FIREPOND, INC.
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarter Ended January 31, 2003

OR

   
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29251

FIREPOND, INC.

(Exact Name of Registrant as Specified in its Charter)
     
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  41-1462409
(I.R.S. Employer
Identification No.)
     
8009 S. 34th Avenue, Minneapolis, MN
(Address of principal executive offices)
  55425
(Zip Code)

(952) 229-2300

(Registrant’s telephone number, including area code)

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

     
Yes [X]   No [  ]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     
Yes [  ]   No [X]

     As of March 13, 2003 there were 3,671,983 shares of the Registrant’s Common Stock outstanding.

 


TABLE OF CONTENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED 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 1. LEGAL PROCEEDINGS
SIGNATURES
CERTIFICATIONS


Table of Contents

FIREPOND, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED January 31, 2003

TABLE OF CONTENTS

           
        Page No.
       
PART I   FINANCIAL INFORMATION      
Item 1.   Financial Statements (unaudited)      
    Condensed Consolidated Balance Sheets -
      January 31, 2003 and October 31, 2002.
  3  
    Condensed Consolidated Statements of Operations -
     Three Months Ended January 31, 2003 and 2002.
  4  
    Condensed Consolidated Statements of Cash Flows -
     Three Months Ended January 31, 2003 and 2002.
  5  
    Notes to Condensed Consolidated Financial Statements   6  
Item 2.   Management’s Discussion and Analysis of Financial Condition and
     Results of Operations
  12  
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   23  
Item 4.   Controls and Procedures   23  
PART II   OTHER INFORMATION    
Item 1.   Legal Proceedings   23  
    SIGNATURES   25  
    CERTIFICATIONS   26  

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Table of Contents

FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)

                         
            January 31,   October 31,
            2003   2002
           
 
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 14,842     $ 13,479  
 
Short-term investments
    10,546       15,690  
 
Accounts receivable, net of allowance for doubtful accounts of $363 and $463
    2,515       2,798  
 
Unbilled revenue
    358       268  
 
Restricted cash
          199  
 
Prepaid expenses and other current assets
    855       982  
 
   
     
 
     
Total current assets
    29,116       33,416  
Property and equipment, net
    1,718       2,105  
Other intangible assets, net
    112       137  
Restricted cash
    190       190  
Other assets
    526       511  
 
   
     
 
 
  $ 31,662     $ 36,359  
 
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 751     $ 1,546  
 
Accrued liabilities
    4,603       5,062  
 
Accrued restructuring
    448       2,266  
 
Deferred revenue
    5,369       5,952  
 
   
     
 
     
Total current liabilities
    11,171       14,826  
Long-term accrued restructuring
    127       160  
Stockholders’ equity:
               
 
Preferred stock, $0.10 par value —
Authorized — 5,000,000 shares;
Issued and outstanding — none at January 31, 2003 and October 31, 2002
           
 
Common stock, $0.10 par value —
Authorized — 100,000,000
     Issued and outstanding — 3,684,983 shares at January 31, 2003 and October 31, 2002
    369       369  
 
Additional paid-in capital
    198,937       198,935  
 
Accumulated deficit
    (172,811 )     (172,094 )
 
Loans receivable
    (4,057 )     (4,287 )
 
Deferred compensation
    (8 )     (10 )
 
Accumulated other comprehensive loss
    (2,066 )     (1,540 )
 
 
   
     
 
   
Total stockholders’ equity
    20,364       21,373  
 
 
   
     
 
 
  $ 31,662     $ 36,359  
 
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

                       
          Three Months
          Ended January 31,
         
          2003   2002
         
 
Revenue:
               
   
License
  $ 599     $ 3,236  
   
Services and maintenance
    3,222       4,261  
   
 
   
     
 
     
Total revenue
    3,821       7,497  
   
 
   
     
 
Cost of revenue:
               
   
License
          56  
   
Services and maintenance (1)
    1,608       3,047  
   
 
   
     
 
     
Total cost of revenue
    1,608       3,103  
   
 
   
     
 
Gross profit
    2,213       4,394  
Operating expenses:
               
   
Sales and marketing (1)
    1,187       2,066  
   
Research and development (1)
    1,073       2,863  
   
General and administrative (1)
    1,179       1,492  
   
Stock-based compensation
    234       1,485  
   
Amortization of intangible assets
    26       408  
   
Impairment of developed technology and know-how
          3,120  
   
 
   
     
 
     
Total operating expenses
    3,699       11,434  
   
 
   
     
 
Loss from operations
    (1,486 )     (7,040 )
Interest income
    102       181  
Other income (expense), net
    667       (196 )
   
 
   
     
 
Loss before cumulative effect of a change in accounting principle
    (717 )     (7,055 )
Cumulative effect of a change in accounting principle
          (3,973 )
   
 
   
     
 
Net loss
  $ (717 )   $ (11,028 )
   
 
   
     
 
Net loss per share:
               
 
Basic and diluted loss per share before cumulative effect of a change in accounting principle
  $ (0.19 )   $ (1.94 )
 
Cumulative effect of a change in accounting principle
          (1.09 )
   
 
   
     
 
 
Basic and diluted net loss per share applicable to common stockholders
  $ (0.19 )   $ (3.03 )
   
 
   
     
 
 
Basic and diluted weighted average common shares outstanding
    3,685       3,639  
   
 
   
     
 


(1)   The following summarizes the departmental allocation of the stock-based compensation charge:
                   
      Three Months
      Ended January 31,
     
      2003   2002
     
 
Cost of revenue
  $ 83     $ 92  
Operating expenses:
               
 
Sales and marketing
          35  
 
Research and development
    2       205  
 
General and administrative
    149       1,153  
 
   
     
 
Total stock-based compensation
  $ 234     $ 1,485  
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FIREPOND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

                         
            Three Months
            Ended January 31,
           
            2003   2002
           
 
Cash flows from operating activities:
               
 
Net loss
  $ (717 )   $ (11,028 )
 
Adjustments to reconcile net loss to net cash used in operating activities:
               
   
Stock-based compensation expense
    234       1,485  
   
Depreciation and amortization
    441       1,085  
   
Impairment of developed technology and know-how
          3,120  
   
Cumulative effect of a change in accounting principle
          3,973  
   
Changes in assets and liabilities:
               
     
Accounts receivable
    151       5,787  
     
Unbilled revenue
    (139 )     233  
     
Prepaid expenses and other current assets
    44       379  
     
Accounts payable
    (832 )     (556 )
     
Accrued liabilities
    (616 )     (509 )
     
Accrued restructuring
    (1,851 )     (2,766 )
     
Deferred revenue
    (764 )     (4,348 )
 
 
   
     
 
       
Net cash used in operating activities
    (4,049 )     (3,145 )
 
 
   
     
 
Cash flows from investing activities:
               
 
Purchases of short-term investments
          (7,291 )
 
Proceeds from the sale and maturities of short-term investments
    5,197       9,600  
 
Purchases of property and equipment
    (29 )     (72 )
 
Return of cash from the Brightware acquisition escrow
          520  
 
Decrease in restricted cash
    199       188  
 
Increase in other assets
          10  
 
 
   
     
 
       
Net cash provided by investing activities
    5,367       2,955  
 
 
   
     
 
Cash flows from financing activities:
               
 
Payments on long-term debt
          (4 )
 
Proceeds from stock options and warrants exercised
          39  
 
 
   
     
 
       
Net cash provided by financing activities
          35  
 
 
   
     
 
Effect of exchange rate changes on cash and cash equivalents
    45       (9 )
 
