**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF********THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTER ENDEDJUNE 30, 2003**

 

 

**COMMISSION FILENUMBER 0-21202**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **Georgia**                                               |   | **58-1588291**      |
|-----------------------------------------------------------|--------|---------------------|
| (State of incorporation)                                  |   | (IRS Employer ID #) |
|                                                      |
| **2859 Paces  Ferry Road, Suite 1000  Atlanta, GA 30339** |
| (Address of principal  executive offices)                 |
|                                                      |
| **770-431-1200**                                          |
| (Telephone number of  registrant)                         |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

Yes o  No ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

Outstanding as of August 13, 2003:

 

Common Stock, no par value                                        2,659,424 shares

 

 

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**FIRSTWAVE TECHNOLOGIES, INC.**

 

**FORM 10-Q**

 

**For the quarter ended June 30, 2003**

 

**Index**

 
| **Part I.**  | **Financial Information**                                                                                   |
|--------------|-------------------------------------------------------------------------------------------------------------|
|         |                                                                                                        |
| Item 1.      | Financial Statements                                                                                        |
|         |                                                                                                        |
|         | Consolidated Balance Sheet -  December 31, 2002 and June 30, 2003                                           |
|         |                                                                                                        |
|         | Consolidated Statement  of Operations - For the Three and Six Months Ended June 30, 2002 and June 30,  2003 |
|         |                                                                                                        |
|         | Consolidated  Statement of Changes in Shareholders’ Equity - For the Six Months Ended June  30, 2003   |
|         |                                                                                                        |
|         | Consolidated  Statement of Cash Flows - For the Six Months Ended June 30, 2002 and June 30,  2003           |
|         |                                                                                                        |
|         | Notes to  Consolidated Financial Statements                                                                 |
|         |                                                                                                        |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
|         |                                                                                                        |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                 |
|         |                                                                                                        |
| Item 4.      | Controls and Procedures                                                                                     |
|         |                                                                                                        |
| **Part II.** | **Other Information**                                                                                       |
|         |                                                                                                        |
| Item 4.      | Submission of Matters to a Vote of Security  Holders                                                        |
|         |                                                                                                        |
| Item 6.      | Exhibits and Reports on Form 8-K                                                                            |
|              |                                                                                                             |  |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**ConsolidatedBalance Sheet**

**(in thousands)**

**(unaudited)**

 
|                                                                                         |   | **Dec 31,  2002** |       | **June 30,  2003** |       |
|----------------------------------------------------------------------------------------------|--------|-------------------|------------|--------------------|------------|
|                                                                                         |   |              | ** ** |               | ** ** |
| **ASSETS**                                                                                   |   |              |       |               |       |
|                                                                                         |   |              |       |               |       |
| **Current assets:**                                                                          |   |              |       |               |       |
| **Cash and cash equivalents**                                                                |   | $                 | 3,779      |               | $          | 3,388 |   |
| **Accounts receivable, less allowance for  doubtful accounts of $88 and $384, respectively** |   | 2,406             |       | 2,156              |       |
| **Prepaid expenses and other assets**                                                        |   | 664               |       | 870                |       |
| **Total current assets**                                                                     |   | 6,849             |       | 6,414              |       |
|                                                                                         |   |              |       |               |       |
| **Property and equipment, net**                                                              |   | 738               |       | 642                |       |
| **Software development costs, net**                                                          |   | 2,041             |       | 3,172              |       |
| **Intangible assets**                                                                        |   | 0                 |       | 1,143              |       |
| **Goodwill**                                                                                 |   | 175               |       | 2,383              |       |
|                                                                                         |   | $                 | 9,803      |               | $          | 13,754 |   |
|                                                                                         |   |              |       |               |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                |   |              |       |               |       |
|                                                                                         |   |              |       |               |       |
| **Current liabilities:**                                                                     |   |              |       |               |       |
| **Accounts payable**                                                                         |   | $                 | 909        |               | $          | 1,206 |   |
| **Deferred revenue**                                                                         |   | 812               |       | 1,479              |       |
| **Accrued employee compensation and benefits**                                               |   | 417               |       | 399                |       |
| **Dividends payable**                                                                        |   | 42                |       | 41                 |       |
| **Other accrued liabilities**                                                                |   | 802               |       | 264                |       |
| **Total current liabilities**                                                                |   | 2,982             |       | 3,389              |       |
|                                                                                         |   |              |       |               |       |
| **Shareholders’ equity**                                                                |   | 6,821             |       | 10,365             |       |
|                                                                                         |   | $                 | 9,803      |               | $          | 13,754 |   |

 

**The accompanying notes are an integral partof these financial statements.**

 

3

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**FIRSTWAVE TECHNOLOGIES, INC.**

**ConsolidatedStatement of Income**

**(in thousands, except per share amounts)**

**(unaudited)**

 
|                                              |   | **For the Three Months Ended** |   | **For the Six Months Ended** |   |
|---------------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|
|                                              |   | **June 30,  2002**             |   | **June 30,  2003**           |   | **June 30,  2002** |   | **June 30,  2003** |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Net Revenues**                                  |   |                           |   |                         |   |   |   |   |   |
| **Software**                                      |   | $                              | 651    |                         | $      | 772 |   | $ | 1,379 |   | $ | 2,379 |   |
| **Services**                                      |   | 2,540                          |   | 1,517                        |   | 5,415 |   | 3,657 |   |
| **Maintenance**                                   |   | 403                            |   | 690                          |   | 851 |   | 1,219 |   |
| **Other**                                         |   | 7                              |   | 11                           |   | 12 |   | 16 |   |
|                                              |   | 3,601                          |   | 2,990                        |   | 7,657 |   | 7,271 |   |
| **Cost and Expenses**                             |   |                           |   |                         |   |   |   |   |   |
| **Cost of revenues**                              |   |                           |   |                         |   |   |   |   |   |
| **Software**                                      |   | 324                            |   | 189                          |   | 647 |   | 479 |   |
| **Services**                                      |   | 912                            |   | 796                          |   | 1,706 |   | 1,749 |   |
| **Maintenance**                                   |   | 117                            |   | 172                          |   | 280 |   | 313 |   |
| **Other**                                         |   | 7                              |   | 11                           |   | 12 |   | 16 |   |
| **Sales and marketing**                           |   | 864                            |   | 976                          |   | 1,644 |   | 2,077 |   |
| **Product development**                           |   | 167                            |   | 267                          |   | 267 |   | 506 |   |
| **General and administrative**                    |   | 300                            |   | 438                          |   | 1,163 |   | 1,221 |   |
|                                              |   | 2,691                          |   | 2,849                        |   | 5,719 |   | 6,361 |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Operating income**                              |   | 910                            |   | 141                          |   | 1,938 |   | 910 |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Interest income**                               |   | 20                             |   | 9                            |   | 24 |   | 20 |   |
| **Income before income taxes**                    |   | 930                            |   | 150                          |   | 1,962 |   | 930 |   |
| **Income taxes**                                  |   | 0                              |   | 0                            |   | 0 |   | (1 | ) |
| **Net income**                                    |   | $                              | 930    |                         | $      | 150 |   | $ | 1,962 |   | $ | 929 |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Dividends on preferred stock**                  |   | (64                            | )      | (55                          | )      | (130 | ) | (110 | ) |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Net income applicable to common  shareholders** |   | $                              | 866    |                         | $      | 95 |   | $ | 1,832 |   | $ | 819 |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Basic:**                                        |   |                           |   |                         |   |   |   |   |   |
| **Earnings per share**                            |   | $                              | 0.41   |                         | $      | 0.04 |   | $ | 0.87 |   | $ | 0.33 |   |
| **Weighted average shares**                       |   | 2,138                          |   | 2,632                        |   | 2,110 |   | 2,505 |   |
|                                              |   |                           |   |                         |   |   |   |   |   |
| **Diluted:**                                      |   |                           |   |                         |   |   |   |   |   |
| **Earnings per share**                            |   | $                              | 0.29   |                         | $      | 0.04 |   | $ | 0.63 |   | $ | 0.28 |   |
| **Weighted average shares**                       |   | 3,172                          |   | 3,460                        |   | 3,130 |   | 3,354 |   |

