-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GJ0HLoWX+F8OKxKTRpgr0TGo42fVTM59VBD3eZWbgUmiWz6GsrEogLhSogJ6Gp/6 iGYtn1C/uf+QlTOFh7iBHQ== 0000950123-02-009314.txt : 20021001 0000950123-02-009314.hdr.sgml : 20021001 20020930214405 ACCESSION NUMBER: 0000950123-02-009314 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTSTEP INC CENTRAL INDEX KEY: 0000872443 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 311083175 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19024 FILM NUMBER: 02777476 BUSINESS ADDRESS: STREET 1: 2800 CORPORATE EXCHANGE DR STREET 2: N/A CITY: COLUMBUS STATE: OH ZIP: 43231 BUSINESS PHONE: 6145237000 MAIL ADDRESS: STREET 1: 2800 CORPORATE EXCHANGE DR CITY: COLUMBUS STATE: OH ZIP: 43231 FORMER COMPANY: FORMER CONFORMED NAME: SYMIX SYSTEMS INC DATE OF NAME CHANGE: 19930328 10-K 1 l96355ae10vk.txt FRONTSTEP, INC. FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19024 --------------------- FRONTSTEP, INC. (Exact name of registrant as specified in its charter) OHIO 31-1083175 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
2800 CORPORATE EXCHANGE DRIVE COLUMBUS, OHIO 43231 (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (614) 523-7000 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for the registrant's common stock in the Nasdaq National Market on September 10, 2002, was approximately $22,704,654. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of September 10, 2002, 7,568,218 shares of the issuer's common stock, without par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FRONTSTEP, INC. AND SUBSIDIARIES FISCAL YEAR 2002 FORM 10-K AND ANNUAL REPORT INDEX
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 11 Item 3. Legal Proceedings........................................... 11 Item 4. Submission of Matters to a Vote of Securities Holders....... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 12 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 28 Item 8. Financial Statements and Supplementary Data................. 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant.......... 55 Item 11. Executive Compensation...................................... 57 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 63 Item 13. Certain Relationships and Related Transactions.............. 66 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 67
--------------------- FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current beliefs, plans, objectives and expectations of the Company's management. The words "expect," "anticipate," "intend," "plan," "believe," "estimate," "would" and similar expressions identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include but are not limited to those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Factors That May Affect Future Results and Market Price of Stock". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q to be filed in the coming year. 2 PART I ITEM 1. BUSINESS OVERVIEW Frontstep, Inc. is a leading global provider of software and services for midsize discrete, to-order manufacturers and business units of larger companies. For more than 23 years, Frontstep has helped manufacturers create and implement business solutions -- including extended enterprise resource management, customer relationship management, and supply chain management -- that simplify and streamline business processes and operations. Through these innovative and practical solutions, manufacturers can respond better and faster to customers' demands for quality products and services. Our innovative and practical solutions are designed specifically for meeting the unique needs of manufacturers of complex, custom products in to-order, job shop and mixed-mode environments. Our software solutions span the business of manufacturing and provide our customers a comprehensive suite of integrated software and services that (1) support the enterprise resource planning ("ERP") and traditional back-office management needs of an extended enterprise; (2) support customer relationship management ("CRM"); and (3) support an enterprise's supply chain management ("SCM") activities. The software products associated with each of these solutions provide a customer with a comprehensive business system that is typically their primary business system. Over the last three years, we have advanced the architecture of our products and have chosen Microsoft as our primary technology platform for the continued delivery of our software applications. Our CustomerSynchronized Solutions, built on Microsoft enterprise servers, languages and development tools, represent a fundamental technology shift that takes advantage of the vision and capabilities of Microsoft.NET. By providing a complete business solution on a single technology platform, Frontstep is able to offer a practical combination of industry-standard technologies designed specifically to work well together. Eliminating the need for disparate technology integration increases efficiency and value, making our solutions more attractive to cost-conscious manufacturers in today's lean economy. Frontstep will continue to support the current Progress-based versions of SyteLine. Frontstep develops, markets and supports the following products: Extended ERP. Manufacturers are spending more time improving operations and processes to compete in this economy. Frontstep's comprehensive Extended ERP offering, SyteLine, is designed to enable manufacturing companies to continue improving internal operations while extending the reach of the enterprise beyond the four walls. The SyteLine software suite provides the means for forward-thinking to-order manufacturers to connect sales, marketing, manufacturing, financials and service. SyteLine also helps companies connect manufacturing operations and core business processes with suppliers and customers. The SyteLine suite goes beyond standard ERP functionality by providing them with the means for competing effectively through enterprise-wide customer visibility and dynamic personalization. SyteLine is the platform for establishing and maintaining a strong business and technical foundation for manufacturing. Customer Relationship Management. Manufacturers are seeking to increase customer loyalty and retention, increase productivity and grow sales revenue. At the same time, with the wealth of information available to customers, expectations are on the rise. Frontstep's customer relationship management solutions provide a single interface point for customers, employees, suppliers and partners to view and execute activity with orders and customers. Frontstep's applications tightly integrate order management and back-office execution capabilities. Frontstep's customer relationship management solutions provide seamless integration of every business process that touches the customer. 3 Supply Chain Management. Supply chain management requires communication among a variety of trading partners. Frontstep's supply chain management applications provide real-time, Internet-based synchronization of manufacturing, distribution and external supply to customer demand. Based on the Microsoft infrastructure for successful business-to-business commerce, Frontstep's supply chain management integrates a company's front-office order entry and customer service operations with its back- office execution systems to assure that promises made are promises kept. Frontstep's supply chain management applications streamline the planning process by providing real-time order promising, dynamic synchronization, real-time intelligent messaging and analysis in both single-site and multisite, multi-ERP environments. Services and Support. Frontstep offers a full portfolio of professional services to help manufacturers achieve a rapid, ongoing return on their business system investment. With more than 23 years experience helping manufacturers, the Frontstep services team can help improve operations over the life of the partnership with Frontstep. Frontstep also provides a full range of education, support, and application hosting services to help operate business systems efficiently, at a low cost, and with high reliability. Our reputation for successful installations and implementations of these CustomerSynchronized Solutions is a function of our discipline and product capabilities and distinguishes the Company from its competition. Our solutions are rapidly deployable, scalable, flexible and reliable resulting in a comparatively low total cost of ownership and rapid return on investment. This is especially true of our newer product offerings, which are based on Microsoft technology to further enhance the ease of maintenance and long-term value. We believe that our approach to solving customers' business system issues results in increased efficiencies, reduced total costs of ownership and enhanced customer relations. More specifically: Increased efficiencies. In today's fast-paced, competitive environment, increased intra-enterprise business process efficiency is more critical to manufacturers than ever before. Frontstep's customers typically manufacture customer products order-by-order, often in small quantities. Increasing the efficiency and transparency of every step, from order entry to shipment and service, translates into valuable competitive benefit. Frontstep's software allows manufacturers to automate business processes, thereby building customer value by enabling and optimizing enterprise and intra-enterprise collaborative operational and financial processes, gaining greater efficiency at every stage. Reduced total cost of ownership. The Company's solutions are designed to minimize the total cost of implementing, operating and maintaining enterprise systems and to maximize operating efficiency, thereby providing tangible return on investments made by the customer. Our software runs on standard hardware platforms, providing users with the flexibility to leverage existing technology systems and to optimize system configurations. The modular design of the Company's software allows manufacturers to implement systems quickly and easily and provides the flexibility to add additional functionality or change business process models as customer needs and business requirements change. Our newer products utilize a unified architecture that is open, integrated, and leverages Microsoft SQL Server 2000, Web services, and more. Enhanced customer relationships. The Company's extended ERP, CRM and SCM solutions integrate customer requirements with sales, marketing, engineering, manufacturing and customer service information, in order to achieve more accurate planning and scheduling decisions, rapid response times, better on-time deliveries, improved order fulfillment, improved field service delivery and overall customer satisfaction. This customer-centric focus satisfies manufacturers' needs by unifying and synchronizing valued-customer touch points. It promotes knowledge accessibility so manufacturers can efficiently respond and deliver on time -- every time, thereby creating customer value by elevating the quality of knowledge. As a result of these factors, which we believe set us apart from our competition, Frontstep has been one of the leading providers of software and services in the enterprise software industry for more than 23 years, particularly with midsize discrete, to-order manufacturing companies. We provide our customers with the software solutions we have developed, professional consulting services associated with the implementation of our products and related training for customer personnel. We have more than 4,400 customer sites and a worldwide network of 26 offices in 16 countries. Our offices are equipped to provide our services, support our products and, 4 in several countries around the world, translate our products into other languages. The Company's principal executive offices are located at 2800 Corporate Exchange Drive, Columbus, Ohio 43231, and its telephone number is (614) 523-7000. THE ENTERPRISE APPLICATIONS SOFTWARE INDUSTRY We are in the enterprise applications software industry. This industry is large and has many companies that provide various types of software to meet general or specific business needs. Frontstep develops and markets products that solve business system issues for the manufacturing industry, specifically for midsize companies or divisions of larger companies. The enterprise application software industry has experienced tremendous change during 2001 and 2002 as software providers were impacted by difficult economic conditions. Software companies focused on generating revenues from their current customers and serving the market with improved return on investment and lower total cost of ownership. The enterprise applications market has been characterized historically as enterprise resource planning. Enterprise resource planning has generally been available since the early 1990's when corporate reengineering began and primarily supports the control and management of operations of a manufacturing enterprise. It has its roots with material requirements planning software and inventory control software that were utilized in the 1980's as a means of managing inventories and production schedules. More recently, our industry has been described as "Collaborative Commerce" by industry analysts, to more accurately reflect a changing business systems model for manufacturing companies to a more Internet-centric model. In recent years, many software providers have focused in recent years on system integration, security and development of Web-based solutions to meet the requirements of an Internet-driven marketplace. Our customers do business in an extremely competitive manufacturing environment. Changing technologies and the prospects for growth of collaboration via the Internet have dramatically altered the manner in which these customers do business or will do business in the future. These changes are also impacting business systems requirements to support these new ways of doing business. We believe that maximizing manufacturing efficiency and productivity, managing customer relationships, managing distribution channels, improving supplier relationships and improving performance of supply chains are essential requirements for the economy of the 21st century as companies seek to increase global reach, innovation, productivity and profitability. Given the difficult economic climate of the last few years and intense competitive factors affecting our customers and potential customers, we believe that mid-market companies are rethinking their business models and changing the way they do business to remain competitive. As they change, business systems requirements will include an enterprise management software solution that integrates front-office capabilities, customer relationship management and supply chain management, with more traditional ERP applications. We also believe that, in the mid-market, the solution must be rapidly deployable, scalable and flexible, resulting in a comparatively low total cost of ownership and rapid return on investment. Since 1998, the Company has been investing in the development of such software products and capabilities and the open architecture required to effectively solve these new challenges for our customers. According to AMR Research, a software market analysis firm, the worldwide marketplace for enterprise software will grow from approximately $37 billion in calendar year 2001 to more than $70 billion in calendar year 2006. For each of the major product markets, the projected annual growth rates are estimated to be approximately as follows:
WORLDWIDE WORLDWIDE SOFTWARE MARKET REVENUES 2001 REVENUES 2006 GROWTH RATE - --------------- ------------- ------------- ----------- (IN BILLIONS) Supply chain and product life-cycle management.................................. $5.6 $13.6 20% Customer relationship management.............. 11.0 26.0 19% Enterprise resource planning.................. 20.0 31.0 9%
5 STRATEGY Our objective is to become the leading provider of enterprise business software solutions for discrete, to-order manufacturing companies concentrated primarily in the mid-market, including subsidiaries and divisions of larger companies on a single platform: Microsoft. Our customer focus includes both single-site and multi-site manufacturers, including those with facilities around the world. Our product focus centers on extended ERP as the enterprise platform, together with fully integrated CRM and SCM solutions to meet all of an enterprise's primary business system requirements. The key components of our strategy include: Deliver a comprehensive, high value solution. We believe that we have the most complete software suite available to discrete, to-order manufacturing companies. The SyteLine brand is a well-known ERP software solution, and we have invested heavily over the last several years in delivering a new version of SyteLine on a 100% Microsoft-based platform and enhancing its base capabilities. Our efforts have also included the integration of complementary software applications to broaden the scope and flexibility of our offerings. We believe companies in our target vertical markets typically have limited economic and staff resources and prefer a single vendor to provide their end-to-end business system. As a result, we believe we can compete with larger, better-capitalized competitors on both the price and functionality of our offerings. Embrace a single technology platform for growing market share. We are committed to delivering a simple, but powerful, technology solution to better manage and leverage our costs of development and maintenance and to simplify our customers' information technology environment. We have chosen Microsoft as our primary technology platform for the continued delivery of all software applications. This standard technology, used by many of the Company's customers in other areas of their business, allows customers to leverage their existing technology investments and capabilities. While currently deployed versions of our ERP software use the Progress Software Corporation database and tools, the new version of SyteLine will advance, standardize and simplify our customers' technology platform as the marketplace increasingly adopts the Microsoft database and architecture. We intend to continue leveraging our strategic relationship with Microsoft to provide complementary solutions to its business applications. Provide outstanding services and support. We are committed to serving our customers beyond the sale of our products with excellence in professional services and support. The Company's worldwide services organization, which employs approximately 175 consultants and managers, uses a tailored, consultative approach and structured implementation methodology. Services include account management, consulting, project management, implementation, education, technical consulting, programming and system integration services, and ongoing maintenance and support. Our methodology and capabilities allow customers to rapidly and efficiently install and maximize the benefits of the Company's software products. The Company considers its ability to implement its software solution rapidly to more quickly provide business value a key competitive factor. Build on our leadership position in key vertical sectors. We believe that we are a leading provider of enterprise system solutions, which are broad and deep, to specific business environments. Our solutions fit single- or multi-site manufacturing companies in specific key verticals including: industrial equipment, fabricated metals, electrical equipment and electronics, furniture and fixtures, specialty vehicles and automotive, and aerospace. These companies employ discrete, to-order manufacturing styles such as engineer-to-order, make-to-order, and mixed mode/hybrid. They are demand pull-driven and need to compress lead times to better manage a complex product ordering and sales process. They need solutions that easily integrate with and complement parent-company systems like SAP or Oracle. We intend to leverage our experience and customer base to enhance our leadership position in the discrete, to-order manufacturing market. Leverage our global alliance of partners. We continue to nurture and grow our alliances with strategic technology partners to expand the breadth of our product capabilities, to expand our ability to market and sell our products, and to support our customers after the product sale. Microsoft, Cognos, Lexign and Crystal Decisions are notable alliances we have undertaken to date. We also retain an exceptional network of preferred business partners around the world that provide sales, consulting and technical services to expand our ability to serve our customers. We believe these alliances bring the best of many disciplines to our 6 customers while allowing us to maintain control over our costs of doing business. We intend to continue to pursue additional important alliances with industry-leading companies that will further enhance the Company's offerings and capabilities. Gain international market share and awareness. We have been serving the mid-market for 23 years and have more than 4,400 customer sites around the world. We service and support these customers from our worldwide network of 26 offices in 16 countries. Given this substantial and loyal customer base, we intend to leverage our comprehensive, integrated suite to further enhance add-on sales. In addition, we intend to enhance our leadership position by leveraging our new SyteLine version as a replacement for less-modern ERP software to grow market share within the 25,000 manufacturing locations using legacy or unsupported ERP software versions. Advance our innovative and practical solutions. Collaborative business is absolutely essential to improving manufacturers' productivity and competitive position. Because of the importance of technology return on investment, ERP solutions must address the extended enterprise and collaboration. We are committed to leveraging enabling technologies, like Web services, to deliver services capabilities as manufacturers are looking