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    1,363       (164 )
Cash and cash equivalents, beginning of period
    13,479       34,660  
 
 
   
     
 
Cash and cash equivalents, end of period
  $ 14,842     $ 34,496  
 
 
   
     
 
Supplemental cash flow information:
               
 
Interest paid
  $     $ 37  
 
 
   
     
 
Non-cash investing and financing activities:
               
 
Return of shares issued to Brightware
  $     $ 2,448  
 
 
   
     
 
 
Increase in other assets for value of shares returned from Brightware
  $     $ 430  
 
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     Nature of Business and Basis of Presentation

     Firepond, Inc., together with its wholly owned subsidiaries (the “Company”), considers itself to be a pioneer in sales configuration systems that help companies reduce the cost of selling complex products, regardless of the sales channel. Companies may achieve a measurable and meaningful return on investment in Firepond technology by converting more leads into accurate orders, whether they sell through a direct sales force, an indirect channel network or via the web. Firepond also offers an online customer assistance solution. Marketed as Firepond’s eServicePerformer, this product line leverages advanced intelligence engines and natural language processing technology to manage a company’s online customer interaction channels, with an emphasis on email response management.

     The Company is subject to a number of risks similar to those of other companies of similar size in its industry, including recurring losses, rapid technological changes, competition, customer concentration, integration of acquisitions, management of international activities and dependence on key individuals.

     The accompanying condensed consolidated financial statements include the accounts of Firepond, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the accompanying financial statements.

     The accompanying condensed consolidated financial statements for the three months ended January 31, 2003 and 2002 are unaudited and have been prepared on a basis consistent with the October 31, 2002 audited financial statements and include normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The Company has combined its product-related revenue and custom development services reporting segments into one. Management determined that the custom development services segment was insufficient in size to warrant separately viewing and managing the engagements and resources. Prior year financials have been reclassed to include custom development services in product-related revenue. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended October 31, 2002 included in the Company’s Form 10-K. The results of operations for the three months ended January 31, 2003 are not necessarily indicative of results to be expected for the entire year or any other period.

2.     Recent Accounting Pronouncements

     In December 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation expands the disclosures to be made by a guarantor in its annual and interim financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by the Interpretation, the Company has adopted the disclosure requirements for the quarter ended January 31, 2003. In connection with the sale of its products in the ordinary course of business, the Company often makes representations affirming that its products do not infringe on the intellectual property rights of others and agrees to indemnify customers against third-party claims for such infringement. Also, the Company's amended and restated by-laws provide for indemnification by the Company of its directors, officers and certain non-officer employees under certain circumstances against expenses, including attorneys fees, judgments, fines and amounts paid in settlement, reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceeding in which any such person is involved by reason of the fact that such person is or was a director, officer or employee of the Company if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to criminal actions or proceedings, if such person had no reasonable cause to believe his or her conduct was unlawful. The Company has not been required to make any material payments under such provisions.

     In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123 (SFAS No. 148) which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the Company’s method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company will adopt the disclosure requirement in its quarter ending April 30, 2003. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

3.     Comprehensive Income (Loss)

     The components of comprehensive loss for the three months ended January 31, 2003 and 2002 are as follows:

                     
        Three Months
        Ended January 31,
       
        2003   2002
       
 
        (In thousands)
Comprehensive loss:
               
 
Net loss
  $ (717 )   $ (11,028 )
 
Other comprehensive loss:
               
   
Unrealized gain (loss) on short-term and long-term investments
    53       (10 )
   
Foreign currency translation
    (579 )     38  
 
   
     
 
 
Comprehensive loss
  $ (1,243 )   $ (11,000 )
 
   
     
 

4.     Stockholders’ Equity

(a)  Stock Options and Warrants

     The Company granted stock options to employees and directors in July 2001 in conjunction with a stock option exchange program that requires the recognition of stock-based compensation expense. As of January 31, 2003, a total of approximately 327,600 options to purchase shares of the Company’s common stock are subject to variable accounting as a result of the stock option exchange program. As of January 31, 2003, the Company recorded no deferred compensation associated with these options because the fair market value of the Company’s common stock was below the option price.

     The Company granted options to employees to purchase approximately 112,100 shares of common stock at a weighted-average exercise price of $2.83 per share during the three months ended January 31, 2003. At January 31, 2003, approximately 721,500 options were outstanding.

     The Company also granted stock options to non-employees and issued warrants to certain customers and strategic business partners that require the recognition of stock-based compensation expense. Stock-based compensation relating to these grants represents the fair market value as computed using the Black-Scholes option pricing model. As of January 31, 2003, the deferred compensation balance associated with these grants was $8,500.

(b)  Loans Receivable

     On November 28, 2000, the Company’s Board of Directors approved a loan facility to Klaus P. Besier, the Company’s Chairman, Chief Executive Officer and President, allowing borrowings up to $3,000,000 bearing interest at the applicable federal rate in effect during the term of the note. On January 9, 2001, the Company’s Board of Directors approved an increase in the loan facility to $4,000,000. Originally, the outstanding principal together with unpaid interest was due and payable on the earlier of October 31, 2001, an event of default, or an event of maturity, as defined. On December 11, 2001, the Company’s Board of Directors amended the facility to extend the maturity to May 1, 2006. Due to the modification of the facility, all amounts outstanding have been reclassified as a component of stockholders’ equity. The promissory note is secured by a pledge of 50,000 shares of the Company’s common stock, valued at $162,000 at January 31, 2003, and is generally not a recourse obligation of the borrower, with specified exceptions. As of January 31, 2003, the amount outstanding was approximately $4,000,000.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     In addition, the Company issued notes to two former officers of the Company totaling $270,000 and to a former employee of the Company in the amount of $125,000. During the quarter ended January 31, 2003, management determined that the remaining loan to the former officer and the loan to the former employee were uncollectible, resulting in a $230,000 charge to stock-based compensation for the difference between the value of the shares securing each note and the $275,000 loan receivable balance. As of January 31, 2003, the loan receivable balance for these two notes has been written down to the value of the underlying shares. During the quarter ended January 31, 2002, in connection with the termination of the other former officers’ employment with the Company, the Company acquired the shares valued at approximately $7,000 securing the note from the officer in satisfaction of $120,000 due under the note. As a result, $113,000 was charged to stock-based compensation during the quarter ended January 31, 2002.

(c)  Net Loss Per Share

     Net loss per share is computed based on the guidance of SFAS No. 128, Earnings per Share. SFAS No. 128 requires companies to report both basic loss per share, which is computed by dividing the net loss by the weighted average number of common shares outstanding, and diluted loss per share, which is computed by dividing the net loss by the weighted average number of common shares outstanding plus the weighted average dilutive potential common shares outstanding using the treasury stock method. As a result of the losses incurred by the Company for the three months ended January 31, 2003 and 2002, all potential common shares were antidilutive and were excluded from the diluted net loss per share calculations.

     As of January 31, 2003 and 2002, common stock options and warrants outstanding which were not included in the calculation of diluted net loss per share since their inclusion would be antidilutive were 770,200 and 852,900, respectively.

5.     Segment Reporting

     Beginning with fiscal year 2003, the Company has combined product-related revenue and custom development services into one reporting segment because management determined that the custom development services segment was insufficient in size to warrant separately viewing and managing the engagements and resources.

     Revenue from the United States, Japan and the United Kingdom contributed approximately 73%, 15% and 12% of revenue, respectively for the three months ended January 31, 2003. Revenue from the United States, the United Kingdom, Switzerland and Sweden contributed approximately 41%, 17%, 17% and 11% of revenue, respectively for the three months ended January 31, 2002.