 

**The accompanying notes are an integral partof these financial statements.**

 

4

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Changes in Shareholders’ Equity**

**(In thousands, except sharedata)**

**(unaudited)**

 

**For the Six Months EndedJune 30, 2003**

 
|                                                        |                |       |       |   |       | **Add’l  paid-in  capital** |       | **Compre-  hensive  income** |       | **Accumulated  Other  compre-  hensive  loss** |       | **Accumulated  Deficit** |       | **Total** |       |
|-------------------------------------------------------------|---------------------|------------|------------|--------|------------|----------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|-----------|------------|
|                                                        |                |
| **Common Stock**                                            | **Preferred Stock** |
| **Shares**                                                  |                | **Amount** | **Shares** |   | **Amount** |
|                                                        |                |       | ** ** |   | ** ** |                             | ** ** |                         | ** ** |                                           | ** ** |                     | ** ** |      | ** ** |   | ** ** |   | ** ** |
| **Balance at December 31, 2002**                            |                | 2,328,713  |       | $      | 12         |                             | 29,020     |                         | $          | 2,483                                          |       | $                        | 22,950     |      | $          | 0 |   | $ | (131 | ) | $ | (18,493 | ) | $ | 6,821 |   |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Exercise of common stock options**                        |                | 43,934     |       |   |       |                             |       |                         |       | 193                                            |       |                     |       |      |       |   |   | 193 |   |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Shares issued for Connect Care acquisition**              |                | 200,000    |       |   |       |                             |       |                         |       | 2,577                                          |       |                     |       |      |       |   |   | 2,577 |   |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Conversion of Series C Preferred Stock to common  stock** |                | 83,333     |       |   |       | (2,000                           | )          | (150                         | )          | 150                                            |       |                     |       |      |       |   |   | 0 |   |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Dividends**                                               |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       | (110 | ) | (110 | ) |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Comprehensive income:**                                   |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Net income**                                              |                |       |       |   |       |                             |       |                         |       |                                           |       | 929                      |       |      |       | 929 |   | 929 |   |
| **Foreign currency translation adjustment**                 |                |       |       |   |       |                             |       |                         |       |                                           |       | (45                      | )          | (45       | )          |   |   | (45 | ) |
| **Accumulated comprehensive income**                        |                |       |       |   |       |                             |       |                         |       |                                           |       | 884                      |       |      |       |   |   |   |   |
|                                                        |                |       |       |   |       |                             |       |                         |       |                                           |       |                     |       |      |       |   |   |   |   |
| **Balance at June 30, 2003**                                |                | 2,655,980  |       | $      | 12         |                             | 27,020     |                         | $          | 2,333                                          |       | $                        | 25,870     |      |       |   | $ | (176 | ) | $ | (17,674 | ) | $ | 10,365 |   |
|                                                             |                     |            |            |        |            |                                  |            |                              |            |                                                |            |                          |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

**The accompanying notes are an integral partof these financial statements.**

 

5

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Cash Flows**

**(in thousands)**

**(unaudited)**

 
|                                                     |   | **For the Six Months Ended** |       |
|----------------------------------------------------------|--------|------------------------------|------------|
|                                                     |   | **June 30, 2002**            |       | **June 30, 2003** |   |
|                                                     |   |                         | ** ** |   | ** ** |
| **Cash flows provided by operating activities**          |   | $                            | 3,484      |   | $ | 1,338 |   |
|                                                     |   |                         |       |   |   |
| **Cash flows from investing activities**                 |   |                         |       |   |   |
| **Software development costs**                           |   | (164                         | )          | (1,510 | ) |
| **Purchases of property and equipment**                  |   | (93                          | )          | (74 | ) |
| **Acquisition of Connect-Care**                          |   | 0                            |       | (178 | ) |
| **Net cash used in investing activities**                |   | (257                         | )          | (1,762 | ) |
|                                                     |   |                         |       |   |   |
| **Cash flows from financing activities**                 |   |                         |       |   |   |
| **Proceeds from issuance of common stock**               |   | 2                            |       | 193 |   |
| **Payment of dividends on preferred stock**              |   | (293                         | )          | (111 | ) |
| **Net cash provided by/(used in) financing  activities** |   | (291                         | )          | 82 |   |
|                                                     |   |                         |       |   |   |
| **Foreign currency translation adjustment**              |   | (48                          | )          | (49 | ) |
|                                                     |   |                         |       |   |   |
| **Increase/(decrease) in cash and cash  equivalents**    |   | 2,888                        |       | (391 | ) |
| **Cash and cash equivalents, beginning of  period**      |   | 1,860                        |       | 3,779 |   |
| **Cash and cash equivalents, end of period**             |   | $                            | 4,748      |   | $ | 3,388 |   |
|                                                     |   |                         |       |   |   |
| **Supplemental disclosure of cash flow  information**    |   |                         |       |   |   |
| **Cash paid for income taxes**                           |   | $                            | 0          |   | $ | 1 |   |
|                                                     |   |                         |       |   |   |
| **Cash paid for interest**                               |   | $                            | 0          |   | $ | 0 |   |

 

**Supplementalschedule of noncash investing and financing activities:**

 

The Company purchased all ofthe outstanding shares of common stock of Connect-Care, Inc. in exchange for200,000 shares of Firstwave common stock. In conjunction with the acquisition, Firstwave assumed liabilites of$624,244.

 

**The accompanying notes are an integral partof these financial statements.**

 

6

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Notes to Consolidated Financial Statements**

**June 30, 2003**

 

**1.****              Description ofBusiness and Basis of Presentation**

 

## ***Description of the Company***

Firstwave Technologies, Inc. is a globalsoftware innovator thatprovides strategic, web-based customer relationship management (CRM) solutionsthat automate and optimize the way companies win, maintain and grow customerrelationships.  The Firstwave productline consists of the Firstwave CRM Product Suite; Takecontrol® andFirstwave for Unix.  The Firstwave CRMProduct Suite consists of the following four products:  Firstwave eCRM, Firstwave CRM Version 10,Firstwave IDE and Firstwave for Technology. Both eCRM and CRM Version 10 areweb-based applications, the former being built with COM+ technology and the latterwith .NET technology.  The IDE is thetoolset supporting CRM Version 10.  TheFirstwave for Technology products were acquired in the Connect-Careacquisition, and are client-server based. In addition to the Firstwave CRM Product Suite, Firstwave also providesand supports Takecontrol ®, a client-server based product, andFirstwave for Unix.