to extend their enterprises to collaborate with customers and partners outside their four walls. Advance our products rapidly. We have rapidly advanced our products and capabilities as technologies and business systems requirements have dramatically changed over the last few years. Since fiscal 1998, we have heavily invested in both the acquisition and development of our products and product capabilities. Approximately $60 million has been invested in acquired and developed software along with research and development expenditures. We are committed to ensuring that the Company's products are technologically advanced and best-of-class in the mid-market. PRODUCTS The software solutions we provide to our customers include a comprehensive suite of integrated software and services that (1) support the traditional back-office management and resources of an enterprise through Extended ERP, (2) support customer relationship management and other front-office business activities and (3) support an enterprise's supply chain management activities. The software products associated with each of these solutions are comprised of the following: Extended ERP. SyteLine is the Company's hallmark Enterprise Resource Planning product for midsize discrete manufacturing companies that provides a comprehensive operations and financial business process solution to an enterprise. SyteLine's functionality includes support for customer service, order processing, inventory control and purchasing, manufacturing production management, production planning and scheduling, cost management, project control, accounting functions and financial administration. With the release of SyteLine 7 in September 2002, the Company will offer this product for use on the Microsoft platform. For many years, this product has been offered for use on the Progress platform. Additional Extended ERP products include: - SyteLine Configuration -- product configuration for sales order and manufacturing - SyteLine Advanced Planning and Scheduling (APS) -- real-time inventory and capacity planning - SyteLine Business Intelligence -- data analysis and charting - SyteLine Workflow Automation -- business process definition and execution - SyteLine Data Collection -- labor and materials data management - SyteLine EDI -- integrate SyteLine with industry-leading EDI translators - SyteLine Advanced Forms -- design and deployment of custom laser printed forms - SyteLine Business Process Management -- enterprise business process modeling 7 SyteLine is designed to operate with all of our other products to create a collaborative and integrated business management solution to meet all of the front office and back office needs of an enterprise. SyteDistribution is the Company's ERP product designed for mid-sized distributors to meet their unique operational process demands to better control inventories, shipments and orders among enterprises. CRM. Frontstep CRM is a single interface point for employees, sales representatives and channel partners to view and execute marketing and sales activity pertaining to prospects and customer orders. CRM solutions improve customer service, lower costs and drive increased revenues. Frontstep CRM provides a sales force automation solution, contact and customer management, marketing, customer service and order management tools integrated with SyteLine and architected for integration with other ERP systems. Additional customer relationship management products include: - Frontstep Customer Center -- Web-based customer self-service solution - Frontstep Configuration -- Web-based product and sales order configuration - Frontstep Advanced Pricer -- Web-based pricing for complex orders SCM. Frontstep's SCM solutions provide the fastest way for companies to align supply with demand, provide real-time order promise dates to customers and ensure on-time delivery. Our solution provides the capability to improve customer service by synchronizing inventory and capacity with customer orders. This solution lowers operational costs and improves on-time deliveries by automating inventory sourcing and manufacturing planning activities through real-time synchronization of demand and supply across multi-site operations and suppliers. Our Supply Chain products include: - Frontstep Intelligent Sourcer -- starting point when accessing sourcing rules and promising engines to balance supply and demand between multiple sites or suppliers - Frontstep Point Promiser -- promising engine for Available-to-Promise (ATP) collaboration that balances inventory availability with demand requirements - Frontstep Capacity Promiser -- promising engine for Capable-to-Promise (CTP) collaboration that balances selected materials and rate based capacity with demand requirements - Frontstep Advanced Planning and Scheduling (APS) -- advanced planning and scheduling for all materials and capacities across multiple sites or through multiple levels of the supply chain Frontstep Knowledge Zone. Frontstep Knowledge Zone is our subscription-based, on-line education service. Users can access education for Frontstep solutions anytime and anywhere they have Internet access. It is a convenient, low cost alternative to hardcopy training manuals and selected classroom education. SERVICES AND SUPPORT We maintain a worldwide professional services organization of over 175 employees and a network of more than 40 business partners and strategic alliances which offer to our customers a full range of services to support installation and ongoing operations and to maximize the benefits of our software products. These services include, but are not limited to, project management, implementation support, product education, technical consulting, programming and system integration services and ongoing maintenance and product support. We employ our own structured services methodology to manage and support customer implementation. Our services are priced separately and fees for our services are not included in the price for our software products. These services are billed as incurred. Although we attempt to minimize customization of our software products, we do provide professional programming services to modify our software products to address specific customer requirements. These modifications may include designing and programming complete applications or integrating our software products with legacy systems. 8 Maintenance and support services include product enhancements and updates, upgrades to new versions, telephone support during extended business hours, full-time emergency support and access to our customer support service center on our Internet home page. Fees for maintenance and support services generally are billed annually in advance and revenue is deferred and recognized ratably over the term of the maintenance and support agreement. SALES AND DISTRIBUTION We currently license our software to customers primarily based on a license fee for each concurrent session or concurrent execution of its software products. We receive additional license fees whenever a customer increases the number of concurrent sessions, usually as a result of the growth of the customer's business or expansion to other sites. Sales opportunities are generated through a combination of in-house telemarketing, our web site, leads from consulting partners, advertising, trade shows and direct contacts by sales representatives. Our product offerings are sold to customers through two primary channels: Direct sales. This sales channel is comprised of direct sales representatives selling to manufacturers and focuses on selling the total business system under the Frontstep brand name. This channel targets the Company's traditional midsize manufacturing markets. We presently have approximately 40 direct sales representatives located around the world. Business partners. This sales channel is comprised of approximately 40 third-party business partner firms that resell the Company's entire suite of products. These partners include sales and consulting firms and application service providers that specialize in the Company's products. We derive our revenues and service our customers in 16 countries around the world. We derived approximately 28%, 22% and 20% of our fiscal 2002, 2001 and 2000 revenues, respectively, from sales outside of North America. The distribution of total revenue, operating income and identifiable assets attributable to each of our geographic market areas for fiscal years 2002, 2001 and 2000 were as follows (in thousands):
NORTH AMERICA EUROPE ASIA/PACIFIC ------------- ------- ------------ FISCAL 2002 Total Revenue...................................... $ 66,425 $16,036 $10,125 Operating Income (loss)............................ (2,535) 928 (389) Long-lived assets.................................. 4,301 397 332 FISCAL 2001 Total Revenue...................................... $ 91,508 $14,736 $10,832 Operating Income (loss)............................ (25,190) (189) (2,238) Long-lived assets.................................. 6,822 312 512 FISCAL 2000 Total Revenue...................................... $103,065 $13,941 $11,902 Operating Income (loss)............................ (5,737) (3,904) (1,155) Long-lived assets.................................. 7,135 383 468
PRODUCT DEVELOPMENT We devote a significant percentage of our resources to identifying the needs of our customers and prospects in developing new features and enhancements to existing products and designing and developing new products. We perform the majority of our development activities with our own professional development and product organization of more than 160 professionals located at the Company's headquarters facility in Columbus, Ohio, as well as Indiana, Arizona and Minnesota. In addition, we subcontract certain of our development efforts to development partners located in Asia and elsewhere overseas. 9 Our practice is to release updates and major enhancements on a regular basis since the market for our products is characterized by changes in customer requirements, rapid technological change, and evolving industry standards in computer hardware and software technology. We are committed to product and technological excellence and to meeting the changing needs of our customers. As a result, we commit a substantial portion of our revenues to research and development and to building new products, which are typically capitalized as developed. Total research and product development costs, including amounts capitalized, were $13.7 million, $18.4 million, and $22.7 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Additions to capitalized software were $7.6 million, $5.1 million, and $7.0 million for the same respective periods and were capitalized in accordance with applicable accounting standards. COMPETITION The market for enterprise solutions is intensely competitive, rapidly changing and highly fragmented. This market has become even more fragmented after the rise and fall of many companies during the "dot-com" era and now with new technology changes and standards. This market is also affected by new product offerings, mergers and acquisitions and other market activities. We have a large number of competitors that vary in size, computing environments and overall product scope. Within our market, our primary competition comes from independent software vendors in three distinct groups: (1) traditional enterprise software developers, including J.D. Edwards & Co., QAD, Inc., Lilly Software Associates, IFS and Epicor Software Corporation; (2) large software developers, like SAP, PeopleSoft and Oracle, moving into the mid-market; and (3) specialized software developers focusing on CRM and supply chain management. A number of companies offer products that are similar to our products that are directed at the market for enterprise software and compete against us on a regular basis. Many of the these competitors have more established and larger marketing and sales organizations, significantly greater financial, technical and other resources and a larger installed base of customers than the Company. We believe that we compete favorably against our competition in the following areas, which we consider to be the most important considerations for potential customers: - knowledge of and experience with midsize businesses - focus on discrete-to-order manufacturing vertical markets - breadth and depth of our comprehensive enterprise application solutions (ERP, CRM, SCM) for our target markets - collaboration and workflow automation across the enterprise and outside the enterprise with customers and suppliers - rapid implementation - single industry-standard technology: Microsoft - competitive pricing - corporate reputation based on more than 23 years of experience - size of installed user base PROPRIETARY TECHNOLOGY Our ability to compete is dependent in part upon our internally developed, proprietary intellectual property. We regard our products as proprietary trade secrets and confidential information. We rely upon our license agreements with customers, distribution agreements with distributors and our own security systems, confidentiality procedures and employee agreements to maintain the trade secrecy of our products. For all of our significant products, we have registered with appropriate Federal agencies for protection of our programs, documentation and other written materials under copyright and trademark laws. See also "Item 7. Factors That 10 May Affect Future Results and Market Price of Stock -- Our success is dependent in part upon our proprietary technology and other intellectual property." EMPLOYEES As of June 30, 2002, we employed 574 persons of which 197 were employed in international operations outside of North America. None of our employees are represented by a labor union. We have never experienced a work stoppage and believe that our employee relations are good. ITEM 2. PROPERTIES Our corporate headquarters and principal administrative, product development, and sales and marketing operations are located in approximately 70,000 square feet of leased office and storage space in Columbus, Ohio. The lease agreement commenced July 1, 2002 and will expire on June 30, 2004. The lease agreement provides for an annual base rent and operating expenses of approximately $984,000. Additionally, we have 25 leased sales and support offices throughout the United States and elsewhere. ITEM 3. LEGAL PROCEEDINGS We are subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these matters cannot be predicted with certainty, management does not believe the outcome of any of these legal matters will have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS (a) The Company held a special meeting of the shareholders on June 20, 2002 (the "Meeting"). (b) Not applicable. (c) The only matters voted on at the Meeting were (i) a proposal to approve the issuance of the Convertible Notes (as defined below), the issuance of common shares upon conversion of the Initial Notes (as defined below) and the issuance of that portion of the Warrants issued to Lawrence J. Fox and James A. Rutherford pursuant to the Securities Purchase Agreement dated March 7, 2002 between the Company and the investors named therein (the "Convertible Note proposal") and (ii) a proposal to approve the Amended and Restated Frontstep, Inc. Stock Option Plan for Outside Directors (the "Director Stock Option Plan proposal"). The manner in which the votes were cast with respect to the Convertible Note proposal was as follows:
SHARES VOTED SHARES VOTED BROKER "FOR" "AGAINST" ABSTENTIONS NON-VOTES - ------------ ------------ ----------- --------- 3,989,816 482,766 15,339 None
The manner in which the votes were cast with respect to the Director Stock Option Plan proposal was as follows:
SHARES VOTED SHARES VOTED BROKER "FOR" "AGAINST" ABSTENTIONS NON-VOTES - ------------ ------------ ----------- --------- 7,341,320 302,621 15,730 None
(d) Not applicable. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common shares are traded in the over-the-counter market and are quoted on the Nasdaq National Market ("NASDAQ") under the symbol "FSTP". As of September 20, 2002, we had approximately 212 shareholders of record. The following table sets forth, for the periods indicated, the range of high and low sale prices for Frontstep's common shares as reported by NASDAQ:
PRICE RANGE -------------- HIGH LOW ------ ----- FISCAL 2002 First Quarter............................................. $ 4.24 $2.84 Second Quarter............................................ 5.25 2.85 Third Quarter............................................. 5.50 2.00 Fourth Quarter............................................ 3.47 2.68 FISCAL 2001 First Quarter............................................. $10.00 $5.31 Second Quarter............................................ 6.88 2.63 Third Quarter............................................. 7.13 3.13 Fourth Quarter............................................ 3.90 1.89
We have never paid cash dividends on our shares. We expect that all future earnings will be retained to finance our operations and for the growth and development of our business. Accordingly, we do not currently anticipate paying cash dividends on our shares in the foreseeable future. The payment of any future dividends will be subject to the discretion of the Board of Directors of Frontstep and will depend on our results of operations, financial position and capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors the Board of Directors deems relevant. In addition, holders of Frontstep's outstanding preferred shares may be entitled to receive dividends on the preferred shares prior to the payment of dividends on the common shares, in certain cases, under our Amended Articles of Incorporation. SALE OF UNREGISTERED SECURITIES On March 7, 2002, we issued 600,000 warrants with an exercise price of $0.01 per share and 10% subordinated notes in the aggregate principal amount of $1.5 million (the "Initial Notes") in a private placement to certain of our preferred shareholders, including Fallen Angel Equity Fund and entities affiliated with Morgan Stanley, and two other shareholders and directors of the Company, Lawrence J. Fox and James A. Rutherford (collectively, the "Investors"), pursuant to a Securities Purchase Agreement dated March 7, 2002 (the "Original Agreement"). The March transaction was part of an agreement by the Investors, subject to certain conditions, to provide a total of $5 million of funding to the Company. The warrants were issued in reliance upon an exemption from registration under Section 4(2) of the Act and Rule 506 promulgated by the Securities and Exchange Commission (the "Commission") under the Act. Under the Original Agreement, we agreed to issue and sell to the Investors, subject to certain conditions, including the approval of the Company's shareholders, in the aggregate an additional $3.5 million principal amount of 10% subordinated convertible notes due May 10, 2004 (the "Convertible Notes"). On June 20, 2002, shareholders of the Company approved the issuance of the Convertible Notes, the issuance of common shares upon conversion of the Initial Notes and the issuance of that portion of the warrants issued in March 2002 to Mr. Fox and Mr. Rutherford. On July 9, 2002, we entered into Amendment Number One to the Original Agreement (the "Amendment") with the Investors and completed the closing of the Convertible Notes transaction. The closing constituted the "Convertible Closing" as such term is defined in the Original Agreement and, therefore, as a result of the closing, the Initial Notes became convertible into common shares of the Company, at the election of the holders, at a conversion price of $2.4876 per share at any time after July 9, 2002. In addition, the Amendment permitted us to issue up to $3.5 million in principal 12 amount of additional Convertible Notes to the Investors. By August 28, 2002 the remaining amount of Convertible Notes had been issued. Under the agreement with the Investors, we are required to file with the Commission a registration statement covering the resale by the Investors of the common shares issuable to them upon conversion of the Convertible Notes and the Initial Notes and upon exercise of the warrants. In July 2001, we entered into a new credit facility arrangement with Foothill Capital Corporation. The credit facility includes a $15 million, three-year term note and a $10 million revolving credit facility. In connection with the new credit facility arrangement with Foothill, we issued to Foothill a warrant to purchase 550,000 common shares at an initial exercise price of $3.36 per share, which was the average of the closing bid price for our common shares for the 10 trading days immediately preceding the closing date for the new credit facility. The exercise price of the warrant and the number of common shares issuable upon exercise of the warrant are subject to adjustments from time to time under the anti-dilution provision contained in the warrant. The warrant expires in July 2006 and is exercisable at any time prior to its expiration. The warrant was amended and restated in November 2001 to clarify certain provisions relating to adjustments under the terms of the warrant upon the occurrence of certain events. The warrant (as originally issued and as amended and restated warrant) was issued in reliance upon an exemption from registration under Section 4(2) of the Act and Rule 506 promulgated by the Commission under the Act. As required by our agreement with Foothill, we filed with the Commission on October 11, 2001 a preliminary registration statement on Form S-3 covering the resale by Foothill of the shares issuable upon exercise of the warrant. The registration statement has not been declared effective by the Commission. 13 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended June 30, 1998 through 2002 have been derived from the Consolidated Financial Statements of Frontstep. The selected consolidated financial data below should be read in conjunction with the Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K (in thousands, except per share data).