6.     Brightware Acquisition

     On February 15, 2001, pursuant to an Agreement and Plan of Merger between the Company and Brightware, Inc. (Brightware), the Company acquired 100% of the issued and outstanding capital stock of Brightware, a supplier of eCustomer assistance software. As a result of the identification and valuation of intangibles acquired, the Company allocated approximately $4,900,000 to developed technology and know-how. Developed technology represents patented and unpatented technology and know-how related to Brightware’s eService product line founded on a combination of artificial intelligence, knowledge manager-technology and internet enterprise applications. Developed technology was being amortized over a period of three years. During the quarter ended January 31, 2002, the Company lowered its estimates of the expected cash flows from the eService product line and determined that developed technology and know-how was significantly impaired. As such, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recorded a $3,120,000 charge to write-off the impaired portion of developed technology and know-how leaving a balance of approximately $215,000 as of January 31, 2002, to be amortized over a two year period. The circumstances leading to the impairment related directly to the Company’s strategic decision to focus on its core value proposition in the “lead-to-order” market with its SalesPerformer product because of the continued global slowdown in information technology spending and the Company’s need to focus its resources to reach profitability. As a result of the change in strategic direction, the Company lowered the eService revenue forecasts, operating profits and cash flows, resulting in the impairment charge of the developed technology and know-how. As of January 31, 2003, accumulated amortization of developed technology and

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

know-how was $103,000. The amortization expense for the quarter ended January 31, 2003 and 2002 was $26,000.

7.     Goodwill and Other Intangible Assets – Adoption of Statement No. 142

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets, which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. The Company early adopted SFAS No. 142 on November 1, 2001, the beginning of its fiscal year 2002. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but, instead, tested at least annually for impairment. Accordingly, the Company reclassified the net book value of assembled workforce to goodwill and ceased amortization of all goodwill on November 1, 2001. Intangible assets that have finite useful lives, consisting of developed technology and know-how, continue to be amortized over their useful lives.

      The standard also requires that goodwill be tested for impairment annually. In the year of adoption, the standard required a transitional goodwill impairment evaluation, which was a two-step process. The first step was a screen for whether there was an indication that goodwill was impaired as of November 1, 2001. To do this, the Company identified its reporting units and determined the carrying value of each by assigning the Company’s assets and liabilities, including existing goodwill, to them as of November 1, 2001. The Company then determined the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to the reporting unit’s carrying value. As of January 31, 2002, the Company completed this first step, which indicated that goodwill recorded during the Brightware acquisition was impaired as of November 1, 2001.

     In the second step, the Company compared the implied fair value of the affected reporting unit’s goodwill to its carrying value to measure the amount of impairment. The fair value of goodwill was determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, Business Combinations. As of January 31, 2002, the Company completed this second step and measured and recognized a transitional impairment loss of $3,973,000 as a cumulative effect of a change in accounting principle in its statement of operations.

     In accordance with SFAS No. 142, the fair value used to determine the impairment was based on a combination of earnings multiples and discounted cash flow valuation techniques. The circumstances leading to the goodwill impairment related to both a global slowdown in information technology spending as well as a significant decrease in comparable company market valuations. The negative economic trend lowered the eService operating profits and cash flows and is evidence that initial growth expectations when Brightware was acquired did not materialize. The decline in comparable company market valuations resulted in reduced earnings multiples.

8.     Restructuring and Other Special Charges

(a)  Fiscal 2002 Restructuring

     During the quarter ended July 31, 2002, the Company undertook plans to restructure its operations as a result of a prolonged slowdown of global information technology spending, specifically within the enterprise software marketplace. As such, the Company announced a strategic realignment to further enhance its focus on the “lead-to-order” market as well as measures to better align its cost structure with projected revenue and preserve cash. The Company reduced headcount and facilities as well as wrote off excess equipment and terminated and restructured certain contractual relationships. Overall, the Company terminated 19 general and administrative, 19 sales and marketing, 25 professional services and 30 development employees. The restructuring and other special charges for the quarter ended July 31, 2002 totaled $5.9 million.

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     The significant components of the restructuring and other special charges were as follows:

         
    Quarter Ended
    July 31, 2002
   
Employee severance costs
  $ 1,931  
Facilities related costs
    2,886  
Impairment of property and equipment
    824  
Excess contractual commitments and termination fees
    188  
Other
    65  
 
   
 
 
  $ 5,894  
 
   
 

     The facilities related cost component consisted of idle lease space and lease termination fees associated with closing the Company’s Netherlands, United Kingdom and San Rafael, California facilities. The Company’s assumptions considered current market value of similar properties and ability, if any, to sublease the idle space or any other future use.

     The impairment of property and equipment charges consisted of excess computer equipment and furniture and fixtures as well as leasehold write-offs resulting from reductions-in-force and office closures.

(b)  Lease Termination of Idle Space

     In November 2002, the Company reached a lease buy-out settlement for its leased space in California for which a portion of the estimated lease liability had been accrued in fiscal 2002 and 2001 restructuring accruals, as well as part of merger related costs associated with the Brightware acquisition. The net settlement for this idle facility was $1.6 million. To reflect the resolution of the idle lease space liability, in its fourth quarter of fiscal 2002, the Company recorded a $2.5 million reversal to its previously recorded restructuring charges for the difference between the amounts paid in November 2002 and the amounts previously accrued for estimated future payments.

(c)  Accrued Restructuring

     A summary of the activity of short and long-term accrued restructuring is as follows:

             
        (In thousands)
Accrued restructuring:
       
 
Balance, at October 31, 2002
  $ 2,426  
   
Severance payments
    (242 )
   
Facilities related payments
    (1,616 )
   
Other
    7  
 
 
   
 
 
Balance, at January 31, 2003
  $ 575  
 
 
   
 

     The remainder of the payments for the restructuring and other special charges will be paid out as follows: facilities related payments through November 2004 and contract termination fees and other payments through July 2003.

     The restructuring and other special charges taken in fiscal 2002 and 2001 included a component for idle lease space. The Company’s assumptions considered current market value of similar properties and the ability, if any, to sublease the idle space or any other future use. If actual market conditions are less favorable than those projected by the Company, additional charges may be required related to this idle lease space.

9.     Commitments and Contingencies

     On October 19, 2001, General Motors Corporation filed a complaint against the Company in the Superior Court of Massachusetts, Middlesex County. The complaint alleges, among other things, a breach of contract under agreements entered into in 1994, as amended; anticipatory repudiation in the spring of 2000 of agreements entered into in 1994, as amended; unjust enrichment; establishment of a constructive trust; rescission and restitution based upon failure of consideration; as well

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FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

as, extortion and coercion relating to agreements entered into in 1994, as amended; breach of the covenant of good faith and fair dealing; fraud; as well as, violation of Chapter 93A of the General Laws of the Commonwealth of Massachusetts relating to unfair and deceptive trade practices. General Motors’ claims further relate to license agreements, services agreements and a general release entered into with the Company in May 2000. The claims generally allege, among other things, that the Company coerced, extorted or otherwise caused General Motors to enter into the May 2000 agreements under duress. On the Civil Cover Sheet for the Superior Court of Massachusetts, Middlesex County, General Motors claims damages in the amount of $9,000,000, exclusive of fees, costs and multiple damages. The complaint does not demand damages in specific dollar amounts. A Motion for Summary Judgment was filed on behalf of the Company in December 2002. An opposition to the motion was filed on behalf of General Motors and a reply brief was filed on behalf of the Company. The Motion for Summary Judgment is now pending before the court. While the Company believes the claims against it are without merit and intends to defend the action vigorously, the litigation is in the preliminary stage and the Company cannot predict the outcome with certainty. The Company may incur substantial legal fees and expenses, and the litigation may divert the attention of some of the Company’s key management. The Company’s defense of this litigation, regardless of its outcome, may be costly and time-consuming. Should the outcome of the litigation be adverse to the Company, it could be required to pay significant monetary damages to the plaintiff, which could harm the business.

