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UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
|
X |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For
the fiscal year ended December 31, 2004. |
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OR |
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[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For
the transition period from ________to_________. |
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Commission File
Number: 0-21202
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Firstwave
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) |
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2859
Paces Ferry Road, Suite 1000, Atlanta, Georgia |
30339 |
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(Address of
principal executive offices) |
(Zip
Code) |
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|
Registrant's
telephone number, including area code:
(770) 431-1200
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
|
Common
Stock, $.0019 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. [_]
Indicate by check
mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2).
Yes__ No
X
Aggregate market
value of the Common Stock held by non-affiliates of the Registrant, based on the
closing price as quoted on the Nasdaq Small Cap Market on:
June 30,
2004: $6,168,369
Number of shares of
Common Stock outstanding as of March 22, 2005: 2,695,177
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.
Firstwave
Technologies, Inc.
Annual
Report on Form 10-K
For the Year
Ended December 31, 2004
Part
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Exhibits
and Financial Statement Schedules |
52 |
Signatures
Part
I
Safe
Harbor for Forward Looking Statements
Except
for historical information contained herein, this section and other parts of
this Form 10-K contain “forward-looking statements” within the meaning of
various provisions of the Securities Act of 1933 and the Securities Exchange Act
of 1934. Such forward-looking statements can generally be identified by words
such as” will”, “expect”, “intends”, “believes”, “anticipates”, “should” and
words of similar meaning. Firstwave Technologies, Inc. (“Firstwave” or “the
Company”) notes that the forward-looking statements involve a number of risks
and uncertainties that could cause actual results to differ materially from any
such statement, such as potential fluctuations in quarterly results due to
delays in purchase decisions and other adverse market conditions, whether the
Company will be able to continue diversification of its revenues, competition
and technological developments, the Company’s capital requirements and other
liquidity concerns, the Company's ability to continue to comply with NASDAQ
listing requirements, and the size, timing, and contractual terms of orders, and
also the risks and uncertainties discussed under the caption “Certain Factors
Affecting Forward Looking Statements” in this Annual Report on Form 10-K. The
information set forth herein is provided as of the date hereof.
General
Headquartered
in Atlanta, Georgia, with an office in Surrey, England, Firstwave is a leading
provider of Customer Relationship Management (CRM) industry-focused solutions.
Firstwave's corporate and product mission reflects our customer-first
commitment: To develop and integrate the best software solutions to manage
customer interactions and information. We strive to provide our clients with
effective CRM, robust technology and the highest standard of customer service.
The Company was incorporated in October of 1984 in the State of Georgia, and has
two subsidiaries: Firstwave Technologies UK Ltd, acquired in May of 1998, which
is a company organized under the laws of the United Kingdom, and Connect-Care,
Inc., acquired in March of 2003, which is incorporated under the laws of the
State of Georgia.
A leader
in Sports and High Technology CRM, Firstwave offers a suite of features to
specifically meet the needs of companies and organizations within those
industries. Firstwave Sports is designed to help organizations, such as National
Governing Bodies, large sporting events and teams, increase revenue by
maximizing the use of their valuable databases. Firstwave Technology helps
software and technology customers keep current customers loyal, close more sales
and capture more market share. Our CRM solutions offer sales, marketing, and
customer support automation along with project and product quality management.
Firstwave CRM is adaptive and scalable and easily integrates with existing
systems. This allows for rapid deployment and, typically, a lower total cost of
ownership.
Firstwave
supports several product lines: Firstwave CRM, Firstwave Sports, Firstwave
Technology and TakeControl.
Firstwave
CRM Solutions
Firstwave
CRM
Firstwave
provides enterprise-wide CRM software solutions specifically designed for the
sports & entertainment and high-technology industries. By embracing a
customer-focused business strategy, Firstwave's CRM solutions help improve an
organization's efficiency enabling revenue growth, cost containment and customer
retention.
Firstwave
CRM handles the collaboration and interaction between workforce, customers and
prospects. Through the use of Firstwave CRM, companies have the ability to
increase revenue growth, customer retention and employee productivity.
Firstwave
offers a variety of tools, applications and access options designed to enhance
the customer experience across the entire enterprise. Firstwave CRM consists of
the following modules:
First-Sales™
- - Easily manage sales cycle for increased revenue and efficiency
First-Market™
- - Comprehensive marketing campaign and content management
First-Support™
- - Increase customer satisfaction, retention and loyalty
First-Survey™
- - Keep a pulse on customer preferences through poll and survey management
First-Project™
- - Streamline service delivery and project management
First-Quality™
- - Close the customer feedback loop and quickly identify product issues
First-Web™
- - Reduce customer support costs and improve communication through customized web
portals
DataWave
- - Unleashes the power of a quality database
Firstwave
Sports™
Designed
specifically for today's sports organizations, Firstwave Sports is a powerful
integrated CRM software solution for national governing bodies, leagues,
professional teams and sports promoters. From a single view of each individual
participant, the Company believes that Firstwave Sports promotes robust fan
loyalty, event, and participant management solutions for today's highly
competitive sports marketplace.
Firstwave
Sports is a robust database, organization and management solution designed to
help organizations drive revenue, increase targeted marketing and market
discovery, and reduce administration costs. Additionally, Firstwave Sports is
designed to allow organizations to improve day-to-day communication with members
and participants of all levels.
Organizations
use Firstwave Sports to optimize internal administration capabilities, automate
competition scheduling and results posting, conduct online training and learning
programs, and drive revenue through the use of its analytics.
Whether
the organization is a professional team, fan club, collegiate athletics program
or league, Firstwave Sports is designed to integrate all participant touch
points throughout an organization, while capturing valuable individual data.
Firstwave Sports helps organizations to manage each participant and fan
interaction for improved communication and results.
By
capturing demographic data and purchasing history on members, fans and
participants, Firstwave Sports provides an organization’s sponsors and
advertisers with increased value and impact.
Ticket
sales, sponsors, logistics, venues, catering, teams and referees are among the
details that must be managed to create a successful event. Firstwave Sports
helps manage the burden of event administration activities while capturing
valuable demographics about individual patrons for increased targeted
cross-marketing and up-selling opportunities.
The
Firstwave Sports solution encompasses league and event administration, venue
management and competition scheduling and a participant and fan management
system.
Firstwave
Technology™
Firstwave
Technology is an enterprise-wide CRM solution specifically designed for today's
fast-paced software and hardware companies. Maintaining our customer-first
commitment, Firstwave Technology gives high technology companies the tools to
improve operational efficiency, maximize revenue and legacy investments, and
increase customer satisfaction, loyalty and retention.
Firstwave
Technology handles the collaboration and interaction between a company’s
workforce, customers and prospects.
Firstwave’s
CRM product suite is built on Microsoft technologies and includes support for
multiple databases, including Oracle and Microsoft SQL. In addition to offering
support for multiple database technologies, Firstwave offers a plug-in based
architecture allowing for a flexible approach to changing business logic and new
data sources. We remain dedicated to our existing customers and continue 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.
TakeControl™
The
TakeControl suite consists of CRM systems designed to optimize sales, marketing
and customer service operations through delivering highly functional solutions.
TakeControl
Sales creates a virtual sales environment through linking field and office
personnel into a powerful sales team by automating account and opportunity
management procedures. Management tools include a report writing facility,
scheduling features, full account and contact details, and graphical analysis
tools.
TakeControl
Marketing pinpoints marketing opportunities to support and enhance differing
marketing campaigns. Specializing on capturing the information required from
prospects and customers, it delivers key facilities such as call scripting, mail
merge, order taking, and activity scheduling to provide a compilation of
simplified, yet precise, information.
TakeControl
Customer Support establishes a support center that builds customer satisfaction
and loyalty by providing support team members with instant access to customer
information to quickly log and trouble-shoot problems while shortening response
times. It also identifies the trends of calls received within the support center
to enable future improvements based on customer feedback.
Providing
Value and Enhancements to Existing Customers
We are
committed to providing value to our existing customers through post-sales
consulting, training, support services and product enhancements. We seek to
differentiate ourselves from our competitors not only through our
industry-focused solutions, product features and technology, but also through an
often overlooked yet critical business function - customer service. High
customer satisfaction is an important part of Firstwave’s continued success.
Leveraging
Strategic Alliances
We
market our CRM solutions through a combination of our direct sales channel and
the efforts of our strategic alliance partners. By leveraging the expertise of
our strategic partners, we hope to focus on our core competency of providing
innovative industry-based solutions. Our goal is to select strategic partners
who are strong providers of hardware, software, and consulting.
Professional
Services
For two
decades, Firstwave has maintained its customer-first commitment, stemming from a
basic customer service principle: Take care of your customers and your customers
will take care of you. From this philosophy comes the Firstwave Client Services
organization.
Firstwave
Client Services is dedicated to gaining a comprehensive understanding of each
customer and their values, business processes and critical business objectives.
From this understanding, Firstwave Client Services enables clients to optimize
their use of Firstwave CRM solutions and services to achieve those objectives.
Firstwave
Client Services is also committed to finding out how clients can use Firstwave
products and services to enhance revenue opportunities and increase customer
satisfaction. Firstwave Client Services provides value to Firstwave customers
through ongoing support and maintenance programs.
The
Firstwave Client Services organization is composed of four main components:
Firstwave's
customer-first commitment goes beyond service and support - knowing our clients'
business is our business. In order to help our customers achieve their goals, we
focus on clearly understanding all the nuances of each customer’s business and
provide a support system that compliments their unique business requirements.
Client
Relations
For our
Firstwave customers, our Client Relations offers:
| |
q |
Management
of subscription services and renewals |
| |
q |
Efficient
and reliable coordination between Firstwave departments
|
| |
q |
Net
Satisfaction Index (NSI) Surveys |
| |
q |
Customer-first
commitment |
Client
Relations is the focal point for escalating concerns to all other Firstwave
departments. Part of the Client Relations mission is to try to ensure that our
customers see tangible benefits from Firstwave subscription services like
CustomCare, technical support and software maintenance. Firstwave Client
Relations provides our customer’s organization with customer value reports and
continuously seeks feedback to help instill confidence in our products,
services, knowledge and experience.
Client
Relations provides documented customer interface processes, reliable delivery of
service and continuous improvement throughout the Company. Client Relations is
committed to sustaining and improving our customer service performance through
the use of best practices, NSI measurements and systematic
analysis.
Professional
Services
Firstwave
Professional Services uses a flexible, requirements-driven, implementation
methodology that scales from workgroup to enterprise environments. Proven
through hundreds of implementation projects, our approach can accommodate an
entire range of implementation options from "big-bang" to "pilot project" and
"fast follower" rollouts. We offer an array of services that promote customer
self-sufficiency and provide cost-effective utilization of consulting resources,
for both new and existing customers.
Firstwave
Professional Services include:
| |
q |
Planning
Services - implementation planning, requirements gathering, consultation
and call center/help desk process consulting
|
| |
q |
Design
Services - web form design, application customization, custom report
generation, First-Sync™ rules development, third party integration and
data migration |
| |
q |
Installation
Services - deployment for web/application server, client/server
application, database server and First-Sync™/database synchronization
|
| |
q |
Consulting
Services - general consulting, project management, system audit and review
|
Firstwave
offers a highly skilled team of support professionals to resolve any issues that
may arise when using Firstwave CRM solutions. We strive to provide top-notch
customer service through clear and proven escalation paths, resolution
procedures, tenured support staff and an extensive FAQ library.
Technical
Support
Working
closely with the development, quality assurance, professional services and
client relations’ teams, Firstwave support is dedicated to keeping our clients’
CRM investment at peak performance. To compliment our telephone support
services, we also provide access to our help desk via fax, e-mail and web.
We
offer:
| |
q |
Phone
and e-mail support |
| |
q |
Extended
hours coverage for live assistance available upon request
|
| |
q |
Application
version control/management |
Firstwave
University
Firstwave
University offers in-depth training on all Firstwave products. These courses are
designed for the users, administrators and developers of the Firstwave suite of
applications. Firstwave University introduces best practices for using Firstwave
CRM solutions by applying best practices structured around the unique business
needs of our customer’s organization. Customers can maximize their investment in
CRM, while benefiting all areas of the Company including marketing, sales,
support and account management.
Customer
service representatives, managers, systems administrators and others can attend
classes designed and presented specifically to meet their needs. They can choose
to take a complete training program for certification or a few specific courses
for targeted improvement.
Firstwave
University has a wide array of training and education courses to fit individual
needs. Public classes are regularly scheduled in our Atlanta corporate training
center and in our Surrey, England office. For our customers’ convenience,
training can also be conducted on-site at their preferred location. Firstwave
customers can view the latest training center schedule and sign up for classes
via our customer support portal, available at http://support.firstwave.net. We
charge customers for education and training services on a per-attendee basis
with a minimum daily charge. For classes conducted at customer sites, we charge
a per-day rate for a set number of attendees.
Sources
of Revenues, Pricing and Material Terms for Licensing
Agreements
The
first component of revenue is software revenues, which consist of license and
ticketing fees. The Company’s CRM solutions are generally licensed on a per-user
model, except for hosting services. Customers generally pay a license fee for
the software based upon the number of licensed users for the application as well
as for the tool set. Hosting allows organizations to deploy the applications
without the need for internal hardware infrastructure or system administrative
capabilities. All license fees are fixed and determinable, whether under the
per-user model or hosting model.
The
Company has agreements with customers, particularly relating to sporting events,
whereby it will recognize revenue at a future date based on a per-ticket or
per-fan membership basis. The amount the Company will receive per ticket or
membership is variable, but is pre-determined in the terms of the agreements.
Although tickets may be sold in advance of the event, the Company will recognize
these revenues after the event occurs. Ticketing revenue is consolidated into
software revenues on the Company’s financial statements.
The
second component of revenue is services revenues, which consist of professional
consulting, technical services and training services. Consulting and technical
services are charged on an hourly basis and may be billed in advance or 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, we charge a per-day rate for a set number of attendees. Actual
travel expenses are billed as incurred. Hosting services are priced as a monthly
or yearly fixed amount based upon the number of users and are recognized as
services revenues ratably by month over the period of services.
The
third component of revenue is maintenance revenues, which 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 provided on a when and if available basis. 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'
written notice to the customer.
Customers
Firstwave’s
customers operate in many industries, but we have a dedicated focus in the
high-technology and sports marketplaces. Our industry-focused solutions are
developed specifically for the industries we target, taking into consideration
their unique needs, revenue sources and customer demands.
The
table below identifies customers who contributed more than 10% of total revenue
for each period shown.
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Electronic
Data Systems, Ltd |
|
|
11.8 |
% |
|
55.2 |
% |
|
71.9 |
% |
|
Rugby Football
Union |
|
|
12.0 |
% |
|
0.0 |
% |
|
N/A |
|
During 2004, we
continued to pursue strategies to transition our revenue stream to a more
diverse customer base and away from dependency on one large customer. The March
2003 acquisition of Connect-Care and the release of our Sports and Entertainment
initiative have assisted in diversifying our customer base.
Sales
and Marketing
In North
America, we market and sell our Firstwave CRM solutions and
services through direct sales and indirect channels. International sales are
accomplished by direct selling through our United Kingdom office and, to a
lesser extent, indirectly through distributors in other countries. The North
American Sales department, overseen by a senior level sales executive, consists
of Telesales/Business Development representatives (BDRs), Pre-Sales Engineers,
and Account Executives (AEs). 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. Our sales team conducts a face-to-face meeting, scopes the
requirements of the potential customer with professional services, assists in
providing a cost justification for the purchase and provides references before
closing business.
Our
marketing department is responsible for generating leads and promoting brand
awareness and mind share among CRM industry professionals and companies within
our target industries that are in need of a CRM solution. Primary marketing
functions include web-based and traditional direct marketing, advertising,
public and analyst relations, vertical market research and development, search
engaging optimization, tradeshows, speaking opportunities and other
Internet-based marketing initiatives. 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 our product development efforts.
Competition
The
competition in our High Technology vertical comes 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.
Our
primary competitors are Salesforce.com, Peoplesoft, Epiphany, Onyx, Microsoft,
Seibel on Demand, Pivotal, and SalesLogix. These companies offer comprehensive
packages, which include marketing, sales, and service. These companies also have
integrated some Internet technology into their products and have customization
capabilities within their product sets. SAP, Oracle and Siebel Systems, due to
their large international presence and market share, are also competitors at the
enterprise level. 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 for pharmaceuticals or
finance.
Our
competitors in the Sports vertical are in-house development, other organizations
focusing on the Sports vertical, and some of the same competitors we encounter
in sales opportunities in our High Technology vertical.
Our
biggest competitive advantage is our demonstrated domain expertise in our two
verticals and high customer satisfaction. We also compete on product features
and functionality specific to the industry we are competing in, flexibility,
..NET technology, product intuitiveness, and value by placing an emphasis on
customer service and support. Although we frequently compete favorably with
respect to these factors, there can be no assurance that we will be able to
achieve the innovation, product development and market share necessary to
maintain competitive advantage.
Proprietary
Rights and Licenses
We
depend upon a combination of trade secrets, copyright and trademark laws,
license agreements, non-disclosure and other contractual provisions with
customers and employees to protect our proprietary rights in our products. We
also maintain confidentiality agreements with our employees. Because Firstwave
CRM solutions allow customers to customize their applications without altering
the source code, the source code for our products is neither licensed nor
provided to customers, although we have contractually agreed in certain
instances to have our source code held in escrow by a third party.
Notwithstanding these precautions, it may be possible for unauthorized persons
to copy aspects of the products or to obtain information that we regard as
proprietary. There can be no assurance that these protections will be adequate
or that competitors will not independently develop technologies that are
substantially equivalent or superior to our technology.
Employees
As of
March 1, 2005, the Company employed 40 persons, including 6 sales and marketing
professionals, 19 service and support representatives, 9 executive and
administrative personnel and 6 persons involved in product innovation and
development. We also employ contractors from time to time to meet the
requirements of product deadlines and/or customer projects. We believe that the
Company's future growth and success will rely on our ability to retain and
attract highly skilled and motivated personnel in all areas of our operations.
Certain
Factors Affecting Forward-Looking Statements
An
investment in our common stock involves a significant degree of risk.
Prospective investors should carefully consider the following factors that may
affect our current and future operations and prospects. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected, the trading price of our common stock
could decline, and you may lose all or part of your investment.
Negative
cash flow and the difficulty of raising additional capital may adversely affect
our operations and the price of our common stock.
During
2003 and 2004, we experienced negative cash flows and may experience negative
cash flow in the future. We require significant amounts of capital to fund our
business operations and product development efforts. The rate at which our
capital is utilized is affected by the operational, acquisition and
developmental costs we incur and our ability to generate sales, services and
maintenance revenues.
If we
are unable to generate sufficient cash from operations, we will evaluate
alternative means of financing to meet our needs. We cannot be certain that
additional financing will be available on favorable terms if or when we require
it, or if it will be available at all. If we are unable to obtain the necessary
additional capital, we may be required to reduce the scope of planned product
development and sales and marketing efforts, as well as reduce the size of
current staff, all of which could have a material adverse effect on our
business, financial condition and ability to reduce losses or generate profits.
In the
past, we have funded our operating losses and working capital needs through cash
flow from operations and from the proceeds of equity offerings and debt
financings. If we raise additional funds through the issuance of equity,
equity-linked or debt securities, those securities may have rights, preferences
or privileges senior to those of the rights of our common stock and, in light of
our current market capitalization, our shareholders may experience substantial
dilution.
On July
29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura. In
December 2004, the Company repaid the $500,000 in borrowings under the Line of
Credit and carried no debt as December 31, 2004. The Company subsequently
canceled the Line of Credit.
Our
revenues have been highly dependent upon a limited number of customers; one of
these customers has decreased purchasing our software and services, and our
revenues have decreased.