YEAR ENDED JUNE 30, -------------------------------------------------- 2002 2001 2000 1999 1998 ------- -------- -------- -------- ------- STATEMENT OF OPERATION DATA: Total revenue..................... $92,586 $117,076 $128,908 $129,072 $97,597 Cost of revenue................... 44,702 58,826 61,856 52,025 35,701 ------- -------- -------- -------- ------- Gross margin...................... 47,884 58,250 67,052 77,047 61,896 Operating expenses: Selling, general and administrative............... 41,921 62,847 57,504 56,801 43,995 Research and development........ 6,182 13,332 15,684 10,217 7,901 Amortization of acquired intangibles.................. 1,777 3,285 3,593 2,140 1,479 Restructuring and other charges...................... -- 6,403 1,067 835 6,503 ------- -------- -------- -------- ------- Total operating expenses..... 49,880 85,867 77,848 69,993 59,878 ------- -------- -------- -------- ------- Operating income (loss)........... (1,996) (27,617) (10,796) 7,054 2,018 Other (expense) income, net....... (2,142) (510) (966) 151 (178) ------- -------- -------- -------- ------- (Loss) income before income taxes........................... (4,138) (28,127) (11,762) 7,205 1,840 (Benefit from) provision for income taxes.................... (693) (2,063) (1,557) 3,206 3,196 ------- -------- -------- -------- ------- Net (loss) income................. $(3,445) $(26,064) $(10,205) $ 3,999 $(1,356) ======= ======== ======== ======== ======= Net (loss) income per common share -- diluted................ $ (0.46) $ (3.46) $ (1.38) $ 0.55 $ (0.21) ======= ======== ======== ======== ======= Weighted average shares outstanding -- diluted.......... 7,568 7,535 7,411 7,264 6,317 BALANCE SHEET DATA: Working capital................... $ 2,418 $ 2,649 $ 19,348 $ 21,926 $13,575 Total assets...................... 73,415 72,593 94,368 90,600 66,382 Total long-term debt and lease obligations..................... 8,928 8,742 3,169 5,759 2,305 Total shareholders' equity........ 19,618 21,004 36,709 42,401 31,301
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the information set forth under Item 6 -- Selected Financial Data and the financial statements and the Notes to those statements included elsewhere in this Report on Form 10-K, as well as the following section titled "Factors That May Affect Future Results and Market Price of Stock" herein. OVERVIEW Frontstep, Inc. is a leading global provider of software and services for midsize discrete, to-order manufacturers and business units of larger companies. For more than 23 years, Frontstep has helped manufacturers create and implement business solutions -- including extended ERP, customer relationship management, and supply chain management -- that simplify and streamline business processes and operations. Through these innovative and practical solutions, manufacturers can respond better and faster to customers' demands for quality products and services. For the last several years, since the second quarter of fiscal 2000, our industry, and specifically, our Company have experienced (1) dramatic changes in worldwide economic conditions, (2) dramatic changes in our market conditions resulting from a recession in many manufacturing industries and (3) a lessening of information technology spending that is a result of these economic and market conditions. Prior to fiscal 2000, and well before these economic and market changes began to affect our results of operations, we began to enhance our product offerings beyond traditional ERP systems to participate in higher growth market segments. These enhancements include a comprehensive suite of integrated software and services that support (1) the management and resources of an enterprise, (2) customer relationship management and other front office business activities and (3) an enterprise's supply chain management activities. In November 2000, the shareholders of the Company approved a change in the Company's name to Frontstep, Inc. to reflect this transformation in our corporate identity. In July 2002, we achieved the culmination of these efforts with the announcement of SyteLine 7, a new version of our flagship ERP product that fully integrates the Company's efforts in traditional ERP, customer relationship management and supply chain management. Additionally, the release of SyteLine 7 offers our customers a product based on Microsoft SQL Server 2000 technology which supports Microsoft's .NET strategy. We believe our strategic efforts to develop this total business system on an industry-standard technology platform greatly expand our market opportunities, increase our potential for a stronger business partner network and will provide better gross margins in the years ahead. However, over the last few years, it has been difficult to manage and predict our revenues due to ever more difficult economic conditions and a lack of demand from manufacturers who have significantly limited their capital spending budgets, especially for information technology investments. This situation has been most severe in North America which has been mired in a recession for nearly two years. We have reacted to these difficult economic and market conditions in several ways. We have accomplished significant reductions in the Company's operating costs and we have completed several financing transactions; each with the intentions of balancing our costs with expected revenues and of ensuring adequate cash to meet our operating needs. In the quarter ended June 30, 2002, we reported operating income in excess of $1.0 million, net income of $487,000 or $0.05 per share and we had positive cash flow of $0.5 million as measured by earnings before interest, taxes, depreciation and amortization ("EBITDA"). Our expectations for our operating results in the September 2002 fiscal quarter and for the full fiscal year ending June 30, 2003 are conservative. We expect revenues during the September 2002 quarter to be slightly below the revenues reported for the most recent quarter ended June 30, 2002 and only modestly increase in our December 2002 quarter as a result of our SyteLine 7 announcement. We will continue to manage our costs very tightly. As a result, we believe that our operating results and EBITDA will be positive for the fiscal 2003 ending June 30, 2003 despite our expectation for continued difficulty in the economy and a lack of information technology spending in our target manufacturing market. While the economy has, at times, over the last several months, shown signs of improvement; we continue to be concerned about our ability to predict revenues in the near term, due to current economic and market conditions. As a result we may not achieve positive operating results in the current quarter ending September 30, 2002. The Company can provide no assurance that it will achieve these expected financial results for the September 2002 quarter or for the remainder of fiscal 2003. 15 CRITICAL ACCOUNTING POLICIES The Company's total revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on an annual basis. Revenue is accounted for in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended and interpreted from time to time. License fees revenue is generally recognized when the software product is shipped. Services revenues are recognized as the services are performed and revenues from maintenance agreements are billed periodically, deferred and recognized straight-line over the term of the agreements. Cost of license fees revenue includes royalties, amortization of capitalized software development costs and software delivery expenses. Cost of service, maintenance and support revenue includes the personnel and related overhead costs for implementation, training and customer support services, together with fees paid to third parties for subcontracted services. Selling, general and administrative expenses consist of personnel, facilities and related overhead costs, together with other operating costs of the Company, including advertising and marketing costs. Research and development expenses include personnel and related overhead costs for product development, enhancement, upgrades, quality assurance and testing. The amount of such expenses is dependent on the nature and status of the development process for the Company's products. Development costs capitalized in a given period are dependent upon the nature and status of the development process. Upon general release of a product, related capitalized costs are amortized over three to five years and recorded as license fees cost of revenue. Frontstep's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, intangible assets, restructuring costs, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue recognition. The Company's total revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on an annual basis. Revenue is accounted for in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended and interpreted from time to time. Revenue is derived principally from the sale of internally produced software products and maintenance and support agreements from software sales. The Company licenses software generally under non-cancelable license agreements and provides product support services and periodic updates including training, installation, consulting and maintenance. License fees revenue is generally recognized when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. For customer license agreements, which meet these recognition criteria, the portion of the fees related to software licenses, which is determined using the residual method, will generally be recognized in the current period, while the portion of the fees related to services is recognized as the services are performed. The amount allocated to services revenues is based on the Company's standard rate per hour. Revenue from maintenance and support agreements, which is determined based on renewal rates, is billed periodically, deferred and recognized ratably over the life of the agreements. In the event revenue is 16 contingent upon customer acceptance criteria, the Company defers that revenue until the contingencies are resolved. Bad Debts. A considerable amount of judgment is required when determining the allowance for bad debt, including assessing the probability of collection as well as the credit-worthiness of each customer. The Company has recorded bad debt reserves in recent periods due to recent economic conditions especially as they affect the Company's customer base. The Company may determine in future periods that additional charges must be recorded. Capitalized Software. The Company capitalizes the cost of developing its software products in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalized software is stated at the lower of cost or net realizable value. The Company's judgment is required when determining the net realizable value of its software and any impairment loss could have a material adverse impact on our financial condition and results of operations. Impairment of Intangible Assets. The Company periodically evaluates acquired intangibles for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Contingencies and Litigation. The Company is subject to proceedings, lawsuits and other claims related to ongoing business and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. If an adverse judgment or outcome can be predicted, an accrual in the determined amount is recorded on the Company's ledger. An accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company is not involved in any actions that currently require an accrual to be recorded. ACCOUNTING PRONOUNCEMENTS In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement established a single accounting model for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 144 in the first quarter of fiscal 2003 and does not expect the adoption of this statement to have a material impact on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 15, 2002. Management does not expect adoption of this Statement to have a material impact on the Company's consolidated financial statements. RESULTS OF OPERATIONS The fiscal year that ended June 30, 2002 is our "current fiscal year" or "fiscal 2002". The prior year that ended June 30, 2001 is the "prior fiscal year" or "fiscal 2001". The year ended June 30, 2000 is "fiscal 2000". 17 FISCAL 2002 COMPARED TO FISCAL 2001 Revenue. Total revenue decreased $24.5 million, or 20.9%, to $92.6 million in fiscal 2002 from $117.1 million in fiscal 2001. The total revenue mix is shown in the table below (in thousands, except percentage data):
FISCAL YEARS ENDED JUNE 30, ------------------------------------ 2002 2001 --------------- ---------------- License fees revenue............................ $35,372 38.2% $ 51,309 43.8% Service revenue................................. 21,787 23.5% 30,921 26.4% Maintenance and support revenue................. 35,427 38.3% 34,846 29.8% ------- ----- -------- ----- Total revenue......................... $92,586 100.0% $117,076 100.0% ======= ===== ======== =====
License fees revenue decreased 31.1% in the current fiscal year from the prior fiscal year. We believe that the decrease in license fees revenue in fiscal 2002 is industry-wide due to the current economic climate that is causing our customers and potential customers to defer their buying decisions related to large capital investments, particularly information technology investments. The Company further believes that our customers in North America have been impacted more dramatically than elsewhere in the world. Our license fees revenues in Europe improved from fiscal 2001 and were comparable to fiscal 2001 license fees revenues in Asia Pacific. We expect that license fees revenues will remain stable or decline slightly in the September 2002 quarter and will not begin to grow again until the current economic climate improves and demand for our products improves as a result. Service revenue decreased 29.5% in the current fiscal year from the prior fiscal year. The decrease is primarily the result of the significant decline in license fees revenues in the current fiscal year as compared to such revenues in the prior fiscal year. Service revenues in particular are directly dependent on new license purchases by new and existing customers. We expect that service revenues have stabilized and will remain stable in the September 2002 quarter. We do not expect any growth to occur until license fees revenue improve. Maintenance and support revenue increased 1.7% in the current fiscal year from the prior fiscal year. Maintenance and support revenue increased as a percentage of total revenue primarily due to the lower license fees and service revenue. Our maintenance and support revenues have been stable after several years of growth. Stability in maintenance and support revenues in the coming year is dependent upon continued renewals of such maintenance and support by our existing customers. We believe that the release of SyteLine 7 will enhance the value of such arrangements to our customers and that there will be sufficient renewals in the coming year to provide for stable maintenance and support revenues. Cost of Revenue. Total cost of revenue as a percentage of total revenue decreased to 48.3% for the current fiscal year from 50.2% for the prior fiscal year. Cost of license fees revenue decreased $4.4 million, or 20.2%, to $17.5 million in the current fiscal year from $21.9 million in the prior fiscal year and as a percentage of license fees revenue, increased to 49.4% in the current fiscal year from 42.7% in the prior fiscal year. Fiscal year 2001 includes $1.9 million of capitalized software written off as part of restructuring the business. In the current fiscal year, the increase as a percentage of license fees revenue is primarily attributable to the effects of product mix relative to third-party product royalty arrangements, discounting as a result of weakened demand and lower license fees revenue affecting certain fixed and related costs. Cost of license fees revenue includes certain fixed components including amortization of capitalized software. Amortization of capitalized software has increased in the current fiscal year over the amount of amortization in the prior fiscal year. Cost of service, maintenance and support revenue decreased $9.7 million, or 26.3%, to $27.2 million in the current fiscal year from $36.9 million in the prior fiscal year and as a percentage of service, maintenance and support revenue, decreased to 47.6% in the current fiscal year from 56.2% in the prior fiscal year. The decrease in cost is attributable to a decline in service revenue for the reasons discussed above and significant cost reductions as part of the Company's overall restructuring efforts. The percentage decrease is primarily due to greater percentage in the current year of maintenance and support revenues relative to service revenue which have higher margins than service revenues. 18 Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $20.9 million, or 33.3%, to $41.9 million in the current fiscal year from $62.8 million in the prior fiscal year. Such expenses as a percentage of total revenue decreased to 45.3% in the current fiscal year from 53.7% in the prior fiscal year. The decrease in costs and as a percentage of total revenue is attributable to the Company's efforts since April 2001 to significantly reduce its operating costs and to a $6.8 million charge to write-off certain accounts receivable which was recorded in the prior fiscal year. Research and Development. Total research and development costs, including amounts capitalized, were $13.7 million in the current fiscal year, a decrease of $4.7 million or 25.4% from $18.4 million of such costs in the prior fiscal year. Total research and development costs decreased as a percentage of total revenues to 14.8% in the current fiscal year from 15.7% in the prior fiscal year. Although total research and development spending decreased from the prior fiscal year, we are continuing to spend a substantial portion of total revenues on the development of our expanded product offerings and product capabilities, development of future releases of our ERP software and development of interfaces with third-party software products. We believe that these investments are critical to the success and market acceptance of our new product offerings and total suite of comprehensive business systems. We capitalized development costs of $7.6 million during the current fiscal year and $5.1 million during the prior fiscal year. We amortized $6.6 million during the current fiscal year and $5.1 million during the prior fiscal year. Restructuring and Other Charges. In April 2001, we announced a broad restructuring plan in order to reduce the Company's workforce, reduce expenses associated with non-essential activities and to improve the Company's ability to be profitable at lower levels of revenue. We reduced our worldwide workforce by approximately 20%, discontinued certain product development and other non-essential activities and closed certain office facilities. In relation to this restructuring plan, we also wrote-off certain accounts receivable and other non-performing assets. We do not believe that the restructuring has had or will have a significant negative impact to our business operations because our personnel and facilities were in excess of needed levels. The significant and positive impact of this restructuring effort on our operating costs is discussed above. As a result of the April 2001 restructuring plan, the Company recorded pre-tax restructuring and other charges of $4.2 million during the year ended June 30, 2001. Of these charges, $80,000 was non-cash primarily relating to the write-off of non-performing assets and $4.1 million represented future cash requirements. The Company expended $2.1 million of the cash requirements in fiscal 2001 and $1.2 million in fiscal year 2002, primarily in the first two fiscal quarters. Certain cash requirements will occur in future fiscal periods. See "Note 2 -- Restructuring and Other Charges" in Item 8 in this Annual Report. The Company's restructuring plan consisted of the following significant items: - Employee separation costs of $2.2 million -- The Company reduced its workforce by approximately 20%, or 162 employees. These costs consist primarily of severance for these employees. - Contract termination liabilities of $900,000 -- The Company elected to discontinue its SyteCentre ERP product to focus resources on the Company's primary ERP product, SyteLine. The Company also discontinued its ASP hosting solution and its Internet procurement software due to sluggish demand and unprofitable operations. As a result, the Company reserved $900,000 to cover anticipated contractual obligations and costs associated with customers currently using the discontinued products and services. - Facility closure costs of $1.2 million -- The Company recorded approximately $1.2 million of costs associated with closing certain offices in Arizona, California, Canada and Asia. Cancelable lease term costs were based on actual determinable amounts. For those leases with non-cancelable lease terms, the Company assumed that subleases would be obtained after a one-year period. In July 2000, the Company announced several structural changes to discontinue certain business operations, write off non-performing assets and to restructure the Company to better focus on its core business strategy. These changes included divesting the Company's FieldPro subsidiary, terminating the operations of its e-Mongoose, Inc. subsidiary, consolidating the Company's product development organizations and restructuring 19 the Company's sales channels. In connection with this announcement, the Company recorded a non-recurring charge of $429,000, pre-tax, in the three months ended June 30, 2000 and an additional non-recurring charge of $2.2 million, pre-tax, in the three months ended September 30, 2000. The aggregate pre-tax charge of $2.6 million included non-cash charges of $429,000 related primarily to the sale of Visual Applications Software, Inc. The remaining $2.2 million was related to the reduction of the Company's headcount. The headcount reduction included approximately 90 employees associated with the operations discussed above and others terminated as part of the restructuring. The costs were for severance payments and were paid during the year ended June 30, 2001. No accruals remain for these costs as of June 30, 2001. Benefit from Income Taxes. The benefit from income taxes for the current and prior fiscal years reflects an effective tax rate of 16.7% and 7.3%, respectively. The effective tax rate in the current fiscal year differs from the expected corporate tax rate primarily due to valuation allowances recorded against the deferred tax assets. FISCAL 2001 COMPARED TO FISCAL 2000 Revenue. Total revenue decreased $11.8 million, or 9.2%, to $117.1 million in fiscal 2001 from $128.9 million in fiscal 2000. The total revenue mix is shown in the table below (in thousands, except percentage data):
FISCAL YEARS ENDED JUNE 30, ------------------------------------- 2001 2000 ---------------- ---------------- License fees revenue........................... $ 51,309 43.8% $ 57,858 44.9% Service revenue................................ 30,921 26.4% 39,626 30.7% Maintenance and support revenue................ 34,846 29.8% 31,424 24.4% -------- ----- -------- ----- Total revenue........................ $117,076 100.0% $128,908 100.0% ======== ===== ======== =====
