** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF**

**THE SECURITIESEXCHANGE ACT OF 1934**

**FOR THE QUARTER ENDED MARCH 31, 2002**

**COMMISSION FILE NUMBER  0-21202**

**FIRSTWAVE TECHNOLOGIES, INC.**
| **7372**                                   |   | **GEORGIA**              |   | **58-1588291**                   |
|--------------------------------------------|--------|--------------------------|--------|----------------------------------|
| (Primary Std. Ind.  Classification Code #) |   | (State of incorporation) |   | (IRS Employer  Identification #) |

 

**2859 PacesFerry Road, Suite 1000Atlanta, Georgia  30339**

(Addressof principal executive offices)

**(770-431-1200)**

(Telephonenumber of registrant)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES                 ý                                           NO                o

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| **Outstanding as of May 10, 2002** |   |             |
|------------------------------------|--------|------------------|
| Common Stock, no par value         |   | 2,211,476 Shares |
|                               |   |             |

 

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**FIRSTWAVE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the quarter ended March 31, 2002**

** **

** **

 

**Index**
|     |                                                                                                         |   |   |
|----------|--------------------------------------------------------------------------------------------------------------|--------|--------|
| Part I.  | Financial Information                                                                                        |
|     |                                                                                                         |
| Item 1.  | Financial Statements                                                                                         |
|     |                                                                                                         |
|     | Consolidated Balance Sheet -  December 31, 2001 and March 31, 2002                                           |
|     |                                                                                                         |
|     | Consolidated  Statement of Operations - For the Three Months Ended March 31, 2001 and March  31, 2002        |
|     |                                                                                                         |
|     | Consolidated  Statement of Changes in Shareholders’ Equity - For the Three Months Ended  March 31, 2002 |
|     |                                                                                                         |
|     | Consolidated  Statement of Cash Flows - For the Three Months Ended March 31, 2001 and March  31, 2002        |
|     |                                                                                                         |
|     | Notes to  Consolidated Financial Statements                                                                  |
|     |                                                                                                         |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  |
|     |                                                                                                         |
| Part II. | Other Information                                                                                            |
|          |                                                                                                              |        |        |  |

 

 

2

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**PART I. FINANCIALINFORMATION**

 

**Item 1.    FinancialStatements**

** **

** **

** **

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Balance Sheet**

**(inthousands)**

 
|                                                                                           |       | **Dec 31,** |   | **Mar 31,**     |   |
|------------------------------------------------------------------------------------------------|------------|-------------|--------|-----------------|--------|
|                                                                                           |       | **2001**    |   | **2002**        |   |
|                                                                                           |       |        |   | **(unaudited)** |   |
| **ASSETS**                                                                                     |       |        |   |            |   |
|                                                                                           |       |        |   |            |   |
| **Current  assets:**                                                                           |       |        |   |            |   |
| **Cash and  cash equivalents**                                                                 |       | $           | 1,860  |            | $      | 2,270 |   |
| **Accounts  receivable, less allowance for****doubtful accounts of $90 and $54, respectively** |       | 1,333       |   | 3,529           |   |
| **Prepaid  expenses and other assets**                                                         |       | 474         |   | 375             |   |
| **Total  current assets**                                                                      |       | 3,667       |   | 6,174           |   |
|                                                                                           |       |        |   |            |   |
| **Property  and equipment, net**                                                               |       | 421         |   | 294             |   |
| **Software  development costs, net**                                                           |       | 1,762       |   | 1,469           |   |
| **Goodwill**                                                                                   |       | 166         |   | 164             |   |
|                                                                                           |       | $           | 6,016  |            | $      | 8,101 |   |
|                                                                                           |       |        |   |            |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                  |       |        |   |            |   |
|                                                                                           |       |        |   |            |   |
| **Current  liabilities:**                                                                      |       |        |   |            |   |
| **Accounts  payable**                                                                          |       | $           | 575    |            | $      | 648 |   |
| **Deferred  revenue**                                                                          |       | 663         |   | 1,301           |   |
| **Accrued  employee compensation and benefits**                                                |       | 145         |   | 326             |   |
| **Dividends  payable**                                                                         |       | 223         |   | 62              |   |
| **Other  accrued liabilities**                                                                 |       | 453         |   | 805             |   |
| **Total  current liabilities**                                                                 |       | 2,059       |   | 3,142           |   |
|                                                                                           |       |        |   |            |   |
| **Shareholders’  equity**                                                                 |       | 3,957       |   | 4,959           |   |
|                                                                                           |       | $           | 6,016  |            | $      | 8,101 |   |
|                                                                                           |       |        |   |            |   |
|                                                                                           | ** ** |
|                                                                                           |       |
| **The  accompanying notes are an integral part of these financial statements.**                |       |