During
2004, we continued to derive revenues from our relationship with Electronic Data
Systems, Ltd., a leading global services company, which is a customer of our
Firstwave UK subsidiary. In addition, our relationship with the Rugby Football
Union accounted for 12% of our total 2004 revenues. The table shown below
illustrates the percentage of total revenue EDS and the Rugby Football Union
contributed each year shown.
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Electronic
Data Systems, Ltd |
|
|
11.8 |
% |
|
55.2 |
% |
|
71.9 |
% |
|
Rugby Football
Union |
|
|
12.0 |
% |
|
0.0 |
% |
|
N/A |
|
We are
pursuing strategies to continue to transition our revenue stream away from
dependency on a few large customers to a more diverse customer base. Unless and
until we effect this transition, our revenues and results of operations will be
substantially dependent on a few large customers.
We
have in the past and may in the future experience significant fluctuations in
our operating results and rate of growth, and the price of our common stock may
be adversely affected by these fluctuations.
Our
quarterly operating results have in the past and may in the future vary or
decrease significantly depending on factors such as:
| |
· |
the
effect of past and future acquisitions, |
| |
· |
the
size and timing of significant orders, |
| |
· |
the
impact of estimates of our future operating results published by third
parties, |
| |
· |
the
timing of revenue from software sales and professional services,
|
| |
· |
the
timing of new product and service announcements,
|
| |
· |
changes
in pricing policies by us and our competitors,
|
| |
· |
market
acceptance of new and enhanced versions of our products,
|
| |
· |
changes
in operating expenses, |
| |
· |
changes
in our strategy, |
| |
· |
key
personnel departures, |
| |
· |
the
introduction of alternative technologies,
and |
| |
· |
general economic
factors. |
We have
limited or no control over many of these factors. Investors are cautioned that
as a matter of policy we do not provide earnings projections or guidance to any
financial analysts or other publishers of financial reports. If we change this
policy, which we do not anticipate, we will make a public announcement regarding
such change. Until such time, if it occurs, you should not rely upon any such
information, reports, statements, estimates or projections of financial
analysts, publishers of financial reports or others as having been provided or
endorsed by us. We expressly do not adopt or endorse, and expressly disclaim,
any and all such independent third party information, reports, statements,
estimates and projections.
Our
expense levels are based, in part, on our expectations as to future revenues. If
revenue levels are below our expectations, we may be unable or unwilling to
reduce expenses proportionately and our operating results are likely to be
adversely affected. As a result, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all these factors, it
is likely that in some future quarter our operating results will be below the
expectations of investors. In that event, the price of our common stock will
likely be adversely affected.
We
have foreign exchange risk related to our wholly owned subsidiary located in
Surrey, England, and fluctuations in exchange rates could affect our
revenues.
The
results of operations of our wholly owned subsidiary located in Surrey, England
are exposed to foreign exchange rate fluctuations as the financial results of
the subsidiary are translated from the local currency into U.S. Dollars upon
consolidation. As exchange rates vary, net sales and other operating results,
when translated, may differ materially from expectations. During 2004, the
average foreign currency exchange rate increased 12% compared to the average
exchange rate during 2003. This rate increase accounted for an increase of
approximately $475,000 in total revenue during 2004. The average foreign
currency exchange rate during 2003 increased 8% compared to the average exchange
rate during 2002. This rate increase accounted for an increase of revenue of
approximately $598,000 during 2003. The average foreign currency exchange rate
during 2002 increased 3% compared to the average exchange rate during 2001. This
rate increase accounted for an increase of revenue of approximately $215,000
during 2002.
Our
stock price has been and may continue to be highly
volatile.
The
trading price of our common stock fluctuates significantly. Trading prices of
our common stock may fluctuate in response to a number of events and factors
such as:
| |
· |
general
economic conditions, |
| |
· |
conditions
or trends in the CRM industry, |
| |
· |
fluctuations
in the stock market in general, and |
| |
· |
quarterly
variations in operating results. |
Decreases
or delays in our target customers’ information technology spending and other
circumstances that result from poor economic conditions may harm our revenues;
if general economic conditions do not improve or worsen, our revenues may be
materially harmed.
Some of
our customers and prospective customers have indicated that they have reduced
their budgets available for spending on outsourced technology applications or
have delayed purchase decisions for information technology products like ours
due, in part, to difficult economic conditions. If the
economy does not improve or worsens, our customers may continue to delay or
reduce their spending on CRM software and customization. When economic
conditions weaken, sales cycles for sales of software products tend to lengthen
and companies’ information technology budgets tend to be reduced. Accordingly,
our revenues could suffer and the price of our common stock may decline and we
may experience a material adverse impact on our business, operating results, and
financial condition.
The
market for our CRM software and services is subject to rapid change stemming
from customer requirements and changes in related technologies, including
hardware, operating systems and telecommunications; if we fail to improve our
products in response to these changes, our sales may
decline.
The
market for our CRM software and services is subject to rapid change,
including technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. Our
future success depends upon our ability to enhance our current products and
continue to develop and market new products that maintain technological
leadership, address the increasingly sophisticated needs of customers and
achieve broad market acceptance. In particular, we believe that we must continue
to respond quickly to customer needs for additional functionality and to ongoing
advances in hardware, operating systems and telecommunications. Any failure by
us to anticipate or respond rapidly to technological advances, new products and
enhancements and changes in customer requirements could have a material adverse
effect on our competitive position or render some of our products obsolete or
less desirable than available alternatives.
With the
release of Firstwave Sports and any other new product release, we are subject to
the risks generally associated with new product introductions and applications,
including lack of market acceptance, delays in development and implementation,
and failure of products to perform as expected. In order to introduce and market
new or enhanced products successfully with minimal disruption in customer
purchasing patterns, we must manage the transition from existing products. There
can be no assurance that we will be successful in developing and marketing, on a
timely basis, product enhancements or products that respond to technological
advances by others, that our new products will adequately address the changing
needs of the market or that we will successfully manage product transitions.
Further, failure to generate sufficient cash from operations or financing
activities to develop or obtain improved products and technologies could have a
material adverse effect on our results of operations and financial
condition.
To
grow our business, we may acquire additional companies, including by issuing
shares of our stock, which may subject us to additional risks and may dilute
your ownership.
To
initiate our growth strategies, we acquired Connect-Care, Inc. in March 2003,
and we may acquire other businesses. An inability to identify, acquire and
integrate businesses, products or services that complement our business may
negatively affect our ability to grow. We cannot guarantee that we will be able
to identify and acquire suitable candidates on acceptable terms. We also cannot
provide any assurance that we will be able to arrange adequate financing,
complete additional transactions or successfully integrate the acquired
businesses. As in the case of the Connect-Care merger, we may issue shares of
stock in future acquisitions or in financing transactions, which would dilute
the ownership percentages of our existing shareholders. Acquisitions and stock
offerings may also distract management and result in the incurrence of debt,
expenses related to goodwill and other intangible assets and unforeseen
liabilities, all of which could have a material adverse effect on our business
and financial condition. In addition, we may not be able to successfully compete
with other companies for acquisition candidates. In order for any acquisition to
be successful, we would have to successfully and quickly integrate the new
business with our business, including:
| |
· |
cross-market
and sell our services and products to the new business’
customers; |
| |
· |
minimize
duplicative managerial, sales and marketing efforts and eliminate
redundant costs of our operations; and |
| |
· |
make the new business’ personnel operate
together with our personnel in a cost-effective
manner. |
If we do
not integrate our operations successfully, we may fail to achieve our business
goals. This would likely cause a slow-down in our growth rate that may result in
a decrease in the value of your investment.
Our
CRM software products, like most software products of a complex nature, may
contain undetected errors; as a result, we could experience delays, additional
expenses or lost revenues.
Software
products as complex as those we offer may contain undetected errors. We could
experience delays or lost revenues during the period required to correct those
errors. There can be no assurance that, despite testing by us and by current and
potential customers, errors will not be found in our software. If our products
are found to contain errors, the result to us could be:
| |
· |
a
loss of or delay in market acceptance, |
| |
· |
additional
and unexpected expenses to fund further product development,
|
| |
· |
additional
and unexpected expenses to add programming personnel to complete a
development project, |
| |
· |
loss
of revenue because of the inability to sell the new product on a timely
basis, and |
| |
· |
loss
of revenue due to adverse effect on our
reputation, |
any one
or more of which could have a material adverse effect on us.
Like
most providers of complex software, our most valuable asset is an intangible,
intellectual property; protection of our proprietary rights can be difficult,
complex and expensive; if we are unable to protect our proprietary rights, then
our competitive position could be weakened, which may reduce our
revenues.
We
derive a significant portion of our revenues from license, service and
maintenance fees generated from our software. We do not have any patents on our
software; rather we rely on
a combination of trade secrets, copyright and trademark laws, non-disclosure and
other contractual provisions and technical measures to protect our proprietary
rights. We may be required to spend significant resources to monitor and police
our proprietary rights. There can be no assurance that these protections will be
adequate or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technologies.
Other
software providers could copy or otherwise obtain and use our products or
technology without authorization. We may not be able to detect infringement and
may lose a competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies.
The laws of some foreign countries do not protect proprietary rights to the same
extent as the laws of the United States. If we fail to successfully enforce our
proprietary rights, our competitive position may be harmed.
Because
it is not difficult to enter our industry, we expect increased competition from
the introduction of superior products or by pricing pressure from competitors,
all of which could harm our business.
The
market for our products is characterized by significant price competition, and
we expect that we will face increasing pricing pressures from our current
competitors. In addition, some of our competitors may have significant
advantages including the ability to adapt quickly to new technologies and
changes in customer demands, and substantially greater resources and market
presence. Moreover, because there are low barriers to entry into the software
market, we believe that competition will increase in the future. Accordingly,
there can be no assurance that we will be able to provide products that compare
favorably with the products of our competitors or that competitive pressures
will not require us to reduce our prices. Any material reduction in the price of
our products would negatively affect gross margins as a percentage of new
revenue and would require us to increase software unit sales in order to
maintain net revenues.
The
terms of our preferred stock include
preferences over our common stock and the issuance of additional shares of
preferred stock may have a material adverse effect on the market value of our
common stock.
Our
board of directors has the authority to issue up to 1,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any further vote or action by
our shareholders. At December 31, 2004 shares of outstanding preferred stock
were as follows:
| |
· |
10,000
shares of Series A Convertible Preferred Stock
|
| |
· |
7,020
shares of Series B Convertible Preferred Stock
|
| |
· |
10,000
shares of Series C Convertible Preferred
Stock |
| |
· |
7,000
shares of Series D Convertible Preferred
Stock |
The
rights of the holders of the common stock are subject to, and may be adversely
affected by, the rights of the holders of Series A, Series B, Series C and
Series D Convertible Preferred Stock and any other preferred stock that may be
issued in the future. The issuance of the Series A, Series B, Series C and
Series D Convertible Preferred Stock and any future issuances of other classes
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change in
control of our company. Furthermore, the Series A, Series B, Series C and Series
D Convertible Preferred Stock have other rights, including economic rights,
senior to the common stock and, as a result, the existence of our preferred
stock may have a material adverse effect on the market value of our common
stock. Any future issuances of other classes of preferred stock may have other
rights, including economic rights, senior to the common stock, and as a result,
the issuance of new preferred stock could have a material adverse effect on the
market value of our common stock. We may, in the future, adopt other measures
that may have the effect of delaying, deferring or preventing a change in
control of our company. Some of these measures may be adopted without any
further vote or action by our shareholders. We have no present plans to adopt
any of those types of measures.
We
are reliant upon certain key personnel for expertise in the CRM software market
and in the technical aspects of the CRM software product; the loss of such key
personnel could affect our ability to successfully grow our
business.
We
depend in large part upon the continued service of our executive officers and
other key sales, engineering and technical staff with expertise in our industry
and products. The loss of the services of our executive officers and other key
personnel could harm our operations. Currently, none of our officers or key
personnel are bound by an employment agreement, and we do not maintain key
person insurance on any of our employees. We would also be harmed if one or more
of our officers or key employees decided to join a competitor or otherwise
compete with us.
The
market for CRM software has fluctuated over the past several years, and we are
uncertain as to its future; if the market for CRM software does not grow, our
revenues may be reduced.
The CRM
software market is fluctuating, and our success depends on its growth. If the
market for CRM software does not grow as quickly or become as large as
anticipated, our revenues may be reduced. Our potential customers
may:
| |
· |
not
understand or see the benefits of using these products,
|
| |
· |
not
achieve favorable results using these products,
|
| |
· |
experience
technical difficulty in implementing or using these products, or
|
| |
· |
use
alternative methods to solve the same business problems.
|
Our
products can have long sales cycles which make it difficult to plan expenses and
forecast results.
It takes
between three and six months to complete the majority of our sales, and some
sales take longer to complete. Therefore, it is difficult to predict the quarter
in which a particular sale will occur and to plan expenditures accordingly. The
length of the period between initial contact with a potential customer and their
purchase of products and services is due to several factors,
including:
| |
· |
the
complex nature of our products, |
| |
· |
our
need to educate potential customers about the uses and benefits of our
products, |
| |
· |
the
purchase of our products may require a significant investment of resources
by a customer, |
| |
· |
customer
budget cycles which affect the timing of purchases,
|
| |
· |
uncertainty
regarding future economic conditions, |
| |
· |
customer
requirements for competitive evaluation and internal approval before
purchasing our products, |
| |
· |
customer
delay of purchases due to announcements or planned introductions of new
products by us or our competitors, and |
| |
· |
large
customer purchasing procedures, which may require a longer time to make
decisions. |
The
delay or failure to complete sales in a particular quarter could reduce our
revenues in that quarter, as well as subsequent quarters over which revenues for
the sale would likely be recognized. If our sales cycle unexpectedly lengthens
in general or for one or more large orders, it would adversely affect the timing
of our revenues.
Because
our business involves the electronic transmission and storage of data, privacy
and security concerns, particularly related to the use of our software on the
internet, may limit the effectiveness of and reduce the demand for our
products.
The
effectiveness of our software products relies on the storage and use of customer
data collected from various sources, including information collected on web
sites, as well as other data derived from customer registrations, billings,
purchase transactions and surveys. Our collection and use of that data for
customer profiling may raise privacy and security concerns. Our customers
generally have implemented security measures to protect customer data from
disclosure or interception by third parties. However, these security measures
may not be effective against all potential security threats. If a
well-publicized breach of customer data security were to occur, our software
products may be perceived as less desirable, impacting our future sales and
profitability.
In
addition, due to privacy concerns, some internet commentators, consumer
advocates, and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. In addition, internet users can, if they choose, configure their
web browsers to limit the collection of user data for customer profiling. Should
many internet users choose to limit the use of customer profiling technologies,
or if major countries or regions adopt legislation or other restrictions on the
use of customer profiling data, our software would be less useful to customers,
our sales could decrease and our results of operations could be materially
adversely affected.
The
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 require that we
undertake an evaluation of our internal controls that may identify internal
control weaknesses.
The
Sarbanes-Oxley Act of 2002 imposes new duties on us and our executives,
directors, attorneys and independent registered public accounting firm. In order
to comply with the Sarbanes-Oxley Act, we are evaluating our internal controls
systems to allow management to report on, and our independent auditors to attest
to, our internal controls. We have initiated establishing the procedures for
performing the system and process evaluation and testing required in an effort
to comply with the management certification and auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act. As the Securities and Exchange
Commission has extended the deadline for non-accelerated files, such as
Firstwave, by one year, we anticipate being able to fully implement the
requirements relating to internal controls and all other aspects of Section 404
in a timely fashion. If we are not able to implement the requirements of Section
404 in a timely manner or with adequate compliance, our auditors may not be able
to render the required attestation concerning our assessment and the
effectiveness of the internal controls over financial reporting, we may be
subject to investigation and/or sanctions by regulatory authorities, such as the
Securities and Exchange Commission or The NASDAQ Stock Market, and our
reputation may be harmed. Any such action could adversely affect our financial
results and the market price of our common stock.
As of
December 31, 2004, the Company's headquarters and principal operations were
located in approximately 17,000 square feet of leased office space in
metropolitan Atlanta, Georgia. This lease, which expires on October 31, 2005,
includes scheduled base rent increases over the life of the lease. The total
amount of base rent, offset by an expense of $153,000 taken in December of 2004
for abandoned office space, is being charged to rent expense on the
straight-line method over the term of the lease. Our United Kingdom operation
leases approximately 4,000 square feet of office space located in Surrey,
England on a month-to-month basis.
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
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities.
Our
common stock is traded on the NASDAQ SmallCap Market under the symbol “FSTW”.
The following table sets forth, for the calendar quarters indicated, the high
and low close prices of the Company’s common stock. Note that prices set forth
below reflect inter-dealer prices without retail mark-ups, mark-downs, or
commissions and may not necessarily reflect actual transactions.
2004 |
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
2003 |
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
High |
|
$ |
6.62 |
|
$ |
4.40 |
|
$ |
2.50 |
|
$ |
3.50 |
|
|
High |
|
$ |
17.79 |
|
$ |
20.41 |
|
$ |
9.40 |
|
$ |
6.89 |
|
|
Low |
|
$ |
4.25 |
|
$ |
2.10 |
|
$ |
1.28 |
|
$ |
1.28 |
|
|
Low |
|
$ |
10.23 |
|
$ |
7.80 |
|
$ |
6.61 |
|
$ |
4.15 |
|
As
of March 1, 2005, there were approximately 72 shareholders of record and
approximately 2,700 persons or entities that hold common stock in nominee name.
There were no common stock dividends declared during 2004 or 2003. The Company
does not plan to pay dividends in the future. Pursuant to a merger agreement, on
March 3, 2003 Firstwave issued 200,000 shares of common stock to the
shareholders of Connect-Care, Inc. in exchange for all outstanding shares of
Connect-Care stock. These 200,000 shares, valued at $2,630,000, were registered
effective July 25, 2003. On August 12, 2004, the Company filed a Post-Effective
Amendment No 1 to Registration Statement on Form S-3, File No. 333-103903, to
remove from registration 198,925 shares originally registered related to the
Connect-Care acquisition that remained unsold at the termination of the
offering.
Item 6. Selected Financial Data.
The
following table sets forth selected financial data about the Company and its
subsidiaries for each of the last five fiscal years. The information presented
below has been derived from the Company's audited consolidated financial
statements.
| |
|
For the Year
Ended December 31, |
|
| |
|
(In thousands,
except per share amounts) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004** |
|
2003*** |
|
2002 |
|
2001 |
|
2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
$ |
7,400 |
|
$ |
11,904 |
|
$ |
14,404 |
|
$ |
8,501 |
|
$ |
9,503 |
|
|
Income/(loss)
before income taxes |
|
|
(4,638 |
) |
|
(774 |
) |
|
3,025
|
|
|
(1,214 |
) |
|
(3,144 |
) |
|
Income tax
(provision)/benefit |
|
|
0
|
|
|
(1 |
) |
|
0
|
|
|
(6 |
) |
|
(2,852 |
) |
|
Net
income/(loss) |
|
|
(4,638 |
) |
|
(775 |
) |
|
3,025
|
|
|
(1,220 |
) |
|
(5,996 |
) |
|
Net
income/(loss) applicable to common shareholders |
|
|
(4,893 |
) |
|
(996 |
) |
|
2,773
|
|
|
(1,825 |
) |
|
(6,116 |
) |
|
Basic
earnings/(loss) per share |
|
|
(1.82 |
) |
|
(0.39 |
) |
|
1.29
|
|
|
(0.87 |
) |
|
(3.05 |
) |
|
Diluted
earnings/(loss) per share |
|
|
(1.82 |
) |
|
(0.39 |
) |
|
0.96
|
|
|
(0.87 |
) |
|
(3.05 |
) |
|
Total
assets |
|
|
6,273 |
|
|
11,807
|
|
|
9,803
|
|
|
6,016
|
|
|
9,307
|
|
|
Redeemable
preferred stock |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,702
|
|
|
Basic weighted
average shares outstanding |
|
|
2,682
|
|
|
2,572
|
|
|
2,150
|
|
|
2,099
|
|
|
2,003
|
|
|
Diluted
weighted average shares outstanding * |
|
|
2,682
|
|
|
2,572
|
|
|
3,153
|
|
|
2,099
|
|
|
2,003
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Stock options and convertible preferred stock are not included in the
diluted earnings per share if they are antidilutive |
|
|
**
2004 includes the one-time write-off of certain amounts of capitalized
software and a charge for Goodwill Impairment of
$750,000 |
|
|
*** 2003
includes the acquisition of Connect-Care in March of 2003 |
|
|
|
|
|
|
|
|
|
|
|
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 presented elsewhere herein. This section contains forward-looking
statements that reflect the Company’s management’s expectations, estimates, and
projections for future periods. These statements may be identified by the use of
forward-looking words such as “may”, “will”, “believe”, “anticipate”,
“estimate”, “expect”, “projects”, or “intends”. Actual events and results may
differ from the results anticipated by the forward-looking statements. Factors
that might cause such differences include, but are not limited to, those items
discussed previously under the caption "Certain Factors Affecting
Forward-Looking Statements" and the
discussion below in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”.