 

## ***Basis of Presentation***

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the consolidated financial statements do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements andshould be read in conjunction with the consolidated financial statementscontained in the Company’s Form 10-K/A for the period ended December 31, 2002.  In the opinion of management, alladjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation of the consolidated financial statements havebeen included.

 

The consolidated balance sheet at December 31, 2002 has been derivedfrom the audited consolidated financial statements for the Company at thatdate, but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.

 

The consolidated financial statements include the accounts of FirstwaveTechnologies, Inc. and its wholly owned subsidiaries, Connect-Care Inc. andFirstwave Technologies UK, Ltd.  Allintercompany transactions and balances have been eliminated in consolidation.

 

**2.****             ****Use of estimates and Critical Accounting Policies**

 

###### ***Use of Estimates***

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

###### ***Critical Accounting Policies***

The Company believes that the following accounting policies arecritical to understanding the consolidated financial statements:

•                  Revenue Recognition

•                  Capitalization of Software Development Costs

•                  Intangible Assets

 

**3.****             ****Summary of Significant Accounting Policies**

 

***Revenue recognition***

The Company recognizes revenue in accordance withStatement of Position (SOP) 97-2, “Software Revenue Recognition”, as amended bySOP 98-9, and related interpretations.

 

Revenue from software product sales is recognizedupon shipment of the product when the Company has a signed contract, the feesare fixed and determinable, no significant obligations remain and collection ofthe resulting receivable is probable. The Company accrues for estimated

 

7

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warranty costs at the time it recognizes licenserevenue.  Services revenue is recognizedas services are performed.  Maintenancerevenue is recognized ratably over the period of coverage.

 

The Company has arrangements with customers that provide for thedelivery of multiple elements, including software licenses and services. TheCompany allocates and recognizes revenue related to each of the multipleelements based on vendor specific objective evidence of the fair value of eachelement. Vendor specific objective evidence is based on standard pricing foreach of the elements in our multiple element arrangements. Revenue associatedwith the various elements of multiple element arrangements is based on suchvendor-specific objective evidence, because the price charged for each elementis the same as when the element would be sold separately from any otherelement.  Pricing does not vary bycustomer, by duration, or by requirements of the arrangement.

 

International revenues are primarily generated byFirstwave UK and independent distributors who offer licenses of the Company’sproducts in specific geographic areas. Under the terms of the Company’s international distributor agreements,international distributors collect license fees and maintenance revenues onbehalf of the Company, and remit to the Company 50% to 60% of standard licensefees and maintenance revenues they produce. The Company recognizes international sales at the gross license amount,with the amount paid to the distributors reflected as a sales and marketingexpense.  The Company’s internationalmaintenance fees are reflected as maintenance revenues, with the amountretained by distributors shown as a cost of maintenance revenue.  There were no revenues derived fromindependent international distributors during the first or second quarter of2003.

 

Revenues from nonmonetary exchanges are recorded atthe fair value of the products and services provided or received, whichever ismore clearly evident.  There were nononmonetary exchanges during the first or second quarter of 2003.

 

Advanced billings for services and maintenancecontracts are recorded as deferred revenue on the Company’s balance sheet, withrevenue recognized as the services are performed and on a pro-rata basis formaintenance.

 

The Company provides an allowance for doubtfulaccounts based on management’s estimate of receivables that may becomeuncollectible.  The estimate is based onhistorical charge-off activity and current account status.

 

***Software development costs***

Capitalized software development costs consistprincipally of salaries, contract services, and certain other expenses relatedto development and modifications of software products capitalized in accordancewith the provisions of SFAS 86, “Accounting for the Costs of Computer Softwareto be Sold, Leased, or Otherwise Marketed.” Capitalization of such costs begins only upon establishment oftechnological feasibility as defined in SFAS 86 and ends when the resultingproduct is available for sale. The Company evaluates the establishment oftechnological feasibility based on the existence of a working model of thesoftware product.  Capitalized costs mayinclude costs related to product enhancements resulting in new features andincreased functionality as well as writing the code in a new programminglanguage.  Since the versionenhancements are built on an already detailed design under an existing sourcecode, technological feasibility is established early for each version.  All costs incurred to establish thetechnological feasibility of software products are classified as research anddevelopment and are expensed as incurred.

 

The Company evaluates the realizability of unamortized capitalizedsoftware costs at each balance sheet date. Software development costs which are capitalized are subsequentlyreported at the lower of unamortized cost or net realizable value. If theunamortized capitalized software cost exceeds the net realizable value of theasset, the amount would be written off accordingly.  The net realizable value of the capitalized software developmentcosts is the estimated future gross revenues of the software product reduced bythe estimated future costs of completing and disposing of that product.Amortization of capitalized software costs is provided at the greater of theratio of current product revenue to the total of current and anticipatedproduct revenue or on a straight-line basis over the estimated economic life ofthe software, which is not more than three years.  It is possible that those estimates of anticipated productrevenues, the remaining estimated economic life of the product, or both couldbe reduced due to changing technologies. The amortization of software development costs is presented as a cost ofsoftware revenue in the Company’s financial statements.

 

***Impairment of Intangible Assets***

In accordance with SFAS No 142 “Goodwill andOther Intangible Assets”, intangible assets with indefinite useful lives mustbe tested periodically for impairment. Examples of Management’s

 

8

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judgment regarding the existence ofimpairment of an intangible asset and the resulting fair value, would includemanagement’s assessment of adverse changes in legal factors, market conditions,or loss of key personnel. If the fair value of the intangible asset isdetermined to be in excess of the carrying value, the Company would record animpairment loss.

 

***Concentration of credit risk and revenue***

The Company is subject to credit risk primarily due to its tradereceivables. The Company has credit risk due to the high concentration of tradereceivables through Firstwave UK, whose customer, Electronic Data Services,Ltd, represented 72% of the Company’s total revenues for the first quarter of2003 and 47% of the Company’s total revenues for the second quarter of2003.  This customer also accounted for59% and 42% of the Company’s total Accounts Receivable outstanding at March 31,2003 and June 30, 2003, respectively. If this customer decreases its purchasing of the Company’s software andservices, revenues would significantly decrease if not replaced with othercustomer accounts.

 

***Stock-BasedCompensation***

Effective for 2002, the Company adopted SFAS 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure,” which did not have amaterial impact on the consolidated financial statements.  The Company has chosen to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related Interpretations and to elect the disclosureoption of SFAS 123, “Accounting for Stock-Based Compensation.”  Accordingly, compensation cost for stockoptions is measured as the excess, if any, of the quoted market price of theCompany’s stock at the date of the grant over the amount an employee must payto acquire the stock.