 

 

3

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement ofOperations**

**(in thousands, except per shareamounts)**

**(unaudited)**

 
|                                                                            |       | **For the Three Months Ended** |   |
|---------------------------------------------------------------------------------|------------|--------------------------------|--------|
|                                                                            |       | **Mar 31,**                    |   | **Mar 31,** |   |
|                                                                            |       | **2001**                       |   | **2002** |   |
|                                                                            |       |                           |   |   |   |
| **Net Revenues**                                                                |       |                           |   |   |   |
| **Software**                                                                    |       | $                              | 132    |   | $ | 728 |   |
| **Services**                                                                    |       | 750                            |   | 2,875 |   |
| **Maintenance**                                                                 |       | 703                            |   | 448 |   |
| **Other**                                                                       |       | 28                             |   | 5 |   |
|                                                                            |       | 1,613                          |   | 4,056 |   |
| **Cost and Expenses**                                                           |       |                           |   |   |   |
| **Cost of revenues**                                                            |       |                           |   |   |   |
| **Software**                                                                    |       | 284                            |   | 323 |   |
| **Services**                                                                    |       | 469                            |   | 794 |   |
| **Maintenance**                                                                 |       | 272                            |   | 163 |   |
| **Other**                                                                       |       | 18                             |   | 5 |   |
| **Sales and marketing**                                                         |       | 791                            |   | 780 |   |
| **Product development**                                                         |       | 195                            |   | 100 |   |
| **General and administrative**                                                  |       | 663                            |   | 863 |   |
|                                                                            |       | 2,692                          |   | 3,028 |   |
|                                                                            |       |                           |   |   |   |
| **Operating income/(loss)**                                                     |       | (1,079                         | )      | 1,028 |   |
|                                                                            |       |                           |   |   |   |
| **Interest income/(expense)**                                                   |       | (30                            | )      | 4 |   |
| **Other expense**                                                               |       | (12                            | )      | 0 |   |
| **Income/(loss) before income taxes**                                           |       | (1,121                         | )      | 1,032 |   |
| **Income taxes**                                                                |       | 0                              |   | 0 |   |
| **Net income/(loss)**                                                           |       | $                              | (1,121 | ) | $ | 1,032 |   |
|                                                                            |       |                           |   |   |   |
| **Dividends on preferred stock**                                                |       | (38                            | )      | (66 | ) |
|                                                                            |       |                           |   |   |   |
| **Net income/(loss) applicable to****common shareholders**                      |       | $                              | (1,159 | ) | $ | 966 |   |
|                                                                            |       |                           |   |   |   |
| **Basic:**                                                                      |       |                           |   |   |   |
| **Earnings/(loss) per share**                                                   |       | $                              | (0.55  | ) | $ | 0.46 |   |
| **Weighted average shares**                                                     |       | 2,098                          |   | 2,100 |   |
|                                                                            |       |                           |   |   |   |
| **Diluted:**                                                                    |       |                           |   |   |   |
| **Earnings/(loss) per share**                                                   |       | $                              | (0.55  | ) | $ | 0.33 |   |
| **Weighted average shares**                                                     |       | 2,098                          |   | 3,108 |   |
|                                                                            |       |                           |   |   |   |
|                                                                            |       |                           |   |   |   |
|                                                                            |       |                           |   |   |   |
| **The accompanying notes are an integral part of these  financial statements.** | ** ** |
|                                                                                 |            |                                |        |  |  |  |  |  |  |

 

 

4

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**FIRSTWAVE TECHNOLOGIES, INC.**