Overview
Headquartered
in Atlanta, Georgia, with an office in Surrey, England, Firstwave is a leading
provider of Customer Relationship Management (CRM) industry-focused solutions.
Firstwave's corporate and product mission reflects our customer-first
commitment: To develop and integrate the best software solutions to manage
customer interactions and information. We strive to provide our clients with
effective CRM, robust technology and the highest standard of customer service.
A leader
in Sports and High Technology CRM, Firstwave offers a suite of features to
specifically meet the needs of companies and organizations within those
industries. Firstwave Sports is designed to help organizations, such as National
Governing Bodies, large sporting events and teams, increase revenue by
maximizing the use of their valuable databases. Firstwave Technology helps
software and technology customers keep current customers loyal, close more sales
and capture more market share. Our CRM solutions offer sales, marketing, and
customer support automation along with project and product quality management.
Firstwave CRM is adaptive and scalable and easily integrates with existing
systems. This allows for rapid deployment and, typically, a lower total cost of
ownership.
Firstwave
supports several product lines: Firstwave CRM, Firstwave Sports, Firstwave
Technology and TakeControl.
Results
of Operations
The
following table sets forth for the periods indicated selected financial data and
the percentages of our net revenues represented by each line item presented. It
also sets forth the percentage change in each line item presented from 2003 to
2004. Certain percentage columns do not add to 100% due to
rounding.
| |
|
Year Ended
December 31, |
|
Year Ended
December 31, |
|
%
Change |
|
|
($ in
thousands) |
|
2004 |
|
% of
revenue |
|
2003 |
|
% of
revenue |
|
2003 to
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
2,322 |
|
|
31.4
|
|
$ |
3,820 |
|
|
32.1
|
|
|
(39.2 |
) |
|
Services |
|
|
2,316
|
|
|
31.3
|
|
|
5,423
|
|
|
45.6
|
|
|
(57.3 |
) |
|
Maintenance |
|
|
2,662
|
|
|
36.0
|
|
|
2,608
|
|
|
21.9
|
|
|
2.1
|
|
|
Other |
|
|
100
|
|
|
1.4
|
|
|
53
|
|
|
0.4
|
|
|
88.7
|
|
|
Net
revenues |
|
|
7,400
|
|
|
100.0
|
|
|
11,904
|
|
|
100.0
|
|
|
(37.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
2,031
|
|
|
27.4
|
|
|
1,239
|
|
|
10.4
|
|
|
63.9
|
|
|
Services |
|
|
2,361
|
|
|
31.9
|
|
|
3,135
|
|
|
26.3
|
|
|
(24.7 |
) |
|
Maintenance |
|
|
490
|
|
|
6.6
|
|
|
609
|
|
|
5.1
|
|
|
(19.5 |
) |
|
Other |
|
|
90
|
|
|
1.2
|
|
|
53
|
|
|
0.4
|
|
|
69.8
|
|
|
Sales and
marketing |
|
|
3,144
|
|
|
42.5
|
|
|
3,970
|
|
|
33.4
|
|
|
(20.8 |
) |
|
Product
development |
|
|
1,188
|
|
|
16.1
|
|
|
1,349
|
|
|
11.3
|
|
|
(11.9 |
) |
|
General &
administrative |
|
|
2,001
|
|
|
27.0
|
|
|
2,348
|
|
|
19.7
|
|
|
(14.8 |
) |
|
Charge for
Goodwill Impairment |
|
|
750
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating cost and exp |
|
|
12,055
|
|
|
162.9
|
|
|
12,703
|
|
|
106.7
|
|
|
(5.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss |
|
|
(4,655 |
) |
|
(62.9 |
) |
|
(799 |
) |
|
(6.7 |
) |
|
482.6
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income,net |
|
|
17
|
|
|
0.2
|
|
|
25
|
|
|
0.2
|
|
|
(32.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes |
|
$ |
(4,638 |
) |
|
(62.7 |
) |
$ |
(774 |
) |
|
(6.5 |
) |
|
499.2
|
|
In
general, competition in the software industry has increasingly been
characterized by shortening product cycles. No assurance can be given that we
will be immune to this trend. If the product cycle for our systems proves to be
shorter than management anticipates, our pricing structure and revenues could be
impaired. In addition, in order to remain competitive, we may be required to
expend a greater percentage of our revenues on product innovation and
development than has historically been the case. In either case, our gross
profit margins and results of operations could be materially adversely affected.
See ”Certain Factors Affecting Forward-Looking Statements” in Part I, Item 1 of
this Annual Report.
2004
Compared to 2003
Revenue
Total
revenues, which include software license fees, services, and maintenance
revenues, decreased 37.8% from $11,904,000 in 2003 to $7,400,000 in 2004 due to
decreases in software and services revenues. The decrease in total revenues was
primarily attributable to lower revenues from our relationship with Electronic
Data Systems, Ltd. (“EDS”), which contributed 55.2% of total revenues during
2003, compared to 11.8% of total revenues for 2004. During 2004, two customers
represented greater than 10% of our total revenues: EDS representing 11.8% and
Rugby Football Union representing 12.0%.
Software
revenues decreased 39.2% from $3,820,000 in 2003 to $2,322,000 in 2004. Although
we generated revenues from our Sports and Entertainment solution in 2004,
software license revenues from companies expected to replace prior revenues from
EDS were lower than anticipated. Our software revenues are significantly
dependent upon the timing of closing of license agreements, and current
quarterly results may not be indicative of future performance.
Total
revenues from international sources decreased from 68.0% of total revenues in
2003 to 59.3% in 2004 primarily due to decreased software licenses and services
revenue from our UK subsidiary, including revenue from the EDS relationship that
decreased from $6,566,000 in 2003 to $873,000 in 2004. Revenues from
international software licenses decreased 40.9% from $2,447,000 in 2003 to
$1,447,000 in 2004, and decreased as a percentage of total revenues from 20.6%
in 2003 to 19.6% in 2004 due to decreased software sales by our UK subsidiary
and total lower revenues for the Company in 2004. With the exception of
approximately $3,000 in maintenance revenue from an Australian distributor,
revenues from Firstwave UK contributed all international revenues. Although we
have renewed our relationships with distributors in Australia and look forward
to activity from these distributors, there has been limited activity thus far.
Services
revenues decreased 57.3% from $5,423,000 in 2003 to $2,316,000 in 2004,
primarily due to decreased services revenue from EDS. Although we
successfully completed implementation of the multi-year services project for EDS
during 2003, we continued to provide limited additional services to this
customer in 2004. Our services revenues have decreased from 2003 levels because
the services revenues we derived from the multi-year contract have not been
replaced with other customer accounts. Our services revenues are subject to
fluctuations based on variations in the length of and number of active service
engagements in a given quarter.
Maintenance
revenues increased 2.1% from $2,608,000 in 2003 to $2,662,000 in 2004. The
increase is due to a full year of maintenance revenue from the Connect-Care
acquisition and additional maintenance revenues associated with new customers
net of cancellations from existing customers. Maintenance revenues are the
result of renewal agreements from previous software license agreements as well
as new license agreements.
Revenues
from non-monetary exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly evident. During 2004,
the Company entered into agreements with four Firstwave Sports customers that
involved an exchange of software licenses, services, and/or maintenance for
marketing sponsorships. In two of the agreements, the payments involved both
cash and non-cash exchanges for marketing sponsorships. The revenue recorded in
2004 related to the non-cash portion of these transactions was $499,600 in
software license revenue, $117,600 in services revenue and $67,000 in
maintenance revenue. An additional $7,000 in services revenue and $43,000 in
maintenance revenue is expected to be recognized in 2005 as services are
performed. The sponsorship packages, which were expensed in 2004, include
“Official CRM Supplier” designations, rights to use customer logos in marketing
materials, and links to client websites. Tickets and hospitality packages for
specific future sporting events in the amount of $5,250 remain as prepaid items
and will be shown as marketing expense when the future sporting event
occurs.
During
the fourth quarter of 2003, the Company entered into an agreement with a
Firstwave Sports customer to exchange a total of $200,000 in software licenses,
services, and maintenance in exchange for marketing sponsorships at future
sporting events. The revenue recorded in the fourth quarter of 2003 on this
transaction was $125,400 in software revenues and $74,600 in deferred revenue.
The deferred revenue was recognized in 2004 as services revenues when the
services were performed and as maintenance revenues ratably over the term of the
maintenance agreement.
The
designation of “Official CRM Supplier” and other sponsorship benefits supports
the Company’s marketing strategy and brand awareness efforts. Firstwave has an
official designation with the Rugby Football Union, the Arena Football League,
the Atlanta Sports Council, the Chick-fil-A Peach Bowl and iSe Hospitality.
Within the Sports Industry, sponsorships are a common tool for a company to
promote its goods and/or services with a popular organization or event.
These
types of designations provide two primary benefits. First, the Company receives
recognition in the general marketing and advertising that the organization or
event executes, thereby helping to promote and identify our brand in the market.
As a sponsor, we receive advertising and logo placement within event programs,
on-site signage such as field boards, and additional forms of awareness
opportunities.
In
addition, we are able to capitalize upon our relationship with these
organizations through the use of their marks and logos in our marketing
materials. We believe this helps establish our credibility when we attend
conferences, generates publicity when announcing the sponsorship and helps open
doors for sales contacts. Organizations in the sports industry keep a close
watch on each other’s sponsors, partners and vendors.
The
results of operations of Firstwave Technologies UK Ltd are exposed to foreign
currency exchange rate fluctuations as the financial results of the subsidiary
are translated from the local currency into U.S. Dollars upon consolidation. As
exchange rates vary, net sales and other operating results, when translated, may
differ materially from expectations. During 2004, the average foreign currency
exchange rate increased 12% compared to the average exchange rates during 2003.
This rate increase accounted for approximately $475,000 in total revenue during
2004. During 2003, the average foreign currency exchange rate increased 8%
compared to the average exchange rates during 2002. This rate increase accounted
for approximately $598,000 in total revenue during 2003.
Cost
of Revenue
Costs of
software revenues increased 63.9% from $1,239,000 in 2003 to $2,031,000 in 2004
and as a percentage of software revenue increased from 32.4% in 2003 to 87.5% in
2004. The increase of costs of software as a percentage of software revenue is
primarily the result of $136,000 in amortization costs related to the write-off
of two product lines prior to release, and $575,000 in amortization for the
write-off of a product line we are no longer actively marketing. The decision to
discontinue these products was based upon a decision to focus future efforts in
other areas where we believe we can earn a better return. Costs of software
revenues include costs of third-party software, amortization of capitalized
software, and costs of packaging, media and documentation. Amortization of
capitalized software represented 89.6% of total cost of software revenues during
2003, compared to 96.8% in 2004. For 2005, we anticipate software amortization
to continue to be the significant majority of the cost of software revenue.
Costs of
revenues for services decreased 24.7% from $3,135,000 in 2003 to $2,361,000 in
2004. The decrease is a result of decreases in outside consultants and bundled
travel associated with the decrease in services revenue. Costs of revenues for
services as a percentage of services revenues increased from 57.8% in 2003 to
101.9% in 2004 primarily due to certain fixed personnel costs, which at lower
revenue levels result in a decrease in the services revenue margin. During 2004,
we invested some of our billable resources in non-billable activities in order
to maintain customer satisfaction and expand the functionality of our products.
Costs of
revenues for maintenance decreased 19.5% from $609,000 in 2003 to $490,000 in
2004. The decrease is primarily due to decreased payroll costs associated with a
reduction in the number of maintenance personnel. Costs of revenues for
maintenance as a percentage of maintenance revenues decreased from 23.4% in 2003
to 18.4% in 2004.
Sales
and Marketing Expense
Sales
and marketing expense decreased 20.8% from $3,970,000 in 2003 to $3,144,000 in
2004, but increased as a percentage of total revenues from 33.4% in 2003 to
42.5% in 2004 due to the decrease in total revenues for 2004. The decrease in
expense is attributed to decreases in payroll and commission expenses,
telemarketing costs, and costs relating to investor relations partially offset
by increased expenses related to marketing sponsorships. In 2004, we expensed
approximately $826,000 in advertising activities associated with marketing
sponsorships. We expensed these activities upon occurrence of the activity in
accordance with SOP 93-7, “Reporting on Advertising Costs”.
Product
Development Expense
The
Company's product innovation and development expenditures which consist
principally of salaries, contract services, and certain other expenses related
to development and modifications of software products, including amounts
capitalized, decreased 62.1% from $3,384,000 in 2003 to $1,282,000 in 2004, and
decreased as a percentage of total revenues from 28.4% in 2003 to 17.3% in 2004.
Software development costs capitalized decreased from $2,035,000 in 2003 to
$94,000 in 2004. The decreases are primarily related to a decrease in payroll
costs and expenses associated with outside contractors.
A net
realizable analysis of capitalized software development costs was performed as
of December 31, 2004 in accordance with SFAS 86 “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.” Based on the
results of the analysis, we determined that the carrying amount of the
unamortized capitalized software costs does not exceed their net realizable
value; therefore, no impairment loss was recorded.
General
and Administrative Expense
General
and administrative expenses decreased 14.8% from $2,348,000 in 2003 to
$2,001,000 in 2004 primarily due to decreases in payroll and employee benefit
costs, partially offset by an increase in rent expense related to an expense for
abandoned office space of $153,000 and by a reserve of $240,000 for surplus
third party products.
Goodwill
Impairment
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of Management’s judgment regarding the existence of impairment of an
intangible asset and the resulting fair value, would include management’s
estimates of future net cash flows and assessment of adverse changes in legal
factors, market conditions, or loss of key personnel. If the fair value of the
intangible asset is determined to be less than the carrying value, the Company
would record an impairment loss. SFAS
No. 142 prescribes a two-phase approach for impairment testing of goodwill. The
first phase screens for impairment; while the second phase (if necessary)
measures the impairment. Goodwill was evaluated at year-end for impairment
during the fourth quarter of 2004 in accordance with SFAS No. 142. The fair
value was estimated using the expected net present value of future cash flows.
It was determined there was no instance of impairment of recorded Goodwill.
Therefore, the second phase of the testing was not required. During the first
quarter of 2005, based on lower-than-expected operating results, the Company
re-evaluated the assumptions utilized at year-end and revised the anticipated
future earnings projections. As a result of the review, it was determined that
there was an impairment of goodwill, and the second phase was required. The
second phase resulted in the Company recording a non-cash impairment charge of
$750,000 to write-off a portion of the carrying value of goodwill.
Net
Interest Income
Interest
income of $43,000 in 2004 came primarily from interest on cash deposits and from
interest payments resulting from a favorable resolution of a customer collection
issue. Interest expense of $26,000 in 2004 was related to the Company’s line of
credit with RBC Centura, which originated in July 2003 and was paid off December
30, 2004. The above factors resulted in a net decrease in net interest income of
32.0% from $25,000 in 2003 to $17,000 in 2004.
Income
Tax Expense
Income
tax expense was $1,000 in 2003 related to withholding tax on an international
cash receipt compared to no income tax expense in 2004. As of December 31, 2004
the Company had a net operating loss carryforward in the United States of
approximately $22,500,000, which expires in years 2009 through 2019, and
approximately $4,700,000 in foreign net operating loss carryforwards. United
Kingdom tax law does not provide for expiration of net operating losses,
consequently the foreign tax operating losses carryforward indefinitely. A
valuation allowance has been created for all deferred tax assets as of 2004 and
2003, respectively.
2003
Compared to 2002
Revenue
Total
revenues, which includes software license fees, services, and maintenance,
decreased 17.4% from $14,404,000 in 2002 to $11,904,000 in 2003 primarily due to
a decrease in services revenues partially offset by increases in software
revenues and maintenance revenues. License fees, hourly rates for services and
maintenance fees were not increased in 2003. The increases in software revenues
and maintenance revenues are attributable to increases in the volume of software
licenses sold and maintenance performed. None of the increases in software
revenues and maintenance revenues was attributed to increases in price.
Software
revenues increased 30.2% from $2,934,000 in 2002 to $3,820,000 in 2003 as a
result of increased sales of the Firstwave CRM products, including Firstwave
Sports, our new Sports and Entertainment solution, and Firstwave Technology, the
software offering available as a result of the Connect-Care acquisition. Our
software revenues are significantly dependent upon the timing of closing of
license agreements, and current quarterly results may not be indicative of
future performance.
Total
revenues from international sources decreased from 87.7% of total revenues in
2002 to 68.0% in 2003 due to decreased services revenue from our UK subsidiary
and increased total revenues from US operations. Revenues from international
software licenses increased 1.8% from $2,404,000 in 2002 to $2,447,000 in 2003,
and increased as a percentage of total revenues from 16.7% in 2002 to 20.6% in
2003 due to increased software sales by our UK subsidiary and total lower
revenues for the Company in 2003. Revenues from Firstwave UK contributed all
international revenues. No revenue was derived from international distributors
during 2003, as compared to $78,000 in 2002. The decrease in revenue derived
from international distributors is related to the decreased use of our
Takecontrol product by international customers which, due to the age and life
cycle of the product, was expected. Revenues and associated costs from
international distributors were immaterial to the Company’s overall financial
statements as they represented none of the gross margin in 2003 and only 0.2% of
the gross margin in 2002. Although we have begun renewing our relationships with
distributors in Europe and Australia and look forward to activity from these
distributors, there has been limited activity thus far. During 2004, we expect
revenue derived from US sources to continue to increase and we expect a decrease
in UK total revenues relative to 2003 levels due to the successful completion of
the multi-year services project with Electronic Data Systems, Ltd.
Services
revenues decreased 44.6% from $9,785,000 in 2002 to $5,423,000 in 2003. The
decrease in services revenues is primarily due to decreases in two large
services engagements. These two engagements represented 94% of our total
services revenues for 2002. While one of these projects continued into 2003, the
scale of services decreased compared to 2002 representing 78% of total services
revenues for 2003. The Company has successfully completed a multi-year services
project, and the Company’s services revenues will significantly decrease if not
replaced with other customer projects or if we do not successfully diversify the
sources of our revenues pursuant to our business strategies. Our services
revenues are subject to fluctuations based on variations of the length and
number of active service engagements in a given quarter.
The
strategies for transitioning our revenue stream away from dependence on a few
large customers include acquisition of companies with customer bases bringing in
recurring maintenance revenues and a potential for upgrade licenses and services
revenues. The Connect-Care acquisition of March 3, 2003 was the first such
acquisition to help diversify our revenue stream. We are also focusing on
vertical markets to increase the prospects in our pipeline with targeted
companies for our solutions. Our vertical markets include high tech companies
and sports associations. During the fourth quarter of 2003, the first full
quarter after its release, Champions World LLC and sportscoach UK were two
organizations that licensed Firstwave Sports. Another strategy we are pursuing
to diversify our revenues is the recruitment of strategic alliances and
resellers for leads and channel distribution of our software.