License fees revenue decreased 11.3% in fiscal 2001 from fiscal 2000. We believe that the decrease in license fees revenue in fiscal 2001 was due to the economic climate which caused our customers and potential customers to defer their buying decisions related to large capital investments, particularly information technology investments. Service revenue decreased 22.0% in fiscal 2001 from fiscal 2000. The decrease was primarily the result of sluggish license fees revenue experienced by the Company in fiscal 2001. Service revenues in particular are directly dependent on new license purchases by new and existing customers, which decreased 11.3% in fiscal 2001 from fiscal 2000. Maintenance and support revenue increased 10.9% due primarily to steadily improving number of active customer contracts over the last few years as the base of customers under such programs has continued to grow. Cost of Revenue. Total cost of revenue as a percentage of total revenue increased to 50.2% for the 2001 fiscal year from 48.0% for the 2000 fiscal year. Cost of license fees revenue increased $0.4 million, or 1.8%, to $21.9 million in fiscal 2001 from $21.5 million in fiscal 2000 and as a percentage of license fees revenue, increased to 42.7% in fiscal 2001 from 37.2% in fiscal 2000. Both years include $1.9 million of capitalized software written off as part of restructuring the business in each of these years. The percentage increase was primarily attributable to an increase in the number of third party product vendors included in our new product offerings, discounting as a result of weakened demand and lower license fees revenue affecting certain fixed and related costs. Cost of service, maintenance and support revenue decreased $3.4 million, or 8.5%, to $36.9 million in fiscal 2001 from $40.4 million in fiscal 2000 and as a percentage of service, maintenance and support revenue, decreased to 56.2% in fiscal 2001 from 56.8% in fiscal 2000. The decrease in cost was attributable to a decline in service revenue resulting from sluggish license fees revenue in fiscal 2001 and the percentage decrease was primarily due to the continued growth of maintenance and support revenues which have higher margins than service revenues. As noted above, service revenues in particular are directly dependent on new license purchases by new and existing customers. 20 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $5.3 million, or 9.3%, to $62.8 million in fiscal 2001 from $57.5 million in fiscal 2000. Such expenses as a percentage of total revenue increased to 53.7% in fiscal 2001 from 44.6% in fiscal 2000. The increase in costs and in the percentage of such costs to total revenue in fiscal 2001 was attributable to a $6.8 million charge to write-off accounts receivable, offset by the initial impact of the Company's restructuring that commenced in April 2001, the full effect of which substantially reduced such costs in fiscal 2002. Research and Development. Total research and development costs, including amounts capitalized, decreased $4.3 million or 18.9%, to $18.4 million for fiscal 2001 from $22.7 million for fiscal 2000 and decreased as a percentage of total revenues to 15.7% in fiscal 2001 from 17.6% in fiscal 2000. Although total research and development spending decreased from the prior fiscal year, we continued to spend a substantial portion of total revenues on the development of our expanded product offerings and product capabilities, development of future releases of our ERP software and development of interfaces with third-party software products. We believe that these investments were critical to the success and market acceptance of our new product offerings and total suite of comprehensive business systems. Restructuring and Other Charges. In April 2001, we announced a broad restructuring plan in order to reduce the Company's workforce, reduce expenses associated with non-essential activities and to improve the Company's ability to be profitable at lower levels of revenue. This restructuring is discussed above under the section entitled "Fiscal 2002 Compared to Fiscal 2001". Benefit from Income Taxes. The benefit from income taxes for the 2001 and 2000 fiscal years reflects an effective tax rate of 7.3% and 13.2%, respectively. The effective tax rate in the current fiscal year differs from the expected corporate tax rate primarily due to valuation allowances recorded against the deferred tax assets related to net operating losses incurred domestically. QUARTERLY RESULTS
THREE MONTHS ENDED (IN THOUSANDS) FISCAL 2002 FISCAL 2001 ----------------------------------------------- ----------------------------------------------- JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 ------- -------- ----------- ------------ ------- -------- ----------- ------------ Total revenue.......... $22,556 $21,732 $23,327 $24,971 $28,821 $26,334 $33,856 $28,065 Gross margin........... 11,647 10,862 11,580 13,795 16,066 9,605 18,801 13,778 Operating income (loss)............... 1,038 (1,278) (2,507) 751 (4,994) (15,928) (1,492) (5,203) % of total revenue Gross margin........... 51.6% 50.0% 49.6% 55.2% 55.7% 36.5% 55.5% 49.1% Operating income (loss)............... 4.6% (5.9)% (10.7)% 3.0% (17.3)% (60.5)% (4.4)% (18.5)%
Our results of operations have fluctuated on a quarterly basis. Our expenses, with the principal exception of sales commissions and certain components of cost of revenue, are generally fixed and do not vary with revenue. As a result, any shortfall of actual revenue in a given quarter would adversely affect net earnings for that quarter. Further explanation of significant variations by quarter is as follows: FISCAL 2001: QUARTER ENDED SEPTEMBER 30, 2000. The Company continued to experience decreasing revenues, for the economic and market reasons discussed under "Overview" above. Total revenues decreased by approximately $2.9 million, or 9.4%, from the prior quarter ended June 30, 2000. The Company's operating results were negatively affected by the Company's investments related to new products as discussed above in the section entitled "Fiscal 2001 Compared to Fiscal 2002, Research and Development". These operating results include an additional non-recurring restructuring charge of $2.1 million for reductions in workforce and related costs, which contributed to a reported operating loss of $5.2 million. 21 QUARTER ENDED DECEMBER 31, 2000. The Company experienced a $5.8 million, or 20.6%, growth in total revenues due to strong license sales for the first time since the year earlier December quarter. The strong demand was partially a result of new product offerings and the related development expenditures of the prior several quarters. Gross margin increased $5.0 million, or 36.5%, to 55.5% of revenues compared to 49.1% for the prior quarter. This was primarily due to strong revenues offsetting the impact of the fixed expenses. While the Company continued to make significant investment in research and development relating to these new products and to maintain the supporting infrastructure, the operating loss in the quarter was $1.5 million, significantly less than recent quarters as a result of the stronger revenues. QUARTER ENDED MARCH 31, 2001. Total revenues decreased $7.5 million, or 22.2%, from the prior quarter ended December 31, 2000. While the Company had anticipated a continued improvement in revenues from stronger demand as was evidenced in the prior quarter, customers chose to defer planned purchases in response to economic turmoil and a rapidly slowing economy. The decrease in revenues directly impacted both gross margin and operating losses due to the fixed nature of the Company's expenses. Gross margin declined $9.2 million, or 48.9%, to 36.5% of revenues from 55.5% in the prior quarter. This was primarily due to decreased revenues and the fixed nature of many of the costs associated with product sales. The Company reported an operating loss of $15.9 million, of which $580,000 was a non-recurring non-cash restructuring charge. The Company also incurred one-time non-cash charges totaling $8.8 million for write-offs of certain accounts receivable and capitalized software related to discontinued products and services. QUARTER ENDED JUNE 30, 2001. The Company experienced a $2.5 million, or 9.4%, improvement in license fees revenue compared to the prior quarter ended March 31, 2001. This increase was a result of modest improvements in customer purchasing behavior following the March quarter. Gross margin improved $6.5 million, or 67.3%, to 55.7% of revenues from 36.5% for the prior quarter. This improvement was a result of the revenue increase and cost reductions associated with the restructuring of the business in April 2001. The April restructuring also significantly reduced the Company's selling, general and administrative expenses and research and development expenses. The Company reported an operating loss of $5.0 million of which $3.7 million was a non-recurring charge relating to the April restructuring. FISCAL 2002: QUARTER ENDED SEPTEMBER 30, 2001. The Company continued to experience decreasing revenue for the same reasons as discussed in the prior quarters above, but heightened by the events of September 11th and the impact of these on the economy, particularly in North America. Total revenues decreased by approximately $3.9 million, or 13.4%, from the prior quarter ended June 30, 2001. However, the Company's operating results were positively impacted by the Company's restructuring efforts. Operating expenses were down $8.0 million, or 38.1%, from the prior quarter ended June 30, 2001. This resulted in an operating income of $0.8 million for the quarter. QUARTER ENDED DECEMBER 31, 2001. Despite an expectation for an improvement in the economy and in market conditions, the Company experienced a further reduction in revenue of $1.6 million, or 6.4%. License fees revenue was down and service revenue was down approximately $1.0 million from the September quarter. The Company believes the lingering effect of the events of September 11th and further economic weakness impacted our ability to achieve our expected financial results. We reported an operating loss of $2.5 million for the quarter. QUARTER ENDED MARCH 31, 2002. Total revenues decreased $1.6 million, or 6.8%, from the prior quarter ended December 31, 2001. The Company expected revenue to continue to be flat from the prior quarter; however, customers continued to defer planned purchases in response to economic turmoil and a recession in the North American economy. However, the Company took action in January 2002 to further reduce its operating costs in an effort to return to profitability at lower revenue levels. The Company's cost reductions included workforce reductions and streamlining of operations by reducing the number and size of office facilities. As a result of these actions, operating expenses continued to decline. However, the effect of reduced revenue caused us to report an operating loss of $1.3 million for the quarter. QUARTER ENDED JUNE 30, 2002. The Company experienced a $0.8 million, or 3.8%, improvement in revenues compared to the prior quarter ended March 31, 2002. This increase was a result of modest 22 improvements in customer purchasing behavior following the March quarter, especially in license fees revenue. The Company also realized a greater impact of the January cost reduction actions. These positive trends in both revenue and operating costs resulted in reported operating income of $1.0 million for the quarter. For additional discussion of quarterly fluctuations refer to previously filed quarterly reports on Form 10-Q. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2002, we had cash and cash equivalents of $3.4 million and working capital of $2.4 million. During the fiscal year ended June 30, 2002, we generated $3.7 million of cash from operating activities, including the restructuring and other charges described above. We purchased $119,000 of property and equipment and used $7.6 million for capitalized software. In July 2001, the Company executed a new credit facility (the "Credit Facility") with Foothill Capital Corporation ("Foothill"). The Credit Facility includes a $15,000,000 three-year term note and a $10,000,000 revolving credit facility. Availability under the Credit Facility is based on and secured by qualifying accounts receivable originating within the United States and Canada. The revolving credit facility bears interest either at the Federal Funds rate plus 1.5%, or at the Eurodollar market rate plus 3.0%. The term note bears interest at the rate of 10.5% plus 1.5% per annum added to principal. The term note is payable in monthly installments commencing October 1, 2001. The Credit Facility is subject to customary terms and conditions and includes financial covenants for maintenance of a minimum tangible net worth, a minimum level of earnings before interest, taxes, depreciation and amortization and a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization. The proceeds from the Credit Facility were used to repay, in full, the Company's revolving credit facility with PNC Bank, National Association. On November 9, 2001, the Company and Foothill amended the Credit Facility to allow for temporary increased borrowing capacity through January 31, 2002 to support the Company's cash needs. Also as part of the amendment, all financial covenants were modified to give account to the current economic conditions affecting the Company. The modification of the financial covenants was effective starting as of September 29, 2001. On February 14, 2002, the Company and Foothill amended the Credit Facility, again due to economic conditions affecting the Company. The amendment provided the Company with certain additional borrowing availability on a temporary basis until July 15, 2002 and allowed the Company to defer principal payments due under the primary term note for a six-month period commencing in January 2002. Also, the financial covenants were modified to reflect the current economic environment. The Company and Foothill further amended the credit facility on July 15, 2002 to extend a portion of the additional availability to August 15, 2002. On September 15, 2002, effective June 28, 2002, the Company and Foothill amended the agreement to modify the covenants to reflect the restatement of the Company's financial statements for the year ended June 30, 2001 and quarter ended March 31, 2002 and at June 30, 2002. After giving effect to these modifications, the Company was in compliance with the financial covenants under the Credit Facility. As we discussed in "Overview" above, it has been difficult in the last several quarters to manage and predict our revenues for any quarterly period. While customer activity has not diminished recently, economic conditions and industry-wide lack of demand for new investments may cause us to generate less revenue than we expect. If we do not generate sufficient revenue to meet our forecast in any quarter in the current fiscal year, including the quarter ending September 30, 2002, the Company may not be in compliance with one or more of the financial covenants under the Credit Facility. In August 2002, we completed the funding of $3.5 million from the issuance of Convertible Notes (See "Item 1. Business -- Sale of Unregistered Securities" herein). However, we continue to experience difficulties in meeting all of our cash operating needs, due to unpredictability in our revenues and the impact of economic conditions on our customers. If we do not meet our revenue expectations in any quarters in the current fiscal year, including the quarter ending September 30, 2002, we may have further difficulty in meeting our operating cash needs. 23 On September 30, 2002, the Company and Foothill amended the Credit Facility with respect to the financial covenants for the quarter ending September 30, 2002 and reset the covenants for the balance of fiscal 2003. This amendment was completed due to the current economic and market conditions. Also, Foothill has agreed in principle to further amend the Credit Facility to provide temporary additional borrowing availability under the revolving credit portion of the Credit Facility. The Company expects that the bank will impose certain conditions to borrowing the additional credit availability. These conditions are expected to include milestones for completion of strategic and operating objectives as agreed to by the parties and for increased participation by Foothill in evaluating the Company's strategic and business alternatives. We expect to complete and execute this further amendment in early October 2002. We have been able to demonstrate positive financial results and positive cash flows as evidenced by the results for the quarter ended June 30, 2002. We also believe that our restructuring efforts in the last several months, and our tight cost management since that time, will support our efforts to achieve quarterly profitability and positive cash flow from operations in the future. By doing so, we expect to be able, over time, to improve our cash to meet operating needs and to meet the financial covenants imposed under the Credit Facility. As such, we believe we will have sufficient cash and cash flow from operations to satisfy cash flow needs for the next 12 months. There can be no assurance that we can achieve levels of quarterly revenue sufficient to satisfy our cash flow needs or to meet the financial covenants of the Credit Facility in future periods and that the bank will continue to provide special financing arrangements to support us in meeting our operating cash needs, including execution of the proposed amendment. We continue to evaluate the Company's strategic and business alternatives. Such alternatives include, but are not limited to, seeking additional sources of capital, further cost-cutting actions, merger with, acquisition of or sale to another software company, or other financial restructuring. All of the Company's strategic efforts are being directed toward 1) reviewing and evaluating our strategic and business alternatives, 2) continuing to serve our customers needs, 3) advancing our product strategies, which includes SyteLine 7 and our other product offerings and 4) improving the Company's competitive position for the future. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK Changes in demand for our products and services could cause potential significant fluctuations in our quarterly and annual operating results. Our operating results may vary significantly from quarter to quarter. Our quarterly operating results are affected by a number of factors that could materially and adversely affect our revenues and profitability. These factors also make estimation of operating results prior to the end of a quarter extremely uncertain. These factors include: - demand for our products and services - competitive conditions in the software industry - the timing of the introduction or market acceptance of new or enhanced products which we offer or which are offered by our competitors - the potential for delay or deferral of customer purchases of our products in anticipation of product enhancements or new product offerings by us or our competitors - the timing of any acquisitions by us and related write-offs - the mix of our product and services net revenues - the mix of our North American and international net revenues - dependence on a few very large new license sales in each quarter to meet our quarterly goals - general economic conditions and other factors affecting capital expenditures by our customers - the size, timing and structure of significant licenses with our customers - the entry of new competitors and technological advances by competitors 24 - delays in localizing our products for new markets - product life cycles The purchase of our products and services may involve a significant commitment of capital and other resources by our customers. As a result, the sales cycles for our products and services, from initial evaluation to delivery or performance, vary from customer to customer. The timing of individual sales is difficult to predict, and sales can occur in quarters subsequent to those anticipated by us. In addition, sales through indirect channels, such as through business partners, are difficult to predict and may have lower profit margins than direct sales. Our revenues in any quarter are substantially dependent on orders signed and shipped in that quarter. Typically, we realize higher revenues in our second and fourth fiscal quarters. Generally, we record a majority of our quarterly revenues in the third month of each quarter, mostly in the latter half of the third month. We believe that the fluctuations in our operating results is caused primarily by the budgeting cycles of our customers and established buying patterns by our customers or potential customers in the industry. As a result, our quarterly operating results are difficult to predict. In addition, delays in product delivery or in closings of sales near the end of a quarter could cause our quarterly operating results to fall substantially short of anticipated levels. Adverse economic conditions in the general business economy or specifically in the manufacturing industries we serve could result in reduced purchases of our products and services. Our customers are primarily discrete to-order manufacturers. Our business depends substantially upon the capital expenditures of our customers. Capital expenditures by our customers are somewhat dependent upon the demand for their manufactured products and the strength of their financial condition. A recession or other adverse economic event in general or one that specifically affects manufacturers could cause them to curtail or delay capital expenditures for computer software products. Any significant changes in the timing or amount of capital expenditures by manufacturers could have a material adverse effect on our business, operating results and financial condition. Industries in which our customers operate have been affected by weakened demand for their products for approximately one to two years and we believe that the demand for our products and services has already been significantly impacted, which has negatively affected our financial results and financial condition. However, there can be no assurance that economic conditions relating to our customers or potential customers will not become more severe. Any decrease in our licensing activity is likely to result in reduced services revenue in future periods. Our service, maintenance and support revenue is derived from our installation, implementation, training, consulting, systems integration and software product maintenance and support services. Typically a decrease in our service, maintenance and support revenue follows a decrease in our licensed software installations. Our ability to maintain or increase our service, maintenance and support revenue depends in large part on our ability to increase our software licensing activity. The market for our products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can cause customers to delay their purchasing decisions and render existing products obsolete and unmarketable. The life cycles of our software products are difficult to estimate. Consequently, our future success will depend, in part, upon our ability to continue to enhance our existing products and to develop and introduce in a timely manner new products with technological developments that satisfy customer requirements and achieve market acceptance. There can be no assurance that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner or that products, capabilities or technologies developed by others will not render our products or technologies obsolete or noncompetitive or shorten the life cycles of our products. If we are unable to develop on a timely and cost-effective basis new software products or enhancement to existing products, or if our products or enhancements do not achieve market acceptance, our business, operating results and financial condition may be materially adversely affected. We derive a significant portion of our business from operations that are subject to foreign economic conditions and currency fluctuations. We derive a significant portion of our business from international sales. 