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

**(In thousands, except share data)**

**(unaudited)**

**For the Three Months Ended March31, 2002**
|                                        |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   |        |   |      |   |
|---------------------------------------------|--------|------------------|--------|---------------------|--------|-------------|--------|-------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|-------------|--------|-----------|--------|
|                                        |   |             |   |                |   |        |   |        |   |              |   |            |   | **Accumulated**   |   |        |   |      |   |
|                                        |   | **Common Stock** |   | **Preferred Stock** |   | **Add'l**   |   | **Compre-** |   | **Other**         |   |            |   |              |   |
|                                        |   |             |   |                |   | **paid-in** |   | **hensive** |   | **comprehensive** |   | **Accumulated** |   |              |   |
|                                        |   | **Shares**       |   | **Amount**          |   | **Shares**  |   | **Amount**  |   | **capital**       |   | **income**      |   | **income/(loss)** |   | **Deficit** |   | **Total** |   |
| **Balance at December 31, 2001**            |   | 2,100,351        |   | $                   | 12     |        | 33,687 |        | $      | 2,833             |   | $               | 22,403 |              | $      | 0           |   | $         | (26)   |   | $ | (21,265 | ) | $ | 3,957 |   |
|                                        |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   |        |   |      |   |
| **Dividends**                               |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   | (66         | )      | (66       | )      |
|                                        |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   |        |   |      |   |
| **Comprehensive income:**                   |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   |        |   |      |   |
| **Net income**                              |   |             |   |                |   |        |   |        |   |              |   | 1,032           |   |              |   | 1,032       |   | 1,032     |   |
| **Foreign currency translation adjustment** |   |             |   |                |   |        |   |        |   |              |   | 36              |   | 36                |   |        |   | 36        |   |
| **Accumulated comprehensive income**        |   |             |   |                |   |        |   |        |   |              |   | 1,068           |   |              |   |        |   |      |   |
|                                        |   |             |   |                |   |        |   |        |   |              |   |            |   |              |   |        |   |      |   |
| **Balance at March 31, 2002**               |   | 2,100,351        |   | $                   | 12     |        | 33,687 |        | $      | 2,833             |   | $               | 22,403 |              |   |        | $      | 10        |   | $ | (20,299 | ) | $ | 4,959 |   |
|                                             |        |                  |        |                     |        |             |        |             |        |                   |        |                 |        |                   |        |             |        |           |        |  |  |  |  |  |  |  |

** **

** **

**The accompanying notes are an integral part of thesefinancial statements.**

 

 

5

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Cash Flows**

**(in thousands)**

**(unaudited)**

 
|                                                                            |       | **For the Three Months Ended** |       |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|
|                                                                            |       | **March 31, 2001**             |       | **March 31, 2002** |   |
|                                                                            |       |                           | ** ** |   | ** ** |
| **Cash flows (used in)/provided by operating activities**                       |       | $                              | (517       | ) | $ | 682 |   |
|                                                                            |       |                           |       |   |   |
| **Cash flows from investing activities**                                        |       |                           |       |   |   |
| **Software development costs**                                                  |       | (224                           | )          | (28 | ) |
| **Purchases of property and equipment**                                         |       | (21                            | )          | (57 | ) |
| **Purchase of investment securities**                                           |       | (711                           | )          | 0 |   |
| **Proceeds from sale/maturity of investment securities**                        |       | 395                            |       | 0 |   |
| **Loss on investment securities**                                               |       | 12                             |       | 0 |   |
| **Net cash provided by/(used in) investing activities**                         |       | (549                           | )          | (85 | ) |
|                                                                            |       |                           |       |   |   |
| **Cash flows from financing activities**                                        |       |                           |       |   |   |
| **Proceeds from borrowings**                                                    |       | 750                            |       | 0 |   |
| **Repayment of borrowings**                                                     |       | (410                           | )          | 0 |   |
| **Proceeds from issuance of common stock**                                      |       | 7                              |       | 0 |   |
| **Payment of dividends on preferred stock**                                     |       | (16                            | )          | (227 | ) |
| **Net cash provided by/(used in) financing activities**                         |       | 331                            |       | (227 | ) |
|                                                                            |       |                           |       |   |   |
| **Foreign currency translation adjustment**                                     |       | 11                             |       | 40 |   |
|                                                                            |       |                           |       |   |   |
| **Increase/(decrease) in cash and cash equivalents**                            |       | (724                           | )          | 410 |   |
| **Cash and cash equivalents, beginning of period**                              |       | 1,281                          |       | 1,860 |   |
| **Cash and cash equivalents, end of period**                                    |       | $                              | 557        |   | $ | 2,270 |   |
|                                                                            |       |                           |       |   |   |
| **Supplemental disclosure of cash flow information**                            |       |                           |       |   |   |
| **Cash paid for income taxes**                                                  |       | $                              | 0          |   | $ | 0 |   |
|                                                                            |       |                           |       |   |   |
| **Cash paid for interest**                                                      |       | $                              | 60         |   | $ | 0 |   |
|                                                                            |       |                           |       |   |   |
| **The accompanying notes are an integral part of these  financial statements.** | ** ** |