     Beginning in August 2001, a number of securities class action complaints were filed in the Southern District of New York seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of the Company’s common stock between the date of its initial public offering and December 6, 2000. The complaints name as defendants the Company and certain of its directors and officers, FleetBoston Robertson Stephens, and other parties as underwriters of the Company’s initial public offering (the “Firepond Defendants”). The plaintiffs allege, among other things, that the Company’s prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the investment banks which underwrote the Company’s initial public offering of securities received undisclosed and excessive brokerage commissions, and required investors to agree to buy shares of the Company’s securities after the initial public offering was completed, at predetermined prices, as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that these actions artificially inflated the price of the Company’s common stock after the initial public offering. The action against the Company is being coordinated with over three hundred other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed in July 2002. In October 2002, the court dismissed the individual defendants from the case without prejudice based upon stipulations of dismissal filed by the plaintiffs and the individual defendants. After a hearing on the motion to dismiss, the Court, on February 19, 2003, denied dismissal of the claims against the companies and individuals, including the Firepond Defendants. While the Company believes the claims against it are without merit and intends to defend the actions vigorously, the litigation is in the preliminary stage and the Company cannot predict the outcome with certainty. The Company may incur substantial legal fees and expenses, and the litigation may divert the attention of some of the Company’s key management. The Company’s defense of this litigation, regardless of its outcome, may be costly and time-consuming. Should the outcome of the litigation be adverse to the Company, it could be required to pay significant monetary damages to the plaintiff, which could harm the business.

     The Company is also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s business, financial condition or results of operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Certain statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Overview,” “Liquidity and Capital Resources” and “Risk Factors” included in these sections and those appearing elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

     We are a leading provider of sales configuration systems that help companies reduce the total cost of selling complex products, regardless of the sales channel. Sold as a complete system, or as incremental modules that address specific business needs, our SalesPerformer sales configuration system simplifies the sale of complex products, enabling companies to convert more leads into accurate orders. We also offer an online customer assistance solution, called eServicePerformer, that leverages advanced intelligence engines and natural language processing technology to manage a company’s online customer interaction channels, with an emphasis on email response management.

     During the quarter ended July 31, 2002, we announced a strategic realignment to further enhance our focus on the markets for sales configuration and email response management, as well as measures to better align our costs with the current economic conditions. In addition, as a result of a prolonged slowdown of global information technology spending, specifically within the enterprise software marketplace, we undertook a plan to restructure our operations. These actions sought to better align our cost structure with projected revenue in the future and preserve cash. We reduced headcount and facilities as well as wrote off excess equipment and terminated and restructured certain contractual relationships. Overall, we terminated 19 general and administrative, 19 sales and marketing, 25 professional services and 30 development employees. The restructuring and other special charges for fiscal 2002 totaled $3.4 million. These actions further contributed to the significant decrease in our expenses in the three months ended January 31, 2003 compared to the same period of the prior year.

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Results of Operations

     The following table presents selected consolidated financial data as a percentage of total net revenue:

                       
          Three Months
          Ended January 31,
         
          2003   2002
         
 
Revenue:
               
   
License
    15.7 %     43.2 %
   
Services and maintenance
    84.3       56.8  
   
 
   
     
 
     
Total revenue
    100.0       100.0  
   
 
   
     
 
Cost of revenue:
               
 
License
          0.8  
 
Product-related services and maintenance
    42.1       40.6  
   
 
   
     
 
     
Total cost of revenue
    42.1       41.4  
   
 
   
     
 
Gross profit
    57.9       58.6  
Operating expenses:
               
 
Sales and marketing
    31.0       27.6  
 
Research and development
    28.1       38.2  
 
General and administrative
    30.9       19.9  
 
Stock-based compensation
    6.1       19.8  
 
Amortization of goodwill and other intangible assets
    0.7       5.4  
 
Impairment of developed technology and know-how
          41.6  
   
 
   
     
 
     
Total operating expenses
    96.8       152.5  
   
 
   
     
 
Loss from operations
    (38.9 )     (93.9 )
Interest income
    2.7       2.4  
Other income (expense), net
    17.4       (2.6 )
   
 
   
     
 
Loss before cumulative effect of a change in accounting principle
    (18.8 )     (94.1 )
Cumulative effect of a change in accounting principle
          (53.0 )
   
 
   
     
 
Net loss
    (18.8 )%     (147.1 )%
   
 
   
     
 

Comparison of Three Months Ended January 31, 2003 and 2002

     Revenue. Total revenue decreased $3.7 million, or 49.0%, to $3.8 million in the three months ended January 31, 2003 from $7.5 million in the three months ended January 31, 2002. This decrease is attributable to an 81.5% decrease in license revenue and a 24.4% decrease in services and maintenance revenue.

       License. License revenue decreased $2.6 million, or 81.5%, to $599,000 in the three months ended January 31, 2003 from $3.2 million in the three months ended July 31, 2002. License revenue as a percentage of total revenue decreased to 15.7% in the three months ended January 31, 2003 from 43.2% in the three months ended January 31, 2002. The decrease in absolute dollars and as a percentage of total revenue are primarily attributable to a decline in our software license sales which we believe is due in part to a continued slowdown in information technology spending by companies in our target markets. The decline in revenue is also due to a fewer number of implementation engagements contributing to license revenue as compared to the prior year quarter. Also, the results for the first quarter of fiscal 2002 included the completion of a large customer implementation resulting in a modification of the estimate to complete and the acceleration of license revenue of $1.2 million as well as the resolution of certain contingencies from two other customers resulting in an additional $1.2 million of license revenue.

       Services and maintenance. Services and maintenance revenue decreased $1.0 million, or 24.4%, to $3.2 million in the three months ended January 31, 2003 from $4.3 million in the three months ended January 31, 2002. Services and maintenance revenue as a percentage of total revenue increased to 84.3% in the three months ended January 31, 2003 from 56.8% in the three months ended January 31, 2002. The decrease in absolute dollars is attributable primarily to the decrease in consulting engagements due to fewer new license implementation engagements as well as a reduced level of implementation services provided with new and post-implementation engagements. The increase as a percentage of total revenue is due to maintenance revenue declining at a substantially lower rate than license and services revenue.

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     Cost of revenue. Total cost of revenue decreased $1.5 million, or 48.2%, to $1.6 million in the three months ended January 31, 2003 from $3.1 million in the three months ended January 31, 2002. Total cost of revenue as a percentage of total revenue increased to 42.1% in the three months ended January 31, 2003 from 41.4% in the three months ended January 31, 2002.

       Cost of license revenue. Cost of license revenue consists primarily of costs of royalties, media, product packaging, and other production costs. Cost of license revenue decreased $56,000, or 100.0%, to $0 in the three months ended January 31, 2003 from $56,000 in the three months ended January 31, 2002. Cost of license revenue as a percentage of license revenue decreased to 0% in the three months ended January 31, 2003 from 1.7% in the three months ended January 31, 2002. The decrease in absolute dollars and as a percentage of license revenue is primarily due to a decrease in royalties due for license transactions during the quarter.