 

The Company has adopted the disclosure-only provisions of SFAS 123, “Accountingfor Stock-Based Compensation.”  Thefollowing table illustrates the effect on net income and net income per shareif the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based employee awards.

 
|                                                                                              |   | **For the Three Months Ended  June 30,** |   | **For the Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                                              |   | **2002**                                 |   | **2003**                               |   | **2002** |   | **2003** |   |
| Net income as reported                                                                            |   | $                                        | 866    |                                   | $      | 95 |   | $ | 1,832 |   | $ | 819 |   |
|                                                                                              |   |                                     |   |                                   |   |   |   |   |   |
| Stock based employee compensation, net of  related tax effects included in net income as reported |   | —                                   |   | —                                 |   | — |   | — |   |
|                                                                                              |   |                                     |   |                                   |   |   |   |   |   |
| Stock based employee compensation, net of  related tax effects under the fair value based method  |   | 70                                       |   | 148                                    |   | 81 |   | 277 |   |
| Net income/(loss) as adjusted                                                                     |   | $                                        | 796    |                                   | $      | (53 | ) | $ | 1,751 |   | $ | 542 |   |
|                                                                                              |   |                                     |   |                                   |   |   |   |   |   |
| Earnings/(loss) per share:                                                                        |   |                                     |   |                                   |   |   |   |   |   |
| Basic - as reported                                                                               |   | $                                        | .41    |                                   | $      | .04 |   | $ | .87 |   | $ | .33 |   |
| Basic - as adjusted                                                                               |   | $                                        | .37    |                                   | $      | (.02 | ) | $ | .83 |   | $ | .22 |   |
|                                                                                              |   |                                     |   |                                   |   |   |   |   |   |
| Diluted - as reported                                                                             |   | $                                        | .29    |                                   | $      | .04 |   | $ | .63 |   | $ | .28 |   |
| Diluted - as adjusted                                                                             |   | $                                        | .27    |                                   | $      | .00 |   | $ | .60 |   | $ | .19 |   |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model with the followingweighted-average assumptions used for quarter ended June 30, 2002 and June 30,2003, respectively; dividend yield of 0% for both quarters; expected volatilityof 149% and 145%, and risk-free interest rate of 3.82% and 2.55%.  For the six month period  ended June 30, 2002 and June 30, 2003,respectively; the assumptions used were dividend yield of 0% for both years;average expected volatility of 149% and 146%, and average risk-free interestrate of 3.82% and 2.73%.

 

The increase in the compensation expense between second quarter 2002compared to second quarter 2003 is primarily the result of an increase in thenumber of options outstanding and an

 

9

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increase in the number of options granted during second quarter 2003compared to second quarter 2002 and the increase in option price related to theincrease in market price of our stock during second quarter 2003 compared tosecond quarter 2002.  Options are issuedat the market price of the Company’s common stock at the date of grant.  The year to date increase is the result ofoptions that were cancelled during the first quarter of 2002 related to a StockExchange Program.  On March 19,2002 the Company completed a Stock Exchange Program that offered each of itsdirectors and employees who held options under the Option Plan with an exerciseprice of greater than $10.00 the opportunity to surrender those options forcancellation in exchange for new options to be granted no sooner than sixmonths and one day after cancellation. The options cancelled in March 2002 under this program totaled 81,684.The Company granted 81,684 new options on September 20, 2002.

 

There is no tax benefit included in the stock-based employeecompensation expense determined under the fair-value-based method for the threemonths ended June 30, 2003 and June 30, 2002, as the Company established a fullvaluation allowance for its net deferred tax assets.

 

***Basic and diluted net income per common share***

Basic net income per common share is based on the weighted averagenumber of shares of common stock outstanding during the period.  Stock options and convertible preferredstock are included in the diluted earnings per share calculation when they arenot antidilutive.  Net income applicableto common shareholders includes a charge for dividends related to the Company’soutstanding preferred stock.

 

Shown below is a reconciliation of the numerators and denominators ofthe basic and diluted per share computations for income from continuingoperations.

 
|                                    |   | **For Quarter Ended June 30, 2003**  |   | **For Six Months Ended June 30, 2003** |   |
|-----------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **Income (000’s)  (Numerator)** |   | **Shares (000’s)  (Denominator)** |   | **Per Share  Amount** |   | **Income (000’s)  (Numerator)** |   | **Shares (000’s)  (Denominator)** |   | **Per Share  Amount** |   |
| Net income                              |   | 150                                  |   |                                   |   |   |   | 929 |   |   |   |   |   |
| Less: Preferred Stock Dividends         |   | (55                                  | )      |                                   |   |   |   | (110 | ) |   |   |   |   |
|                                    |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                           |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Income available to common shareholders |   | 95                                   |   | 2,632                                  |   | $ | 0.04 |   | 819 |   | 2,505 |   | $ | 0.33 |   |
|                                    |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive  Securities**      |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Warrants                                |   |                                 |   | 19                                     |   |   |   |   |   | 19 |   |   |   |
| Convertible Preferred Stock             |   | 55                                   |   | 665                                    |   |   |   | 110 |   | 665 |   |   |   |
| Stock Options                           |   |                                 |   | 144                                    |   |   |   |   |   | 165 |   |   |   |
|                                    |   | 55                                   |   | 828                                    |   |   |   | 110 |   | 849 |   |   |   |
| **Diluted EPS**                         |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Income available to common shareholders |   | 150                                  |   | 3,460                                  |   | $ | 0.04 |   | 929 |   | 3,354 |   | $ | 0.28 |   |

 
|                                    |   | **For Quarter Ended June 30, 2002**  |   | **For Six Months Ended June 30, 2002** |   |
|-----------------------------------------|--------|--------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **Income (000’s)  (Numerator)** |   | **Shares (000’s)  (Denominator)** |   | **Per Share  Amount** |   | **Income (000’s)  (Numerator)** |   | **Shares (000’s)  (Denominator)** |   | **Per Share  Amount** |   |
| Net income                              |   | 930                                  |   |                                   |   |   |   | 1,962 |   |   |   |   |   |
| Less: Preferred Stock Dividends         |   | (64                                  | )      |                                   |   |   |   | (130 | ) |   |   |   |   |
|                                    |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                           |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Income available to common shareholders |   | 866                                  |   | 2,138                                  |   | $ | 0.41 |   | 1,832 |   | 2,110 |   | $ | 0.87 |   |
|                                    |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive  Securities**      |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Warrants                                |   |                                 |   | 19                                     |   |   |   |   |   | 19 |   |   |   |
| Convertible Preferred Stock             |   | 64                                   |   | 879                                    |   |   |   | 130 |   | 911 |   |   |   |
| Stock Options                           |   |                                 |   | 136                                    |   |   |   |   |   | 90 |   |   |   |
|                                    |   | 64                                   |   | 1,034                                  |   |   |   | 130 |   | 1,020 |   |   |   |
| **Diluted EPS**                         |   |                                 |   |                                   |   |   |   |   |   |   |   |   |   |
| Income available to common shareholders |   | 930                                  |   | 3,172                                  |   | $ | 0.29 |   | 1,962 |   | 3,130 |   | $ | 0.63 |   |

 

10

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***Foreigncurrency translation***

The financial statements of the Company’s international subsidiary aretranslated into U.S. dollars at current exchange rates, except for revenues andexpenses, which are translated at average exchange rates during each reportingperiod.  Currency transaction gains orlosses are included in the results of operations as general and administrativeexpenses in the Company’s financials statements.  Net exchange gains or losses resulting from the translation ofassets and liabilities are included as a component of accumulated othercomprehensive income in shareholders’ equity.