 

 

6

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Notes to Consolidated FinancialStatements**

**March 31, 2002**

 

 

**A.            Basisof Presentation**

 

Firstwave Technologies, Inc. (the “Company”) is aprovider of flexible Internet-based Customer Relationship Management (CRM)solutions that optimize and strengthen the relationship between a company andits customers.  The Firstwave eCRM(Internet-based Customer Relationship Management) Suite is an integrated,Internet-based suite of applications that easily integrate with existingsystems, allowing for rapid deployment and easy customization.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the consolidated financialstatements do not include all of the information and footnotes required byaccounting principles generally accepted in the United States and should be readin conjunction with the consolidated financial statements contained in theCompany’s Form 10-K for the period ended December 31, 2001.  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 financialstatements include the accounts of Firstwave Technologies, Inc. and its whollyowned subsidiary Firstwave Technologies UK, Ltd.  All significant intercompany transactions and balances have beeneliminated in consolidation.

 

 

**B.            Accounting Policies**

 

**Concentration of revenue**

During the first quarterof 2002, the Company had a significant concentration of software and servicesrevenue derived from its partnership with a leading global services company.

 

**Revenue recognition**

Revenue from softwareproduct sales is recognized upon shipment of the product when the Company has asigned contract, the fees are fixed and determinable, no significant obligationsremain and collection of the resulting receivable is probable.  The Company accrues for estimated warrantycosts at the time it recognizes revenue. Services revenue is recognized as services are performed.  Maintenance revenue is recognized on a****prorata basis over the term of the maintenance agreements.

 

International revenues areprimarily generated by Firstwave UK and independent distributors who offerlicenses of the Company’s products in specific geographic areas.  Under the terms of the Company’sinternational distributor agreements, international distributors collectlicense fees and maintenance revenues on behalf of the Company, and generallyremit 50% to 60% of standard license fees and maintenance revenues theyproduce.  The Company recognizesinternational sales at the gross license amount, with the amount paid to thedistributors reflected as a selling expense. The Company’s international maintenance fees are reflected asmaintenance revenues, with the amount retained by distributors shown as a costof maintenance revenue.

 

Revenues from nonmonetaryexchanges are recorded at the fair value of the products and services providedor received, whichever is more clearly evident.

 

Advanced billings forservices and maintenance contracts are recorded as deferred revenue on theCompany’s balance sheet, with services revenue recognized as the services areperformed and maintenance revenue recognized on a pro-rata basis.

 

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

Basic net income or net lossper common share is based on the weighted average number of shares of commonstock outstanding during the period. Stock options and convertible preferred stock have been included in thediluted earnings per share calculation when they are not antidilutive.  Net income or loss applicable to commonshareholders includes a charge for dividends related to the Company’soutstanding preferred stock.

 

 

7

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** **

**Foreign currency 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, which are included in the results of operations, are insignificant forall periods presented.  Net exchangegains or losses resulting from the translation of assets and liabilities areincluded as a component of accumulated other comprehensive income in shareholders’equity.

 

**Use of estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

#### **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.

 

**Segmentreporting**

Management believes that it has only a single segment consisting ofsoftware sales with related services and support.  The information presented in the consolidated statement ofoperations reflects the revenues and costs associated with this segment thatmanagement uses to make operating decisions and assess performance.

 

**Recent accounting pronouncements**

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 133, Accounting for DerivativeInstruments and Hedging Activities (“SFAS 133”).  SFAS 133 establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. The Company adopted SFAS 133 effective January 1, 2001 and it did nothave a material impact on the consolidated financial statements.