25 We expect to continue to expand our international operations, which will require significant management attention and financial resources. Our international operations are subject to various risks, including the following: - the impact of a recession in foreign countries, particularly in Europe and the Asia/Pacific regions - cultural and language difficulties associated with serving customers and localizing products - staffing and management problems related to foreign operations - exchange controls and reduced protection for intellectual property in some countries - political instability - unexpected changes in foreign regulatory requirements - difficulties in collecting accounts receivable and longer collection periods - restrictions on the repatriation of foreign earnings - the impact of local economic conditions and practices - fluctuations in foreign exchange rates - potential adverse foreign tax consequences Termination of agreement with Progress would cause a disruption of service to our customers and may result in lower operating margins or a loss of business. Our core product, SyteLine, through version 6.0, is written in Progress, a proprietary programming language which we license from Progress Software Corporation. We market and distribute Progress in connection with the sale of our products under a non-exclusive agreement with Progress. The agreement may be terminated by either party upon written notice to the other party. In addition, the agreement may be terminated immediately by either party if a material breach of the agreement by the other party continues after written notice. Our relationship with Progress involves other risks which could have a material adverse effect on our business, operating results or financial condition, including the following: - the failure of Progress to continue its business relationship with us - the failure of Progress to develop, support or enhance Progress in a manner that is competitive with enhancements of other programming languages - delays in the release of Progress products or product enhancements that require a delay in the release of our products or product enhancements - the loss of market acceptance of Progress and its relational database management system - our inability to migrate our software products to other programming languages on a timely basis if Progress is no longer available We have begun to mitigate these risks for future periods by developing SyteLine Version 7.0 which was released in September 2002 and does not require the use of the Progress database or toolset. Conversion of our outstanding Series A preferred shares or our Convertible Notes and exercise of our outstanding warrants could result in substantial dilution, a detrimental effect on the market liquidity of our common shares and ability to raise additional capital, and a significant decline in the market value of our common shares. As of September 20, 2002, we had approximately 7,568,218 common shares outstanding. As of this date we had 2,267,732 additional common shares reserved for issuance upon conversion of our outstanding Series A preferred shares, 2,009,969 additional common shares reserved for conversion of our Convertible Notes and 1,603,546 additional shares reserved for exercise of our outstanding warrants. Our Series A preferred shares, Convertible Notes and outstanding warrants also contain or are subject to various anti-dilution and similar provisions which may require us to issue additional common shares in certain circumstances. If these securities are converted or exercised, other holders of our common shares may experience significant dilution in the market value of our common shares held by them. If the holders were to sell all or a substantial 26 amount of those common shares into the open market, the sales could have a negative effect on the market price of our common shares. The sales also might make it more difficult for us to sell equity or equity-related securities in the future at a price we deem appropriate. We have no intention of paying cash dividends. We have never paid any cash dividends on our common shares. We currently intend to retain all future earnings, if any, for use in our business and we do not expect to pay any cash dividends in the foreseeable future. In addition, dividend payments to holders of our common shares are subject to the rights of holders of our preferred shares. As long as our Series A preferred shares are outstanding, no dividends may be declared or paid on our securities that rank junior to our Series A preferred shares, including our common shares, unless all required cumulative dividends are paid or a sum sufficient for the payment of the dividends is set apart for such payment. Turnover in our senior management or other key employees could have a material adverse effect on our business, operating results and financial condition. Our success depends to a significant extent upon senior management and other key employees. The loss of one or more key employees could have a material adverse effect on our business. We do not have employment agreements with our executive officers, except Stephen A. Sasser, our President and Chief Executive Officer, and we do not maintain key man life insurance on our executive officers. We believe that our future success will depend in part on our ability to attract and retain highly skilled technical, managerial, sales, marketing, service and support personnel. Competition for personnel in the computer software industry has historically been intense. There can be no assurance that we will be successful in attracting and retaining key personnel, and the failure to do so could have a material adverse effect on our business, operating results and financial condition. Our success is dependent in part upon our proprietary technology and other intellectual property. Our ability to compete is dependent in part upon our internally developed proprietary intellectual property. We regard our products as proprietary trade secrets and confidential information. We rely largely upon a combination of copyright, trade secret and trademark laws, license agreements with our customers, distribution agreements with our distributors, and our own security systems, confidentiality procedures and employee agreements to maintain the confidentiality and trade secrecy of our products. In certain cases, we also seek to protect our programs, documentation and other written materials through registration of our trademarks and service marks and copyrights of our products under trademark and copyright laws in the United States and certain other countries, but we have not secured registration of all our marks and copyrights. None of our products are patented. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad are adequate or that competitors will not independently develop similar technology. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in other jurisdictions. Preventing or detecting unauthorized use of our products is difficult. Despite our efforts, it may be possible for third parties to copy certain portions or reverse engineer our products, or to obtain and use our proprietary or confidential information. We also rely on certain other technology which we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. No assurance can be given that the steps taken by us will prevent misappropriation of our technology or that our license agreements will be enforceable. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation, even if not meritorious, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. We may be exposed to property rights infringement claims. Although we do not believe that our products infringe the proprietary rights of third parties, there can be no assurance that infringement or invalidity claims, including claims for indemnification resulting from infringement claims, will not be asserted or prosecuted against us. Regardless of the validity or the successful assertion of such claims, defending against such claims could result in significant costs and diversion of resources which could have a material adverse effect on our business, operating results and financial condition. In addition, the assertion of such infringement claims could 27 result in injunctions preventing us from distributing certain products, which would have a material adverse effect on our business, operating results and financial condition. If any claims or actions are asserted against us, we may seek to obtain a license to such intellectual property rights. There can be no assurance, however; that such a license would be available to us on reasonable terms or at all. We may be exposed to product liability claims. Our products may contain undetected operating errors due to the complex nature of our software. Such operating errors are usually resolved through regular maintenance and updating processes. However, our products also may contain more serious operating errors or failures that may not be detected until the products have been delivered to customers. As a result of serious operating errors or failures, our customers could suffer major business interruptions or other problems that could lead to claims for damages against us. Such operating errors or failures could also delay the scheduled release of new or enhanced products or diminish the market acceptance of our products. As a result, our financial results of operations and financial condition may be materially adversely affected. Our future revenue is substantially dependent upon our installed customer base. In the past, we have depended on our installed customer base for additional future revenue from services, support and maintenance and licensing of additional products. Our maintenance and support agreements generally are renewable annually at the option of the customer. Fees for maintenance and support services are billed 12 months in advance, and maintenance and support revenue is deferred and recognized ratably over the term of the maintenance and support agreement. There can be no assurance that current installed customers will renew their maintenance and support in future periods, continue to use the Company for professional services or purchase additional products; each of which would have a material negative impact on our financial results and financial condition. We may not be able to maintain or expand our relationships with business partners. We believe that we need to maintain and expand our relationships with our existing business partners and enter into relationships with additional business partners in order to expand the distribution of our products. Many of our business partners also sell products that compete with our products. There can be no assurance that we will be able to maintain effective, long-term relationships with our business partners or that selected business partners will continue to meet our sales needs. Further, there can be no assurance that our business partners will not market software products in competition with our products in the future or will not otherwise reduce or discontinue their relationships with us. If we fail to maintain successfully our existing business partner relationships or to establish new business partner relationships in the future, our business, operating results and financial condition could be materially and adversely affected. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk. Frontstep's revenues originating outside of North America were 28%, 22% and 20% of our total revenues for fiscal years 2002, 2001 and 2000, respectively. By geographic region, revenues originating in Europe were 17%, 13% and 11% of total revenues for fiscal years 2002, 2001 and 2000, respectively. Revenues originating in Asia Pacific were 11%, 9% and 9% of total revenues for fiscal years 2002, 2001 and 2000, respectively. International sales are made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. Our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts in which costs of software, including certain development costs, incurred in the United States are charged to our foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Foreign currency gains and losses will continue to result from fluctuations in the value of the currencies in which we conduct our operations as compared to the U.S. dollar and future operating results will be affected by gains and losses from foreign currency exposure. We do not currently hedge against losses arising from our foreign currency exposure. We have considered the potential impact of a hypothetical 10% 28 adverse change in foreign exchange rates and we believe that such a change would not have a material impact on financial results or financial condition in the coming fiscal year. Interest Rate Risk. We invest our surplus cash in financial instruments such as short-term marketable securities and interest-bearing time deposits. We also incur interest at variable rates, dependent upon the prime rate or LIBOR rate that may be in effect from time to time. We have considered the potential impact of a hypothetical one hundred basis point adverse change in interest rates and we believe that such a change would not have a material impact on financial results or financial condition in the coming fiscal year. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Frontstep, Inc. We have audited the accompanying consolidated balance sheets of Frontstep, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frontstep, Inc. and subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of the Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". /s/ KPMG LLP Columbus, Ohio September 30, 2002 30 REPORT OF INDEPENDENT AUDITORS Board of Directors Frontstep, Inc. We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows of Frontstep, Inc (formerly Symix Systems, Inc.) and Subsidiaries for the year ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Frontstep, Inc. and Subsidiaries for the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Columbus, Ohio July 27, 2000 31 FRONTSTEP, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, ------------------- 2002 2001 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 3,389 $ 1,512 Trade accounts receivable, net............................ 29,049 31,446 Prepaid expenses.......................................... 6,224 3,756 Income taxes receivable................................... -- 47 Deferred income taxes..................................... 3,386 2,026 Inventories............................................... 491 738 Other current assets...................................... 362 979 -------- -------- 42,901 40,504 Capitalized software, net................................... 16,371 15,094 Intangibles, net............................................ 8,039 7,911 Property and equipment, net................................. 5,030 7,646 Other assets................................................ 1,074 1,438 -------- -------- Total assets................................................ $ 73,415 $ 72,593 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 13,284 $ 15,610 Deferred revenue.......................................... 18,796 20,278 Current portion of long-term obligations.................. 7,998 1,967 Income taxes payable...................................... 405 -- -------- -------- 40,483 37,855 Noncurrent liabilities: Long-term debt............................................ 8,928 8,337 Deferred income taxes..................................... 4,268 2,891 Other..................................................... -- 405 -------- -------- 13,196 11,633 Minority interest........................................... 118 2,101 Shareholders' equity: Series A Convertible Participating Preferred Stock, no par value; 1,000,000 shares authorized; 566,933 shares issued and outstanding at June 30, 2002 and 2001; liquidation preference $13,606,392..................... 10,865 10,865 Common stock, no par value; 20,000,000 shares authorized; 7,872,418 shares issued at June 30, 2002 and 2001, at stated capital amounts of $0.01 per share.............. 79 79 Additional paid-in capital................................ 39,341 37,470 Treasury stock, at cost; 304,200 shares at June 30, 2002 and 2001............................................... (1,320) (1,320) Retained earnings (accumulated deficit)................... (26,217) (22,772) Accumulated other comprehensive loss...................... (3,130) (3,318) -------- -------- 19,618 21,004 -------- -------- Total liabilities and shareholders' equity.................. $ 73,415 $ 72,593 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 32 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, -------------------------------------- 2002 2001 2000 ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: License fees.............................................. $35,372 $ 51,309 $ 57,858 Service................................................... 21,787 30,921 39,626 Maintenance and support................................... 35,427 34,846 31,424 ------- -------- -------- Total revenue..................................... 92,586 117,076 128,908 Cost of revenue: License fees.............................................. 17,464 21,885 21,504 Service, maintenance and support.......................... 27,238 36,941 40,352 ------- -------- -------- Total cost of revenue............................. 44,702 58,826 61,856 ------- -------- -------- Gross margin................................................ 47,884 58,250 67,052 Operating expenses: Selling, general and administrative....................... 41,921 62,847 57,504 Research and development.................................. 6,182 13,332 15,684 Amortization of acquired intangibles...................... 1,777 3,285 3,593 Restructuring and other charges........................... -- 6,403 1,067 ------- -------- -------- Total operating expenses.......................... 49,880 85,867 77,848 ------- -------- -------- Operating income (loss)..................................... (1,996) (27,617) (10,796) Interest expense............................................ (2,317) (623) (782) Other income (expense), net................................. 175 113 (184) ------- -------- -------- Income (loss) before income taxes........................... (4,138) (28,127) (11,762) Provision for (benefit from) income taxes................... (693) (2,063) (1,557) ------- -------- -------- Net income (loss)........................................... $(3,445) $(26,064) $(10,205) ======= ======== ======== Net income (loss) per common share: Basic..................................................... $ (0.46) $ (3.46) $ (1.38) ======= ======== ======== Diluted................................................... $ (0.46) $ (3.46) $ (1.38) ======= ======== ======== Shares used in computing per share amounts: Basic..................................................... 7,568 7,535 7,411 Diluted................................................... 7,568 7,535 7,411
The accompanying notes are an integral part of these consolidated financial statements. 33 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUM. PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED OTHER ---------------- --------------- PAID-IN TREASURY EARNINGS COMPR. SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK (DEFICIT) LOSS TOTAL ------ ------- ------ ------ ---------- -------- --------- ------- -------- Balance at June 30, 1999... -- $ -- 7,654 $76 $32,363 $(1,320) $ 13,497 $(2,214) $ 42,402 Issuance of common stock: Acquisitions............. -- -- -- -- 3 -- -- -- 3 Stock option exercises... -- -- 118 2 1,009 -- -- -- 1,011 Employee stock purchase plan................... -- -- 35 -- 577 -- -- -- 577 Tax benefit on stock options exercised........ -- -- -- -- 754 -- -- -- 754 Issuance of common stock warrants................. -- -- -- -- 2,510 -- -- -- 2,510 Net loss................. -- -- -- -- -- -- (10,205) -- (10,205) Foreign currency translation adjustment............. -- -- -- -- -- -- -- (343) (343) -------- Comprehensive loss:........ (10,548) --- ------- ----- --- ------- ------- -------- ------- -------- Balance at June 30, 2000... -- -- 7,807 78 37,216 (1,320) 3,292 (2,557) 36,709 Issuance of common stock: Stock option exercises... -- -- 2 -- 60 -- -- -- 60 Employee stock purchase plan................... -- -- 63 1 194 -- -- -- 195 Convertible preferred stock transferred from temporary equity......... 567 10,865 -- -- -- -- -- -- 10,865 Net loss................. -- -- -- -- -- -- (26,064) -- (26,064) Foreign currency translation adjustment............. -- -- -- -- -- -- -- (761) (761) -------- Comprehensive loss:........ (26,825) --- ------- ----- --- ------- ------- -------- ------- -------- Balance at June 30, 2001... 567 10,865 7,872 79 37,470 (1,320) (22,772) (3,318) 21,004 Issuance of common stock: Common stock warrants.... -- -- -- -- 1,871 -- -- -- 1,871 Employee stock purchase plan................... -- -- -- -- -- -- -- -- -- Net loss................. -- -- -- -- -- -- (3,445) -- (3,445) Foreign currency translation adjustment............. -- -- -- -- -- -- -- 188 188 -------- Comprehensive loss:........ (3,257) --- ------- ----- --- ------- ------- -------- ------- -------- Balance at June 30, 2002... 567 $10,865 7,872 $79 $39,341 $(1,320) $(26,217) $(3,130) $ 19,618 === ======= ===== === ======= ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 34 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ------------------------------ 2002 2001 2000 -------- -------- -------- (IN THOUSANDS) CASH FLOW FROM OPERATING ACTIVITIES: Net loss.................................................. $ (3,445) $(26,064) $(10,205) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation........................................... 2,305 4,149 3,618 Amortization........................................... 6,609 7,333 7,811 Restructuring and other charges........................ -- 6,403 1,067 Deferred income taxes.................................. 16 (2,040) (2,333) Gain/loss on disposal of assets........................ 269 18 162 Tax benefit on stock options exercised................. -- -- 754 Write-off of capitalized software...................... -- 1,913 1,868 Changes in operating assets and liabilities, net of restructuring and other charges: Accounts receivable.................................. 2,900 5,214 7,403 Prepaid expenses and other assets.................... (2,000) (855) (22) Accounts payable and accrued expenses................ (2,377) (3,680) (3,409) Deferred revenue..................................... (1,212) 2,274 1,267 Income taxes payable/receivable...................... 639 1,820 (1,331) -------- -------- -------- Net cash provided by (used in) operating activities......... 3,704 (3,515) 6,650 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (119) (3,996) (4,496) Additions to capitalized software......................... (7,554) (5,074) (7,009) Proceeds from sale of subsidiary.......................... -- -- 2,585 Purchase of subsidiaries, net of acquired cash............ -- -- (2,116) -------- -------- -------- Net cash used in investing activities....................... (7,673) (9,070) (11,036) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible preferred stock, net.................................................... -- -- 10,865 Proceeds from issuance of common stock warrants, net...... 1,871 -- 2,510 Proceeds from issuance of common stock, net............... -- 253 654 Proceeds from long-term obligations....................... 69,138 76,090 40,964 Payments on long-term obligations......................... (64,562) (74,026) (44,076) -------- -------- -------- Net cash provided by financing activities................... 6,447 2,317 10,917 Effect of exchange rate changes on cash..................... (601) (88) 101 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 1,877 (10,356) 6,632 Cash and cash equivalents at beginning of year.............. 1,512 11,868 5,236 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 3,389 $ 1,512 $ 11,868 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 35 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Description of Business. Frontstep, Inc. and its subsidiaries ("Frontstep" or the "Company"), is a leading global provider of business software and services for midsize manufacturing companies, including business units of larger companies. The Company offers a comprehensive suite of integrated, collaborative network-centric software and services that (1) support the traditional back office management and resources of an enterprise ("ERP"), (2) support customer relationship management ("CRM") and other front office business activities and (3) support an enterprise's supply chain management activities. The accompanying financial statements include the accounts of Frontstep and its subsidiaries after elimination of intercompany accounts and transactions. Founded in 1979, Frontstep is headquartered in Columbus, Ohio. The Company has more than 4,400 customers that it serves from 26 sales and service offices in North America, Europe and the Pacific Rim, as well as through independent software and support business partners worldwide. The Company changed its name from Symix Systems, Inc. to Frontstep, Inc. as of 2000. Revenue Recognition. The Company's revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on an annual basis. Revenue is accounted for in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended and interpreted from time to time. Revenue is derived principally from the sale of internally produced software products and maintenance and support agreements from software sales. The Company licenses software generally under non-cancelable license agreements and provides product support services and periodic updates including training, installation, consulting and maintenance. License fees revenue is generally recognized when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. For customer license agreements, which meet these recognition criteria, the portion of the fees related to software licenses, which is determined using the residual method, will generally be recognized in the current period, while the portion of the fees related to services is recognized as the services are performed. The amount allocated to services revenues is based on the Company's standard rate per hour. Revenue from maintenance and support agreements, which is determined based on renewal rates, is billed periodically, deferred and recognized ratably over the life of the agreements. In the event revenue is contingent upon customer acceptance criteria, the Company defers recognizing that revenue until the contingencies are resolved. Inventories. Inventories consist primarily of software-related products that are held for resale. The Company values inventory at the lower of cost or market. Cost is determined using the specific identification method. Capitalized Software. Capitalized software is stated at the lower of cost or net realizable value. The Company capitalizes the cost of developing its software products in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalized software costs are amortized by the straight-line method using estimated useful lives of three to five years. Amortization expense was $6,609,000, $5,071,000 and $6,764,000 for the years ended June 30, 2002, 2001 and 2000, respectively. In addition, during fiscal years 2001 and 2000, the Company wrote off $1,913,000 and $1,868,000, respectively of capitalized software as part of restructuring operations (see Note 2). 36 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Capitalized software is summarized as follows:
