 the Company also had increased trade show, marketing materials, and advertising expenses relating to the new corporate identity and name change from Brock International, Inc. to Firstwave Technologies, Inc. The Company's product innovation and development expenditures remained consistent at $525,000 in the first quarter of 1998 compared to $524,000 in the first quarter of 1997. No capitalization was recorded during the first quarter of 1997 or 1998 because development activities qualifying for capitalization were immaterial. General and administrative expenses decreased 45.5% from $1,129,000 in the first quarter of 1997 to $615,000 in the first quarter of 1998. The decreases are attributed to decreased bad debt expense and decreases in professional fees related to litigation with a customer that went to trial during the first quarter 1997. (The case was settled favorably during the third quarter of 1997.) Decreases in personnel and personnel related costs including telephone and insurance also contributed to the lower expenses. -9- 10 The above factors combined to result in a net loss of $573,000 in the first quarter of 1998 compared to a net loss of $799,000 in the first quarter of 1997, and a net loss per share of $.11 for the first quarter of 1998 compared to a net loss per share of $.16 for the first quarter of 1997. BALANCE SHEET Net accounts receivable decreased 36.2% from $3,047,000 at December 31, 1997, to $1,945,000 at March 31, 1998, as a result of the collection of outstanding receivables and lower revenues of $3,610,000 for the first quarter 1998 compared to $4,850,00 in the fourth quarter of 1997. Accrued restructuring declined 24.0% from $325,000 at December 31, 1997 to $247,000 at March 31, 1998 as a result of the amortization of costs associated with non-cancelable leases. The remaining accrual represents costs associated with non-cancelable leases which will amortize over the remaining life of the leases. Accrued employee compensation and benefits decreased 43.8% from $614,000 at December 31, 1997 to $345,000 at March 31, 1998 due to first quarter payments of annual incentives and commissions accrued at December 31, 1997. Common stock subject to repurchase decreased 100% from $300,000 at December 31, 1997 to none at March 31, 1998 as a result of reclassifying the stock to equity upon the February 13, 1998 registration of the shares on Form S-3 with the SEC. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had cash and marketable securities of $5,192,000 and believes that its present liquidity position and available line of credit are sufficient to finance the Company's operations during 1998 and beyond. During the first quarter of 1998, the Company executed a $3,000,000 line of credit arrangement with a bank. The line of credit bears interest at the prime rate plus 1% and reduces to the prime rate upon the Company's attainment of quarterly income objectives. The line of credit is secured by substantially all of the corporate assets of the Company with a negative pledge on intellectual property. As of March 31, 1998 there were no borrowings against the line of credit. The Company will be investing aggressively in its Internet technologies to maximize future performance. SUBSEQUENT EVENTS On April 30, 1998, the Company acquired its largest international distributor, Co-Cam UK. Based in London, Co-Cam UK is a leading sales and marketing solutions provider with an expertise in call center applications. 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 is payable in cash in four quarterly installments beginning July 31, 1998, after a payment of approximately $85,000 on the date of closing. -10- 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K a) Exhibits - 27 Financial Data Schedule (for SEC use only). b) Reports on Form 8-K Form 8-K filed January 13, 1998 reporting the acquisition of Netgain Corporation Form 8-K filed May 13, 1998 reporting the acquisition of Co-Cam, a division of PMS Creative UK -11- 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRSTWAVE TECHNOLOGIES, INC. DATE: May 12, 1998 /s/ Judith A. Vitale -------------------- Judith A. Vitale Director of Finance and Administration -12-