 

In September 2000, the FASBissued SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” This statement replaces SFAS No. 125 and is effective for transfers andservicing occurring after June 30, 2001 and, for certain provisions, fiscalyears ending after December 15, 2000. The Company accounts for activity under its Accounts Receivable PurchaseAgreement pursuant to SFAS No. 140.  Asof March 31, 2002 the Company had not had any activity under this Agreement.

 

In July 2001, the FASBissued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets.”  Under thesenew standards, the FASB eliminated accounting for certain mergers andacquisitions as pooling of interests, eliminated amortization of goodwill andindefinite life intangible assets and established new impairment measurementprocedures for goodwill.  For calendaryear reporting companies, the standards become effective for all acquisitionscompleted on or after June 30, 2001, except with regard to businesscombinations initiated prior to July 1, 2001. Changes in financial statement treatment for goodwill and intangible assetsarising from mergers and acquisitions completed prior to June 30, 2001 becameeffective January 1, 2002.   As SFAS 141is effective for transactions on or after June 30, 2001, the Company haseffectively adopted this statement with no material impact on the consolidatedfinancial statements.  The Companyadopted SFAS 141 effective January 1, 2002 and it did not have a materialimpact on the consolidated financial statements.  SFAS No. 142 requires goodwill and intangible assets that haveindefinite useful lives no longer be amortized but rather tested at leastannually for impairment.  During thefirst quarter of 2002 the Company did not record any impairment of goodwill.

 

 

**C.            Borrowings**

 

In second quarter 2001, theCompany signed an Accounts Receivable Purchase Agreement with a commercial bankwhereby the Company may sell up to $500,000 of its eligible accountsreceivable, as defined in the agreement. Said agreement will expire one year from execution, accrue interest at1.85% per month on amounts outstanding, and is secured by the assets of theCompany.  As of March 31, 2002, therewere no outstanding borrowings under this agreement.

 

As of March 31, 2002, the Company has no outstanding long-term debt.

 

 

8

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**Item 2.**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Management’s Discussion andAnalysis of**

**Financial Condition and Results ofOperations**

 

 

**Overview**

 

FirstwaveTechnologies Inc. (NASDAQ:FSTW) is a web-based, Customer RelationshipManagement (CRM) software innovator that providesInternet-based customer relationship management (eCRM) solutions that automateand optimize the way companies win and keep customers.  Headquarteredin Atlanta, Georgia with an office in Surrey, England, we enable businesses toimprove customer relations by streamlining sales, marketing and serviceprocesses.  We support threeproduct lines: a web-based CRM solution, Firstwave eCRM; a client-serversolution, Takecontrol®; and Firstwave for Unix.

 

 

**Results of Operations**

 

During the first quarter of 2002 our financial results reflect significantquarter over comparable quarter improvement. Total revenues increased 151.5%from $1,613,000 in the first quarter of 2001 to $4,056,000 in the first quarterof 2002 primarily due to increased software and services revenue.  Software revenues increased 451.5% from$132,000 in the first quarter of 2001 to $728,000 in the first quarter of2002.  Our software revenues aresignificantly dependent upon the timing of closing of license agreements.  Services revenues increased 283.3% from$750,000 in the first quarter of 2001 to $2,875,000 in the first quarter of2002.

 

During the first quarter of 2002, we had amajor concentration of software and services revenue derived from ourpartnership with a leading global services company.  This partnership contributed a significant amount of our totalrevenue for first quarter 2002.  Weexpect that the revenues from this partnership will remain at a high level forthe next two quarters based upon projects already in process.  If thispartner decreases its purchasing of our software and services, our revenueswould be subject to significant decrease if not replaced with other significantaccounts.

 

Maintenance revenues decreased 36.3% from$703,000 in the first quarter of 2001 to $448,000 in the first quarter of 2002.  The decrease is primarily due tocancellations of maintenance agreements of customers who were using theTakecontrol and Firstwave for Unix product lines.  Maintenance revenues are the result of renewal agreements fromprevious software license sales as well as new license agreements.  While we anticipate increases in maintenancerevenues related to the eCRM product, which will be relative to new softwarelicense sales, we anticipate a continued decrease in maintenance revenue fromthe Takecontrol and Unix product line based on the age and life cycle of thoseproducts.  During 2002, we expect anoverall decrease of maintenance revenues as compared to 2001 due to anexpectation that the decrease in maintenance revenues related to Takecontrolcancellations will exceed the increase in revenues related to new eCRMmaintenance agreements.  As our eCRMlicense revenues increase during 2002, we would expect a reversal of thistrend.