Maintenance
revenues increased 57.7% from $1,654,000 in 2002 to $2,608,000 in 2003. The
increase is due to the addition of maintenance revenue from the Connect-Care
acquisition and additional maintenance revenues associated with additional
software revenues from the CRM product line. Maintenance revenues are the result
of renewal agreements from previous software license agreements as well as new
license agreements. During 2004, we expect maintenance revenues to increase
slightly as we increase license revenues with our CRM products.
The
results of operations of Firstwave Technologies UK Ltd are exposed to foreign
currency exchange rate fluctuations as the financial results of the subsidiary
are translated from the local currency into U.S. Dollars upon consolidation. As
exchange rates vary, net sales and other operating results, when translated, may
differ materially from expectations. During 2003, the average foreign currency
exchange rate increased 8% compared to exchange rates during 2002. This rate
increase accounted for approximately $598,000 in total revenue during 2003. The
average foreign currency exchange rate during 2002 increased 3% compared to
exchange rates during 2001. This rate increase accounted for an increase of
revenue of approximately $215,000 during 2002. The average foreign currency
exchange rate during 2001 decreased 5% compared to exchange rates during 2000.
This rate decrease accounted for a decrease of revenue of approximately $158,000
in 2001.
Cost
of Revenue
Costs of
software revenues increased 3.5% from $1,197,000 in 2002 to $1,239,000 in 2003
and as a percentage of software revenue decreased from 40.8% in 2002 to 32.4% in
2003. The decrease of costs of software as a percentage of software revenue is
primarily the result of the relatively consistent amounts of capitalized
software amortization costs of $1,110,000 during 2003 and $1,172,000 in 2002,
with increased software revenues for 2003, resulting in an increase in the
software revenue margin. Costs of software revenues include costs of third-party
software, amortization of capitalized software, and costs of packaging, media
and documentation. Amortization of capitalized software represented 89.6% of
total cost of software revenues during 2003, compared to 97.9% in 2002. For
2004, we anticipate amortization expense to remain the significant majority of
cost of software.
Costs of
revenues for services decreased 3.6% from $3,252,000 in 2002 to $3,135,000 in
2003. The decrease is a result of decreases in outside consultants and bundled
travel associated with the decrease in services revenue. Costs of revenues for
services as a percentage of services revenues increased from 33.2% in 2002 to
57.8% in 2003 primarily due to certain fixed personnel costs, which at lower
revenue levels result in a decrease in the services revenue margin.
Costs of
revenues for maintenance increased 18.3% from $515,000 in 2002 to $609,000 in
2003. The increase is primarily due to increased payroll costs related to
additional personnel from the Connect-Care acquisition. This increase in costs
is consistent with increased maintenance revenue. Costs of revenues for
maintenance as a percentage of maintenance revenues decreased from 31.1% in 2002
to 23.4% in 2003.
Sales
and Marketing Expense
Sales
and marketing expenses increased 14.0% from $3,481,000 in 2002 to $3,970,000 in
2003, and increased as a percentage of total revenues from 24.2% in 2002 to
33.4% in 2003. The increase in expense is attributed to increases in payroll
costs and telemarketing services. During 2004, we anticipate continued increases
in sales and marketing expenses as we continue to implement marketing programs
focused on creating awareness, generating qualified leads, and development of
new marketing channels. If the resulting projected revenues do not increase as
quickly as expected, or at the rate we expect, we may experience an adverse
impact on our business and operating results.
Product
Development Expense
The
Company's product innovation and development expenditures which consist
principally of salaries, contract services, and certain other expenses related
to development and modifications of software products, including amounts
capitalized, increased 57.4% from $2,150,000 in 2002 to $3,384,000 in 2003, and
increased as a percentage of total revenues from 14.9% in 2002 to 28.4% in 2003.
Software development costs capitalized increased from $1,451,000 in 2002 to
$2,035,000 in 2003. The increase is primarily related to increased payroll costs
related to an increase in development personnel and fees associated with outside
contractors related to the development of our latest version of the CRM product
including the new sports and entertainment offering, Firstwave Sports.
In 2003,
Firstwave continued its development efforts on both its tools and its CRM
products. In the fall of 2002, Firstwave contracted with Extreme Logic for
services to assist our development efforts. This relationship continued through
June of 2003. Central to this effort is the Firstwave IDE. The Firstwave IDE is
an application code generation tool that can be used to generate Microsoft .Net
applications using a non-programming paradigm. As part of the effort related to
the CRM product line, the latest generation, Firstwave CRM 10 was released in
June of 2003. Firstwave Sports was launched in October
of 2003. This product provides CRM functionality to the sports and entertainment
marketplace.
General
and Administrative Expense
General
and administrative expenses increased 4.0% from $2,257,000 in 2002 to $2,348,000
in 2003 primarily due to amortization of intangible assets related to the
Connect-Care acquisition and increases in employee benefits, insurance, and
professional fees, offset by a favorable change in the foreign currency
translation rate during the year.
Net
Interest Income
Net
interest income decreased 52.8% from $53,000 in 2002 to $25,000 in 2003. While
the Company had no interest expense in 2002, the interest expense for 2003 is
related to the Company’s $1,000,000 line of credit with RBC Centura. The Company
had borrowings of $500,000 against the line of credit at December 31, 2003, and
interest related to the line of credit in 2003 totaled approximately $6,600.
Income
Tax Expense
Income
tax expense was $1,000 in 2003 related to withholding tax on an international
cash receipt compared to no income tax expense in 2002. In 2002, income tax
expense generated from net income was completely offset by the utilization of
net operating loss carryforwards as opposed to the current year’s net loss. As
of December 31, 2003 the Company had a US net operating loss carryforward of
approximately $22,000,000, which expires in years 2009 through 2018, and
approximately $2,900,000 in foreign net operating loss carryforwards. A
valuation allowance has been created for all deferred tax assets as of 2003 and
2002, respectively.
Balance
Sheet
Net
accounts receivable decreased 50.8% from $1,230,000 at December 31, 2003 to
$605,000 at December 31, 2004 consistent with lower total revenues during fourth
quarter 2004 compared to fourth quarter 2003. The allowance for doubtful
accounts decreased 37.8% from $98,000 at December 31, 2003 to $61,000 at
December 31, 2004 consistent with the decrease in accounts receivable. Other
assets decreased 43.0% from $991,000 at December 31, 2003 to $565,000 at
December 31, 2004 primarily due to expensing of prepaid marketing expenses
during 2004 and due to a decrease in third party software products related to
establishing a reserve for surplus products. Property and equipment decreased
46.0% from $489,000 at December 31, 2003 to $264,000 at December 31, 2004 due to
fixed asset purchases offset by year-to-date depreciation and disposals.
Capitalized software decreased 63.1% from $2,966,000 at December 31, 2003 to
$1,095,000 at December 31, 2004 due to additional capitalization of $94,000 in
development costs net of $1,965,000 in amortization including $711,000 related
to a decision to discontinue development of two product lines and to discontinue
one product line which we will no longer sell. Intangible assets decreased 22.3%
from $1,029,000 at December 31, 2003 to $800,000 at December 31, 2004, due to
$229,000 in amortization expense. Goodwill decreased by $740,000 from $2,398,000
at December 31, 2003 to $1,658,000 at December 31, 2004 due to a charge for
impairment of $750,000, offset by $10,000 due to an increase in the foreign
currency rate used to translate Goodwill associated with the U.K. subsidiary
upon consolidation.
Accounts
payable increased 2.3% from $568,000 at December 31, 2003 to $581,000 at
December 31, 2004 due to the timing of payment of certain payables. Sales tax
payable decreased 41.0% from $373,000 at December 31, 2003 to $220,000 at
December 31, 2004 primarily due to a decrease in accrued VAT payable in the UK
consistent with decreased revenue in the fourth quarter of 2004 compared to the
fourth quarter of 2003. Deferred revenue decreased 5.5% from $1,429,000 at
December 31, 2003 to $1,351,000 at December 31, 2004 primarily due to a decrease
in deferred professional services at year end. Accrued employee compensation and
benefits decreased 57.6% from $368,000 at December 31, 2003 to $156,000 at
December 31, 2004 due to decreased accruals related to incentives and
commissions consistent with decreased software revenues for fourth quarter 2004
compared to fourth quarter 2003. Short term incentive plans were forfeited in
2004 pending improvement in the Company’s financial condition. Borrowings at
December 31, 2003 were $500,000 against the line of credit with RBC Centura. The
Company repaid the line of credit in December 2004 resulting in no borrowings as
of December 31, 2004. Other accrued liabilities decreased 56.0% from $159,000 at
December 31, 2003 to $70,000 at December 31, 2004 primarily due to the timing
and amount of payments related to payroll withholdings.
Liquidity
and Capital Resources
As of
December 31, 2004, the Company had cash and cash equivalents of $1,286,000, a
decrease of 52.4% from the cash balance of $2,704,000 at December 31, 2003. The
decreased cash balance is primarily due to lower total revenues while the
Company continued to invest in its technology and sales and marketing efforts
and repaid $500,000 against our line of credit.
During
2004, 11.8% of our total revenue was attributed to our relationship with
Electronic Data Systems Ltd, a leading global services company. During 2003,
this same relationship accounted for 55.2% of total revenues. During 2004, the
Company was not able to fully replace the software and services revenues
previously generated from our relationship with EDS with revenues from other
customer accounts, which resulted in a decrease in total revenues when compared
to 2003 and 2002.
On July
29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura. The
renewal was made on the same terms and conditions set forth in the original Loan
Agreement dated July 29, 2003 with the following modifications: the principal
amount was decreased from a maximum of $1,000,000 to a maximum of $500,000, no
margin formula or certified borrowing base was required for any borrowings under
the Line of Credit, and the maturity date was extended to July 27, 2005. The
Company paid off the line of credit on December 30, 2004 and subsequently
cancelled the line of credit.
The
Revolving Line of Credit accrued interest at a variable rate equal to the one
month London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC
Centura Prime Rate” plus 0.50%, at our option. The weighted average interest
rate for 2004 was 5.03%.
During
June 2004, the Company issued 7,000 shares of Series D Convertible Preferred
Stock in a private placement. The Company received $700,000 in gross proceeds
and incurred approximately $22,000 in expenses related to this offering. The net
proceeds of the Series D Convertible Preferred Stock are being used for working
capital and general corporate purposes.
Our
future capital requirements will depend on many factors, including our ability
to obtain positive cash flows, market acceptance of our products, and the timing
and extent of spending to support product development efforts and expansion of
sales and marketing. Our future capital needs will be highly dependent upon our
ability to control expenses and generate additional software license revenues,
and any projections of future cash needs and cash flows are subject to
substantial uncertainty. If we are unable to fund expenses from operations or
obtain the necessary additional capital, we may be required to reduce the scope
of planned product development and sales and marketing efforts, as well as
reduce the size of current staff, all of which could have a material adverse
effect on our business, financial condition, and ability to reduce losses or
generate profits.
We
capitalized $94,000 in software development costs during 2004, as compared to
$2,035,000 during 2003. These amounts relate to continued development and
enhancements to our Firstwave CRM solutions including the development of our
Sports and Entertainment solution, Firstwave Sports.
We have
no material commitments for capital expenditures. We do not believe that
inflation has historically had a material effect on our Company's results of
operations.
Taxes
As of
December 31, 2004, we had general business tax credit carryforwards of
approximately $245,000, which will expire in 2008 through 2011. We also have
U.S. net operating loss carryforwards for federal and state income tax reporting
purposes of approximately $22,500,000 which expire in years 2009 through 2019,
and approximately $4,700,000 in foreign net operating loss carryforwards. United
Kingdom tax law does not provide for expiration of net operating losses,
consequently the foreign tax operating losses carryforward indefinitely. The
Internal Revenue Code contains provisions that limit the use in any future
period of net operating loss and tax credit carryforwards upon the occurrence of
specific events. A valuation allowance has been created for all deferred tax
assets.
Off
Balance Sheet Arrangements
The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities known as “Variable Interest Entities”
(VIEs). In the ordinary course of business the Company leases certain real
properties and equipment as disclosed in Note 11 in the Notes to Financial
Statements.
Contractual
Obligations
At
December 31, 2004, our outstanding contractual obligations included (in
thousands):
| |
|
|
|
Greater than
|
|
|
|
|
|
Less
than |
|
one year to
|
|
|
|
|
|
|
one
year |
|
three
years |
|
Total |
|
| |
|
|
|
|
|
|
|
|
Lease
commitments |
|
$ |
359 |
|
$ |
3 |
|
$ |
362 |
|
Critical
Accounting Policies
The
Company believes that the following accounting policies are critical to
understanding the consolidated financial statements.
Revenue
recognition
The
Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,
“Software Revenue Recognition”, as amended by SOP 98-9, and related
interpretations.
Revenue
from software product licenses (other than ticketing and fan memberships
described below) is recognized upon shipment of the product when the Company has
a signed contract, the fees are fixed and determinable, no significant
obligations remain and collection of the resulting receivable is probable. The
Company accrues for estimated warranty costs at the time it recognizes revenue.
The
Company’s products are licensed on a per-user model, except for hosting
services. In accordance with Paragraph 8 of SOP 97-2, license revenues under the
per-user model are recognized under the Company’s revenue recognition polices
when revenue recognition criteria are met. Hosting services are priced as a
monthly or yearly fixed amount based upon number of users, and are recognized
ratably by month over the period of service. Hosting services revenues are
consolidated into services revenues on the Company’s financial
statements.
The
Company has agreements with customers, particularly relating to sporting events,
whereby it will recognize revenue at a future date based on a per-ticket or
per-fan membership basis. The amount the Company will receive per ticket or
membership is variable, but is pre-determined in the terms of the agreements.
Although tickets may be sold in advance of an event, the Company will recognize
these revenues after the event occurs. Ticketing revenue is consolidated into
software revenues on the Company’s financial statements.
Services
revenue is recognized as services are performed. Our software product is able to
function independently in a customer’s environment without additional services.
Our training, implementation, and customization services are optional services
to our customers and are not necessary for the functioning of the software
product. Our software is offered as a stand-alone product. It can be implemented
with minimal services. The essential functionality of the software, such as
database support and maintenance, preparation of marketing campaigns, and
standard workflow, is functional and can be utilized by the customer upon
installation as intended by the customer. At a customer’s request, the software
can also be implemented with additional services, such as data conversion and
workflow modifications, which are not significant to the functionality of the
software, but rather tailor features to most effectively function in the
customer’s environment.
The
revenue for the customization or implementation services is recognized as the
services are provided and earned. Revenue is allocated to software and services
based on vendor specific objective evidence of fair values. Because the software
is a stand-alone product that can be used for the customer’s purpose upon
installation, and because any services performed have insignificant effect on
the functionality of the software, services revenues are accounted for
separately in accordance with Paragraph 69 of SOP 97-2.
The
Company has not recorded any unbilled receivables related to implementation and
customization service revenues, and the Company has accounted for any
implementation and customization service revenues that have been billed as the
services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.
The
Company has arrangements with customers that provide for the delivery of
multiple elements, including software licenses and services. The Company
allocates and recognizes revenue related to each of the multiple elements based
on vendor specific objective evidence of the fair value of each element and when
there are no undelivered elements essential to the functionality of the
delivered element. Vendor specific objective evidence is based on standard
pricing for each of the elements in our multiple element arrangements. Revenue
associated with the various elements of multiple element arrangements is based
on such vendor specific objective evidence as the price charged for each element
is the same as when the element would be sold separately from any other element.
Standard pricing does not vary by customer or by duration, or by requirements of
the arrangement.
International
revenues are primarily generated by Firstwave UK and 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 remit 50% to 60% of standard license fees and maintenance revenues
they produce. Pursuant to EITF 99-19, the Company recognizes these distributor
sales at the gross license amount because the Company retains title to the
products, holds the risk and rewards of ownership, such as risk of loss for
collection, and responsibility for providing the product to the customer. The
Company is responsible for establishing and maintaining the pricing of the
product and performs any source code changes to the product. The independent
distributors are considered agents of the Company and work on a commission
basis. The commissions paid are reflected as a selling expense in the Company’s
financial statements. The maintenance fees generated by distributor revenues are
reflected as maintenance revenues, with the amount retained by distributors
shown as a cost of maintenance revenue. There were $3,000 of international
distributor revenues in 2004 and no such revenues in 2003.
Revenues
from non-monetary exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly evident. During 2004,
the Company entered into agreements with four Firstwave Sports customers that
involved an exchange of software licenses, services, and/or maintenance for
marketing sponsorships. In two of the agreements, the payments involved both
cash and non-cash exchanges for marketing sponsorships. The revenue recorded in
2004 related to the non-cash portion of these transactions was $499,600 in
software license revenue, $117,600 in services revenue and $67,000 in
maintenance revenue. An additional $7,000 in services revenue and $43,000 in
maintenance revenue is expected to be recognized in 2005 as services and
maintenance are performed. The marketing sponsorship packages, which were
expensed in 2004, include “Official CRM Supplier” designations, rights to use
customer logos in marketing materials, and links to client websites. Tickets and
hospitality packages for specific future sporting events in the amount of $5,250
remain as prepaid items and will be shown as marketing expense when the future
sporting event occurs.
During
the fourth quarter of 2003, the Company entered into an agreement with a
Firstwave Sports customer to exchange a total of $200,000 in software licenses,
services, and maintenance in exchange for marketing sponsorships at future
sporting events. The revenue recorded in the fourth quarter of 2003 on this
transaction was $125,400 in software revenues and $74,600 in deferred revenue.
The deferred revenue was recognized in 2004 as services revenues when the
services were performed and as maintenance revenues ratably over the term of the
maintenance agreement.
The
designation of “Official CRM Supplier” and other sponsorship benefits supports
the Company’s marketing strategy and brand awareness efforts. Firstwave has an
official designation with the Rugby Football Union, the Arena Football League,
the Atlanta Sports Council, the Chick-fil-A Peach Bowl and iSe Hospitality.
Within the Sports Industry, sponsorships are a common tool for a company to
promote its goods and/or services with a popular organization or event.
These
types of designations provide two primary benefits. First, the Company receives
recognition in the general marketing and advertising that the organization or
event executes, thereby helping to promote and identify our brand in the market.
As a sponsor, we receive advertising and logo placement within event programs,
on-site signage such as field boards, and additional forms of awareness
opportunities.
In
addition, we are able to capitalize upon our relationship with these
organizations through the use of the organization’s marks and logos in our
marketing materials. We believe this helps establish our credibility when we
attend conferences, generates publicity when announcing the sponsorship and
helps open doors for sales contacts. Organizations in the sports industry keep a
close watch on each other’s sponsors, partners and vendors.
Maintenance
revenue is recognized on a pro-rata
basis over the term of the maintenance agreements.
Advanced
billings for services and maintenance contracts are recorded as deferred revenue
on the Company's balance sheet, with revenue recognized as the services are
performed and on a pro-rata basis over the term of the maintenance agreements.
The
Company provides an allowance for doubtful accounts based on management’s
estimate of receivables that will be uncollectible. The estimate is based on
historical charge-off activity and current account status.
The
Company’s accounting management in the U.S. oversees reporting procedures in the
U.K. and monitors their transactions on a timely basis. The U.S. management
reviews transactions and sales contracts as such transactions and sales are
occurring to ensure that revenues are recognized under the Company’s revenue
recognition policy and that expenses and other transactions are reported in
accordance with generally accepted accounting principles. Management of the U.K.
subsidiary reports directly to U.S. management, with U.S. management
substantially involved in all aspects of U.K. operations. As such, U.S.
management has established procedures to insure that international revenues are
recognized properly and on a timely basis.
Software
development costs
Capitalized
software development costs consist principally of salaries, contract services,
and certain other expenses related to development and modifications of software
products capitalized in accordance with the provisions of SFAS 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 SFAS 86 and ends when the resulting product is
available for sale. The Company evaluates the establishment of technological
feasibility based on the existence of a working model of the software product.