       Cost of services and maintenance revenue. Cost of services and maintenance revenue consists primarily of salaries and related costs for consulting, training and customer support personnel, including cost of services provided by third-party consultants engaged by us. Cost of services and maintenance revenue decreased $1.4 million, or 47.2%, to $1.6 million in the three months ended January 31, 2003 from $3.0 million in the three months ended January 31, 2002. Cost of services and maintenance revenue as a percentage of services and maintenance revenue decreased to 49.9% in the three months ended January 31, 2003 from 71.5% in the three months ended January 31, 2002. The decrease in absolute dollars and as a percentage of services and maintenance revenue is primarily due to decreased staff and consulting resources, increased utilization rate of staff, and our effort to cut costs.

     Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions and bonuses for sales and marketing personnel, and promotional expenses. Sales and marketing expenses decreased $879,000, or 42.5%, to $1.2 million in the three months ended January 31, 2003 from $2.1 million in the three months ended January 31, 2002. Sales and marketing expenses as a percentage of total revenue increased to 31.0% in the three months ended January 31, 2003 from 27.6% in the three months ended January 31, 2002. Sales and marketing expenses decreased in absolute dollars primarily due to the decrease in headcount in our sales and marketing operations as a result of the actions we took to restructure our operations and lower commissions on fewer license transactions, as well as a decrease in marketing program spending. We plan to invest in marketing programs as necessary.

     Research and development expenses. Research and development expenses consist primarily of salaries and personnel-related costs and the costs of contractors associated with the development of new products, the enhancement of existing products, and the performance of quality assurance and documentation activities. Research and development expenses decreased $1.8 million, or 62.5%, to $1.1 million in the three months ended January 31, 2003 from $2.9 million in the three months ended January 31, 2002. Research and development expenses as a percentage of total revenue decreased to 28.1% in the three months ended January 31, 2003 from 38.2% in the three months ended January 31, 2002. These expenses decreased in absolute dollars and as a percentage of total revenue due to a decrease in headcount and decreased utilization of product development contractors as well as lower operating costs due to a consolidation of our research and development operations to Minnesota. We will continue to make necessary investments to enhance our existing products and develop new products.

     General and administrative expenses. General and administrative expenses consist primarily of salaries, and other personnel-related costs for executive, financial, human resource, information services, and other administrative functions, as well as legal and accounting costs. General and administrative expenses decreased $313,000, or 21.0%, to $1.2 million in the three months ended January 31, 2003 from $1.5 million in the three months ended January 31, 2002. General and administrative expenses as a percentage of total revenue increased to 30.9% in the three months ended January 31, 2003 from 19.9% in the three months ended January 31, 2002. These expenses decreased in absolute dollars primarily as a result of decreased headcount, which resulted in reduced payroll and other related expenses. These expenses as a percentage of total revenue increased primarily due to the lower revenue for the first quarter of fiscal 2003.

     Stock-based compensation expense. Stock-based compensation expense decreased $1.3 million, or 84.2%, to $234,000 in the three months ended January 31, 2003 from $1.5 million in the three months ended January 31, 2002. Stock-based compensation expense as a percentage of total revenue decreased to 6.1% in the three months ended January 31, 2003 from 19.8% in the three months ended January 31, 2002. Stock-based compensation expense at January 31, 2003 includes $3,500 for charges related to employee and non-employee stock option grants and warrants and $230,000 for charges related to shares we acquired in satisfaction of two loan agreements.

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     Amortization of other intangible assets. Amortization of other intangible assets decreased $382,000, or 93.6%, to $26,000 in the three months ended January 31, 2003 from $408,000 in the three months ended January 31, 2002. Amortization of other intangible assets as a percentage of total revenue decreased to 0.7% in the three months ended January 31, 2003 from 5.4% in the three months ended January 31, 2002. The decrease is primarily due to the impairment of related developed technology and know-how under SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.

     Impairment of developed technology and know-how. During the three months ended January 31, 2002, we lowered our estimates of the expected revenue from the Brightware product, eCustomer assistance software, and determined that the developed technology and know-how intangible asset was significantly impaired and, accordingly, recorded a $3.1 million impairment charge.

     Interest income. Interest income decreased $79,000, or 43.6%, to $102,000 in the three months ended January 31, 2003 from $181,000 in the three months ended January 31, 2002. The decrease is primarily due to our decreased cash and cash equivalents and short-term investments as well as a decline in interest rates.

     Other income (expense), net. Other income (expense), net primarily consists of bank fees and foreign currency transaction gains and losses. Other income (expense), net improved $863,000, or 440.3%, to $667,000 in income in the three months ended January 31, 2003 from $196,000 in expense in the three months ended January 31, 2002. The change is primarily due to foreign currency transaction gains in the three months ended January 31, 2003.

     Cumulative effect of a change in accounting principle. With the acquisition of Brightware, Inc. in 2001, we allocated approximately $4.0 million to goodwill and $2.2 million to assembled workforce. As of October 31, 2001, accumulated amortization of goodwill and assembled workforce was $1.8 million and $519,000, respectively. Effective November 1, 2001, we adopted SFAS No. 142, Goodwill and Other Intangible Assets and reclassified the net book value of assembled workforce to goodwill. As a result of the valuation under the new FASB standard of the remaining goodwill, we determined that the goodwill was fully impaired and, accordingly, recorded a cumulative change in accounting principle charge of $4.0 million.in the quarter ended January 31, 2002.

Liquidity and Capital Resources

     As of January 31, 2003, cash and cash equivalents were $14.8 million and short-term investments were $10.5 million as compared with cash and cash equivalents of $13.5 million and short-term investments of $15.7 million as of October 31, 2002. Our working capital at January 31, 2003 was $17.9 million compared to working capital of $18.6 million at October 31, 2002.

     Net cash used in operating activities was $4.0 million in the three months ended January 31, 2003 compared with net cash used in operating activities of $3.1 million in the three months ended January 31, 2002. Cash used in operating activities in the three months ended January 31, 2003 was attributable to our net loss, as well as changes in various working capital accounts including accrued restructuring of which $1.6 million was due to facilities-related payments, offset by stock-based compensation and depreciation and amortization.

     Net cash provided by investing activities was $5.4 million in the three months ended January 31, 2003 compared with net cash provided by investing activities of $3.0 million in the three months ended January 31, 2002. Net cash provided by investing activities in the three months ended January 31, 2003 was primarily attributable to proceeds from the sale and maturities of short-term investments and a decrease in restricted cash, offset by the purchase of property and equipment.

     We lease facilities under non-cancelable operating leases which have various expiration dates ranging from 2003 through 2005. At January 31, 2003, future minimum annual lease payments amounted to $1.6 million under these leases.

     We anticipate continued spending on capital expenditures consistent with anticipated requirements for operations, infrastructure and personnel. We believe that our existing cash balances will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, we may need to raise additional funds in the next 12 months or in the future to support more rapid expansion of our sales force, develop new or enhanced products or services, respond to competitive pressures, acquire complementary businesses or technologies, pay damages under current or future litigation, or respond to unanticipated requirements. If we seek to raise additional funds, we may not be able to

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obtain funds on terms which are favorable or acceptable to us. If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing stockholders would be reduced. Furthermore, these securities may have rights, preferences or privileges senior to our common stock.

Recent Accounting Pronouncements

     In December 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation expands the disclosures to be made by a guarantor in its annual and interim financial statements about its obligations under certain guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by the Interpretation, we have adopted the disclosure requirements for the quarter ended January 31, 2003. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.