 

***Impairment of long-lived assets***

The Company evaluates impairment of long-lived assets whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be recoverable.  If the sum of theexpected future undiscounted cash flows is less than the carrying amount of theasset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be basedon the fair value of the asset.

 

***Segment reporting***

Management believes that the Company has only a single segmentconsisting of software sales with related services and support.  The information presented in the consolidatedstatement of operations reflects the revenues and costs associated with thissegment that management uses to make operating decisions and assessperformance.

 

**4.****                                      Acquisition**

 

On March 3, 2003, Firstwave Technologies, Inc. (“Firstwave”), a Georgiacorporation, acquired Connect-Care, Inc. (“Connect-Care”), a Georgiacorporation that provides customer relationship management (CRM) softwaresolutions 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., awholly-owned subsidiary of Firstwave (“Merger Sub”), Connect-Care, and certainshareholders of Connect-Care.  Pursuantto the Merger Agreement, Merger Sub merged with and into Connect-Care, andConnect-Care, which was the surviving corporation in the Merger, became awholly-owned subsidiary of Firstwave, the results of Connect-Care’s operationshave been included in the Company’s financial statements since March 3, 2003.

 

In exchange for all outstanding shares of Connect-Care stock, Firstwaveissued 200,000 shares of Firstwave common stock to the shareholders ofConnect-Care and granted such shareholders certain registration rights.  Additional consideration of $300,000 in cashmay be payable if certain revenue goals, as set forth in Section 3.1 ofthe Merger Agreement, are attained. Such amount would be paid on or prior to the earlier of (i) thedate Firstwave files its Annual Report on Form 10-K with respect to thefiscal year ending December 31, 2003 or (ii) March 31, 2004.

 

The $300,000 earn-out provision of the merger agreement withConnect-Care makes this payment contingent upon the attainment of certain totalrevenues, including license revenues and associated maintenance revenues thatwould be recognized according to SOP 97-2, during 2003 from March throughDecember.  Such earn-out is contingentconsideration based upon future financial performance.  Such revenue attainment is offset by any netaccounts receivable shown as of February 28, 2003, not collected by December31, 2003.  If the revenue targets arerealized, the $300,000 will be paid in full. If the revenue targets are partially realized, then the payout ispayable ratably.  If the revenue targetis met, the payout will be accounted for on Firstwave’s financial statements asan increase to the purchase price of the acquisition and an increase toGoodwill.

 

The Company is accounting for the $300,000 as contingent considerationin accordance with paragraphs 25 through 28 of SFAS 141. Because the amount, ifany, of contingent consideration was not determinable at the acquisition date,no amount for the contingency will be recorded in the Company’s financialstatements until the contingency is resolved, or the consideration is issued orbecomes issuable. The Company expects that, should any amount of contingentconsideration be issuable, such amount would result in an additional element ofthe cost of acquiring Connect-Care.

 

An analysis of each material asset acquired and each material liabilityassumed from the acquisition of Connect-Care was completed to ensure accuracyof fair value.  All line itemsrepresented fair value because of each item’s short-term nature.  The Company evaluated each asset andliability and the timing in which assets would be received and liabilitieswould be settled and determined that these amounts represented their fairvalues.

 

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The following table summarizes the estimatedfair value of the assets acquired and liabilities assumed at the date ofacquisition.

 
| Current Assets        |   | $      | 771,660    |   |
|-----------------------|--------|--------|------------|--------|
| Property and Equip    |   | $      | 29,504     |   |
| Intangible Assets     |   | $      | 1,200,000  |   |
| Goodwill              |   | $      | 2,204,970  |   |
| Total assets acquired |   | $      | 4,206,134  |   |
|                  |   |   |       |
| Current liabilities   |   | $      | (1,425,408 | )      |
|                  |   |   |       |
| Net assets acquired   |   | $      | 2,780,726  |   |

 

Of the $3,404,970 of acquired intangible assets, $300,000 was assignedas an estimated fair value of the Connect-Care technology, $900,000 wasassigned as an estimated fair value for customer relationships based onpotential future revenues that may be derived from such customer relationshipsand the remaining balance of $2,204,970 was assigned to Goodwill with anindefinite life.  We believe thisGoodwill reflects such matters as (but not limited to) personnel that weobtained in the acquisition, new customer opportunities that we will have as aresult of our involvement with the acquired customers, relationships we willdevelop through the acquisition, and expertise and name recognition we willreceive through this acquisition. Goodwill will be evaluated periodically forimpairment in accordance with SFAS No. 142 “Goodwill and Other IntangibleAssets.”

 

During the second quarter of 2003 an additional $28,909 in costs ofacquisition were recorded and an additional $2,322 of assumed liabilities wererecorded related to the Connect-Care acquisition.

 

The following table summarizes the comprehensive purchase price,including net liabilities assumed and costs to date related to the acquisition.

 
| Purchase Price               |   | $ | 2,630,000 |   | 200,000 shares at $13.15 |   |
|------------------------------|--------|---|-----------|--------|--------------------------|--------|
| Net liabilities assumed      |   | $ | 624,244   |   |                     |   |
| Cost of acquisition to date  |   | $ | 150,726   |   |                     |   |
| Comprehensive purchase price |   | $ | 3,404,970 |   |                     |   |

 

Theprimary objective of the Connect-Care acquisition was to acquire the customerrelationships of the customer base of Connect-Care and, to a lesser degree, toacquire utilization of Connect-Care technology. The Connect-Care technologyasset consists of the source code for the Connect-Care product.  We believe we will continue to deriverevenue from licensing this product to new and existing customers.  The customer relationship asset representsthe existing customer base of Connect-Care which we believe will continue tocontribute revenue from the purchase of additional licenses of the Connect-Careproduct, purchase of additional service engagements, and renewals of annualmaintenance agreements.  We also expectthat some of the existing active customers or former customers may transitionto the Firstwave eCRM product. Of the $3,404,970 purchase price, $300,000 wasassigned as an estimated fair value to the intangible asset Connect-Caretechnology with an estimated useful life of three years, $900,000 was assignedas an estimated fair value to the intangible asset Connect-Care customer relationshipswith an estimated useful life of seven years, and $2,204,970 was assigned toGoodwill.  The weighted averageamortization period for these intangible assets is six years. There are nosignificant residual values in the intangible assets.  The Company began amortization of the intangible assets effectiveApril 1, 2003, recording $57,141 in amortization expense during the secondquarter of 2003.  Goodwill will beevaluated for impairment in accordance with SFAS No. 142 “Goodwill andOther Intangible Assets.”  There was nochange in the carrying amount of Goodwill during the second quarter of 2003.