 

Cost of software revenues increased 13.7%from $284,000 in the first quarter of 2001 to $323,000 in the first quarter of2002.  The increase is primarily aresult of the amortization of capitalized software additions of the FirstwaveeCRM product line.  Cost of softwarerevenues include costs of third party software, amortization of capitalizedsoftware costs, media costs, and documentation materials.

 

Cost of revenues for services increased69.3% from $469,000 in the first quarter of 2001 to $794,000 in the firstquarter of 2002 primarily due to increases in payroll, outside consultants, andtravel related to the increase in services revenue.  Cost of revenues for services as a percentage of servicesrevenues decreased from 62.5% in the first quarter of 2001 to 27.6% in thefirst quarter of 2002 due to higher utilization rates of servicepersonnel.  Cost of revenues formaintenance decreased 40.1% from $272,000 in the first quarter of 2001 to$163,000 in the first quarter of 2002 primarily due to decreased payroll andrelated costs and lower royalty costs consistent with decreased maintenancerevenues generated by international distributors.

 

Sales and marketing expense decreased slightly from $791,000 in thefirst quarter of 2001 to $780,000 in the first quarter of 2002.

 

The Company’s product innovation anddevelopment expenditures, which includes amounts capitalized, decreased 69.4%from $419,000 in the first quarter of 2001 to $128,000 in the first quarter of2002.  The decrease is primarily relatedto decreased use of outside development contractors and the reallocation ofsome development resources to billable services projects during the firstquarter of 2002.  Software developmentcosts capitalized during the three months ended March 31, 2001 and March 31,2002 were $224,000 and $28,000 respectively.  We believe development expenditures will increase for the balance of2002 and expect that the enhancements to Firstwave eCRM as a result ofincreased expenditures will further improve the product’s viability in the CRMmarket.

 

General and administrative expensesincreased 30.2% from $663,000 in the first quarter of 2001 to $863,000 in thefirst quarter of 2002 primarily due to the write off of a third party softwareasset related to a change in the technology used for our internal web-sitedevelopment and increases in incentives related to employee compensation plans.

 

 

9

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Net interest income decreased 113.3% from$30,000 net interest expense in the first quarter of 2001 to $4,000 netinterest income in the first quarter of 2002 due to the decreased level ofborrowings during the period.  Dividendson preferred stock increased 73.7% from $38,000 in the first quarter of 2001 to$66,000 in the first quarter of 2002 due to the issuance of Series C ConvertiblePreferred Stock in September 2001.

 

The above factors combined to result in a183.4% increase in net income available to common shareholders from a net lossof $1,159,000 in the first quarter of 2001 to a net income of  $966,000 in the first quarter of 2002, and anet loss per basic and diluted share of $0.55 for the first quarter of 2001compared to a net income per basic share of $0.46 and net income per diluted share of $0.33 for the first quarter of2002.

 

 

**Balance Sheet**

 

Net accounts receivable increased 164.7%from $1,333,000 at December 31, 2001 to $3,529,000 at March 31, 2002 primarilydue to outstanding receivables related to our large partnership servicesengagement.   As of May 6, 2002 theseamounts have been collected.   Propertyand equipment decreased 30.2% from $421,000 at December 31, 2001 to $294,000 atMarch 31, 2002, due to year to date depreciation and the write off of a thirdparty software asset resulting from a change in technology used in our internalweb-site development offset by additional fixed asset purchases.  Capitalized software decreased 16.6% from$1,762,000 at December 31, 2001 to $1,469,000 at March 31, 2002 due toadditional capitalization of $28,000 in development costs net of $321,000 inamortization.  Accounts payableincreased 12.7% from $575,000 at December 31, 2001 to $648,000 at March 31,2002 due to the timing of vendor payments. Deferred revenue increased 96.2% from $663,000 at December 31, 2001 to$1,301,000 at March 31, 2002 primarily due to a prepayment for softwarelicenses that will be delivered and recognized as license revenue in the secondquarter of 2002 and annual maintenance billed in advance during first quarter2002 offset by the recognition of three months of maintenance revenue billed inadvance at December 31, 2001.  Accruedemployee compensation and benefits increased 124.8% from $145,000 at December31, 2001 to $326,000 at March 31, 2002 due to increased accruals related toincreased incentives and commissions consistent with increased softwarerevenues and improved overall financial performance.  Dividends payable decreased 72.2% from $223,000 at December 31,2001 to $62,000 at March 31, 2002 due to the payment of dividends on preferredstock.  Other accrued liabilitiesincreased 77.7% from $453,000 to $805,000 primarily due to increased VAT in theUK consistent with increased revenue.