     In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123 (SFAS No. 148) which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about our method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We will adopt the disclosure requirement in its quarter ending April 30, 2003. The adoption of this standard is not expected to have a material effect on our consolidated financial statements.

Risk Factors

     As defined under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995, except for the historical information contained herein, some of the matters discussed in this filing contain forward-looking statements regarding future events that are subject to risks and uncertainties. The following factors, among others, could cause actual results to differ materially from those described by such statements.

A continued slowdown in information technology spending could reduce the sale of our products

     Average license fees for our SalesPerformer product typically range from approximately a few hundred thousand dollars to several million dollars. Often this represents a significant information technology capital expenditure for the companies to which we target our sales efforts. In addition, regardless of the cost of our products, many companies may elect not to pursue information technology projects which may incorporate either of our product suites, or our individual components, as a result of the continued slowdown in information technology spending. Consequently, if the continued slowdown in information technology spending should persist, due to a weakened economy or other factors, we may be unable to maintain or increase our sales volumes and achieve our targeted revenue growth. In addition, we depend on our customers to pay recurring maintenance fees to us for technical support and product upgrades. Often, this represents a significant and recurring information technology capital expenditure for our customers. As a result, if the continued slowdown in information technology spending should persist, due to a weakened economy or other factors, we may be unable to maintain our maintenance revenues at their current levels and achieve our targeted revenues.

If the markets for sales configuration and customer service solutions do not expand, we may not be successful

     Our products address a new and emerging market for solutions that optimize the “lead-to-order” process and solutions which address guided customer service. The failure of these markets to expand, or a delay in the expansion of these markets, would seriously harm our business. Our business depends on the successful customer acceptance of our products and we expect that we will continue to depend on revenue from new and enhanced versions of our products. Our business would be harmed if our target customers do not adopt and expand their use of our products.

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We depend on key personnel and must attract and retain qualified personnel to be successful

     Our success depends upon the continued contributions of our senior management, sales, engineers, and professional services personnel, who perform important functions and would be difficult to replace. Also, we believe that our future success is highly dependent on Klaus P. Besier, our Chairman, Chief Executive Officer and President. The loss of the services of any key personnel, particularly senior management, sales, engineers, or professional services personnel could seriously harm our business.

     We depend on our direct sales force for a significant portion of our current sales and our growth depends on the ability of our direct sales force to increase sales to a level that will allow us to reach and maintain profitability. Our ability to increase our sales will depend on our ability to train and retain top quality sales people who are able to target prospective customers’ senior management, and who can productively and efficiently generate and service large accounts. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Turnover among our sales staff has been significant and a number of our employees have left or been terminated. If we are unable to retain qualified sales personnel, or if newly hired personnel fail to develop the necessary skills or to reach productivity when anticipated, we may not be able to increase sales of our products and services.

     In addition, in connection with our effort to streamline operations, reduce costs and bring our staffing and infrastructure in line with industry standards, we restructured our organization and reduced our workforce. In fiscal year 2002, we terminated 93 employees and incurred aggregate costs of $1.9 million associated with this workforce reduction related to severance and other employee-related costs, and may incur further costs. Our restructuring may also yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. Continuity of personnel is an important factor in the successful completion of our business plan and ongoing turnover in our personnel could materially and adversely impact our sales and marketing efforts, current customer implementations, and our development projects. We believe that hiring and retaining qualified individuals at all levels is essential to our success, and there can be no assurance that we will be successful in attracting and retaining the necessary personnel.

Recent material litigation has caused, and may continue to cause, us to incur substantial costs as well as to divert management’s attention and resources

     On October 19, 2001, General Motors Corporation filed a complaint against us alleging certain statutory and common law claims including breach of contract, coercion, fraud, and unfair and deceptive trade practices. General Motors’ claims relate to our original 1994 agreement with General Motors, as amended, and license agreements, services agreements and a general release entered into with us in May 2000. We may incur substantial legal fees and expenses and the litigation may divert the attention of some of our key management. Our defense of this litigation, regardless of its outcome, has been and may continue to be costly and time-consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages to the plaintiffs, which could harm our business.

     In addition, since August 1, 2001, a number of securities class action complaints were filed against us, the underwriters of our initial public offering, and certain of our executives, in the United States District Court for the Southern District of New York. The complaints allege that the underwriters of our initial public offering, Firepond, and the other named defendants violated federal securities laws by making material false and misleading statements in the prospectus incorporated in our registration statement on Form S-1 filed with the Securities and Exchange Commission in November 1999. The complaints allege, among other things, that FleetBoston Robertson Stephens and the other underwriters solicited and received excessive and undisclosed commissions from several investors in exchange for which FleetBoston Robertson Stephens and the other underwriters allocated to these investors material portions of the restricted number of shares of common stock issued in connection with our initial public offering. The complaints further allege that FleetBoston Robertson Stephens and the other underwriters entered into agreements with its customers in which FleetBoston Robertson Stephens and the other underwriters agreed to allocate the common stock sold in our initial public offering to certain customers in exchange for which such customers agreed to purchase additional shares of our common stock in the after-market at pre-determined prices. Securities class action litigation can result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

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Negative results from the discovery of fraudulent acts by our former acting vice president of sales could adversely affect our company

     In fiscal 2002, as a result of senior management’s discovery of three fraudulent transactions involving license amounts totaling approximately $5 million by our former acting vice president of sales, we lowered our previously reported results and reduced our forecasted revenues. The Securities and Exchange Commission’s investigation into this matter as well as any further action brought by government agencies or any shareholder litigation has and may continue to result in substantial legal fees and expenses and divert management’s attention and resources.

Disappointing quarterly revenue or operating results could cause the price of our common stock to fall

     We currently derive a significant portion of our license revenue in each quarter from a small number of relatively large orders, and we generally recognize revenue from our SalesPerformer product licenses over the related implementation period. If we are unable to recognize revenue from one or more substantial license sales planned for a particular fiscal quarter, our operating results for that quarter would be seriously harmed. In addition, the license of our SalesPerformer product typically involves a substantial commitment of resources by our customers or their consultants over an extended period of time. The time required to complete an implementation may vary from customer to customer and may be protracted due to unforeseen circumstances. Because our revenue from implementation, maintenance and training services are largely correlated with our license revenue, a decline in license revenue would also cause a decline in our services revenue in the same quarter and in subsequent quarters. Because our sales cycle is long, we may have difficulty predicting when we will recognize revenue. If our quarterly revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could fall substantially and we could become subject to securities class-action litigation. Litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would materially adversely affect our business, financial condition and results of operations.

We expect to continue to incur losses and may not be profitable in the future

     We have incurred quarterly and annual losses intermittently since we were formed in 1983, and regularly since fiscal 1997. We incurred net losses of $717,000 for the three months ended January 31, 2003, $23.7 million in fiscal 2002, $70.3 million for fiscal 2001, and $16.3 million for fiscal 2000. We may continue to incur losses on a quarterly and annual basis and not become profitable. Additionally, we may not grow or generate sufficient revenue to attain profitability.

We face possible Nasdaq delisting which would result in a limited public market for our common stock and make obtaining future equity financing more difficult for us

     We are currently trading at levels that may result in our failure to maintain the Nasdaq National Market minimum $5 million market value of publicly held share requirement. If the market value of our publicly held shares falls below $5 million for a period of thirty consecutive business days, Nasdaq has the right to delist the stock if within ninety days thereafter the market value of our publicly held shares is not $5 million for a minimum of ten consecutive business days. In the event the market value of our publicly held shares does not rise above $5 million for the required ten consecutive business days, we would have the right to request a hearing to appeal a Nasdaq determination that our stock should be delisted.