 

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The following table presents details ofAcquired Intangible Assets:

 
|                                   |   | **December 31, 2002**      |   | **June 30, 2003**             |   |
|----------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                                   |   | **Gross carrying  amount** |   | **Accumulated  amortization** |   | **Gross carrying  amount** |   | **Accumulated  amortization** |   |
| Amortized intangible assets            |   |                       |   |                          |   |   |   |   |   |
| Connect-Care Technology                |   | —                     |   | —                        |   | 300,000 |   | 25,000 |   |
| Connect-Care Customer Relationships    |   | —                     |   | —                        |   | 900,000 |   | 32,141 |   |
| Total                                  |   | —                     |   | —                        |   | 1,200,000 |   | 57,141 |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Aggregrate Amortization Expense        |   |                       |   |                          |   |   |   |   |   |
| For the Six months ended June 30, 2003 |   | 57,141                     |   |                          |   |   |   |   |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Estimated Amortization Expense         |   |                       |   |                          |   |   |   |   |   |
| For year ended December 31, 2003       |   | 171,429                    |   |                          |   |   |   |   |   |
| For year ended December 31, 2004       |   | 228,571                    |   |                          |   |   |   |   |   |
| For year ended December 31, 2005       |   | 228,571                    |   |                          |   |   |   |   |   |
| For year ended December 31, 2006       |   | 153,571                    |   |                          |   |   |   |   |   |
| For year ended December 31, 2007       |   | 128,571                    |   |                          |   |   |   |   |   |

 

The following table presents the unauditedpro forma consolidated results of operations as if the acquisition had occurredas of January 1 of each year presented.

 
|               |   | **Quarter Ended**  |   | **Six Months Ended** |   |
|--------------------|--------|--------------------|--------|----------------------|--------|
|               |   | **June 30,  2002** |   | **June 30,  2003**   |   | **June 30,  2002** |   | **June 30,  2003** |   |
|               |   |               |   |                 |   |   |   |   |   |
| Revenues           |   | $                  | 4,021  |                 | $      | 2,990 |   | $ | 8,499 |   | $ | 7,618 |   |
|               |   |               |   |                 |   |   |   |   |   |
| Net Income         |   | $                  | 583    |                 | $      | 95 |   | $ | 1,284 |   | $ | 395 |   |
|               |   |               |   |                 |   |   |   |   |   |
| Earnings per share |   |               |   |                 |   |   |   |   |   |
| Basic              |   | $                  | 0.25   |                 | $      | 0.04 |   | $ | 0.56 |   | $ | 0.15 |   |
| Diluted            |   | $                  | 0.19   |                 | $      | 0.04 |   | $ | 0.43 |   | $ | 0.15 |   |

 

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**Item 2.**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Management’s Discussion and Analysis of**

**Financial Condition and Results of Operations**

 

*The followingdiscussion should be read in conjunction with the Financial Statements andNotes thereto of the Company presented in the Company’s Annual Report on Form10-K/A for the year ended December 31, 2002. This section contains forward-looking statements that reflectmanagement’s expectations, estimates, and projections for future periods.  These statements may be identified by theuse of forward-looking words such as “may”, “will”, “believe”, “anticipate”,“estimate”, “expect”, “projects”, or “intends”.  Actual events and results may differ from the results anticipatedby the forward-looking statements. Factors that might cause such differences include, but are not limitedto, those items discussed under the caption “Certain Factors AffectingForward-Looking Statements” presented in the Company’s Annual Report on Form 10-K/Afor the year ended December 31, 2002.*

 

**Overview**

Firstwave Technologies, Inc. is a globalsoftware innovator thatprovides strategic, web-based customer relationship management (CRM) solutionsthat automate and optimize the way companies win, maintain and grow customerrelationships.  The Firstwave productline consists of the Firstwave CRM Product Suite; Takecontrol® andFirstwave for Unix.  The Firstwave CRMProduct Suite consists of the following four products:  Firstwave eCRM, Firstwave CRM Version 10,Firstwave IDE and Firstwave for Technology. Both eCRM and CRM Version 10 areweb-based applications, the former being built with COM+ technology and thelatter with .NET technology.  The IDE isthe toolset supporting CRM Version 10. The Firstwave for Technology products were acquired in the Connect-Careacquisition, and are client-server based. In addition to the Firstwave CRM Product Suite, Firstwave also providesand supports Takecontrol ®, a client-server based product, andFirstwave for Unix.

 

**Results of Operations**

Total revenues decreased 17.0% from $3,601,000 in the second quarter of2002 to $2,990,000 in the second quarter of 2003 primarily due to a decrease inservices revenues. For the six month period ended June 30th, total revenuesdecreased 5.0% from $7,657,000 in 2002 to $7,271,000 in 2003.  Software revenues increased 18.6% from$651,000 in the second quarter of 2002 to $772,000 in the second quarter of2003.  For the six month period endedJune 30th, software revenues increased 72.5% from $1,379,000 in 2002 to$2,379,000 in 2003 primarily due to a large first quarter 2003 software licensecontract with Electronic Data Services, Ltd. Our software revenues aresignificantly dependent upon the timing of closing of license agreements and currentquarterly results may not be indicative of future performance.

 

Services revenues decreased 40.3% from $2,540,000 in the second quarterof 2002 to $1,517,000 in the second quarter of 2003 and, for the six monthperiod ended June 30th, decreased 32.5% from $5,415,000 in 2002 to $3,657,000in 2003. During the first half of 2002 we had a significant services engagementwith Electronic Data Services, Ltd. While we continued our services engagement with Electronic DataServices, Ltd during the first half of 2003, the scale of the servicesdecreased compared to the services performed during 2002.  Our services revenues are subject tofluctuations based on variations of the length of and number of active serviceengagements in a given quarter.

 

During the second quarter of 2003, wecontinued to have a concentration of revenue derived from our relationship withElectronic Data Services, Ltd.  Thiscustomer contributed 46.6% of our total revenue for the second quarter of 2003,compared to 71.9% of total revenue during the first quarter of 2003.  If this customer decreases its purchasing of oursoftware and services, our revenues would significantly decrease if notreplaced with other customer accounts. We are pursuing strategies to continue to transition our revenue streamaway from dependency on a few large customers to a more diverse customerbase.  The acquisition of Connect-Carehas assisted in diversifying our customer base.

 

Maintenance revenues increased 71.2% from $403,000in the second quarter of 2002 to $690,000 in the second quarter of 2003 and,for the six month period ended June 30th, increased 43.2% from $851,000 in 2002to $1,219,000 in 2003.  The increase isdue to the addition of maintenance revenues from the Connect-Care acquisitionand additional revenues associated with the CRM product line.  Maintenance revenues are the result ofrenewal agreements from previous software license sales as well as new licenseagreements.

 

TheConnect-Care acquisition brings a customer base to Firstwave with recurringmaintenance revenues and the potential for software license upgrades andadditional services engagements.  Theserevenues will

 

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berecognized in accordance with SOP 97-2 and in the same manner as previouslyrecognized on Connect-Care’s financial statements.  In addition, the nature of the costs associated with theserevenues is similar to the nature of Firstwave’s costs of revenues (i.e., laborassociated with performing the services and maintenance work), and we do notanticipate price increases.  There areno materials or inventory to consider with respect to cost of revenues.

 

Costof software revenues decreased 41.7% from $324,000 in the second quarter of2002 to $189,000 in the second quarter of 2003 and, for the six month periodended June 30th, decreased 26.0% from $647,000 in 2002 to $479,000 in2003.  The decrease is primarily due tolower amortization of capitalized software as a result of previously capitalizedversions of the software being fully amortized.  We expect the cost of software to increase during the remainderof 2003 as amortization expense increases as of July 1, 2003 due to the releaseof Firstwave CRM Version 10. Cost of software revenues include amortization ofcapitalized software costs, costs of third party software, media costs, anddocumentation materials. Cost of software as a percentage of software revenuedecreased from 49.8% in the second quarter of 2002 to 24.5% the second quarterof 2003 primarily due to the decrease in amortization of capitalized softwareexpense detailed above in conjunction with an increase in software revenueresulting in an increase in the software revenue margin.