Capitalized costs may include costs related to product enhancements resulting in
new features and increased functionality as well as writing the code in a new
programming language. Since version enhancements are built on an already
detailed design under an existing source code, technological feasibility is
established early for each version. All costs incurred to establish the
technological feasibility of software products are classified as research and
development and are expensed as incurred.
The
Company evaluates the realizability of unamortized capitalized software costs at
each balance sheet date. Software development costs which are capitalized are
subsequently reported at the lower of unamortized cost or net realizable value.
If the unamortized capitalized software cost exceeds the net realizable value of
the asset, the amount would be written off accordingly. The net realizable value
of the capitalized software development costs is the estimated future gross
revenues of the software product reduced by the estimated future costs of
completing and disposing of that product. 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. The amortization of software development costs is
presented as a cost of software revenue in the Company’s financial
statements.
During
the fourth quarter of 2004, a decision to no longer market one product and
discontinue development of two other products, resulted in a write-off of
$711,000 of previously capitalized software development costs which is reflected
in cost of software revenue in the Company’s consolidated financial statements.
Goodwill
and other intangibles
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of Management’s judgment regarding the existence of impairment of an
intangible asset and the resulting fair value, would include management’s
estimates of future net cash flows and assessment of adverse changes in legal
factors, market conditions, or loss of key personnel. If the fair value of the
intangible asset is determined to be less than the carrying value, the Company
would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
for impairment testing of goodwill. The first phase screens for impairment;
while the second phase (if necessary) measures the impairment. Goodwill was
evaluated at year-end for impairment during the fourth quarter of 2004 in
accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. It was determined there was no instance
of impairment of recorded Goodwill. Therefore, the second phase of the testing
was not required. During the first quarter of 2005, based on lower-than-expected
operating results, the Company re-evaluated the assumptions utilized at year-end
and revised the anticipated future earnings projections. As a result of the
review, it was determined that there was an impairment of goodwill, and the
second phase was required. The second phase resulted in the Company recording a
non-cash impairment charge of $750,000 to write-off a portion of the carrying
value of goodwill.
Recent
Accounting Pronouncements
FASB
Statement No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123, was
issued in December 2002 and provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements of this statement are effective for fiscal years ending
after December 15, 2002 and are included in the consolidated financial
statements.
FASB
Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, was
issued in May 2003 and establishes standards for how to classify and measure
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of the
provisions of this statement did not have a material impact on the consolidated
financial statements of the Company.
FASB
Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107,
and rescission of FASB Interpretation No. 34 was
issued in November 2002 and elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The provisions
of this interpretation are required prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the provisions of this FASB
Interpretation did not have a material impact on the consolidated financial
statements of the Company.
FASB
Interpretation No. 46, Consolidation
of Variable Interest Entities an interpretation of ARB No. 51, as
amended by FASB Interpretation No. 46R, was issued in January 2003 and addresses
consolidation by business enterprises of variable interest entities. The Company
does not have variable interest entities as defined by this Interpretation and
therefore, the adoption of the provisions of this FASB Interpretation did not
have a material impact on the consolidated financial statements of the Company.
FASB
Statement No. 123(R) Share-Based
Payment, was
issued in December 2004 and requires compensation costs related to share-based
payment transactions be recognized in the financial statements. With minor
exceptions, the amounts of compensation costs will be measured based on the
grant-date fair value of the equity or liability instruments issued, over the
period that the employee provides service in exchange for the award. In addition
liability awards will be re-measured each reporting period. This pronouncement
is effective as of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently evaluating the requirements of
SFAS No. 123R and expects that adoption of SFAS No. 123R will have a material
impact on the company’s consolidated financial position and consolidated results
of operations. The Company has not yet determined the method of adoption or the
effect of adopting SFAS No. 123R, and it has not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under SFAS No. 123. See stock-based compensation in Note 3 of the Notes to
consolidated financial statements.
FASB
Statement No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, was
issued in December 2004 and provides additional guidance on the accounting for
nonmonetary exchanges of assets. The provisions of this SFAS are effective for
nonmonetary asset exchanges occurring in fiscal periods ending after June 15,
2005. The Company will adopt this SFAS effective January 1, 2006. The adoption
of this SFAS is not expected to have a significant effect on the Company’s
results of operations or financial position.
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, 2004. This information has
been prepared on the same basis as the consolidated financial statements
appearing elsewhere in this document and includes all adjustments necessary to
present fairly this information when read in conjunction with the Financial
Statements and Notes thereto. Our operating results for any one quarter are not
necessarily indicative of results for any future period.
| |
|
Quarter
ended |
|
| |
|
3/31/04 |
|
6/30/04 |
|
9/30/04 |
|
12/31/04 |
|
3/31/03 |
|
6/30/03 |
|
9/30/03 |
|
12/31/03 |
|
| |
|
(in thousands,
except per share amounts) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
$ |
1,661 |
|
$ |
2,365 |
|
$ |
1,666 |
|
$ |
1,708 |
|
$ |
4,281 |
|
$ |
2,990 |
|
$ |
2,369 |
|
$ |
2,264 |
|
|
Operating
income/(loss) |
|
|
(1,131 |
) |
|
(138 |
) |
|
(712 |
) |
|
(2,674 |
) |
|
769
|
|
|
141
|
|
|
(1,128 |
) |
|
(581 |
) |
|
Net
income/(loss) |
|
|
(1,132 |
) |
|
(142 |
) |
|
(717 |
) |
|
(2,647 |
) |
|
779
|
|
|
150
|
|
|
(1,120 |
) |
|
(584 |
) |
|
Net
income/(loss) applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to common
shareholders |
|
|
(1,187 |
) |
|
(200 |
) |
|
(788 |
) |
|
(2,718 |
) |
|
724
|
|
|
95
|
|
|
(1,175 |
) |
|
(640 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per share |
|
|
(0.44 |
) |
|
(0.07 |
) |
|
(0.29 |
) |
|
(1.01 |
) |
|
0.30
|
|
|
0.04
|
|
|
(0.44 |
) |
|
(0.24 |
) |
|
Diluted
earnings/(loss) per share |
|
|
(0.44 |
) |
|
(0.07 |
) |
|
(0.29 |
) |
|
(1.01 |
) |
|
0.24
|
|
|
0.04
|
|
|
(0.44 |
) |
|
(0.24 |
) |
Total
revenues decreased 24.6% from $2,264,000 in the fourth quarter of 2003 to
$1,708,000 in the fourth quarter of 2004 due to decreases in software and
services revenues. The primary cause of the decrease in total revenues is due to
lower revenues from our relationship with Electronic Data Systems, Ltd. (EDS)
which contributed 55.2% of total revenues during 2003, compared to 11.8% of
total revenues for 2004. Our
software revenues are significantly dependent upon the size and timing of
closing of license agreements and our services revenues are subject to
fluctuations based on length and number of active engagements in a given
quarter.
In the
fourth quarter of 2004, the Company took a write-off of $711,000 of previously
capitalized software development costs due to a decision to no longer market one
product and to discontinue development of two other products, a write-off
$153,000 for abandoned office space, and a reserve of $240,000 for surplus third
party products.
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of Management’s judgment regarding the existence of impairment of an
intangible asset and the resulting fair value, would include management’s
estimates of future net cash flows and assessment of adverse changes in legal
factors, market conditions, or loss of key personnel. If the fair value of the
intangible asset is determined to be less than the carrying value, the Company
would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
for impairment testing of goodwill. The first phase screens for impairment;
while the second phase (if necessary) measures the impairment. Goodwill was
evaluated at year-end for impairment during the fourth quarter of 2004 in
accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. It was determined there was no instance
of impairment of recorded Goodwill. Therefore, the second phase of the testing
was not required. During the first quarter of 2005, based on lower-than-expected
operating results, the Company re-evaluated the assumptions utilized at year-end
and revised the anticipated future earnings projections. As a result of the
review, it was determined that there was an impairment of goodwill, and the
second phase was required. The second phase resulted in the Company recording a
non-cash impairment charge of $750,000 to write-off a portion of the carrying
value of goodwill.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The
Company is subject to market risk exposures of varying correlations and
volatilities, including interest rate risk and foreign exchange rate risk.
Currently, the Company maintains its cash position primarily in money market
funds and other bank accounts. The Company does not currently engage in hedging
activities or otherwise use derivatives to alter the interest characteristics of
its financial assets. Although a decrease in interest rates could reduce our
interest income, management does not believe a change in interest rates will
materially affect the Company's financial position or results of operations in
2005.
The
Company had a variable interest rate on its line of credit, which accrued
interest at the London Interbank Offered Rate (LIBOR) plus 3.00%. Due to the
amount of the borrowings and the short term nature of the debt, we did not have
a significant risk due to potential fluctuations in interest rates for loans
during 2004. Changes in interest rates could make it more costly to borrow money
in the future and may impede our future acquisition and growth strategies if
management determines that the costs associated with borrowing funds are too
high to implement these strategies.
The
results of operations of Firstwave Technologies, UK Ltd, our wholly owned
subsidiary located in Surrey, England, are exposed to foreign exchange rate
fluctuations as the financial results of this subsidiary are translated from the
local currency to U.S. Dollars upon consolidation. Because of the significance
of the operations of this subsidiary to our consolidated operations, as exchange
rates vary, net sales and other operating results, when translated, may differ
materially from our prior performance and our expectations. In addition, because
of the significance of our overseas operations, we could also be significantly
affected by weak economic conditions in foreign markets that could reduce demand
for our products and further negatively impact the results of our operations in
a material and adverse manner. As a result of these market risks, the price of
our stock could decline significantly and rapidly.
The
Company manages the risk by monitoring on a regular basis the fluctuations in
foreign currency exchange rates as they relate to our UK subsidiary, and
attempts to take action if the foreign currency exchange rate would result in a
material impact to the Company’s financial statements upon translation from the
local currency, the British pound, to the US Dollar. The action taken in these
instances by the Company is to move the currency from the UK subsidiary to the
Company’s headquarters when doing so would be beneficial to the Company.
The
foreign currency that the Company transfers to the United States comes from the
operations of the UK subsidiary in the normal course of business. The UK
subsidiary has recognized 59.3% of the revenues generated by the Company in
2004, and collected the payments for those revenues. After covering the expenses
to operate the subsidiary, the Company has had excess currency in the UK. These
transactions are not economic hedges of a net investment in the UK subsidiary
and are not intercompany transactions of a long-term nature. The cash payments
from the UK subsidiary to the US parent are payments against a short term
intercompany account. The intercompany account represents items owed to the US
parent for royalty charges and intercompany charges assessed on the UK
subsidiary. These items are intercompany in nature and are eliminated in the
consolidation of the Company’s financial statements. Cash payments against the
intercompany balance are made regularly by the UK subsidiary to the US parent.
The Company tries to time the actual payments from the UK subsidiary to the US
parent to occur when the currency exchange rate of British Pounds to US Dollars
is strong, thus yielding favorable conversion results. The intercompany account
charges are denominated in UK currency, converted to US dollars, and eliminated
in the preparation of the consolidated financial statements. The exchange risk
to the Company is if the exchange rate decreases, the carrying value of the
intercompany balance decreases and results in a charge against income. The tax
consequences of this intercompany activity are that the US parent recognizes
income on the US corporate tax return for the intercompany charges assessed on
the UK subsidiary.
We do
not engage in any hedging activities. As foreign currency exchange rates vary,
the fluctuations in revenues and expenses may materially impact the financial
statements upon consolidation. A weaker US dollar would result in an increase to
revenues and expenses upon consolidation, and a stronger US dollar would result
in a decrease to revenues and expenses upon consolidation.
Item 8. Financial Statements and Supplementary
Data.
Information
included under Item 15 (a) (1) and (2)
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors
Firstwave
Technologies, Inc.
Atlanta,
Georgia
We
have audited the accompanying consolidated balance sheets of Firstwave
Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2004 and
2003, and the related consolidated statements of operations, changes in
shareholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Firstwave
Technologies, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/Cherry,
Bekaert & Holland, L.L.P.
Atlanta,
Georgia
April
12, 2005
Firstwave
Technologies, Inc. |
|
|
|
|
|
Consolidated
Balance Sheet |
|
|
|
|
|
(in
thousands, except share data) |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
1,286 |
|
$ |
2,704 |
|
|
Accounts
receivable, less allowance for doubtful |
|
|
|
|
|
|
|
|
accounts of
$61 and $98 in 2004 and 2003, respectively |
|
|
605
|
|
|
1,230
|
|
|
Prepaid
expenses and other assets |
|
|
565
|
|
|
991
|
|
|
Total current
assets |
|
|
2,456
|
|
|
4,925
|
|
| |
|
|
|
|
|
|
|
|
Property and
equipment, net |
|
|
264
|
|
|
489
|
|
|
Software
development costs, net |
|
|
1,095
|
|
|
2,966
|
|
|
Intangible
assets |
|
|
800
|
|
|
1,029
|
|
|
Goodwill |
|
|
1,658
|
|
|
2,398
|
|
|
Total
assets |
|
$ |
6,273 |
|
$ |
11,807 |
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity |
|
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
581 |
|
$ |
568 |
|
|
Sales tax
payable |
|
|
220
|
|
|
373
|
|
|
Deferred
revenue |
|
|
1,351
|
|
|
1,429
|
|
|
Accrued
employee compensation and benefits |
|
|
156
|
|
|
368
|
|
|
Borrowings |
|
|
-
|
|
|
500
|
|
|
Dividends
payable |
|
|
46
|
|
|
41
|
|
|
Other accrued
liabilities |
|
|
70
|
|
|
159
|
|
|
Total current
liabilities |
|
|
2,424
|
|
|
3,438
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Shareholders'
equity |
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 1,000,000 shares authorized; |
|
|
|
|
|
|
|
|
50,687 shares
issued; 34,020 and 27,020 outstanding |
|
|
|
|
|
|
|
|
at 2004 and
2003, respectively |
|
|
|
|
|
|
|
|
24,020 shares
@$100 per share liquidation preference |
|
|
|
|
|
|
|
|
10,000 shares
@$75 per share liquidation preference |
|
|
3,011
|
|
|
2,333
|
|
| |
|
|
|
|
|
|
|
|
Common stock,
par value $.0019 per share; 10,000,000 |
|
|
|
|
|
|
|
|
shares
authorized; 2,693,993 and 2,672,728 shares issued |
|
|
|
|
|
|
|
|
and
outstanding at 2004 and 2003, respectively |
|
|
13
|
|
|
13
|
|
| |
|
|
|
|
|
|
|
|
Additional
paid-in capital |
|
|
25,485
|
|
|
25,691
|
|
|
Accumulated
other comprehensive loss |
|
|
(754 |
) |
|
(400 |
) |
|
Accumulated
deficit |
|
|
(23,906 |
) |
|
(19,268 |
) |
|
Total
shareholders' equity |
|
|
3,849
|
|
|
8,369
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity |
|
$ |
6,273 |
|
$ |
11,807 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements. |
|
|
|
|
Firstwave
Technologies, Inc. |
|
|
|
|
|
|
|
Consolidated
Statement of Operations |
|
|
|
|
|
|
|
(in
thousands, except share data) |
|
|
|
|
|
|
|
| |
|
For
the year ended |
|
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
revenues |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
2,322 |
|
$ |
3,820 |
|
$ |
2,934 |
|
|
Services |
|
|
2,316
|
|
|
5,423
|
|
|
9,785
|
|
|
Maintenance |
|
|
2,662
|
|
|
2,608
|
|
|
1,654
|
|
|
Other |
|
|
100
|
|
|
53
|
|
|
31
|
|
| |
|
|
7,400
|
|
|
11,904
|
|
|
14,404
|
|
|
Costs and
expenses |
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues |
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
2,031
|
|
|
1,239
|
|
|
1,197
|
|
|
Services |
|
|
2,361
|
|
|
3,135
|
|
|
3,252
|
|
|
Maintenance |
|
|
490
|
|
|
609
|
|
|
515
|
|
|
Other |
|
|
90
|
|
|
53
|
|
|
31
|
|
|
Sales and
marketing |
|
|
3,144
|
|
|
3,970
|
|
|
3,481
|
|
|
Product
development |
|
|
1,188
|
|
|
1,349
|
|
|
699
|
|
|
General and
administrative |
|
|
2,417
|
|
|
2,773
|
|
|
2,584
|
|
|
Foreign
currency exchange (gain)/loss |
|
|
(416 |
) |
|
(425 |
) |
|
(327 |
) |
|
Charge for
Goodwill Impairment |
|
|
750
|
|
|
-
|
|
|
-
|
|
|
Operating
income/(loss) |
|
|
(4,655 |
) |
|
(799 |
) |
|
2,972
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net |
|
|
17
|
|
|
25
|
|
|
53
|
|
|
Income/(loss)
before income taxes |
|
|
(4,638 |
) |
|
(774 |
) |
|
3,025
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income tax
provision |
|
|
-
|
|
|
(1 |
) |
|
-
|
|
|
Net
income/(loss) |
|
|
(4,638 |
) |
|
(775 |
) |
|
3,025
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Dividends on
preferred stock |
|
|
(255 |
) |
|
(221 |
) |
|
(252 |
) |
|
Net
income/(loss) applicable to common shareholders |
|
$ |
(4,893 |
) |
$ |
(996 |
) |
$ |
2,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per share |
|
$ |
(1.82 |
) |
$ |
(.39 |
) |
$ |
1.29 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic weighted
average shares outstanding |
|
|
2,682
|
|
|
2,572
|
|
|
2,150
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings/(loss) per share |
|
$ |
(1.82 |
) |
$ |
(.39 |
) |
$ |
.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding |
|
|
2,682
|
|
|
2,572
|
|
|
3,153
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements. |
|
|
|
|
|
Firstwave
Technologies, Inc.
Consolidated
Statement of Changes in Shareholders' Equity
(in
thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
Compre- |
|
Accumulated |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
hensive |
|
other |
|
|
|
|
|
| |
|
Common
Stock |
|
Preferred
Stock |
|
paid-in |
|
income |
|
comprehensive |
|
Accumulated |
|
|
|
| |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
capital |
|
(loss) |
|
income/(loss) |
|
deficit |
|
Total |
|
|
Balance at
December 31, 2001 |
|
|
2,100,351
|
|
$ |
12 |
|
|
33,687
|
|
$ |
2,833 |
|
$ |
22,403 |
|
|
|
|
$ |
(26 |
) |
$ |
(21,265 |
) |
$ |
3,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
common stock options |
|
|
33,807
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
197
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
197
|
|
|
Employee stock
purchases |
|
|
97
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Conversion of
Series C Preferred Stock to Common |
|
|
194,458
|
|
|
-
|
|
|
(4,667 |
) |
|
(350 |
) |
|
350
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Dividends |
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(253 |
) |
|
(253 |
) |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,025
|
|
|
-
|
|
|
3,025
|
|
|
3,025
|
|
|
Foreign
currency translation adjustment |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(105 |
) |
|
(105 |
) |
|
-
|
|
|
(105 |
) |
|
Comprehensive
income |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2002 |
|
|
2,328,713
|
|
|
12
|
|
|
29,020
|
|
|
2,483
|
|
|
22,950
|
|
|
|
|
|
(131 |
) |
|
(18,493 |
) |
|
6,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
common stock options |
|
|
56,311
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
233
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
234
|
|
|
Employee stock
purchases |
|
|
65
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Issuance of
common stock for Connect Care acquisition |
|
|
200,000
|
|
|
-
|
|
|
|
|
|
|
|
|
2,535
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,535
|
|
|
Issuance of
common stock |
|
|
4,306
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
Conversion of
Series C Preferred Stock to Common |
|
|
83,333
|
|
|
-
|
|
|
(2,000 |
) |
|
(150 |
) |
|
150
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Dividends |
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(221 |
) |
|
-
|
|
|
-
|
|
|
|
|
|
(221 |
) |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(775 |
) |
|
-
|
|
|
(775 |
) |
|
(775 |
) |
|
Foreign
currency translation adjustment |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(269 |
) |
|
(269 |
) |
|
-
|
|
|
(269 |
) |
|
Comprehensive
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,044 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2003 |
|
|
2,672,728
|
|
|
13
|
|
|
27,020
|
|
|
2,333
|
|
|
25,691
|
|
|
|
|
|
(400 |
) |
|
(19,268 |
) |
|
8,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
common stock options |
|
|
2,292
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
Employee stock
purchases |
|
|
745
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
Issuance of
common stock |
|
|
18,228
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
Series D
Convertible Preferred Stock |
|
|
-
|
|
|
-
|
|
|
7,000
|
|
|
678
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
678
|
|
|
Dividends |
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(255 |
) |
|
-
|
|
|
-
|
|
|
|
|
|
(255 |
) |
|
Comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,638 |
) |
|
-
|
|
|
(4,638 |
) |
|
(4,638 |
) |
|
Foreign
currency translation adjustment |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(354 |
) |
|
(354 |
) |
|
-
|
|
|
(354 |
) |
|
Comprehensive
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$ |
(4,992 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2004 |
|
|
2,693,993
|
|
$ |
13 |
|
|
34,020
|
|
$ |
3,011 |
|
$ |
25,485 |
|
|
|
|
$ |
(754 |
) |
$ |
(23,906 |
) |
$ |
3,849 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
Firstwave
Technologies, Inc.