     We cannot assure you that we will comply with the requirements for continued listing of our common stock on the Nasdaq National Market, or that any appeal of a decision to delist our common stock will be successful. However, if our common stock loses its Nasdaq National Market status, we may apply for inclusion in the Nasdaq SmallCap Market. If our common stock loses its Nasdaq National Market status and we are unable to trade on the Nasdaq SmallCap Market, shares of our common stock would likely trade in the over-the-counter market. Consequently, selling our common stock would be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and securities analysts’ and news media coverage of us may be reduced. In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity thereof. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common stock.

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     Such delisting from the Nasdaq National Market or further declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and significantly increase the ownership dilution to stockholders caused by our issuing equity in financing or other transactions. Furthermore, our delisting from the Nasdaq National Market will likely damage our general business reputation and thus may harm our financial condition and operating results.

We may not achieve anticipated maintenance revenue if we do not successfully migrate our SalesPerformer customers to the latest version of our products and customers cancel their maintenance agreements

     Our business depends on the success and customer acceptance of our products and the adoption of future enhancements to those products. Customers enter into maintenance agreements for the purpose of receiving both customer support and the right to future enhancements of the product. When implementing our SalesPerformer products customers may have requirements to create customized features or functionality outside of our base product offering. Customization of our products is usually performed by writing additional software code which will make it difficult for the customer to migrate to the next version of the product. Customers who extensively customized our products may be unwilling to or unable to commit additional resources to upgrade to the latest or next version of our product. If our customers do not adopt the latest version of our products, those customers may cancel their maintenance agreements and we may not achieve our anticipated maintenance revenue.

Difficulties and financial burdens associated with mergers and acquisitions could harm our business and financial results

     In the future, we may acquire additional businesses or product lines or be the target of a potential merger or acquisition. Any future merger or acquisition of or by us may not produce the revenue, earnings or business synergies anticipated, and an acquired product, service or technology might not perform as expected. Prior to completing a merger or acquisition, however, it is difficult to determine if such benefits can actually be realized. The process of integrating companies into our business or integrating our company into another business may also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which we might otherwise devote to our existing business. Also, the process may require significant financial resources that we might otherwise allocate to other activities, including the ongoing development or expansion of our existing operations. If we pursue a future merger or acquisition, our management could spend a significant amount of time and effort identifying and completing the merger or acquisition. If we make a future acquisition, we could issue equity securities which would dilute current stockholders’ percentage ownership, incur substantial debt, assume contingent liabilities or incur a one-time charge.

Failure to expand our relationships with third party channels may adversely impact our support and maintenance of existing customers, delay the implementation of our products and delay the growth of our revenue

     Our strategy includes expanding and increasing third party channels which license and support our products, such as resellers, distributors, OEMs, system integrators and consulting firms. This often requires that these third parties recommend our products to their customers and install and support our products for their customers. To increase our revenue and implementation capabilities, we must develop and expand our relationships with these third parties. In addition, if these firms fail to implement our products successfully for their clients, we may not have the resources to implement our products on the schedule required by the client which would result in our inability to recognize revenue from the license of our products to these customers.

Difficulties associated with the protection of our intellectual property and potential claims alleging infringement of third parties’ intellectual property could harm our ability to compete and result in significant expense to us and loss of significant rights

     Our success and ability to compete is dependent in part upon our proprietary technology. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors’ offering similar products, potentially resulting in loss of a competitive advantage and decreased revenue. Existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, we may not be able to protect our proprietary rights against unauthorized third party copying or use. Furthermore, policing the

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unauthorized use of our products is difficult. Some of our contractual arrangements provide third parties with access to our source code and other intellectual property upon the occurrence of specified events. This access could enable these third parties to use our intellectual property and source code to develop and manufacture competing products, which would adversely affect our performance and ability to compete. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could materially adversely affect our future operating results.

     Further, the software industries are characterized by the existence of frequent litigation of intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, disrupt our relationships with our customers or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our operating results. Royalty or licensing agreements, if required, may not be available on terms acceptable to us. If a claim against us is successful and we cannot obtain a license to the relevant technology on acceptable terms, license a substitute technology or redesign our products to avoid infringement, our business, financial condition and results of operations would be materially adversely affected.

Intense competition from other technology companies could prevent us from increasing or sustaining revenue and achieving or sustaining profitability

     The market for sales configuration solutions is intensely competitive and we expect that this competition will increase. Many of our current and potential competitors have longer operating histories, greater name recognition and substantially greater resources than we do. Therefore, they may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. If we are unable to compete effectively, our revenue could significantly decline.

Our failure to successfully implement our products in a timely manner could result in negative publicity and reduced sales, both of which could significantly harm our business and operating results

     In the future, our customers may experience difficulties or delays in completing the implementation of our products. We have found that implementing our SalesPerformer products may be more time consuming than we, or our customers, anticipate. The unique configuration or integration with our customers’ legacy systems, such as existing databases and enterprise resource planning software, may be underestimated and the deployment of our products can be delayed. Failing to meet customer expectations on deployment of our products could result in a loss of customers and negative publicity regarding us and our products, which could adversely affect our ability to attract new customers. In addition, time-consuming deployments may also increase the amount of professional services we allocate to each customer, thereby increasing our costs and adversely affecting our business and operating results.

We depend upon technology licensed to us by third parties, the loss of which could adversely affect our competitive position

     We license technology from a small number of software providers for use with our products and implementation services. We anticipate that we will continue to license and rely on technology from third parties in the future. This technology may not continue to be available on commercially reasonable terms, if at all, and some of the technology we license would be difficult to replace. The loss of the use of this technology would result in delays in the license and implementation of our products until equivalent technology, if available, is identified, licensed and integrated. In turn, this could prevent the implementation or impair the functionality of our products, delay new product introductions, or injure our reputation.

Our results of operations may be harmed by charges associated with stock-based compensation

     On June 26, 2001, we announced an offer to allow our directors and certain eligible employees to exchange outstanding stock options for new stock options. The number of options granted was equal to three-fourths of the number of options that were tendered and accepted for exchange. On July 26, 2001, we accepted approximately 717,900 options for exchange and, on July 31, 2001 issued approximately 538,400 new stock options with an exercise price equal to $6.60 per share. For

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financial reporting purposes all option grants subject to the tender offer are treated as variable awards. Accordingly, we are required to record as compensation expense, chargeable against our reported earnings, all increases in the value of those options, including any appreciation in the market price of the underlying option shares, which occurs between the grant date of that option and the date the option is exercised or otherwise terminated unexercised. The greater the increase in the market value of our common stock following the date of grant is the greater the compensation expense and effect on our reported earnings will be.

Our stock price may continue to be volatile which may lead to losses by investors and result in securities litigation

     The trading price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including quarterly variations in our results of operations; changes in recommendations by the investment community or in their estimates of our revenue or operating results; speculation in the press or investment community; strategic actions by our competitors, such as product announcements or acquisitions; and general market conditions. In addition, the stock market in general and the Nasdaq National Market and securities of Internet and software companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to their operating performance. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. Litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would materially adversely affect our business, financial condition and results of operations.

Failure to realize planned international revenue could seriously harm our business

     International revenue currently accounts for a significant percentage of our total revenue. We expect international revenue to continue to account for a significant percentage of total revenue in the future. However, foreign markets for our products may develop more slowly than currently anticipated. International revenue as a percentage of total revenue was 27% in the three months ended January 31, 2003, 51% in fiscal 2002, 36% in fiscal 2001, and 28% in fiscal 2000. Our failure to realize our planned international sales levels could have a significant negative impact on our business.