 

Costof revenues for services decreased 12.7% from $912,000 in the second quarter of2002 to $796,000 in the second quarter of 2003. This decrease is primarily dueto decreases in outside consultants and travel expenses related to decreasedservices revenues. The cost of revenues for services as a percentage ofservices revenues increased from 35.9% in the second quarter of 2002 to 52.5%in the second quarter of 2003 primarily due to certain fixed personnel costs,which at lower revenue levels, result in a decrease in the services revenuemargin.  For the six month period endedJune 30th, cost of revenues for services increased 2.5% from $1,706,000 in 2002to $1,749,000 in 2003 primarily due to increased payroll costs.

 

Costof revenues for maintenance increased 47.0% from $117,000 in the second quarterof 2002 to $172,000 in the second quarter of 2003, and for the six month periodended June 30th, increased 11.8% from $280,000 in 2002 to $313,000 in 2003. Theincrease is primarily due to increased payroll costs related to theConnect-Care acquisition.  This increaseis consistent with increased maintenance revenue.

 

Sales and marketing expense increased 13.0% from $864,000 in the secondquarter of 2002 to $976,000 in the second quarter of 2003 and, for the sixmonth period ended June 30th, increased 26.3% from $1,644,000 in 2002 to$2,077,000 in 2003.  The increases arethe result of increases in payroll costs, telemarketing services, and publicrelations expenses.  During theremainder of 2003, we anticipate marketing expenses will remain atapproximately this level as we continue to engage in a full range of marketingprograms focused on generating qualified leads and market awareness of ourproducts.

 

TheCompany’s product innovation and development expenditures, which includesamounts capitalized, increased 164.7% from $303,000 in the second quarter of2002 to $802,000 in the second quarter of 2003.  For the six month period ended June 30th, product developmentexpenditures increased 367.8% from $431,000 in 2002 to $2,016,000 in 2003. Theincrease is primarily related to increased payroll costs and increased use ofoutside development contractors related to the development of our latestversion of the CRM product.  Softwaredevelopment costs capitalized during the three and six months ended June 30,2002 were $136,000 and $164,000 respectively, and for the three and six monthsended June 30, 2003 were $534,000 and $1,509,000 respectively.  We believe total product innovation anddevelopment expenditures will decrease somewhat from these levels for theremainder of the year, but if the Company pursues other developmentopportunities, these expenses could increase significantly.

 

Generaland administrative expenses increased 46.0% from $300,000 in the second quarterof 2002 to $438,000 in the second quarter of 2003 and, for the six month periodended June 30th, increased 5.0% from $1,163,000 in 2002 to $1,221,000 in 2003primarily due to amortization of intangible assets and increased payroll andrelated costs.

 

Dividendson preferred stock decreased 14.1% from $64,000 in the second quarter of 2002to $55,000 in the second quarter of 2003 due to the conversion of Series CConvertible Preferred Stock, held by an outside investor, into common stockduring the second half of 2002 and the first quarter of 2003.

 

Theabove factors combined to result in a 89.0% decrease in net income available tocommon shareholders from a net income of $866,000 in the second quarter of 2002to a net income of  $95,000 in thesecond quarter of 2003, and a net income per basic and diluted share of $0.41and $0.29 respectively, for the second quarter of 2002 compared to a net incomeper basic and diluted share of  $0.04and $0.04 respectively, for the second quarter of 2003.  At June 30, 2002 the number of basicweighted average shares outstanding were 2,138,000 compared to 2,632,000 atJune 30, 2003.  The increase in basicweighted average shares outstanding is primarily related to the conversion ofSeries C Convertible Preferred Shares, held by an outside investor, intoapproximately 278,000 common shares and the issuance of 200,000 shares relatedto the Connect-Care acquisition.

 

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**Balance Sheet**

 

Netaccounts receivable decreased 10.4% from $2,406,000 at December 31, 2002 to$2,156,000 at June 30, 2003 primarily due to the collection of outstandingreceivables related to a large UK license and services contract billed duringDecember 2002, offset by the addition of receivables related to theConnect-Care acquisition. The allowance for doubtful accounts increased 336.4% from$88,000 at December 31, 2002 to $384,000 at June 30, 2003 primarily due to theConnect-Care acquisition.  At the dateof acquisition, Connect-Care had a general reserve for bad debt of $66,534 andan additional reserve of $229,342 related to a customer dispute currently inarbitration.  The amount in arbitrationis fully reserved due to the uncertainty of the recoverability of thereceivable. Other assets increased 31.0% from $664,000 at December 31, 2002 to$870,000 at June 30, 2003 primarily due to an increase in prepaidexpenses.  Property and equipmentdecreased 13.0% from $738,000 at December 31, 2002 to $642,000 at June 30,2003, due to year to date depreciation offset by new asset purchases and theaddition of Connect-Care fixed assets. Capitalized software increased 55.4%from $2,041,000 at December 31, 2002 to $3,172,000 at June 30, 2003 due toadditional capitalization of $1,509,000 in development costs related toFirstwave CRM Version 10, net of $378,000 in year to date amortization expense.  Amortization expense will increase effectiveJuly 1, 2003, as we begin to amortize the capitalized costs associated withFirstwave CRM Version 10.  Intangibleassets of $1,143,000 at June 30, 2003 relate to the $1,200,000 acquisition ofConnect-Care technology and customer relationship intangibles, net of $57,000in amortization expense. Goodwill increased 1,261.7% from $175,000 at December31, 2002 to $2,383,000 at June 30, 2003 primarily due to the Connect-Careacquisition.  Accounts payable increased32.7% from $909,000 at December 31, 2002 to $1,206,000 at June 30, 2003 due topayables acquired and costs incurred with the Connect-Care acquisition.Deferred revenue increased 82.1% from $812,000 at December 31, 2002 to$1,479,000 at June 30, 2003 primarily due to deferred maintenance andprofessional services revenues acquired in the Connect-Care acquisition.  Other accrued liabilities decreased 67.1%from $802,000 at December 31, 2002 to $264,000 at June 30, 2003 primarily dueto a decrease of accrued VAT payable in the UK consistent with decreasedrevenue.

 

**Liquidity and CapitalResources**

 

Asof June 30, 2003, the balance of cash and cash equivalents was $3,388,000compared to $3,779,000 at December 31, 2002.

 

During the year 2002, 71.9% of our totalrevenue was attributed to our relationship with Electronic Data Services Ltd, aleading global services company.  During the first half of 2003, this samerelationship accounted for 61.5% of total revenues.  If this partydecreases its purchasing of our software and services, our revenues and cashposition would significantly decrease if not replaced with other customeraccounts.