Consolidated
Statement of Cash Flows
(in
thousands)
| |
|
For
Year Ended |
|
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Cash flows
from operating activities |
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) |
|
$ |
(4,638 |
) |
$ |
(775 |
) |
$ |
3,025 |
|
|
Adjustments to
reconcile net income/(loss) to net cash |
|
|
|
|
|
|
|
|
|
|
|
used in
operating activities |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
1,817
|
|
|
1,660
|
|
|
1,482
|
|
|
(Gain)/loss on
disposal of fixed assets |
|
|
3
|
|
|
(8 |
) |
|
115
|
|
|
Provision for
bad debts |
|
|
(33 |
) |
|
(10 |
) |
|
22
|
|
|
Stock
compensation |
|
|
44
|
|
|
44
|
|
|
-
|
|
|
Impairment of
Goodwill |
|
|
750
|
|
|
|
|
|
|
|
|
Write-off of
capitalized software |
|
|
711
|
|
|
-
|
|
|
-
|
|
|
Changes in
assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
658
|
|
|
1,889
|
|
|
(1,095 |
) |
|
Prepaid
expenses and other assets |
|
|
426
|
|
|
(284 |
) |
|
(190 |
) |
|
Accounts
payable |
|
|
13
|
|
|
(695 |
) |
|
334
|
|
|
Sales tax
payable |
|
|
(153 |
) |
|
(344 |
) |
|
317
|
|
|
Deferred
revenue |
|
|
(78 |
) |
|
(148 |
) |
|
149
|
|
|
Accrued
employee compensation and benefits |
|
|
(212 |
) |
|
(356 |
) |
|
272
|
|
|
Other accrued
liabilities |
|
|
(89 |
) |
|
74
|
|
|
32
|
|
|
Total
adjustments |
|
|
3,857
|
|
|
1,822
|
|
|
1,438
|
|
|
Net cash
provided by operating activities |
|
|
(781 |
) |
|
1,047
|
|
|
4,463
|
|
|
Cash flows
from investing activities |
|
|
|
|
|
|
|
|
|
|
|
Software
development costs |
|
|
(94 |
) |
|
(2,035 |
) |
|
(1,451 |
) |
|
Purchases of
property and equipment,net |
|
|
(108 |
) |
|
(93 |
) |
|
(735 |
) |
|
Acquisition of
Connect Care, net of cash acquired |
|
|
-
|
|
|
(130 |
) |
|
-
|
|
|
Net cash used
in investing activities |
|
|
(202 |
) |
|
(2,258 |
) |
|
(2,186 |
) |
|
Cash flows
from financing activities |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of convertible preferred stock, net |
|
|
678
|
|
|
-
|
|
|
-
|
|
|
Issuance of
common stock |
|
|
-
|
|
|
(95 |
) |
|
-
|
|
|
Exercise of
common stock options |
|
|
4
|
|
|
234
|
|
|
197
|
|
|
Proceeds from
employee stock purchase plan |
|
|
1
|
|
|
-
|
|
|
-
|
|
|
Proceeds from
borrowings |
|
|
-
|
|
|
500
|
|
|
-
|
|
|
Repayment of
borrowings |
|
|
(500 |
) |
|
-
|
|
|
-
|
|
|
Payment of
dividends on convertible preferred stock |
|
|
(250 |
) |
|
(222 |
) |
|
(434 |
) |
|
Net cash
provided by/(used in) financing activities |
|
|
(67 |
) |
|
417
|
|
|
(237 |
) |
|
Effect of
exchange rate changes on cash |
|
|
(368 |
) |
|
(281 |
) |
|
(121 |
) |
|
Net
increase/(decrease) in cash |
|
|
(1,418 |
) |
|
(1,075 |
) |
|
1,919
|
|
|
Cash and cash
equivalents, beginning of year |
|
|
2,704
|
|
|
3,779
|
|
|
1,860
|
|
|
Cash and cash
equivalents, end of year |
|
$ |
1,286 |
|
$ |
2,704 |
|
$ |
3,779 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest |
|
$ |
26 |
|
$ |
4 |
|
$ |
- |
|
|
Cash paid for
income taxes |
|
$ |
- |
|
$ |
1 |
|
$ |
- |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
1. Description
of Business and Basis of Presentation
Description
of the Company
Headquartered
in Atlanta, Georgia, with an office in Surrey, England, Firstwave (“Firstwave”
or the “Company”) is a leading provider of Customer Relationship Management
(CRM) industry-focused solutions. Firstwave's corporate and product mission
reflects our customer-first commitment: To develop and integrate the best
software solutions to manage customer interactions and information. We strive to
provide our clients with effective CRM, robust technology and the highest
standard of customer service.
A leader
in Sports and High Technology CRM, Firstwave offers a suite of features to
specifically meet the needs of companies and organizations within those
industries. Firstwave Sports is designed to help organizations, such as National
Governing Bodies, large sporting events and teams, increase revenue by
maximizing the use of their valuable databases. Firstwave Technology helps
software and technology customers keep current customers loyal, close more sales
and capture more market share. Our CRM solutions offer sales, marketing,
customer support automation along with project and product quality management.
Firstwave CRM is adaptive and scalable and easily integrates with an
organization’s existing systems. This allows for rapid deployment and,
typically, a lower total cost of ownership.
Firstwave
supports several product lines: Firstwave CRM, Firstwave Sports, Firstwave
Technology and TakeControl.
Basis
of presentation and liquidity considerations
Fair
value of financial instruments
The
Company has identified cash, accounts receivable, accounts payable and debt as
financial instruments of the Company. Due to the nature of these financial
instruments the Company believes that the fair value of these financial
instruments approximates their carrying value.
Consolidation
The
consolidated financial statements include the accounts of Firstwave
Technologies, Inc. and its wholly owned subsidiaries, Connect-Care, Inc. and
Firstwave Technologies UK, Ltd. All intercompany transactions and balances have
been eliminated in consolidation.
Reclassifications
Certain
amounts in the 2003 and 2002 consolidated financial statements have been
reclassified to conform to the 2004 presentation.
Liquidity
Maintaining
the Company’s future capital requirements will depend on many factors, including
its ability to increase revenue levels and keep costs of operations down to
generate positive cash flows, as well as the timing and extent of spending to
support product development efforts and expansion of sales and marketing, and
market acceptance of the Company’s products. Although the Company has
historically been able to satisfy its cash requirements, there can be no
assurance that efforts to obtain additional financing, if needed, for operations
will be successful in the future. The Company’s future capital needs will be
highly dependent upon the Company’s ability to control expenses and generate
additional software license revenues, and any projections of future cash needs
and cash flows are subject to uncertainty. If the Company is unable to obtain
the necessary additional capital, it may be required to reduce the scope of
planned product development and sales and marketing efforts, as well as reduce
the size of current staff, all of which could have a material adverse effect on
its business, financial condition, and the Company’s ability to reduce losses or
generate profits.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
2. Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Examples of estimates which require management’s judgment
include revenue recognition, accounts receivable reserve, valuation of
long-lived assets and intangible assets, and goodwill. Management bases its
estimates on historical experience and on other factors which are believed to be
reasonable under the circumstances. All accounting estimates and the basis for
these estimates are discussed between the Company’s senior management and the
Audit Committee. Actual results could differ from those estimates.
3. Summary
of Significant Accounting Policies
Revenue
recognition
The
Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,
“Software Revenue Recognition,” as amended by SOP 98-9, and related
interpretations.
Revenue
from software product licenses (other than ticketing and fan memberships
described below) is recognized upon shipment of the product when the Company has
a signed contract, the fees are fixed and determinable, no significant
obligations remain and collection of the resulting receivable is probable. The
Company accrues for estimated warranty costs at the time it recognizes revenue.
The
Company’s products are licensed on a per-user model, except for hosting
services. In accordance with Paragraph 8 of SOP 97-2, license revenues under the
per-user model are recognized under the Company’s revenue recognition polices
when revenue recognition criteria are met. Hosting services are priced as a
monthly or yearly fixed amount based upon number of users, and are recognized
ratably by month over the period of service. Hosting services revenues are
consolidated into services revenues on the Company’s financial
statements.
The
Company has agreements with customers, particularly relating to sporting events,
whereby it will recognize revenue at a future date based on a per-ticket or
per-fan membership basis. The amount the Company will receive per ticket or
membership is variable, but is pre-determined in the terms of the agreements.
Although tickets may be sold in advance of the event, the Company will recognize
these revenues after the event occurs. Ticketing revenue is consolidated into
software revenues on the Company’s financial statements. The Company will
recognize a per-fan membership revenue at the time membership begins or upon
receipt of payment, whichever occurs later.
Services
revenue is recognized as services are performed. Our software product is able to
function independently in a customer’s environment without additional services.
Our training, implementation, and customization services are optional services
to our customers and are not necessary for the functioning of the software
product. Our software is offered as a stand-alone product. It can be implemented
with minimal services. The essential functionality of the software, such as
database support and maintenance, preparation of marketing campaigns, and
standard workflow, is functional and can be utilized by the customer upon
installation as intended by the customer. At a customer’s request, the software
can also be implemented with additional services, such as data conversion and
workflow modifications, which are not significant to the functionality of the
software, but rather tailor features to most effectively function in the
customer’s environment.
The
revenue for the customization or implementation services is recognized as the
services are provided and earned. Revenue is allocated to software and services
based on vendor specific objective evidence of fair values. Because the software
is a stand-alone product that can be used for the customer’s purpose upon
installation, and because any services performed have insignificant effect on
the functionality of the software, services revenue is accounted for separately
in accordance with Paragraph 69 of SOP 97-2.
The
Company has not recorded any unbilled receivables related to implementation and
customization service revenues, and the Company has accounted for any
implementation and customization service revenues that have been billed as the
services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
The
Company has arrangements with customers that provide for the delivery of
multiple elements, including software licenses, and services. The Company
allocates and recognizes revenue related to each of the multiple elements based
on vendor specific objective evidence of the fair value of each element and when
there are no undelivered elements essential to the functionality of the
delivered element. Vendor specific objective evidence is based on standard
pricing for each of the elements in our multiple element arrangements. Revenue
associated with the various elements of multiple element arrangements is based
on such vendor-specific objective evidence as the price charged for each element
is the same as when the element would be sold separately from any other element.
Standard pricing does not vary by customer or by duration, or by requirements of
the arrangement.
International
revenues are primarily generated by Firstwave UK and 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 remit 50% to 60% of standard license fees and maintenance revenues
they produce. Pursuant to EITF 99-19, the Company recognizes these distributor
sales at the gross license amount because the Company retains title to the
products, holds the risk and rewards of ownership, such as risk of loss for
collection, and responsibility for providing the product to the customer. The
Company is responsible for establishing and maintaining the pricing of the
product and performs any source code changes to the product. The independent
distributors are considered agents of the Company and work on a commission
basis. The commissions paid are reflected as a selling expense in the Company’s
financial statements. The maintenance fees generated by distributor revenues are
reflected as maintenance revenues, with the amount retained by distributors
shown as a cost of maintenance revenue. There were no international distributor
revenues in 2003, compared to $3,000 in 2004.
Revenues
from non-monetary exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly evident. During 2004,
the Company entered into agreements with four customers that involved an
exchange of software licenses, services, and/or maintenance for marketing
sponsorships. In two of the agreements, the payments involved both cash and
non-cash exchanges for marketing sponsorships. The revenue recorded in 2004
related to the non-cash portion of these transactions was $499,600 in software
license revenue, $117,600 in services revenue and $67,000 in maintenance
revenue. An additional $7,000 in services revenue and $43,000 in maintenance
revenue is expected to be recognized in 2005 as services and maintenance are
performed. The marketing sponsorship packages, which were expensed in 2004,
include “Official CRM Supplier” designations, rights to use customer logos in
marketing materials, and links to client websites. Tickets and hospitality
packages for specific future sporting events in the amount of $5,250 remain as
prepaid items and will be shown as marketing expense when the future sporting
event occurs.
During
the fourth quarter of 2003, the Company entered into an agreement with a
Firstwave Sports customer to exchange a total of $200,000 in software licenses,
services, and maintenance in exchange for marketing sponsorships at future
sporting events. The revenue recorded in the fourth quarter of 2003 on this
transaction was $125,400 in software revenues and $74,600 in deferred revenue.
The deferred revenue was recognized in 2004 as services revenues when the
services were performed and as maintenance revenues ratably over the term of the
maintenance agreement.
Maintenance
revenue is recognized on a pro rata
basis over the term of the maintenance agreements.
Advanced
billings for services and maintenance contracts are recorded as deferred revenue
on the Company's balance sheet, with revenue recognized as the services are
performed and on a pro-rata basis over the term of the maintenance agreements.
The
Company provides an allowance for doubtful accounts based on management’s
estimate of receivables that will be uncollectible. The estimate is based on
historical charge-off activity and current account status.
The
Company’s US accounting management oversees reporting procedures in the UK and
monitors the UK’s transactions on a timely basis. The US management reviews
transactions and sales contracts as such transactions and sales are occurring to
ensure that revenues are recognized under the Company’s revenue recognition
policy and that expenses and other transactions are reported in accordance with
generally accepted accounting principles. Management of the UK subsidiary report
directly to US management, with US management substantially involved in all
aspects of UK operations. As such, US management has established procedures to
insure that international revenues are recognized properly and on a timely
basis.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
Software
development costs
Capitalized
software development costs consist principally of salaries, contract services,
and certain other expenses related to development and modifications of software
products capitalized in accordance with the provisions of SFAS 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 SFAS 86 and ends when the resulting product is
available for sale. The Company evaluates the establishment of technological
feasibility based on the existence of a working model of the software product.
Capitalized costs may include costs related to product enhancements resulting in
new features and increased functionality as well as writing the code in a new
programming language. In this case, as the version enhancements are built on an
already detailed design under an existing source code, technological feasibility
is established early for each version. All costs incurred to establish the
technological feasibility of software products are classified as research and
development and are expensed as incurred.
The
Company evaluates the realizability of unamortized capitalized software costs at
each balance sheet date. Software development costs which are capitalized are
subsequently reported at the lower of unamortized cost or net realizable value.
If the unamortized capitalized software cost exceeds the net realizable value of
the asset, the amount would be written off accordingly. The net realizable value
of the capitalized software development costs is the estimated future gross
revenues of the software product reduced by the estimated future costs of
completing and disposing of that product. 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. The amortization of software development costs is
presented as a cost of software revenues in the Company’s financial
statements.
During
the fourth quarter of 2004 we conducted a review of the products comprising
capitalized software development costs on the Company’s balance sheet. After the
review, a decision was made that we would no longer use one product to generate
revenues and we would discontinue development of two other products. This
resulted in a write-off of $711,000 of software development costs capitalized in
prior years which are reflected in cost of software revenues.
Goodwill
and other intangibles
In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of Management’s judgment regarding the existence of impairment of an
intangible asset and the resulting fair value, would include management’s
estimates of future net cash flows and assessment of adverse changes in legal
factors, market conditions, or loss of key personnel. If the fair value of the
intangible asset is determined to be less than the carrying value, the Company
would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
for impairment testing of goodwill. The first phase screens for impairment;
while the second phase (if necessary) measures the impairment. Goodwill was
evaluated at year-end for impairment during the fourth quarter of 2004 in
accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. It was determined there was no instance
of impairment of recorded Goodwill. Therefore, the second phase of the testing
was not required. During the first quarter of 2005, based on lower-than-expected
operating results, the Company re-evaluated the assumptions utilized at year-end
and revised the anticipated future earnings projections. As a result of the
review, it was determined that there was an impairment of goodwill, and the
second phase was required. The second phase resulted in the Company recording a
non-cash impairment charge of $750,000 to write-off a portion of the carrying
value of goodwill.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
Concentration
of credit risk
The
Company is subject to credit risk primarily due to its trade receivables. The
Company has credit risk due to the high concentration of trade receivables
through certain customers. The customer accounts receivable which represented
more than 10% of total accounts receivable are shown below:
|
|
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
|
sports coach
UK |
|
|
0.0 |
% |
|
65.3 |
% |
|
Argos,
Ltd |
|
|
13.8 |
% |
|
0.0 |
% |
|
British Canoe
Union |
|
|
10.7 |
% |
|
N/A |
|
|
CapGemini
UK |
|
|
12.6 |
% |
|
0.0 |
% |
|
Sungard HTE,
Inc. |
|
|
15.0 |
% |
|
0.0 |
% |
Significant
Customer
The
table below identifies customers who contributed more than 10% of total revenue
for each year shown.
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Electronic
Data Systems, Ltd |
|
|
11.8 |
% |
|
55.2 |
% |
|
71.9 |
% |
|
Rugby Football
Union |
|
|
12.0 |
% |
|
0.0 |
% |
|
N/A |
|
Stock-based
compensation
Effective
for 2002, the Company adopted SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure”, which did not have a material impact
on the consolidated financial statements. 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
SFAS No. 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.
The Company has adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The
following table illustrates the effect on net income/(loss) and net
income/(loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee awards (in thousands, except
for per share data).
| |
|
Year
Ended |
|
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
income/(loss) applicable to common |
|
|
|
|
|
|
|
|
|
|
|
shareholders
as reported |
|
$ |
(4,893 |
) |
$ |
(996 |
) |
$ |
2,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Stock based
employee compensation, net of related |
|
|
|
|
|
|
|
|
|
|
|
tax effects
under the fair value based method |
|
|
943
|
|
|
556
|
|
|
629
|
|
|
Net
income/(loss) as adjusted |
|
$ |
(5,836 |
) |
$ |
(1,552 |
) |
$ |
2,144 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic - as
reported |
|
$ |
(1.82 |
) |
$ |
(.39 |
) |
$ |
1.29 |
|
|
Basic - as
adjusted |
|
$ |
(2.18 |
) |
$ |
(.60 |
) |
$ |
1.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted - as
reported |
|
$ |
(1.82 |
) |
$ |
(.39 |
) |
$ |
.96 |
|
|
Diluted - as
adjusted |
|
$ |
(2.18 |
) |
$ |
(.60 |
) |
$ |
.76 |
|
Firstwave
Technologies, Inc.
Notes to
Financial Statements
The fair
value of each option grant and the employees' purchase rights are estimated on
the dates of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used in 2004, 2003 and 2002,
respectively: dividend yield of 0% for all years; expected volatility of 127%,
143% and 149%, and risk-free interest rate ranging from 2.96% to 3.82% and
expected life of 4.5 years for grants in all years and 90 days for stock
purchase rights for all quarters.