JUNE 30, --------------------------- 2002 2001 2000 ------- ------- ------- (IN THOUSANDS) Capitalized cost of: Internally developed software......................... $33,014 $25,106 $22,196 Acquired software..................................... 11,616 11,608 10,459 ------- ------- ------- Total capitalized software at cost...................... 44,630 36,714 32,655 Accumulated amortization.............................. 28,259 21,620 14,326 ------- ------- ------- Capitalized software, net............................... $16,371 $15,094 $18,329 ======= ======= =======
Intangibles. As of June 30, 2002, the Company had unamortized intangibles in the amount of $8,039,000. Intangibles consist of goodwill resulting from acquisitions accounted for using the purchase method of accounting according to SFAS No. 141, Business Combinations, which specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. For fiscal year 2002, the Company has adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite lives no longer be amortized and be tested for impairment at least annually. The Company conducted such an evaluation and determined that the assets underlying the Company's goodwill are not impaired, resulting in no revaluation of goodwill at this time. Prior to adopting SFAS No. 142, the intangible assets were amortized using the straight-line method over a period of three to ten years. There were no additions to goodwill in 2002. The only change is from the effect of foreign currency translation. Accumulated amortization of intangibles as of June 30, 2001 and 2000 was $3,309,000 and $1,047,000, respectively. The following table illustrates what reported net income (loss) and net income (loss) per share would have been in the periods presented exclusive of amortization expense recognized in those periods related to goodwill (in thousands, except per share data):
YEAR ENDED JUNE 30, ----------------------------- 2002 2001 2000 ------- -------- -------- Numerator for basic and diluted loss per share -- net loss................................................. $(3,445) $(26,064) $(10,205) Goodwill amortization................................ -- 2,262 1,047 ------- -------- -------- Adjusted net income /(loss)............................ $(3,445) $(23,802) $ (9,158) ======= ======== ======== Basic and diluted net income (loss) per share: Net income (loss)................................. $ (0.46) $ (3.46) $ (1.38) Goodwill amortization............................. -- $ 0.30 $ 0.14 ------- -------- -------- Adjusted net income (loss)........................ $ (0.46) $ (3.16) $ (1.24) ======= ======== ========
Property and Equipment. Property and equipment are recorded at cost and include expenditures which substantially increase the useful lives of the assets. Property and equipment under capital leases are stated at the present value of minimum lease payments. Maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method. Amortization of capital leases is provided over the lease terms using the straight-line method and is included in depreciation expense. 37 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Depreciation and amortization on the Company's property and equipment has been computed based on the following useful lives:
YEARS ------- Furniture and fixtures...................................... 3 to 7 Computers and other equipment............................... 2 to 7 Leasehold improvements...................................... 5 to 10
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation. The Company has determined that the functional currency of each foreign operation is the local currency. The effects of translation rate changes related to assets and liabilities located outside the United States are included as a component of other comprehensive income (loss). Foreign currency transaction gains and losses are included in "Other income (expense), net" on the Consolidated Statements of Operations. Comprehensive Loss. The Company believes that the only item in addition to net income (loss) that would be included in comprehensive income is the foreign currency translation adjustment. Comprehensive income (loss) for the years ended June 30, 2002, 2001 and 2000 is as follows (in thousands):
YEAR ENDED JUNE 30, ----------------------------- 2002 2001 2000 ------- -------- -------- Net loss............................................... $(3,445) $(26,064) $(10,205) Foreign currency translation adjustment................ 188 (761) (343) ------- -------- -------- Comprehensive net income (loss)........................ $(3,257) $(26,825) $(10,548) ======= ======== ========
Stock-based Compensation. The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant and amortized over the period of service, only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Statement of Cash Flows. The Company considers all demand deposits and highly liquid investments with an original maturity of three months or less as cash equivalents. Cash paid for (received from) income taxes, net of refunds, for fiscal 2002, 2001 and 2000 was $1,146,000, $(2,251,000) and $1,756,000, respectively. Cash paid for interest was $2,282,000, $671,000 and $782,000 for fiscal 2002, 2001 and 2000, respectively. Financial Instruments. Financial instruments consist primarily of cash, accounts receivable, accounts payable and long-term debt. The carrying value of all financial instruments at June 30, 2002 and 2001 approximated their fair value. 38 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Long-lived Assets. The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 -- RESTRUCTURING AND OTHER CHARGES Fiscal 2001 Restructuring Charges. In April 2001, the Company announced a broad restructuring plan to reduce operating costs by reducing its worldwide workforce by approximately 20%, or 162 employees, all of which were direct employees involved in all aspects of the Company's business, both domestic and international; discontinuing certain product development and other non-essential activities, including terminating activities related to its SyteCentre product and exiting certain license agreements; and closing certain office facilities in Arizona, California, Canada and Asia. As a result of this restructuring plan, the Company recorded pre-tax restructuring charges of $580,000 and $3,660,000 in the three months ended March 31, 2001 and June 30, 2001, respectively. These restructuring charges are recorded as a separate line in the Consolidated Statements of Operations. The Company's restructuring plan consisted of the following significant items: - Employee separation costs of $2,182,000 -- The Company reduced its workforce by approximately 20%, or 162 employees. These costs consist primarily of severance for these employees. - Contract termination liabilities of $900,000 -- The Company elected to discontinue its SyteCentre ERP product to focus resources on the Company's primary ERP product, SyteLine. The Company also discontinued its ASP hosting solution and its Internet procurement software due to sluggish demand and unprofitable operations. As a result, the Company provided $900,000 to cover anticipated contractual obligations and costs associated with customers currently using the discontinued products and services. - Facility closure costs of $1,158,000 -- The Company recorded $1,158,000 of costs associated with closing certain offices in Arizona, California, Canada and Asia. Cancelable lease term costs were based on actual determinable amounts. For those leases with non-cancelable lease terms, the Company assumed that subleases would be obtained after a one-year period. 39 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following table displays a rollforward of the accruals established for the restructuring and other charges from the announcement of the plan to June 30, 2002 (in thousands):
AMOUNTS AMOUNTS USED IN ACCRUAL AMOUNTS USED IN INITIAL FISCAL BALANCE AT RECLASSIFIED FISCAL ACCRUAL AT CHARGE 2001 JUNE 30, 2001 IN 2002 2002 JUNE 30, 2002 ------- ------- ------------- ------------ ------- ------------- Termination costs related to employees........... $2,182 $1,770 $ 412 $723 $ 570 $565 Exit costs: Facility closure costs............ 1,158 280 878 (248) 396 234 Contract termination liabilities...... 900 120 780 (475) 215 90 ------ ------ ------ ---- ------ ---- Total................. $4,240 $2,170 $2,070 $ 0 $1,181 $889 ====== ====== ====== ==== ====== ====
The amounts used of $1,181,000 and $2,170,000 in fiscal 2002 and 2001, respectively, reflect cash payments of $3,271,000 and non-cash charges of $80,000. During fiscal 2002, the Company reclassified estimated amounts previously allocated in the restructuring reserve, as noted in the above table, to reflect the actual amounts needed for each category. The remaining accrual of $889,000, which is included in accounts payable and accrued expenses, represents cash payments to be made over the course of remaining contracts through 2004. In relation to the April 2001 restructuring plan, the Company wrote off certain accounts receivable amounting to $6,840,000 during 2001, which is presented in the Statement of Operations in Operating expenses: Selling, general and administrative. Also, in relation to the restructuring plan, the Company wrote off other non-performing assets amounting to $1,913,000 in 2001, which is presented in the Statement of Operations in Cost of revenue: License fees. The accounts receivable write-offs were recorded to reflect accounts deemed to be uncollectible due to economic and other situations that occurred subsequent to the recording of the sales related to those receivables. The non-performing assets are no longer in use and were completely written off. Fiscal 2001 Other Charges. In relation to this restructuring plan, the Company also wrote off certain accounts receivable and other non-performing assets. These charges have been reported separately from the restructuring charge in the Statement of Operations. The accounts receivable write offs were recorded to reflect accounts deemed to be uncollectible due to economic and other situations that occurred subsequent to the recording of the sales related to those receivables. The non-performing assets are no longer in use. These charges are: - Accounts receivable write-offs -- $6,840,000 -- As part of the restructuring, the Company elected to discontinue certain product lines and focus on more profitable endeavors. During the third quarter of the year, the Company realized this would result in related collection issues. Thus, the Company wrote off $3,460,000 in receivables related to discontinued products and services. Additionally, in the third quarter ended March 31, 2001, the Company recorded other charges of $3,380,000 to write off customer receivables as a result of customer bankruptcies and solvency issues. These charges are reported in Operating expenses: Selling, general and administrative in the Statement of Operations for the year ended June 30, 2001. - Capitalized software write-offs -- $1,913,000 -- The Company elected to discontinue its SyteCentre ERP product to focus resources on the Company's primary ERP product, SyteLine. The Company also discontinued its ASP hosting solution and its Internet procurement software due to sluggish demand and unprofitable operations. As a result, the Company wrote off $1,463,000 of capitalized internally developed software relating to SyteCentre and $450,000 of capitalized purchased software relating to Internet procurement products. These charges are reported in Cost of revenue: License fees in the Statement of Operations for the year ended June 30, 2001. 40 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Fiscal 2000 Restructuring Charges. In July 2000, the Company announced several structural changes to discontinue certain business operations, write off non-performing assets which are no longer in use and to restructure the Company to better focus on its core business strategy. These changes included divesting the Company's FieldPro subsidiary, terminating the operations of its e-Mongoose, Inc. subsidiary, consolidating the Company's product development organizations and restructuring the Company's sales channels. In connection with this announcement, the Company recorded a non-recurring charge of $429,000, pre-tax, in the three months ended June 30, 2000 and an additional non-recurring charge of $2,163,000, pre-tax, in the three months ended September 30, 2000. The aggregate pre-tax charge of $2,592,000 included non-cash charges of $429,000 related primarily to the sale of Visual Applications Software, Inc., all of which was expended in Fiscal 2000, and $2,163,000 to reduce the Company's headcount. The headcount reduction included approximately 90 employees associated with the operations discussed above and others terminated as part of the restructuring. All severance payments were paid during the year ended June 30, 2001 and no accruals remain for these costs as of June 30, 2001 and 2002. The following table displays a rollforward of the accruals at June 30, 2000 and June 30, 2001 established for the structural changes:
INITIAL CHARGE AMOUNTS USED IN ACCRUAL AT IN 2000 FISCAL 2000 JUNE 30, 2000 -------------- --------------- ------------- 2000 (IN THOUSANDS) Loss on sale of Visual Applications Software, Inc. assets..................... $429 $429 -- ---- ---- -- $429 $429 -- ==== ==== ==
INITIAL CHARGE AMOUNTS USED IN ACCRUAL AT IN 2001 FISCAL 2001 JUNE 30, 2001 2001 -------------- --------------- ------------- (IN THOUSANDS) Termination costs to employees.............. $2,163 $2,163 --
Fiscal 2000 Other Charges. In relation to the fiscal 2000 restructuring plan, the Company also wrote-off certain accounts receivable and other non-performing assets. These charges have been reported separately from the restructuring charge in the Statement of Operations. The accounts receivable write-offs were recorded to reflect accounts deemed to be uncollectible due to economic and other situations that occurred subsequent to the recording of the sales related to those receivables. The non-performing assets are no longer in use. These charges are: - Accounts receivable write offs -- The Company wrote off $714,000 in receivables related to the discontinuation of the e-Mongoose products. These charges are reported in Operating expenses: Selling, general and administrative in the Statement of Operations for the year ended June 30, 2000. - Capitalized software write offs -- The Company wrote off $1,868,000 of capitalized internally developed software relating to e-Mongoose. These charges are reported in Cost of revenue: License fees in the Statement of Operations for the year ended June 30, 2000. 41 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 3 -- ACCOUNTS RECEIVABLE Accounts receivable is summarized as follows (in thousands):
JUNE 30, ----------------- 2002 2001 ------- ------- Accounts receivable......................................... $31,378 $32,877 Less allowance for doubtful accounts........................ 2,329 1,431 ------- ------- $29,049 $31,446 ======= =======
The following is a summary of activity in the allowance for doubtful accounts (in thousands):
YEAR ENDED JUNE 30, ---------------------------- 2002 2001 2000 ------- -------- ------- Beginning balance....................................... $ 1,431 $ 2,075 $ 1,500 Provision for bad debts................................. 2,143 9,731 3,255 Account write-offs, net................................. (1,245) (10,375) (2,680) ------- -------- ------- Ending balance.......................................... $ 2,329 $ 1,431 $ 2,075 ======= ======== =======
NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands):
JUNE 30, ----------------- 2002 2001 ------- ------- Furniture and fixtures...................................... $ 3,438 $ 3,655 Computers and other equipment............................... 21,715 21,720 Leasehold improvements...................................... 1,823 1,827 ------- ------- 26,976 27,202 Less accumulated depreciation and amortization.............. 21,946 19,556 ------- ------- $ 5,030 $ 7,646 ======= =======
NOTE 5 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses are summarized as follows (in thousands):
JUNE 30, ----------------- 2002 2001 ------- ------- Accounts payable............................................ $ 5,287 $ 5,579 Accrued payroll and related costs........................... 2,670 2,441 Third party royalties....................................... 1,197 2,408 Restructuring and other charges............................. 889 2,070 Other....................................................... 3,241 3,112 ------- ------- $13,284 $15,610 ======= =======
42 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 6 -- OPERATING LEASE COMMITMENTS The Company has entered into certain operating lease agreements for the rental of office facilities and computer equipment. The facility leases provide for annual rentals which are subject to escalation for increased operating costs. Amounts expensed under all operating lease agreements were approximately $4,215,000, $5,401,000 and $4,822,000 for the years ended June 30, 2002, 2001 and 2000, respectively. The future minimum lease payments required under noncancelable operating leases for the five years ending June 30 are: 2003, $3,302,000; 2004, $2,237,000; 2005, $829,000; 2006, $321,000; 2007, $164,000; 2008 and thereafter, $328,000. These amounts were adjusted for certain sub-lease agreements in the amount of $132,000 in fiscal 2003 and $66 in fiscal 2004. NOTE 7 -- LONG-TERM OBLIGATIONS Long-term debt is summarized as follows (in thousands):
JUNE 30, ----------------- 2002 2001 ------- ------- Term notes payable, net of discount......................... $13,799 $ -- Minority interest notes payable............................. 2,000 -- Convertible notes payable, net of discount.................. 1,031 -- Revolving credit facility................................... -- 8,337 Acquisition notes payable................................... -- 1,573 Present value of minimum capital lease payments............. -- 742 Other....................................................... 96 57 ------- ------- 16,926 10,709 Less current maturities..................................... 7,998 1,967 ------- ------- $ 8,928 $ 8,742 ======= =======