 

 

**Liquidity and Capital Resources**

 

As of March 31, 2002, the balance of cashand cash equivalents was $2,270,000 compared to $1,860,000 at December 31,2001, an increase of $410,000 due to the increase in cash provided byoperations.  As of March 31, 2002 wehave no outstanding long term debt.

 

Our future capital requirements will dependon many factors, including our ability to maintain positive cash flows, as wellas the timing and extent of spending to support product development efforts andexpansion of sales and marketing, and market acceptance of our products.  Although we have historically been able tosatisfy our cash requirements, there can be no assurance that efforts tomaintain positive cash flows from operations will be successful in thefuture.  Our future capital needs willbe highly dependent upon our ability to control expenses and generate softwarelicense revenues, and any projections of future cash needs and cash flows aresubject to substantial uncertainty.  Ifwe are not able to generate sufficient cash from revenues, we may need to raiseadditional capital.  If we are unable toobtain the necessary additional capital, we may be required to reduce the scopeof planned product development and sales and marketing efforts, as well asreduce the size of current staff, all of which could have a material adverseeffect on our business and financial condition, as well as our ability toreduce losses or generate profits.

 

 

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**PARTII.  OTHER INFORMATION**

 

Item 1.    Legal Proceedings

                Not Applicable

 

Item2.    Changes in Securities

                None

 

Item3.    Defaults Upon Senior Securities

                Not applicable

 

Item4.    Submission of Matters to a Vote ofSecurity Holders

 

The Annual Meeting of Shareholders was held on May 2, 2002, in Atlanta,Georgia, at which the following matters were submitted to a vote of theshareholders:

 

1.               Votes cast foror 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** |
|---------------------|--------|---------------|--------|--------------------|
| Roger A. Babb       |   | 2,520,032     |   | 105,931            |
| Richard T. Brock    |   | 2,520,032     |   | 105,931            |
| John F. Keane       |   | 2,520,032     |   | 105,931            |
| Michael T. McNeight |   | 2,520,032     |   | 105,931            |
| James R. Porter     |   | 2,520,032     |   | 105,931            |

 

 

2.               Votes castfor, against or abstained regarding an amendment of the Company’s 1993 StockOption Plan to increase the number of shares reserved for future grants underthe plan from 466,667 to 516,667.

 
| **Votes For** |   | **Votes Against** |   | **Abstain** |   |   |   |   |   |
|---------------|--------|-------------------|--------|-------------|--------|--------|--------|--------|--------|
| 2,359,074     |   | 257,572           |   | 9,317       |   |   |   |   |   |

 

3.               Votes cast for, against, or abstained regarding anamendment of the Company’s Employee Stock Purchase Plan to increase the numberof shares of Common Stock reserved for possible purchase by Company employeesfrom 30,000 to 40,000.

 
| **Votes For** |   | **Votes Against** |   | **Abstain** |   |   |   |   |   |
|---------------|--------|-------------------|--------|-------------|--------|--------|--------|--------|--------|
| 2,587,383     |   | 33,047            |   | 5,533       |   |   |   |   |   |

 

 

Item 5.    Other Information

                Not applicable

 

 

Item 6.    Exhibits and Reports on form 8-K

 

 

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**SIGNATURES**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |         |   |   | FIRSTWAVE TECHNOLOGIES,  INC. |                    |
|--------|--------------|--------|--------|-------------------------------|-------------------------|
|   |         |   |   |                          |                    |   |
| DATE:  | May 10, 2002 |   |   |                          | /s/ Judith A. Vitale    |   |
|   |         |   |   |                          |                    |   |
|   |         |   |   |                          | Judith A. Vitale        |   |
|   |         |   |   |                          | Chief Financial Officer |   |
|        |              |        |        |                               |                         |  |  |

 

 

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