There is
no tax benefit included in the stock-based employee compensation expense
determined under the fair-value-based method for the twelve month periods ended
December 31, 2004 and December 31, 2003, as the Company established a full
valuation allowance for its net deferred tax assets.
Basic
and diluted net income/(loss) per common share
Basic
net income/(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 earnings per
share calculation in 2003 and 2004 had they not been antidilutive. Net
income/(loss) applicable to common shareholders includes a charge for dividends
related to the Company’s outstanding preferred stock.
The
total number of common shares included in the Company’s computation of diluted
income per share was 1,003,088 in 2002, and the number of common shares that
would have been included in the Company's computation of diluted loss per share
if they had been dilutive was 830,779 in 2004 and 791,419 in 2003. Weighted
average options to purchase shares of common stock outstanding but not included
in the computation of diluted EPS were 426,975 in 2004, 126,227 in 2003, and
67,427 in 2002. These options were not included in the computation of diluted
EPS because the options’ exercise price was greater than the average market
price of the common shares.
Shown
below is a reconciliation of the numerators and denominators of the basic and
diluted per share computations for income from continuing operations (in
thousands, except per share data):
| |
|
For
Year Ended December 31, 2004 |
|
| |
|
Income
|
|
Shares
|
|
|
|
Per
Share |
|
|
|
|
(Numerator) |
|
(Denominator) |
|
|
|
Amount |
|
|
Net
loss |
|
$ |
(4,638 |
) |
|
|
|
|
|
|
|
|
|
|
Less:
Preferred Stock Dividends |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders |
|
|
(4,893 |
) |
|
2,682
|
|
|
|
|
$ |
(1.82 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock |
|
|
-
|
|
|
792
|
|
|
|
|
|
|
|
|
Stock
Options |
|
|
|
|
|
20
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
831
|
|
|
(1 |
) |
|
|
|
|
Diluted
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders |
|
$ |
(4,893 |
) |
|
2,682
|
|
|
|
|
$ |
(1.82 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Not
included in Diluted EPS because they were anti-dilutive |
|
|
|
|
|
|
|
|
|
|
| |
|
For
Year Ended December 31, 2003 |
|
| |
|
Income
|
|
Shares
|
|
|
|
Per
Share |
|
|
|
|
(Numerator) |
|
(Denominator) |
|
|
|
Amount |
|
|
Net
loss |
|
$ |
(775 |
) |
|
|
|
|
|
|
|
|
|
|
Less:
Preferred Stock Dividends |
|
|
(221 |
) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders |
|
|
(996 |
) |
|
2,572
|
|
|
|
|
$ |
(0.39 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock |
|
|
-
|
|
|
665
|
|
|
|
|
|
|
|
|
Stock
Options |
|
|
|
|
|
107
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
791
|
|
|
(1 |
) |
|
|
|
|
Diluted
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
applicable to common shareholders |
|
$ |
(996 |
) |
|
2,572
|
|
|
|
|
$ |
(0.39 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Not
included in Diluted EPS because they were anti-dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
Year Ended December 31, 2002 |
|
| |
|
Income
|
|
Shares
|
|
Per
Share |
|
|
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
|
Net
income |
|
$ |
3,025 |
|
|
|
|
|
|
|
|
Less:
Preferred Stock Dividends |
|
|
(253 |
) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS |
|
|
|
|
|
|
|
|
|
|
|
Income
applicable to common shareholders |
|
|
2,772
|
|
|
2,150
|
|
$ |
1.29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
19
|
|
|
|
|
|
Convertible
Preferred Stock |
|
|
253
|
|
|
865
|
|
|
|
|
|
Stock
Options |
|
|
|
|
|
119
|
|
|
|
|
| |
|
|
|
|
|
1,003
|
|
|
|
|
|
Diluted
EPS |
|
|
|
|
|
|
|
|
|
|
|
Income
applicable to common shareholders |
|
$ |
3,025 |
|
|
3,153
|
|
$ |
0.96 |
|
Foreign
currency translation
The
financial statements of the Company's U.K. subsidiary are translated into U.S.
dollars at current exchange rates, except for revenues and expenses, which are
translated at average exchange rates during each reporting period. Net exchange
gains or losses resulting from the translation of assets and liabilities are
included as a component of accumulated other comprehensive loss in shareholders'
equity.
The
Company maintains a short term intercompany account representing items owed to
the U.S. parent for royalty charges and intercompany charges assessed on the
U.K. subsidiary. These items are intercompany in nature and are eliminated in
the consolidation of the financial statements. Cash payments against the
intercompany balance are made regularly by the U.K. subsidiary to the U.S.
parent. The intercompany account charges are denominated in U.K. currency,
converted to U.S. dollars, and eliminated in the preparation of the consolidated
financial statements. The exchange risk to the Company is if the exchange rate
decreases, the carrying value of the intercompany balance decreases and results
in a charge against income. The tax consequence of this intercompany activity is
that the U.S. parent recognizes income in its U.S. corporate income tax returns
for the intercompany charges assessed on the U.K. subsidiary.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
During
the period from January 1 through March 22, 2005, the U.S. dollar strengthened
against the U.K. pound, with the result that the Company has incurred
approximately $59,000 of exchange rate decreases during such
period.
Advertising
Expense
The
Company expenses advertising costs when the advertising takes place. Advertising
costs were $842,000, $54,000 and $78,000 in 2004, 2003 and 2002, respectively.
Impairment
of long-lived assets
The
Company evaluates impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss would be recognized.
Measurement of an impairment loss for long-lived assets would be based on the
fair value of the asset.
Cash
and cash equivalents
Cash and
cash equivalents include all highly liquid investment instruments with an
original maturity of three months or less.
Property
and equipment
Property
and equipment consist of furniture, computers, other office equipment, and
purchased software, 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.
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. A valuation allowance
is provided if, based upon the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be
realized.
Comprehensive
income/(loss)
Comprehensive
income/(loss) consists of net income/(loss) and other gains and losses affecting
shareholders’ equity that, under generally accepted accounting principles are
excluded from net income/(loss). For the Company, such items include primarily
the cumulative translation adjustment converting the financial position and
statement of operations of our UK subsidiary to US dollars.
4. Acquisition
On March
3, 2003, Firstwave acquired Connect-Care, Inc. a provider of CRM software
solutions for software companies. Connect-Care was acquired pursuant to a Merger
Agreement dated March 3, 2003 (the “Merger Agreement”) by and among Firstwave,
CC Subsidiary, Inc., a wholly-owned subsidiary of Firstwave (“Merger Sub”),
Connect-Care, and certain shareholders of Connect-Care. Pursuant to the Merger
Agreement, Merger Sub merged with and into Connect-Care, and Connect-Care, which
was the surviving corporation in the Merger, became a wholly-owned subsidiary of
Firstwave. The results of Connect-Care’s operations have been included in the
Company’s financial statements since March 3, 2003.
In
exchange for all outstanding shares of Connect-Care stock, Firstwave issued
200,000 shares of Firstwave common stock to the shareholders of Connect-Care and
granted such shareholders certain registration rights. Additional contingent
consideration of $300,000 in cash would have been payable if certain revenue
goals, as set forth in Section 3.1 of the Merger Agreement, were attained.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
The
Company accounted for the $300,000 as contingent consideration in accordance
with paragraphs 25 through 28 of SFAS 141. Because the amount, if any, of
contingent consideration was not determinable at the acquisition date, no amount
for the contingency was recorded in the Company’s financial statements until the
contingency was resolved, or the consideration was issued or became
issuable.
The
$300,000 earn-out provision of the merger agreement with Connect-Care was
contingent upon the attainment of certain total revenues, including license
revenues and associated maintenance revenues that would be recognized according
to SOP 97-2, during 2003 from March through December. Such earn-out was
contingent consideration based upon future financial performance. Such revenue
attainment would be offset by any net accounts receivable shown as of February
28, 2003 that was not collected by December 31, 2003. Such amount was to be paid
on or prior to the earlier of (i) the date Firstwave files its Annual
Report on Form 10-K with respect to the fiscal year ending December 31,
2003 or (ii) March 31, 2004. As of December 31, 2003 the revenue goals were
not met, and therefore, no additional consideration was paid.
An
analysis of each material asset acquired and each material liability assumed
from the acquisition of Connect-Care was completed to ensure accuracy of fair
value. All line items represented fair value based on each item’s short-term
nature. The Company evaluated each asset and liability and the timing in which
assets would be received and liabilities would be settled and determined that
these amounts represented their fair values.
The
following table summarizes the estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition (in thousands):
|
Current
Assets |
|
$ |
772 |
|
|
Property and
Equipment |
|
|
29
|
|
|
Intangible
Assets |
|
|
1,200
|
|
|
Goodwill |
|
|
2,210
|
|
|
Total assets
acquired |
|
|
4,211
|
|
| |
|
|
|
|
|
Current
liabilities |
|
|
(1,425 |
) |
| |
|
|
|
|
|
Net assets
acquired |
|
$ |
2,786 |
|
The
following table summarizes the comprehensive purchase price, including net
liabilities assumed and costs to date related to the acquisition (in
thousands):
|
Purchase
Price |
|
$ |
2,630 |
|
|
(200,000
shares at $13.15 |
) |
|
Net
liabilities assumed |
|
|
624
|
|
|
|
|
|
Cost of
acquisition to date |
|
|
156
|
|
|
|
|
|
Comprehensive
purchase price |
|
$ |
3,410 |
|
|
|
|
The
primary objective of the Connect-Care acquisition was to acquire the customer
relationships of the customer base of Connect-Care and, to a lesser degree, to
acquire utilization of Connect-Care technology. The Connect-Care technology
asset consists of the source code for the Connect-Care product. We believe we
will continue to derive revenue from licensing this product to new and existing
customers. The customer relationship asset represents the existing customer base
of Connect-Care which we believe will continue to contribute revenue from the
purchase of additional licenses of the Connect-Care product, purchase of
additional service engagements, and renewals of annual maintenance agreements.
We also expect that some of the existing active customers or former customers
may transition to the Firstwave CRM product. Of the $3,410,000 purchase price,
$300,000 was assigned as an estimated fair value to the intangible asset
Connect-Care technology with an estimated useful life of three years, $900,000
was assigned as an estimated fair value to the intangible asset Connect-Care
customer relationships with an estimated useful life of seven years, and
$2,210,000 was assigned to goodwill. The value assigned to customer
relationships was based on potential future revenues that may be derived from
such customer relationships. We believe this goodwill reflects such matters as
(but not limited to) personnel obtained in the acquisition, new customer
opportunities that we will have as a result of our involvement with the acquired
customers, relationships we will develop through the acquisition, and expertise
and name recognition we will receive through this acquisition. Goodwill will be
evaluated periodically for impairment in accordance with SFAS No. 142 “Goodwill
and Other Intangible Assets.”
Firstwave
Technologies, Inc.
Notes to
Financial Statements
The
weighted average amortization period for these intangible assets is six years.
There are no significant residual values in the intangible assets. The Company
began amortization of the intangible assets effective April 1, 2003, recording
$229,000 and $171,000 in total amortization expense in 2004 and 2003,
respectively. Goodwill was evaluated for impairment during the fourth quarter of
2004 in accordance with SFAS No. 142 “Goodwill and Other Intangible
Assets”. The fair value was estimated using the expected net present value of
future cash flows. It was determined there was no instance of impairment of
recorded goodwill. During the first quarter of 2005, based on
lower-than-expected operating results, the Company re-evaluated the assumptions
utilized at year-end and revised anticipated future earnings projections. As a
result of the review, it was determined that there was an impairment of
goodwill, and the second phase was required. The second phase resulted in the
Company recording a non-cash impairment charge of $750,000 to write-off a
portion of the carrying value of goodwill.
The
following table presents details of acquired intangible assets (in
thousands):
| |
|
December 31,
2004 |
|
| |
|
Gross
carrying |
|
Accumulated |
|
| |
|
amount |
|
amortization |
|
|
Amortizable
intangible assets |
|
|
|
|
|
|
|
|
Connect-Care
Technology |
|
$ |
300 |
|
$ |
175 |
|
|
Connect-Care
Customer Relationships |
|
|
900
|
|
|
225
|
|
|
Total |
|
$ |
1,200 |
|
$ |
400 |
|
| |
|
|
|
|
|
|
|
|
Aggregrate
Amortization Expense |
|
|
|
|
|
|
|
|
For the nine
months ended December 31, 2003 |
|
$ |
171 |
|
|
|
|
|
For the twelve
months ended December 31, 2004 |
|
|
229
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Estimated
Amortization Expense |
|
|
|
|
|
|
|
|
For year ended
December 31, 2005 |
|
$ |
229 |
|
|
|
|
|
For year ended
December 31, 2006 |
|
|
154
|
|
|
|
|
|
For year ended
December 31, 2007 |
|
|
129
|
|
|
|
|
|
For year ended
December 31, 2008 |
|
|
129
|
|
|
|
|
|
For year ended
December 31, 2009 |
|
$ |
129 |
|
|
|
|
Firstwave
Technologies, Inc.
Notes to
Financial Statements
5. Property
and Equipment
Property
and equipment are summarized as follows (in thousands):
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Computer
hardware and other equipment |
|
$ |
1,789 |
|
$ |
1,825 |
|
|
Furniture and
fixtures |
|
|
780
|
|
|
773
|
|
|
Purchased
software |
|
|
1,796
|
|
|
1,740
|
|
| |
|
|
4,365
|
|
|
4,338
|
|
|
Less:
Accumulated depreciation and amortization |
|
|
(4,101 |
) |
|
(3,849 |
) |
| |
|
$ |
264 |
|
$ |
489 |
|
Depreciation
and amortization of property and equipment totaled $334,000, $379,000, and
$310,000, in 2004, 2003 and 2002, respectively.
6. Product
Development Expenses
Product
development expenses are summarized as follows (in
thousands):
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Total
development expenses |
|
$ |
1,282 |
|
$ |
3,384 |
|
$ |
2,150 |
|
|
Less:
Additions to capitalized software |
|
|
|
|
|
|
|
|
|
|
|
development
before amortization |
|
|
94
|
|
|
2,035
|
|
|
1,451
|
|
|
Product
development expenses |
|
$ |
1,188 |
|
$ |
1,349 |
|
$ |
699 |
|
The
activity in the capitalized software development account is summarized as
follows (in thousands):
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
|
Balance at
beginning of year, net |
|
$ |
2,966 |
|
$ |
2,041 |
|
$ |
1,762 |
|
|
Additions |
|
|
94
|
|
|
2,035
|
|
|
1,451
|
|
|
Amortization
expense |
|
|
(1,254 |
) |
|
(1,110 |
) |
|
(1,172 |
) |
|
Write-off of
discontinued products prior to release |
|
|
(136 |
) |
|
-
|
|
|
-
|
|
|
Write-off of
discontinued product |
|
|
(575 |
) |
|
-
|
|
|
-
|
|
|
Balance at end
of year, net |
|
$ |
1,095 |
|
$ |
2,966 |
|
$ |
2,041 |
|
During
the fourth quarter of 2004, a decision to no longer market one product and
discontinue development of two other products resulted in a write-off of
$711,000 of previously capitalized software development costs which is reflected
in cost of software revenue in the Company’s consolidated financial statements.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
7. Borrowings
On July
29, 2003, the Company signed a “Revolving Credit Facility” loan with RBC Centura
whereby the Company could borrow up to $1,000,000. The Company had borrowings of
$500,000 against the line of credit as of December 31, 2003. The Revolving
Facility accrued interest at a variable rate equal to the one month London
Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime
Rate” plus 0.50%, at Borrower’s option. The loan was secured by the assets of
the Company. The Company had to comply with certain financial covenants per the
terms of the agreement.
On July
29, 2004, the Company renewed its Revolving Credit Facility with RBC Centura.
The renewal was made on the same terms and conditions set forth in the original
Loan Agreement dated July 29, 2003 with the following modifications: the
principal amount was decreased from a maximum of $1,000,000 to a maximum of
$500,000, no margin formula or certified borrowing base was required for any
borrowings under the Line of Credit, and the maturity date was extended to July
27, 2005.
The
weighted average interest rates for 2004 and for the period from July 29 through
December 31, 2003 were 5.03% and 4.43%, respectively.
The
Company repaid its $500,000 of borrowings under the line of credit in full on
December 30, 2004 and, on March 1, 2005, cancelled the Revolving Credit
Facility.
8. Shareholders’
Equity
Preferred
Stock
During
June 2004, the Company issued 7,000 shares of Series D Convertible Preferred
Stock in a private placement. The Company received $700,000 in gross proceeds
and incurred approximately $22,000 in expenses related to this offering. The
Preferred Stock has voting rights and accumulates dividends at an annual rate of
9%, payable monthly in cash or shares of common stock, and is convertible at the
holder’s option into Common Stock of the Company at any time after June 15,
2005, at a conversion rate of $3.00 per share of Common Stock. The Series D
Convertible Preferred Stock has a liquidation preference of $100 per share plus
all accrued and unpaid dividends but ranks junior to the Company’s Series A
Convertible Preferred, Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock with respect to payment upon liquidation and
dividends. At December 31, 2004, there were 7,000 shares of Series D Preferred
Stock outstanding and $5,250 of dividends payable related to this offering. Net
loss applicable to common shareholders included a year to date charge of
approximately $34,000 in dividends related to the Series D Convertible Preferred
Stock for the year ending December 31, 2004.
In
September 2001, 16,667 shares of the Company’s Series C Convertible Preferred
Stock were issued. The Series C Preferred Stock has voting rights and
accumulates dividends at a rate of 9% payable in cash monthly and are
convertible into Common Stock of the Company at anytime at a conversion rate of
$1.80 per share of Common Stock. The Preferred Stock has a liquidation
preference of $75 per share plus all accrued and unpaid dividends. The Company
incurred $119,000 in legal fees and cost related to the special proxy mailing
associated with this offering. These costs were netted from the proceeds
received for the stock. In 2003, 2,000 shares of this offering were converted to
83,333 shares of Common Stock and in 2002, 4,667 shares of this offering were
converted to 194,458 shares of Common Stock pursuant to the original terms of
the Preferred Stock. At December 31, 2004, there were 10,000 shares of Series C
Preferred Stock outstanding and $5,625 of dividends payable related to this
offering. Net income/(loss) applicable to common shareholders included a year to
date charge of approximately $68,000, $68,000 and $99,000 in dividends related
to the Series C Convertible Preferred Stock for years ending December 31, 2004,
2003, and 2002, respectively.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
In
November 2000, the Company issued 7,020 shares of Series B Convertible Preferred
Stock in a private placement. The Company received $702,000 in November 2000
related to this offering. The Series B Convertible Preferred Stock has voting
rights and accumulates dividends at a rate of 9% payable in cash monthly,
effective January 2002, and is convertible into Common Stock of the Company, at
a conversion rate of $8.10 per share of Common Stock. The Preferred Stock has a
liquidation preference of $100 per share plus all accrued and unpaid dividends
but ranks junior to the Company’s Series A Convertible Preferred Stock and
Series C Convertible Preferred Stock with respect to payment upon liquidation
and dividends. At December 31, 2004, there were 7,020 shares of Series B
Preferred Stock outstanding and $5,265 in dividends payable related to this
offering. Net income/(loss) applicable to common shareholders included a year to
date charge of approximately $63,000 per year in dividends related to the Series
B Convertible Preferred Stock for years ending December 31, 2004, 2003, and
2002.
During
the second quarter of 1999, the Company issued 20,000 shares of Series A
Convertible Preferred Stock in a private placement. The Company received
$2,000,000 related to this offering. The Series A Convertible Preferred Stock
has voting rights and accumulates dividends at a rate of 9% payable in cash
monthly, effective January 2002, and is convertible into Common Stock of the
Company, at a conversion rate of $6.18 per share of Common Stock. The Preferred
Stock has a liquidation preference of $100 per share plus all accrued and unpaid
dividends but ranks junior to the Company’s Series C Convertible Preferred Stock
with respect to payment upon liquidation and dividends. During 2000, 10,000
shares of this offering were converted to 161,812 shares of Common Stock
pursuant to the original terms of the Preferred Stock. At December 31, 2004,
there were 10,000 shares of Series A Convertible Preferred Stock outstanding and
$7,500 dividends payable related to this offering. Net income/(loss) applicable
to common shareholders included a year to date charge of $90,000 per year in
dividends related to the Series A Convertible Preferred Stock for years ending
December 31, 2004, 2003, and 2002.