Term notes payable and revolving credit facility. In July 2001, the Company executed a new credit facility (the "Credit Facility") with Foothill Capital Corporation ("Foothill"). The Credit Facility includes a $15,000,000, three-year term note and a $10,000,000 revolving credit facility. Availability under the Credit Facility is based on and secured by qualifying accounts receivable originating within the United States and Canada. The revolving credit facility bears interest either at the Federal Funds rate plus 1.5%, or at the Eurodollar market rate plus 3.0%. The term note bears interest at the rate of 10.5% plus 1.5% per annum added to principal. The term note is payable in monthly installments commencing October 1, 2001. The Credit Facility is subject to customary terms and conditions and includes financial covenants for maintenance of a minimum tangible net worth, a minimum level of earnings before interest, taxes, depreciation and amortization and a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization. The proceeds from the Credit Facility were used to repay, in full, the Company's revolving credit facility with PNC Bank, National Association. In connection with the Credit Facility, Foothill was granted a warrant to purchase 550,000 of the Company's common shares priced at the current market price at closing of the transaction ($3.36 per share), which expire in July 2006. The warrant is subject to certain anti-dilution provisions as defined in the warrant agreement. The relative fair value of the warrant, $1,276,000, was recorded as a debt discount and is being amortized as interest expense over the three-year term of the Credit Facility. The Company determined this value, as of the date of the transaction, using a modified Black-Scholes option pricing model with the following assumptions: risk-free 43 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED interest rate of 5.5%, no dividend yield, volatility factor of 0.95, and option life of 5 years. As of June 30, 2002, the unamortized balance of the debt discount was $957,000. In connection with the grant of the warrants to Foothill as discussed above, and pursuant to the contractual terms of the warrant agreement associated with the private placement of preferred shares by the Company in fiscal 2000, the original exercise price of $15.00 per share for the existing warrants to purchase 453,546 common shares of the Company issued in fiscal 2000 was adjusted to $3.36 per share. Because this change in price was due to contractual provisions already in place at the inception of the arrangement, there is no impact on the Company's financial statements. On November 9, 2001, the Company and Foothill amended the Credit Facility to allow for temporary increased borrowing capacity through January 31, 2002. Also as part of the amendment, all financial covenants were modified to give account to the current economic conditions affecting the Company. The modification of the financial covenants was effective starting as of September 29, 2001. On February 14, 2002, the Company and Foothill amended the Credit Facility, again due to economic conditions affecting the Company. The amendment provided the Company with certain additional borrowing availability on a temporary basis until July 15, 2002 and allowed the Company to defer principal payments due under the primary term note for a six-month period commencing in January 2002. Also, the financial covenants were modified to reflect the current economic environment. Fees associated with the amendment to the credit facility of $900,000 which have been recorded as other assets and are included in current portion of long-term obligations, are payable in nine installments commencing July 2002 and are being amortized as interest expense over the remaining life of the credit facility. As of June 30, 2002, the Company was not in compliance with certain financial covenants under the Credit Facility as a result of its financial results for the three months ended June 30, 2002. The noncompliance does not relate to any payment due under the Credit Facility. On September 15, 2002, effective as of June 28, 2002, the Company and Foothill amended the Credit Facility to waive the conditions of noncompliance and to reset the related financial covenants as of June 30, 2002 and for the Company's fiscal 2003 year. Minority interest notes payable. In 2001, certain minority interest investors, including Mitsui & Co., Asia Investment Ltd. and its affiliates (collectively, "Mitsui") exercised their put option agreements which gave them the right to sell their shares in a Company subsidiary to another subsidiary of the Company at a formula price as provided in the put options, to be not less than an aggregate of $2,000,000. At that time the Company reclassified $2,000,000 from minority interest equity to current portion of long-term obligations. In May 2002 and July 2002, the Company and Mitsui executed convertible note agreements that provide for the Company to pay Mitsui approximately $1.1 million principal amount of the notes, plus accrued interest at approximately 4.4% per annum, on September 1, 2002 and the remainder, plus accrued interest, on March 1, 2003. The Mitsui convertible note agreements are subordinated to the Company's senior indebtedness as defined in the agreement. The Mitsui convertible note agreements also provide that, in certain circumstances, Mitsui is entitled to convert the notes, plus accrued interest, into common stock of the Company at a price of $12 per share. The Mitsui convertible note agreements were modified in principle in September 2002. See Note 13 -- Minority Interest and Note 19 -- Subsequent Events. Convertible notes payable. On March 7, 2002, the Company executed an agreement pursuant to which certain holders of its Series A Convertible Participating Preferred Shares and certain members of the Company's Board, including the Company's founder (collectively, the "Investors"), agreed to provide up to $5.0 million to the Company for working capital needs in exchange for convertible notes (the "Convertible Notes") with a term expiring in May 2004. Under the terms of the agreement, the Company issued an aggregate principal amount of $1.5 million of initial notes and warrants to purchase 600,000 common shares of the Company to the Investors on March 7, 2002. The initial notes bear interest at 10% per annum. The warrants are exercisable at a price of $0.01 per share. The transaction was approved by the Company's shareholders in June 2002. Upon the subsequent 44 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED closing of the sale of the remaining portion of the $5.0 million of convertible notes in July, 2002, the initial notes became convertible into Company common shares at the conversion price of $2.4876 per share. The remaining portion of the convertible notes were issued by the Company in August, 2002. See also Note 19 -- Subsequent Events. The Company recorded the relative fair value of the 600,000 warrants issued in connection with the initial notes ($595,153) as a debt discount and is amortizing the debt discount over the three-year expected life of the Notes. The Company determined the value, as of the date of the transaction using a modified Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5%, no dividend yield, volatility factor of 1.00, and option life of 10 years. Also, due to the debt being convertible into common stock at 80% of an average price per share, there is a beneficial conversion feature. The beneficial conversion feature is calculated at the commitment date as the difference between the conversion price and the fair value of the common stock into which the debt is convertible, multiplied by the number of shares into which the debt is convertible (intrinsic value). The beneficial conversion feature totaled $145,000. Because the debt is immediately convertible starting in the first quarter of 2003, this amount will be charged to interest expense in the first quarter of 2003. The aggregate maturities of long-term debt for the five years ending June 30 are: 2003, $7,998,000; 2004, $8,928,000; 2005 and thereafter, $0. NOTE 8 -- INCOME TAXES The components of the provision for (benefit from) income taxes are summarized as follows (in thousands):
YEAR ENDED JUNE 30, --------------------------- 2002 2001 2000 ------- ------- ------- Current: Federal................................................ $(1,281) $ -- $ (516) State and local........................................ -- -- (17) Foreign................................................ 572 (23) 541 ------- ------- ------- (709) (23) 8 Deferred: Federal................................................ 16 (1,778) (1,399) State and local........................................ -- (262) (206) Foreign................................................ -- -- 40 ------- ------- ------- 16 (2,040) (1,565) ------- ------- ------- $ (693) $(2,063) $(1,557) ======= ======= =======
45 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The significant components of the Company's deferred tax asset and liability are as follows (in thousands):
JUNE 30, ---------------- 2002 2001 ------- ------ Current deferred tax asset: Allowance for doubtful accounts........................... $ 1,412 $ 195 Accrued liabilities....................................... 1,974 1,831 ------- ------ $ 3,386 $2,026 ======= ====== Long-term deferred tax (asset) liability: Capitalized software...................................... $ 4,654 $5,072 Intangibles............................................... 881 1,038 Capitalized leases........................................ 422 422 Accrued liabilities....................................... -- 239 Book over tax depreciation................................ (932) (602) Domestic losses........................................... (6,696) (9,776) Foreign losses............................................ (2,095) (682) Tax credits............................................... (2,672) (1,935) ------- ------ (6,438) (6,227) Less valuation allowance.................................. 10,706 9,118 ------- ------ $ 4,268 $2,891 ======= ======
The long-term deferred tax assets pertaining to foreign losses are net operating loss carryforwards for certain foreign subsidiaries. The Company has set a valuation allowance for the foreign net operating loss carryforwards, domestic tax credits and the majority of the domestic net operating loss carryforwards. Management believes it is more likely than not that the remaining deferred tax assets will be recovered through taxable income from future operations. Deferred taxes are not provided on unremitted earnings of subsidiaries outside the United States because it is expected that the earnings are permanently reinvested. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. 46 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Differences arising between the provision for (benefit from) income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
YEAR ENDED JUNE 30, -------------------- 2002 2001 2000 ---- ---- ---- Federal tax at statutory rate............................... (34)% (34)% (34)% State and local income taxes net of federal tax benefit..... -- (4) (3) Foreign operations taxes at rates different from U.S. federal statutory rate.................................... -- 3 7 Disposition of foreign operation............................ -- -- 5 Nondeductible acquisition research and development write off....................................................... -- -- 2 General business credits.................................... -- (2) -- Nondeductible permanent differences......................... 2 1 4 Valuation allowance recorded against deferred tax assets, net of tax benefit recorded due to 2002 tax law change pertaining to NOL carryback provisions.................... 15 29 6 --- --- --- (17)% (7)% (13)% === === ===
The Company has domestic net operating loss carryforwards for tax purposes of $490,000, $347,000, $37,000, $752,000, $1,344,000, $1,779,000, $8,466,000 and $3,954,000 which expire in fiscal years 2008, 2010, 2012, 2013, 2018, 2019, 2021 and 2022, respectively. NOTE 9 -- STOCK OPTION PLANS The Company has a non-qualified stock option plan (the "Plan") that provides for the granting of up to 2,653,070 options to officers and other key employees for common shares at purchase prices of not less than the fair market value on the date of the grant as determined by the Stock Option Committee of the Board of Directors. Options under the Plan generally vest over periods of up to four years and must be exercised within ten years of the date of grant. As of June 30, 2002, options for 942,811 common shares were outstanding at a weighted average exercise price of $6.42 per share. Shareholder approval was obtained on November 17, 1999 for a separate non-qualified stock option plan (the "1999 Plan"). The 1999 Plan, which was amended on November 7, 2001 to increase the options available to grant from 600,000 to 900,000, provides for the granting of options to officers and key employees for common shares at purchase prices of not less than the fair market value on the date of the grant as determined by the Stock Option Committee of the Board of Directors. Options under the 1999 Plan generally vest over periods of up to four years and must be exercised within ten years of the date of the grant. As of June 30, 2002, options for 683,325 common shares were outstanding at a weighted average exercise price of $4.94 per share. The Company also has a non-qualified stock option plan for Key Executives (the "Key Executives Plan"). A total of 400,000 common shares are designated for issuance under the Key Executives Plan. The Stock Option Committee of the Board of Directors is authorized to set the price and terms and conditions of the options granted under the Key Executives Plan. Options under the Key Executives Plan must be exercised within ten years of the date of the grant. As of June 30, 2002, options for 400,000 common shares were outstanding at a weighted average exercise price of $3.81 per share. The Company also has a stock option plan for Outside Directors (the "Outside Directors Plan"). The Outside Directors Plan provides for the issuance of options for 20,000 shares of stock to each Outside Director upon his/her election to the Board of Directors. A total of 200,000 common shares may be issued under the Outside Directors Plan. The Outside Directors Plan was amended June 20, 2002 to allow discretionary grants in addition to those provided upon election. Options under the Outside Directors Plan vest immediately and must be 47 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED exercised within ten years of the date of grant. As of June 30, 2002, options for 80,000 common shares were outstanding at a weighted average exercise price of $6.46. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted under that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000: risk-free interest rates of 5.0%, 5.0% and 6.5%, respectively; no dividend yield; volatility factor of the Company's common shares of 0.69, 1.0 and 0.9, respectively; and expected life of each option of 7 years, 7 years and 7 years, respectively. If the Company had elected to recognize compensation cost based on the fair value of options at the grant date (which includes shares issuable under the Employee Stock Purchase Plan -- see Note 10) as prescribed by SFAS No. 123, the following table displays what reported net income (loss) and per share amounts would have been (in thousands, except per share data):
PRO FORMA YEAR ENDED JUNE 30, ----------------------------- 2002 2001 2000 ------- -------- -------- Net income (loss)...................................... $(5,285) $(27,895) $(11,402) Net income (loss) per share, assuming dilution......... (0.70) (3.70) (1.54)
The pro forma financial effects of applying SFAS No. 123 may not be representative of the pro forma effects on reported results of operations for future years. The following table summarizes stock option activity:
WEIGHTED- AVERAGE NUMBER OF EXERCISE PRICE OPTIONS (#) PER SHARE ($) ----------- -------------- Outstanding at June 30, 1999................................ 1,755,272 8.26 Granted................................................... 377,100 9.69 Cancelled................................................. (79,150) 13.00 Exercised................................................. (117,300) 6.73 --------- Outstanding at June 30, 2000................................ 1,935,922 8.44 Granted................................................... 351,000 5.95 Cancelled................................................. (204,550) 11.39 Exercised................................................. (1,500) 5.66 --------- Outstanding at June 30, 2001................................ 2,080,872 7.73 Granted................................................... 650,264 3.37 Cancelled................................................. (625,000) 10.75 Exercised................................................. -- -- --------- Outstanding at June 30, 2002................................ 2,106,136 5.45 =========
The weighted average fair value exercise price per share of options granted during the years ended June 30, 2002, 2001 and 2000 was $2.35, $5.12 and $5.92, respectively. At June 30, 2002, 626,620 shares remained available for grant under the Company's stock option plans. On October 30, 2001, the Company offered the participants in its employee stock option plans (excluding the Key Executive Plan) the opportunity to exchange existing stock options for new stock options under the plans to be granted at a future date at least six months and one day after the date of cancellation of the old options by 48 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED the Company. The stock option exchange program expired on December 7, 2001 and options to purchase 366,111 common shares were returned to the Company and cancelled. Subject to the terms and conditions of the offer, the Company granted options to purchase 333,764 common shares on June 10, 2002 with an exercise price per share equal to the closing market price per share of the Company's common shares, $3.12 per share. The new options have other terms and conditions substantially the same as the old options. Executive officers of the Company who participated in the program returned options for 125,000 common shares for cancellation and were issued new options for 100,000 common shares in exchange for the cancelled options which vest over a two year period. The following tables summarize information regarding stock options outstanding as of June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE STOCKHOLDER APPROVED PLANS ------------------------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF EXERCISE REMAINING EXERCISE EXERCISE PRICE ($) # OF OPTIONS LIFE (YEARS) PRICE ($) # OF OPTIONS PRICE ($) ----------------- ------------ ------------ ------------ ------------ --------- 3.12 412,764 9.9 3.12 0 N/A 3.13- 5.00 348,100 7.0 3.97 128,875 4.27 5.01- 7.00 438,125 5.5 5.86 279,125 5.42 7.01- 10.00 360,175 4.5 7.89 333,725 7.59 10.01- 20.50 146,972 6.2 14.36 119,647 13.99 --------- ------- Total 1,706,136 6.7 5.97 861,372 7.28 ========= =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------------ NON-STOCKHOLDER APPROVED PLANS WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF EXERCISE REMAINING EXERCISE EXERCISE PRICE ($) # OF OPTIONS LIFE (YEARS) PRICE ($) # OF OPTIONS PRICE ($) ----------------- ------------ ------------ ------------ ------------ --------- 3.81 400,000 3.0 3.81 400,000 3.81 ------- ------- Total 400,000 3.0 3.81 400,000 3.81 ======= === ==== ======= ====
NOTE 10 -- EMPLOYEE BENEFIT PLANS The Company has a 401(k) plan that covers substantially all employees over 21 years of age. The Company contributes to the plan based upon employee contributions and may make additional contributions at the discretion of the Board of Directors. The Company made contributions to this plan of approximately $575,000, $837,000 and $683,000, for the years ended June 30, 2002, 2001, and 2000, respectively. The Company has an employee stock purchase plan that is in accordance with Section 423 of the Internal Revenue Code whereby participants are eligible to purchase common shares of the Company during the plan year. The purchase price for a common share is determined by the Compensation Committee of the Board of Directors prior to the effective date. The purchase price may not be less than 90% of the per share fair market value of the Company's common shares on either the effective date or the option date for the offering, whichever is the lesser. Substantially all non-officer employees are eligible to participate. During the plan period ended December 31, 2000, the plan did not have any more shares available for purchase. At the November 2001 annual shareholder's meeting, the shareholders approved the Board of Directors' proposal to amend the Company's Employee Stock Purchase Plan to increase the aggregate number of shares available for issuance under the plan from 200,000 to 400,000. The plan remained inactive during the year ended June 30, 2002. The Compensation Committee of the Board of Directors determines the date on which any future offering under the Employee Stock Purchase Plan will commence. 49 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 11 -- ACQUISITIONS On February 9, 2000, the Company acquired Profit Solutions, Inc. ("PSI"), a Minnesota corporation and provider of Web-centric customer relationship management applications with sales, marketing, service and business intelligence functionality, for approximately $2,100,000 in cash paid at closing and $5,000,000 in unsecured, subordinated promissory notes. The transaction was accounted for as a purchase and resulted in a one-time, non-recurring charge of $638,000 relating to the write-off of acquired in-process technology of PSI. The following table sets forth the unaudited consolidated pro forma results of operations for the period indicated giving effect to the acquisition as if it had occurred at the beginning of the period indicated. The non-recurring charge of $638,000 is excluded from pro forma net income (loss). No pro forma information is required for the years ended June 30, 2002 and 2001 since all acquisitions occurred in prior years.
YEAR ENDED JUNE 30, 2000 --------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue..................................................... $129,333 Net income (loss)........................................... (10,888) Net income (loss) per share, assuming dilution.............. (1.47)
NOTE 12 -- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
YEAR ENDED JUNE 30, ----------------------------- 2002 2001 2000 ------- -------- -------- Numerator for basic and diluted income (loss) per share -- net income (loss)........................... $(3,445) $(26,064) $(10,205) ======= ======== ======== Denominator: Weighted average common shares outstanding........... 7,568 7,535 7,411 Contingently issuable shares......................... -- -- -- ------- -------- -------- Denominator for basic income (loss) per share..... 7,568 7,535 7,411 Effect of dilutive employee stock options............ -- -- -- ------- -------- -------- Denominator for diluted income (loss) per share... 7,568 7,535 7,411 ======= ======== ======== Basic net income (loss) per share...................... $ (0.46) $ (3.46) $ (1.38) ======= ======== ======== Diluted net income (loss) per share.................... $ (0.46) $ (3.46) $ (1.38) ======= ======== ========