Due to our international operations we are subject to foreign exchange risk

     We serve our customers from offices throughout the United States, Europe and Japan. Consequently, we are exposed to fluctuations of the dollar against the foreign currencies of those countries in which we have a substantial presence. For each of our foreign subsidiaries, the functional currency is the local currency. Accordingly, assets and liabilities are translated at period-end exchange rates and operating statement items are translated at weighted-average rates prevailing during the periods presented. We have exchange rate exposure in the following principal currencies: the British Pound, Euro and Japanese Yen.

     Fluctuations against the U.S. dollar can produce significant differences in the reported value of sales and expenses. For sales in the United States which are produced outside of the United States, any weakening of the U.S. dollar against a particular country’s currency reduces the amount of net income reported in U.S. dollars. Conversely, the same weakening of the U.S. dollar generates an offsetting increase in the dollar value of profits arising from sales within that country. Any weakening of the U.S. dollar that negatively impacts a foreign operation’s operating income will similarly reduce the dollar value of any overhead expense located in that country.

     The translation of foreign denominated assets and liabilities at period-end exchange rates could materially and adversely effect our reported financial position.

If we are unable to introduce new and enhanced products on a timely basis that respond effectively to changing technology, our revenue may decline

     Our market is characterized by rapid technological change, changes in customer requirements, frequent new product and service introductions and enhancements, and evolving industry standards. Advances in Internet technology or in e-commerce software applications, or the development of entirely new technologies to replace existing software, could lead to new competitive products that have better performance or lower prices than our products and could render our products obsolete and unmarketable. In addition, if a new software language or operating system becomes standard or is widely adopted in our

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industry, we may need to rewrite portions of our products in another computer language or for another operating system to remain competitive. If we are unable to develop new and enhanced products on a timely basis that respond to changing technology, our business could be seriously harmed.

If our new and sophisticated products fail to perform properly, our revenue would be adversely affected

     Software products as sophisticated as ours may contain undetected errors, or bugs which result in product failures, or may cause our products to fail to meet our customers’ expectations. Our products may be particularly susceptible to bugs or performance degradation because of the evolving nature of Internet technologies and the stress that full deployment of our products over the Internet to thousands of end-users may cause. Product performance problems could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources or injury to our reputation.

Product liability claims related to our customers’ critical business operations could result in substantial costs

     Our products are critical to the business operations of our customers. If one of our products fails, a customer may assert a claim for substantial damages against us, regardless of our responsibility for the failure. Our product liability insurance may not cover claims brought against us. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any product liability claims, whether or not successful, could seriously damage our reputation and our business.

Control by our executive officers, directors and associated entities may limit stockholders’ ability to influence the outcome of director elections and other matters requiring stockholder approval

     As of January 31, 2003, our executive officers, directors and entities associated with them own approximately 48% of the outstanding shares of our common stock. These stockholders have significant influence over matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.

Provisions of Delaware law and of our charter and by-laws may make a takeover more difficult and lower the value of our common stock

     Provisions in our certificate of incorporation and by-laws and in Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so, and the ability of public stockholders to change our management could be substantially impeded by these anti-takeover provisions. For example, we have a staggered board of directors and the right under our charter documents to issue preferred stock without further stockholder approval, which could adversely affect the holders of our common stock.

Future sales of our stock could cause our stock price to fall

     Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income and expense are sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments. Based on the nature and current levels of our investments, however, we have concluded that there is no material market risk exposure.

ITEM 4. CONTROLS AND PROCEDURES

     Our principal executive officer and principal financial officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On October 19, 2001, General Motors Corporation filed a complaint against us in the Superior Court of Massachusetts, Middlesex County. The complaint alleges, among other things, a breach of contract under agreements entered into in 1994, as amended; anticipatory repudiation of agreements entered into in 1994, as amended; unjust enrichment; establishment of a constructive trust; rescission and restitution based upon failure of consideration as well as extortion and coercion relating to agreements entered into in 1994, as amended; breach of the covenant of good faith and fair dealing; fraud; as well as violation of Chapter 93A of the General Laws of the Commonwealth of Massachusetts relating to unfair and deceptive trade practices. General Motors’ claims further relate to license agreements, services agreements and a general release entered into with us in May 2000. The claims generally allege, among other things, that we coerced, extorted or otherwise caused General Motors to enter into the May 2000 agreements under duress. On the Civil Cover Sheet for the Superior Court of Massachusetts, Middlesex County, General Motors claims damages in the amount of $9,000,000, exclusive of fees, costs and multiple damages. The complaint does not demand damages in specific dollar amounts. A Motion for Summary Judgment was filed on our behalf in December 2002. An opposition to the motion was filed on behalf of General Motors and a reply brief was filed on our behalf. The Motion for Summary Judgement is now pending before the court. While we believe the claims against us are without merit and intend to defend the action vigorously, the litigation is in the preliminary stage and we cannot predict the outcome with certainty. We may incur substantial legal fees and expenses, and the litigation may divert the attention of some of our key management. Our defense of this litigation, regardless of its outcome, may be costly and time-consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages to the plaintiff, which could harm our business.

     Beginning in August 2001, a number of securities class action complaints were filed in the Southern District of New York seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of our common stock between the date of our initial public offering and December 6, 2000. The complaints name as defendants Firepond and certain of its directors and officers, FleetBoston Robertson Stephens, and other parties as underwriters of our initial public offering (the “Firepond Defendants”). The plaintiffs allege, among other things, that our prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the investment banks which underwrote our initial public offering of securities received undisclosed and excessive brokerage commissions, and required investors to agree to buy shares of our securities after the initial public offering was completed, at predetermined prices, as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that these actions artificially inflated the price of our common stock after the initial public offering. The action against us is being coordinated with over three hundred other nearly identical actions filed against other companies. A motion to dismiss addressing issues common to the companies and individuals who have been sued in these actions was filed in July 2002. In October 2002, the court dismissed the individual defendants from the case without prejudice based upon stipulations of dismissal filed by the plaintiffs and the individual defendants. After a hearing on the motion to dismiss, the Court, on February 19, 2003, denied dismissal of the claims against the companies and the individuals,

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including the Firepond Defendants. While we believe the claims against us are without merit and intend to defend the actions vigorously, the litigation is in the preliminary stage and we cannot predict the outcome with certainty. We may incur substantial legal fees and expenses, and the litigation may divert the attention of some of our key management. Our defense of this litigation, regardless of its outcome, may be costly and time-consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages to the plaintiff, which could harm our business.

     We are also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on our business, financial condition or results of operations.

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SIGNATURES

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

Dated: March 17, 2003

  FIREPOND, INC.

  /s/ KLAUS P. BESIER

Klaus P. Besier
Chairman, Chief Executive Officer and President
(Principal Executive Officer)

  /s/ SUSAN W. LEDOUX

Susan W. Ledoux
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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CERTIFICATIONS

I, Klaus P. Besier, certify that:

  1.   I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”);
 
  c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 17, 2003

/s/ KLAUS P. BESIER


Klaus P. Besier
Chairman, Chief Executive Officer and President
(Principal Executive Officer)

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I, Susan W. Ledoux, certify that:

  1.   I have reviewed this quarterly report on Form 10-Q of Firepond, Inc.;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  a)   Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
  b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”);
 
  c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent function):

  a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 17, 2003

/s/ SUSAN W. LEDOUX


Susan W. Ledoux
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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