9. Income
Taxes
The
components of the provision/(benefit) for income taxes are as follows (in
thousands):
| |
|
Year
ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
$ |
- |
|
$ |
1 |
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
United
States |
|
|
(1,233 |
) |
|
338
|
|
|
1,179
|
|
|
Foreign |
|
|
(703 |
) |
|
(630 |
) |
|
-
|
|
|
Change in
valuation allowance |
|
|
1,936
|
|
|
292
|
|
|
(1,179 |
) |
|
|
|
$ |
- |
|
$ |
1 |
|
$ |
- |
|
The
difference between the provision for income taxes at the approximate statutory
income tax rate of 34% and the Company's effective tax rate is as
follows:
Firstwave
Technologies, Inc.
Notes to
Financial Statements
At
December 31, 2004 and 2003, deferred tax (assets) liabilities are comprised of
the following
| |
|
Year
ended |
|
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
|
Gross deferred
tax liabilities |
|
|
|
|
|
|
|
|
Capitalization
of software development costs |
|
$ |
374 |
|
$ |
1,009 |
|
|
Depreciation |
|
|
150
|
|
|
151
|
|
|
Other |
|
|
-
|
|
|
-
|
|
| |
|
|
524
|
|
|
1,160
|
|
|
Gross deferred
tax assets |
|
|
|
|
|
|
|
|
Net operating
loss carryforwards |
|
|
(10,918 |
) |
|
(9,600 |
) |
|
Tax credit
carryforwards |
|
|
(83 |
) |
|
(83 |
) |
|
Allowance for
doubtful accounts receivable |
|
|
(16 |
) |
|
(34 |
) |
| |
|
|
(11,017 |
) |
|
(9,717 |
) |
|
Valuation
allowance |
|
|
10,493
|
|
|
8,557
|
|
| |
|
|
(524 |
) |
|
(1,160 |
) |
|
Net deferred
tax assets |
|
$ |
- |
|
$ |
- |
|
The
Company has general business tax credit carryforwards of approximately $245,000
which will expire in years 2008 through 2011. At December 31, 2004 the Company
has U.S. net operating loss carryforwards of approximately $23,300,000 which
expire in years 2009 through 2019, and approximately $4,700,000 in foreign net
operating loss carryforwards, United Kingdom tax law does not provide for
expiration of net operating losses, consequently the foreign tax operating
losses carryforward indefinitely.
SFAS No.
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.
10. Stock
Option Plans
In
February 1993, the Board of Directors adopted a Stock Option Plan (the "Option
Plan"). The Company has reserved 816,667 shares of common stock for issuance
under the Option Plan. Pursuant to the terms of the Option Plan, the
Compensation Committee of the Board of Directors is authorized to grant options
to employees and directors of the Company who are eligible to receive options
under the Option Plan. The Compensation 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 or change of control, as specified by the original individual grant
agreements. Options expire ten years after the date of grant.
At
December 31, 2004, 68,366 options were available for grant and 579,612 options
were outstanding related to the Option Plan.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
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, 2001 |
|
|
335,745
|
|
|
.95
- 35.81 |
|
|
7.15
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
195,785
|
|
|
2.20 -
14.60 |
|
|
6.58
|
|
|
5.89
|
|
|
Exercised |
|
|
(33,807 |
) |
|
1.38 -
9.75 |
|
|
5.79
|
|
|
|
|
|
Canceled or
expired |
|
|
(141,125 |
) |
|
1.32 -
35.81 |
|
|
9.78
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2002 |
|
|
356,598
|
|
|
.95
- 16.50 |
|
|
5.93
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
219,734
|
|
|
5.50 -
16.50 |
|
|
9.87
|
|
|
8.61
|
|
|
Exercised |
|
|
(56,311 |
) |
|
.95
- 11.25 |
|
|
4.15
|
|
|
|
|
|
Canceled or
expired |
|
|
(135,192 |
) |
|
.95
- 16.50 |
|
|
6.63
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2003 |
|
|
384,829
|
|
|
1.32 -
16.50 |
|
|
8.21
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
312,000
|
|
|
2.24 -
5.59 |
|
|
3.81
|
|
|
3.23
|
|
|
Exercised |
|
|
(2,292 |
) |
|
1.38 -
4.05 |
|
|
2.11
|
|
|
|
|
|
Canceled or
expired |
|
|
(114,925 |
) |
|
1.38 -
15.92 |
|
|
7.39
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2004 |
|
|
579,612
|
|
|
1.32 -
16.50 |
|
|
6.02
|
|
|
|
|
| |
|
|
|
Weighted |
|
| |
|
|
|
Avg
Exercise |
|
|
Options
exercisable |
|
|
Shares |
|
|
Price |
|
| |
|
|
|
|
$ |
|
|
|
at December
31, 2004 |
|
|
310,822
|
|
|
5.19
|
|
|
at December
31, 2003 |
|
|
118,860
|
|
|
7.52
|
|
|
at December
31, 2002 |
|
|
109,298
|
|
|
6.87
|
|
On March
19, 2002 the Company completed a Stock Exchange Program that offered each of its
directors and employees who held options under the Option Plan with an exercise
price of greater than $10.00 the opportunity to surrender those options for
cancellation in exchange for new options to be granted no sooner than six months
and one day after cancellation. The options exchanged under this program totaled
81,684, and the Company granted 81,684 new options on September 20, 2002, which
are included in the 195,785 options granted in 2002 as shown above. There were
two instances of options granted to participants in the six-month period prior
to cancellation of options. As required by the Stock Exchange Program, such
options were forfeited in order to participate in the program. The new options
were consistent with the Company’s stock compensation practices, the length of
time from cancellation and granting was at least six months and one day, and the
exercise price equaled the fair value of the stock at the date of grant.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
The
following table summarizes information about stock options outstanding at
December 31, 2004:
| |
|
Options
Outstanding |
|
Options
Exercisable |
|
| |
|
Number |
|
Weighted |
|
|
|
Number |
|
|
|
| |
|
Outstanding |
|
Average |
|
Weighted |
|
Outstanding |
|
Weighted |
|
| |
|
at |
|
Remaining |
|
Average |
|
at |
|
Average |
|
| |
|
December
31, |
|
Contractual |
|
Exercise |
|
December
31, |
|
Exercise |
|
| |
|
2004 |
|
Life
(years) |
|
Price |
|
2004 |
|
Price |
|
|
$ 1.32 - $
2.84 |
|
|
201,027 |
|
|
9.05
|
|
$ |
2.53 |
|
|
176,577 |
|
$ |
2.60 |
|
|
$ 2.95 - $
7.31 |
|
|
193,848 |
|
|
8.35
|
|
|
5.63
|
|
|
55,862 |
|
|
6.09
|
|
|
$ 7.69 -
$16.50 |
|
|
184,737 |
|
|
7.27
|
|
|
10.24
|
|
|
78,383 |
|
|
10.39
|
|
|
$ 1.32 -
$16.50 |
|
|
579,612 |
|
|
8.25
|
|
|
6.02
|
|
|
310,822 |
|
|
5.19
|
|
11. Commitments
and Contingencies
The
Company leases office space and equipment under noncancelable lease agreements
expiring on various dates through 2007. At December 31, 2004, future minimum
rentals for noncancelable leases are as follows (in thousands):
| |
|
Minimum |
|
|
Year
ending |
|
Annual |
|
|
December
31, |
|
|
Rentals |
|
| |
|
|
|
|
2005 |
|
$ |
359 |
|
|
2006 |
|
|
2
|
|
|
2007 |
|
|
1
|
|
| |
|
$ |
362 |
|
Net rent
expense under these and other agreements was approximately $814,000, $780,000,
and $972,000, for the years ended December 31, 2004, 2003 and 2002,
respectively.
At
December 31, 2004, the Company evaluated its future lease commitments in its
Atlanta, Georgia office and determined that it was currently using approximately
7,000 square feet of the 16,995 square feet leased through October 31, 2005. The
remaining 9,995 square feet are not used by the Company and will provide no
economic benefit for the remaining term of the lease. In accordance with SFAS
No. 146, the Company has accrued $153,000 representing the remaining rent
expense relating to these 9,995 square feet ($218,000) net of estimated
potential sublease rental income ($65,000).
The
Company may be 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 effect the
financial position of the Company.
12. Employee
Benefit Plans
401(k)
Plan
Effective
August 1, 1990 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 100% of their annual compensation to the 401(k) Plan, subject
to Internal Revenue Service annual contribution limits. For each payroll period,
the Company matches 30% of the lesser of (1) the participants' contribution or
(2) 7.5% of the participants' compensation. In addition, the Company may make
discretionary annual contributions. For the years ended December 31, 2004,
2003,and 2002, the Company made matching contributions of approximately $46,500,
$55,000, and $39,500, respectively, to the 401(k) Plan and no discretionary
contributions were made.
Firstwave
Technologies, Inc.
Notes to
Financial Statements
Employee
Stock Purchase Plan
The
Company has reserved 40,000 shares of common stock for issuance under its
Employee Stock Purchase Plan ("ESPP"), which was effective January 31, 1995. The
ESPP was designed to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code. The ESPP 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. 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 2004 and 2003, 745 and 65 shares, respectively, were issued under the
ESPP. At December 31, 2004, 23,049 shares had been issued cumulatively under the
plan and there were options to purchase 518 shares outstanding.
13. Segment
Information
Accounting
Standard No. 131 - "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) 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 SFAS No. 131 are presented
below. The Company exports its products through agreements with international
distributors to whom it grants territorial rights.
A
summary of international revenues, including the Company's U.K. subsidiary, by
geographic area is as follows (in thousands):
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
United
States |
|
$ |
3,012 |
|
$ |
3,814 |
|
$ |
1,767 |
|
|
Europe
|
|
|
4,385
|
|
|
8,090
|
|
|
12,572
|
|
|
South
America |
|
|
-
|
|
|
-
|
|
|
23
|
|
|
Australia and
New Zealand |
|
|
3
|
|
|
-
|
|
|
42
|
|
| |
|
$ |
7,400 |
|
$ |
11,904 |
|
$ |
14,404 |
|
Long-lived
assets of the Company are located primarily in the United States and in the
office of the Company’s wholly owned subsidiary, Firstwave Technologies UK Ltd.
Fixed assets of approximately $43,000, or 16.3% of the consolidated fixed asset
balance, are located in the United Kingdom.
14. Related
Party Transactions
The
President and Chief Operating Officer of the Company participated in the Series
D Convertible Preferred Stock offering during June 2004 purchasing 300 shares of
Series D Convertible Preferred Stock for a total investment of $30,000. He is
paid monthly dividends of $225, with approximately $1,200 paid during 2004 and
$225 has been accrued but not paid at December 31, 2004.
The
Chairman and Chief Executive Officer of the Company is paid $16,875 monthly for
dividends related to his $2,250,000 investment in Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred
Stock. He was paid $202,500 annually in dividends during 2004 and 2003 and
$363,000 during 2002, and $16,875 was accrued but not paid at December 31, 2004
and 2003.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
Item
9A. Controls and Procedures
Evaluation
of disclosure controls and procedures
Based on
their most recent evaluation, which was completed in consultation with
management within 90 days of the filing of this Form 10-K, the
Company’s Chairman and Chief Executive Officer and Chief Financial Officer
believe the design and operation of the Company’s disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective
as of the date of such evaluation in timely alerting the Company’s management to
material information required to be included in this Form 10-K and other
Exchange Act filings.
Changes
in internal controls
There
were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in the Company’s internal
controls or other factors that could significantly affect these controls
subsequent to the date of the evaluation described above.
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 captions
“Corporate Governance and Board Matters,” “Proposal 1 - Election of Directors,”
“Executive Officers,” and “Section 16(A) Beneficial Ownership Reporting
Compliance” of the Company’s Proxy Statement for the Annual Meeting of
Shareholders.
Code
of Ethics
The
Company has adopted a Code of Business Conduct and Ethics that applies to all of
our directors, officers, and employees. The Code of Business Conduct and Ethics
is posted on the Company’s web site at www.firstwave.net under
the caption “Codes and Charters” under “Investor Relations.”
The
information required by this item is incorporated by reference to information
under the captions “Corporate
Governance and Board Matters,” “Proposal 1 - Election of Directors,” “Executive
Compensation” (excluding the section entitled “Certain Relationships and Related
Transactions”), and “Stock Performance Graph” in the Company’s Proxy
Statement for the Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
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.
Item 13. Certain Relationships and Related
Transactions.
The
information required by this item is incorporated by reference to information
under the caption "Executive Compensation -
Certain
Relationship and Related Transactions"
in the Company's Proxy Statement for the Annual Meeting of
Shareholders.
Item 14. Principal Accounting Fees and
Services
The
information required by this item is incorporated by reference to information
under the caption "Independent Accountants” in the Company's Proxy Statement for
the Annual Meeting of Shareholders.
PART
IV
Item 15. Exhibits and Financial Statement
Schedules.
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(a) |
The
following documents are filed as part of this report: |
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1. |
Financial
Statements |
· Report
of Independent Registered Public Accounting Firm
· Consolidated
Balance Sheet at December 31, 2004 and December 31, 2003
· Consolidated
Statement of Operations for the three years ended December 31, 2004
· Consolidated
Statement of Changes in Shareholders' Equity for the three years ended
December 31, 2004
· Consolidated
Statement of Cash Flows for the three years ended December 31,
2004
· Notes to
Financial Statements
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3.1 |
Amended
and Restated Articles of Incorporation of the Company. (1) |
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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)). |
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3.3 |
Articles
of Amendment dated April 26, 1999 setting forth the designation of the
Series A Redeemable Preferred Stock. |
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3.4 |
Articles
of Amendment dated November 15, 2000 setting forth the designation of the
Series B Redeemable Preferred Stock. |
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3.5 |
Articles
of Amendment dated September 7, 2001 setting forth certain revisions to
Series A and Series B Convertible Preferred Stock. (4) |
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3.6 |
Articles
of Amendment dated September 12, 2001 setting forth the one-for-three
reverse stock split. (4) |
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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. |
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4.9 |
Second
Amendment to the Firstwave Technologies, Inc. 1993 Stock Option Plan
(12) |
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4.10 |
Third
Amendment to the Firstwave Technologies, Inc. 1993 Stock Option Plan
(12) |
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4.11 |
Fourth
Amendment to the Firstwave Technologies, Inc. 1993 Stock Option Plan
(12) |
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4.14 |
Second
Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase Plan
(12) |
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4.15 |
Third
Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase Plan
(12) |
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4.16 |
Fourth
Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase Plan
(12) |
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10.1 |
Form
of Series D Convertible Preferred Stock Purchase Agreement (16) |
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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) |
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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) |
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10.5 |
Tax
Indemnification Agreement dated February 4, 1993 among the Company
and certain of its shareholders.(2) |
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10.6 |
Form
of Selective Distribution Agreement for International
Distributors.
(1) |
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10.7 |
Form
of Software License Agreement.
(1) N/A |
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10.9 |
Computer
Software License Marketing Agreement dated December 21, 1987 between
the Company and Co-Cam Computer Services, Pty. Ltd.
(1) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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) |
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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.(8) |
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10.23
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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.
(8) |
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10.24 |
Certificate
of Designation of Series C Convertible Preferred Stock. (4) |
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10.25 |
Registration
Rights Agreement dated July 18, 2001 between the Company and Mercury Fund
No.1 LTD and Mercury Fund II, LTD. (4) |
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10.26 |
Eleventh
Amendment to Lease Agreement dated as of October 28, 2002 between
the
Company and National Office Partners Limited Partnership relating to the
Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
GA.
(9) |
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10.27
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Software
License Agreement dated July 25, 2001, by and between Firstwave
Technologies UK Limited and Electronic Data Systems Ltd.
(10) |
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10.28 |
Software
Development and License Agreement dated December 23, 2002, by and between
The Football Association Limited and Firstwave Technologies UK
Ltd.
(10)(11) |
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10.29 |
Software
License Agreement dated September 2, 2002, between The Football
Association and Firstwave Technologies UK Limited.
(10) |
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10.30 |
Letter
Amendment dated February 10, 2004 amending the Software Development and
License Agreement dated December 23, 2002, by and between the Football
Association Limited and Firstwave Technologies UK Ltd.(14) |
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10.30 |
Secured
Loan Agreement in the amount of up to $1,000,000 dated July 29, 2003 by
the Company in favor of RBC Centura (13) |
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10.31 |
Commercial
Promissory Note in the amount of up to $1,000,000 dated July 29, 2003 by
the Company in favor of RBC Centura (13) |
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10.33 |
Waiver
and First Amendment to Secured Loan Agreement dated July 29, 2003, by the
Company in favor of RBC Centura (14) |
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10.34 |
Second
Amendment of Loan Agreement and Revolving Line of Credit Note by and
between Firstwave Technologies, Inc. and RBC Centura Bank. (15) |
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14.1 |
Firstwave
Technologies, Inc. Code of Business Conduct and Ethics (17) |
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21.1 |
Subsidiaries
of the Company. (17) |
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23.1 |
Consent
of Independent Registered Public Accounting Firm |
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31.1 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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31.2 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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32.1 |
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
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(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 exhibits attached to the proxy statement dated August 17,
2001 for Special Meeting of Shareholders held on September 7, 2001.
(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.
(8)Incorporated
herein by reference to exhibit of the same number in the Company’s Form 10-K for
the year ended December 31, 1999.
(9)not
used
(10)Incorporated
herein by reference to exhibits attached to the Company’s Registration Statement
on Form S-3 filed with the Commission March 18, 2003.
(11)Confidential
treatment has been requested with respect to portions of this document pursuant
to Rule 406 of the Securities Act. The redacted portions of this document were
filed separately with the Securities and Exchange Commission.
(12)Incorporated
herein by reference to exhibits attached to the Company’s Registration Statement
on Form S-8 filed with the Commission February 9, 2004.
(13)Incorporated
herein by reference to exhibits attached to the Company’s Form 10-Q for the
quarter ended September 30, 2003.
(14)Incorporated
herein by reference to exhibits attached to the Company’s Form 10-Q for the
quarter ended March 31, 2004.
(15)Incorporated
herein by reference to exhibits attached to the Company’s Form 10-Q for the
quarter ended June 30, 2004.
(16)Incorporated
herein by reference to exhibits attached to the Company’s Current Report on Form
8-k filed with the Commission on June 14, 2004.
(17)Incorporated
herein by reference to exhibit of the same number in the Company’s Form 10-K for
the year ended December 31, 2003.
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.
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Firstwave Technologies,
Inc. |
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| Date: April 12,
2005 |
By: |
/s/ Richard T. Brock |
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Richard
T. Brock
Chairman
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.
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| Date: April 12,
2005 |
By: |
/s/ Richard T. Brock |
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Richard
T. Brock
Chairman
and Chief Executive Officer
(Principal Executive
Officer) |
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| Date: April 12,
2005 |
By: |
/s/ Judith A. Vitale |
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Judith
A. Vitale
Chief
Financial Officer
(Principal
Financial and Accounting Officer) |
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| Date: April 12,
2005 |
By: |
/s/ Roger A. Babb |
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| Date: April 12,
2005 |
By: |
/s/ Vincent J. Dooley |
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Vincent
J. Dooley
Director |
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| Date: April 12,
2005 |
By: |
/s/ Alan I. Rothenberg |
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Alan
I. Rothenberg
Director |
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| Date: April 12,
2005 |
By: |
/s/ John N. Spencer, Jr. |
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John
N. Spencer, Jr.
Director |
56