 

Ourfuture capital requirements will depend on many factors, including our abilityto maintain positive cash flows, as well as the timing and extent of spendingto support product development efforts and expansion of sales and marketing,and market acceptance of our products. Our future capital needs will be highly dependent upon our ability to controlexpenses and generate additional software license revenues, and any projectionsof future cash needs and cash flows are subject to substantialuncertainty.  If we are unable to fundexpenses from operations or obtain the necessary additional capital, we may berequired to reduce the scope of planned product development and sales andmarketing efforts, as well as reduce the size of current staff, all of whichcould have a material adverse effect on our business, financial condition, andour ability to reduce losses or generate profits.

 

Wehave no material commitments for capital expenditures.  We do not believe that inflation hashistorically had a material effect on our Company’s results of operations.

##### ** **

##### **Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

TheCompany is subject to market risk exposures of varying correlations andvolatilities, including interest rate risk and foreign exchange rate risk.  Currently, the Company maintains its cashposition primarily in money market funds and other bank accounts.  The Company does not currently engage inhedging activities or otherwise use derivatives to alter the interestcharacteristics of its financial assets. Although a decrease in interest rates could reduce our interest income,at this time management does not believe a change in interest rates willmaterially affect the Company’s financial position or results of operations.

 

Wedo not have any material credit facilities and, therefore, do not have asignificant risk due to potential fluctuations in interest rates for loans atthis time. Changes in interest rates could make it more costly to borrow moneyin the future and may impede our future acquisition and growth strategies ifmanagement determines that the costs associated with borrowing funds are toohigh to implement these strategies.

 

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Theresults of operations of our wholly owned subsidiary located in Surrey, Englandare exposed to foreign exchange rate fluctuations as the financial results ofthis subsidiary are translated from the local currency to U.S. Dollars uponconsolidation.  Because of thesignificance of the operations of this subsidiary to our consolidatedoperations, as exchange rates vary, net sales and other operating results, whentranslated, may differ materially from our prior performance and ourexpectations.  In addition, because ofthe significance of our overseas operations, we could also be significantlyaffected by weak economic conditions in foreign markets that could reducedemand for our products and further negatively impact the results of ouroperations in a material and adverse manner. As a result of these market risks, the price of our stock could declinesignificantly and rapidly.

 

TheCompany manages the risk by monitoring on a regular basis the fluctuations inforeign currency exchange rates as they relate to our UK Subsidiary, and takesaction if the foreign currency exchange rate would result in a material impactto 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 thecurrency from the UK Subsidiary to the Company’s headquarters when doing sowould be beneficial on the Company’s financial statements.  The Company does not engage in any hedgingactivities.  As foreign currencyexchange rates vary, the fluctuations in revenues and expenses may materiallyimpact the financial statements upon consolidation.  A weaker US dollar would result in an increase to revenues andexpenses upon consolidation, and a stronger US dollar would result in adecrease to revenues and expenses upon consolidation. 

 

##### **Item 4. Controls and Procedures**

 

Basedon their most recent evaluation, which was completed in consultation withmanagement as of the end of the period covered by the filing of thisForm 10-Q, the Company’s Chairman and Chief Executive Officer and ChiefFinancial Officer believe the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14 and 15d-14 promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”))were effective as of the date of such evaluation in timely alerting theCompany’s management to material information required to be included in this Form 10-Qand other Exchange Act filings.

 

**PART II. OTHER INFORMATION**

 
| Item 1. |   | Legal Proceedings                                                                                                                                               |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   | Not Applicable                                                                                                                                                  |
|    |   |                                                                                                                                                            |
| Item 2. |   | Changes in Securities                                                                                                                                           |
|    |   | Not Applicable                                                                                                                                                  |
|    |   |                                                                                                                                                            |
| Item 3. |   | Defaults Upon Senior Securities                                                                                                                                 |
|    |   | Not Applicable                                                                                                                                                  |
|    |   |                                                                                                                                                            |
| Item 4. |   | Submission of Matters to a Vote of Security Holders                                                                                                             |
|    |   | The Annual Meeting of Shareholders was held on May 1, 2003, in  Atlanta, Georgia, at which the following matters were submitted to a vote of  the shareholders: |
|    |   |
|    |   | 1.   Votes cast for or withheld regarding the election  of five (5) Directors for a term of one (1) year were as follows:                        |
|         |        |                                                                                                                                                                 |  |

 
| **Name of Nominee** |   | **Votes For** |   | **Votes Withheld** |   | **Non-votes** |   |
|---------------------|--------|---------------|--------|--------------------|--------|---------------|--------|
| Roger A. Babb       |   | 2,886,224     |   | 98,729             |   | 307,818       |   |
| Richard T. Brock    |   | 2,886,224     |   | 98,729             |   | 307,818       |   |
| Richard D. Jackson  |   | 2,886,224     |   | 98,729             |   | 307,818       |   |
| John F. Keane       |   | 2,886,224     |   | 98,729             |   | 307,818       |   |
| Alan I. Rothenberg  |   | 2,886,224     |   | 98,729             |   | 307,818       |   |

 

17

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2.                    Votescast for, against or abstained regarding an amendment of the Company’s 1993Stock Option Plan to increase the number of shares reserved for future grantsunder the plan from 516,667 to 816,667.

 

| **Votes For** |   | **Votes Against** |   | **Abstain** |   | **Non-votes** |   |
|---------------|--------|-------------------|--------|-------------|--------|---------------|--------|
| 1,307,324     |   | 171,498           |   | 9,557       |   | 1,804,392     |   |

 
| Item 5. |   | Other Information                                                                                                                                                                                           |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   | Not Applicable                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                        |
| Item 6. |   | Exhibits and Reports on Form 8-K                                                                                                                                                                            |
|    |   | a. Exhibit  31.1 Certification of Periodic Report by the Chief Executive Officer pursuant  to Rule 13-a-14(a) of the Securities Exchange Act of 1934.                                                       |
|    |   |                                                                                                                                                                                                        |
|    |   | Exhibit 31.2  Certification of Periodic Report by the Chief Financial Officer pursuant to  Rule 13-a-14(a) of the Securities Exchange Act of 1934.                                                          |
|    |   |                                                                                                                                                                                                        |
|    |   | Exhibit 32  Certification of Chief Executive Officer and Chief Financial Officer pursuant  to 18 U.S.C. Section 1350.                                                                                       |
|    |   |                                                                                                                                                                                                        |
|    |   | b. Reports  of Form 8-K filed during the quarter ended June 30, 2003:                                                                                                                                       |
|    |   |                                                                                                                                                                                                        |
|    |   | Firstwave filed a  Form 8-K/A on May 1, 2003, June 10, 2003 and July 14, 2003.  These Form 8-K/A’s amended the 8-K filed  on March 4, 2003, with respect to its acquisition of Connect-Care, Inc. |
|    |   |                                                                                                                                                                                                        |
|    |   | On May 12, 2003,  Firstwave filed a current report on Form 8-K with the press release of April  22, 2003 reporting financial results for the first quarter of 2003.                                         |

 

18

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | FIRSTWAVE TECHNOLOGIES, INC. |
|--------|------------------------------|
|   |                         |
|   |                         |   |
| DATE:  | August 13, 2003              |   |   | /s/ Judith A. Vitale |   |
|   |                         | Judith A. Vitale |
|   |                         | Chief Financial Officer |
|   |                         | (Principal Financial Officer) |
|        |                              |  |  |  |  |

 

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