During years ended June 30, 2002, 2001 and 2000 common share equivalents in stock options, warrants and convertible preferred shares were outstanding. However, such common share equivalents were not included in the computation of diluted net income per share because the Company reported a net loss for the period and, therefore, the effect would be anti-dilutive. As of June 30, 2002, 2,106,136 common share equivalents in stock options, 1,603,546 common share equivalents in warrants and 2,267,732 common share equivalents in convertible preferred shares were outstanding. 50 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13 -- MINORITY INTEREST In June 1998, Frontstep Computer Systems (Singapore) Pte. Ltd., a wholly-owned subsidiary of the Company, sold previously unissued shares of common stock (representing a 13.3% interest in that subsidiary) to Mitsui for $2,000,000. No gain or loss was recognized on the sale of the subsidiary stock. The Company, through another subsidiary, and Mitsui also entered into put options which provided that during a six month period which commenced on September 1, 2001, Mitsui would have the right to put the subsidiary shares to the Company at a formula price as provided in the put options, to be not less than an aggregate of $2,000,000. Mitsui exercised the put options in September 2001. Subsequently, the parties executed convertible notes relating to the payment for the subsidiary shares. See Note 7 -- Long-Term Obligations -- Minority interest notes payable. The Mitsui convertible notes were modified in principle in September 2002. See Note 19 -- Subsequent Events. In September 1999, the Company formed a new subsidiary, Frontstep Japan Ltd., of which 15% of the initial capitalization was contributed by a minority interest investor. NOTE 14 -- PREFERRED STOCK The Company's Amended Articles of Incorporation authorize 1,000,000 shares of preferred stock, no par value. The Board of Directors is authorized to determine the rights and preferences of these shares. Effective May 10, 2000, the Company consummated a private placement of 566,933 shares of Series A convertible participating preferred shares and warrants to purchase 453,546 common shares (the "Transaction"). Net proceeds realized from the Transaction were $13,375,000. The preferred shares are convertible to common shares at any time, in whole or in part, at the holder's option at a defined conversion rate. This conversion rate was originally two common shares for one preferred share. On March 7, 2002, in connection with the Transaction (See Note 7 -- Long-Term Obligations), the Company and the holders of its Series A preferred shares agreed that the conversion price for the Series A preferred shares would be immediately reset from $12.00 per share to $6.00 per share and therefore the conversion rate became four shares for one preferred share. Additionally, concurrent with the Transaction adjustments relating to share price and anti-dilution rights under the original preferred share agreement were waived by the holders of the preferred shares only with respect to the Transaction. The conversion price applicable to the preferred shares is subject to adjustment on the fourth anniversary of the Transaction if the average daily price of the Company's common shares, weighted by trading volume, for the forty consecutive trading days immediately preceding the fourth anniversary ("Average Weighted Price") is less than $6 per share. The adjusted conversion rate is determined by dividing $6 by the Average Weighted Price. This potential adjustment to the conversion rate represents a contingent beneficial conversion feature. Assuming the Average Weighted Price on the fourth anniversary is equal to the closing price of the Company's common shares on June 30, 2002 ($2.99), the adjusted conversion rate would be 8.02 common shares for one preferred share. Mandatory conversion occurs if, at any time after the second anniversary of the Transaction, the daily price of the Company's common shares exceeds $24 for each and every day of any period of forty consecutive trading days. The Company may, at its option, redeem all, but not less than all, of the outstanding preferred shares within thirty days after the fourth anniversary of the Transaction for $30.72 per preferred share plus accumulated, but unpaid, dividends, if any. Holders of the preferred shares have a liquidation preference whereby upon voluntary or involuntary liquidation/dissolution/winding-up of the Company the preferred holders have a preference against the assets of the Company available for distribution. The liquidation preference is equal to the greater of a) $24 per preferred share outstanding plus accumulated, but unpaid, dividends, if any, or b) the amount that would be received by a holder of the number of common shares underlying the preferred shares if all the preferred shares were converted to common shares immediately prior to liquidation/dissolution/winding-up. 51 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Concurrent with the execution of the Credit Facility with Foothill (see Note 7 -- Long-Term Obligations) in July 2001, the exercise price of the warrants issued in the Transaction was reduced to $3.36 per share from $15 per share. The warrants expire five years from the date of the Transaction. The warrants also contain certain adjustment provisions related to share price and provisions for anti-dilution rights, which were waived in connection with the execution of the Credit Facility agreement. The exercise price of the warrants is subject to adjustment on the fourth anniversary of the Transaction if the Average Weighted Price is less than $15 per share. The adjusted exercise price is the greater of a) the Average Weighted Price or b) 75% of the exercise price. Mandatory exercise occurs if, at any time after the second anniversary of the Transaction, the daily price of the Company's common shares exceeds $12 per share for each and every day in any period of forty consecutive trading days. The Company determined that the fair value of the warrants on the date of the Transaction, net of issuance costs, was $2,510,000. This value was determined using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.5%, no dividend yield, volatility factor of .827, and option life of 5 years. Under applicable Nasdaq rules, the Company was required to obtain shareholder approval of the issuance of common shares upon conversion of the convertible preferred shares and/or the exercise of the warrants at a price less than the market price of the Company's common shares on the date of the Transaction ($9.1875 per share). The Company submitted to its shareholders at the Company's annual meeting on November 8, 2000 a proposal to approve such issuance and such approval was obtained at that meeting. NOTE 15 -- BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company designs, develops, markets and supports business software and services for midsize manufacturing companies, including business units of larger companies. The Company operates exclusively in this market and, therefore, only reports on one primary segment. Summarized financial information attributable to each of the Company's geographic areas is shown in the following table (in thousands):
NORTH AMERICA, UNITED STATES EXCLUDING U.S. EUROPE ASIA/PACIFIC ------------- -------------- ------- ------------ FISCAL 2002 Total Revenue......................... $63,386 $3,039 $16,036 $10,125 Operating income (loss) before amortization of intangibles and special charges..................... (2,622) 1,800 992 (389) Operating Income (loss)............... (4,335) 1,800 928 (389) Long-lived assets..................... 4,287 14 397 332 FISCAL 2001 Total Revenue......................... $87,405 $4,103 $14,736 $10,832 Operating income (loss) before amortization of intangibles and special charges..................... (18,099) 2,115 259 (2,204) Operating Income (loss)............... (27,305) 2,115 (189) (2,238) Long-lived assets..................... 6,793 29 312 512 FISCAL 2000 Total Revenue......................... $98,739 $4,326 $13,941 $11,902 Operating income (loss) before amortization of intangibles and special charges..................... (3,564) 1,881 (3,376) (1,077) Operating Income (loss)............... (7,618) 1,881 (3,904) (1,155) Long-lived assets..................... 7,099 36 383 468
52 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 16 -- COMMITMENTS AND CONTINGENCIES The Company is subject to claims and lawsuits in the ordinary course of its business. It is the Company's policy to vigorously defend any action brought against it, to the fullest extent, in the normal legal process. In the opinion of management, the outcome of these actions, which is not clearly determinable at the present time, are either adequately covered by insurance, or if not insured, will not, in the aggregate, have a material adverse effect upon the Company's financial position or its results of future operations. NOTE 17 -- SALE OF VISUAL APPLICATIONS SOFTWARE Effective June 21, 2000, the Company sold certain assets of its Visual Applications Software, Inc. subsidiary for $2,915,000. The Company has recognized a $429,000 net loss in connection with the sale of which approximately $1,200,000 includes write-off of purchased goodwill. The costs related to the disposition of Visual Applications Software, Inc. are included in "restructuring and other charges" in the Consolidated Statements of Operations for the year ended June 30, 2000. NOTE 18 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED ----------------------------------------------- JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 ------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 2002 Total revenue.......................... $22,556 $21,732 $23,327 $24,971 Gross margin........................... 11,647 10,862 11,580 13,795 Operating income (loss)................ 1,038 (1,278) (2,507) 751 Net income (loss)...................... 487 (1,242) (2,887) 197 Basic income (loss) per common share... $ 0.06 $ (0.16) $ (0.38) $ 0.03 Diluted income (loss) per common share............................... $ 0.05 $ (0.16) $ (0.38) $ 0.03 FISCAL 2001 Total revenue.......................... $28,821 $26,334 $33,856 $28,065 Gross margin........................... 16,066 9,605 18,801 13,778 Operating income (loss)................ (4,994) (15,928) (1,492) (5,203) Net income (loss)...................... (5,197) (16,186) (1,164) (3,517) Basic income (loss) per common share... $ (0.69) $ (2.14) $ (0.16) $ (0.47) Diluted income (loss) per common share............................... $ (0.69) $ (2.14) $ (0.16) $ (0.47)
NOTE 19 -- SUBSEQUENT EVENTS On August 12, 2002 and August 28, 2002, the Company issued its 10% convertible subordinated notes (the "Convertible Notes") in the aggregate principal amount of $2.5 million and $1.0 million, respectively to, and received $2.5 million and $1.0 million, respectively in cash from, certain of its preferred shareholders, including Fallen Angel Equity Fund and entities affiliated with Morgan Stanley, and two other shareholders and directors of the Company, Lawrence J. Fox and James A. Rutherford (collectively, the "Investors"), in accordance with the terms of a private placement transaction. The Convertible Notes are each due on May 10, 2004 and are convertible into common shares of the Company at a conversion rate of $2.4876 per share. All $5.0 million of the Convertible Notes have now been drawn down by the Company. See Note 7 -- Long-Term Obligations. 53 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of all convertible notes issued as part of the private placement transaction is as follows:
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF INITIAL NOTES CONVERTIBLE NOTES NAME OF INVESTOR PURCHASED PURCHASED - ---------------- ------------------- ------------------- Morgan Stanley Dean Witter Venture Partners IV, L.P............................................. $ 550,131 $1,283,639 Morgan Stanley Dean Witter Venture Investors IV, L.P............................................. $ 63,824 $ 148,923 Morgan Stanley Dean Witter Venture Offshore Investors IV, L.P............................... $ 21,463 $ 50,080 Fallen Angel Equity Fund, L.P..................... $ 264,582 $ 617,358 Lawrence J. Fox................................... $ 450,000 $1,050,000 James A. Rutherford............................... $ 150,000 $ 350,000 ---------- ---------- Total........................................... $1,500,000 $3,500,000 ========== ==========
The Company and Mitsui entered into convertible note agreements in May 2002 and July 2002 for the payment of $2,000,000 to Mitsui in connection with the exercise of put options. See Note 7 - Long-Term Obligations. In September 2002, the Company and Mitsui agreed in principle to modify the terms of these convertible note agreements with respect to the notes due originally due September 1, 2002. Under the modified terms, 50% of the principal amount of the Mitsui convertible notes that were due September 1, 2002, plus the accrued interest on such amount, will be payable in common shares of the Company based upon a conversion price of $2.85 per share. The Company must register the shares for resale and may issue the common shares to Mitsui at any time prior to January 1, 2003. However, interest continues to accrue on these notes until the common shares are issued and the notes are exchanged. The remaining 50% of the principal amount of the Mitsui convertible notes due September 1, 2002, plus accrued interest, is due and payable no later than January 1, 2003. The amended agreement will provide that, in the event of non-payment, Mitsui has the right to require late payment interest on the unpaid principal and accrue interest at 16% per annum or to convert all of the unpaid principal and accrued interest into common shares of the Company. The price per share for such conversion is the lower of (a) $2.85 or (b) the average of the daily closing price for 30 consecutive trading days prior to January 1, 2003. The Company may repay the Mitsui convertible notes at any time, including the portion exchangeable for common shares of the Company, prior to the issuance of such shares. The Company expects to execute an amended agreement with Mitsui in early October 2002. The Company has outstanding under its employee stock option plans options granted pursuant to stock option agreements which contain provisions that provide that the options covered by the agreements will become fully exercisable as of the date of a "change in control" of the Company, as defined in the agreements, if the option has been outstanding six months or more at the time of such change in control. For purposes of the agreements, a "change in control" is deemed to have occurred on the date that any entity or person (including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1933, other than a trustee or other fiduciary of securities held under an employee benefit plan of the Company or its subsidiaries) becomes the beneficial owner of, or obtains voting control over, any percentage of the Company's outstanding common shares greater than or equal to the percentage beneficially owned by Lawrence J. Fox. On August 12, 2002, as a result of the Convertible Note offering made by the Company and subsequent draws thereon, Morgan Stanley beneficially owned a greater number of our common shares and, consequently a greater percentage of our outstanding common shares than Mr. Fox. As a result, employee stock options covering 388,575 common shares, with exercise prices ranging from $3.55 to $20.50 per share, became vested. 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. The Company filed a current report on Form 8-K, dated November 8, 2000, to report under Item 4 (Changes in Registrant's Certifying Accountant) that effective November 8, 2000, the registrant appointed KPMG LLP as its Certifying Accountant. Ernst & Young LLP was previously the principal accountant for Frontstep. The decision to change accountants was approved by the Audit Committee and the Board of Directors. In connection with the audits of the two fiscal years ended June 30, 2000 and during the subsequent interim period through September 30, 2000, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's Directors are as follows:
DIRECTOR OF FRONTSTEP DIRECTOR AGE PRINCIPAL OCCUPATIONS SINCE - -------- --- --------------------- ----------- Lawrence J. Fox..... 45 Chairman of the Board of Frontstep 1984 Stephen A. Sasser... 52 President and Chief Executive Officer of Frontstep 1995 Duke W. Thomas...... 64 Partner, Vorys, Sater, Seymour and Pease LLP 1988 James A. Rutherford........ 55 President of Wingset Inc. 1995 Roger D. Blackwell......... 61 Professor of Marketing, Fisher College of Business, The 2000 Ohio State University and President and Chief Executive Officer Roger Blackwell Associates, Inc. Guy L. de Chazal.... 54 Managing Director of each of Morgan Stanley & Co. Inc. 2000 and MSDW Venture Partners IV, Inc. Barry M. Goldsmith......... 57 General Partner, Updata Venture Associates, L.P. 2000 A. Zuheir Sofia..... 58 Chairman of Sofia & Company, Inc. 2001
Mr. Fox founded a predecessor to Frontstep in 1979 as a sole proprietorship. He has held his present office as Chairman of the Board since a predecessor to the Company was incorporated in 1984. From 1984 to 1998, Mr. Fox also served as Chief Executive Officer of the Company. Mr. Fox is also a director of Alkon Corporation, a provider of enterprise solutions to the construction industry. Mr. Sasser has held the positions of President and Chief Executive Officer of the Company since January 1999. Mr. Sasser previously served the Company, from the time that he joined the Company in July 1995 until January 1999, as President and Chief Operating Officer. Mr. Sasser has served as a director of the Company since July 1995. Mr. Sasser also is a director of Aelita, Inc., a provider of systems management utility tools. Mr. Thomas has been a partner of Vorys, Sater, Seymour and Pease LLP, a law firm based in Columbus, Ohio, since 1970. Mr. Thomas is also a director of The Ohio Bar Liability Insurance Co., a lawyers professional liability company, and the Ohio Printing Company, a commercial printing company. Mr. Rutherford founded Wingset Inc., a private investment management corporation, and has served as its President since 1992. Mr. Rutherford also serves as Managing Director of Wingset Investments Ltd., a private investment management corporation. Mr. Rutherford is also a director of Ciber, Inc., a provider of information technology consulting services. Dr. Blackwell has been associated with The Ohio State University since 1965 and is currently a Professor of Marketing in the Fisher College of Business. Dr. Blackwell also has been President and Chief Executive Officer of Roger Blackwell Associates, Inc., a consulting firm in Columbus, Ohio, since 1980. Dr. Blackwell is a board 55 member of Anthony & Sylvan Pools, Inc., a pool builder and designer; Flex-Funds, a manager and marketer of mutual and money market funds and other investment vehicles; AirNet Systems, Inc., a provider of specialty air courier services; Intimate Brands, Inc., the parent company of several former divisions of The Limited Inc. which includes Victoria's Secret, Victoria's Secret Catalogue and Bath & Body Works; Max & Erma's Restaurants, a chain of casual family dining restaurants throughout the Midwest; Applied Industrial Technologies, which is engaged in business-to-business electronic commerce and distribution; and Diamond Hill Capital Management, Inc., an investment management company. Mr. de Chazal has been Managing Director of Morgan Stanley & Co. Inc., an investment bank, since 1994. Mr. de Chazal also serves as a Managing Director of MSDW Venture Partners IV, Inc., a venture capital investments fund. Mr. de Chazal also is a director of Lionbridge Technologies, a provider of globalization services to software publishers, computer hardware manufacturers and telecommunications companies. See also footnotes 4 and 5 under "Principal Holders of Securities." Mr. Goldsmith has been a General Partner of Updata Venture Partners, a technology private equity firm, since March of 2000. He also has been the Managing Director of Updata Capital, Inc., a mergers and acquisitions consulting organization, since 1987. Mr. Goldsmith also is the general partner of Fallen Angel Capital, L.L.C. Mr. Goldsmith is currently a board member of Compuware Corporation, a provider of software and professional services for information technology departments of business enterprises; and Dendrite International, Inc., a specialized software services provider. See also footnotes 6 and 7 under "Principal Holders of Securities." Mr. Sofia has been Chairman of Sofia & Company, Inc., an Ohio based investment-banking firm, since 2001. He has also been the President of Stanberry Group, LLC, a registered investment advisor, since 1999. Previously, Mr. Sofia was President, COO, Treasurer and Director of Huntington Bancshares Inc., a $26 billion bank holding company which he joined in 1971. Mr. Sofia is also director of the Lancaster Colony Corporation. Mr. Sofia is Vice Chairman of the Ohio Banking Commission and serves on the Western Kentucky University Board of Advisors. The Company's executive officers (excluding those that are also directors) are as follows:
NAME AGE TITLE - ---- --- ----- Lawrence W. DeLeon................... 47 Executive Vice President, Worldwide Field Operations Daryll L. Wartluft................... 61 Executive Vice President, Products Group Robert D. Williams................... 47 Vice President, Human Resources Aggie G. Haslup...................... 51 Vice President, Marketing Daniel P. Buettin.................... 49 Vice President, Finance, Chief Financial Officer and Secretary
Lawrence W. DeLeon has held the position of Executive Vice President Worldwide Field Operations since August 2000. Mr. DeLeon previously served the Company as Vice President, Chief Financial Officer and Secretary from the time that he joined the Company in 1995 to July 2000. Daryll L. Wartluft has held the position of Executive Vice President Frontstep Product Group since August 2000. Mr. Wartluft previously served as Vice President and General Manager, SyteLine Division from the time that he joined the Company in May 1998 until July 2000. From 1995 to 1998, he was President and Chief Executive Officer and a director of Pivotpoint Inc., an ERP software and services provider. Robert D. Williams joined the Company in September 1995 as Vice President, Human Resources. Aggie G. Haslup has held the position of Vice President of Corporate Marketing since November 2001. Ms. Haslup joined the Company in 1996 and has previously served as an operating Vice President with various marketing responsibilities. Daniel P. Buettin joined the Company in August 2000 as Vice President, Finance, Chief Financial Officer and Secretary. Mr. Buettin served from 1995 to August 2000 as Vice President and Chief Financial Officer of MPW Industrial Services Group, Inc., a publicly-traded services company. 56 The executive officers of the Company are appointed by and serve at the pleasure of the Company's Board of Directors. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was so appointed. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Frontstep executive officers and directors, and persons who beneficially own more than 10% of the outstanding common shares, to file initial reports of ownership and reports of changes in ownership of their equity securities of Frontstep with the Commission and the National Association of Securities Dealers, Inc. Frontstep executive officers, directors and greater than 10% beneficial owners are required by Commission regulations to furnish Frontstep with copies of all Section 16(a) forms filed by them. Based solely on a review of the copies of such forms furnished to Frontstep and written representations from Frontstep's executive officers and directors, Frontstep believes that all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were complied with for fiscal 2002. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table shows, as to the Chief Executive Officer and the other four most highly compensated executive officers of Frontstep whose salary plus bonus exceeded $100,000, information concerning compensation paid for services to Frontstep in all capacities during the fiscal year ended June 30, 2002, as well as the total compensation paid to each such individual for Frontstep's two previous fiscal years (if such person was the Chief Executive Officer or an executive officer, as the case may be, during any part of such fiscal years). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ ----------------------------------------- SECURITIES NAME AND OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION(S) YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS COMPENSATION ($) - --------------------- ---- ---------- --------- ---------------- ------------ ---------------- Lawrence J. Fox............ 2002 $247,500 None $28,236(1) 22,400(12) $ 5,049(2) Chairman of the Board 2001 269,271 None 39,771(1) None 33,107(3) 2000 275,000 None 36,690(1) None 33,000(4) Stephen A. Sasser.......... 2002 $270,000 None None None $ 5,505(5) President and Chief 2001 293,750 $74,880 None None 7,494(6) Executive Officer 2000 272,000 None None None 6,262(7) Stephen A. Yount (8)....... 2002 $165,600 $12,000 None 20,000 $53,807(9) Executive Vice President 2001 180,167 26,774 None None 1,565(10) Business Development 2000 170,000 42,778 None 10,000 14,024(11) and Channel Operations Lawrence W. DeLeon......... 2002 $171,000 None None 30,000 $ 4,215(2) Executive Vice President 2001 186,042 48,170 None 10,000 5,855(2) Frontstep Worldwide 2000 165,000 7,440 None None 5,055(2) Field Operations Daryll L. Wartluft......... 2002 $180,000 None None 98,800(13) $ 2,250(2) Executive Vice President 2001 195,833 35,170 None 25,000 2,694(2) Frontstep Product Group 2000 189,000 19,828 None None 2,684(2)
- --------------- (l) Includes payment for automobile allowance, other travel costs, club dues, legal fees and tax preparation costs. (2) Represents Frontstep's matching contribution to the 401(k) Profit Sharing Plan for the named officer. 57 (3) Includes $28,000 paid for premiums on split term life insurance on the named officer and Frontstep's matching contribution to 401(K) Profit Sharing Plan of $5,107. (4) Includes $28,000 paid for premiums on split term life insurance on the named officer and Frontstep's matching contribution to 401(K) Profit Sharing Plan of $5,000. (5) Includes $2,130 paid for premiums on split term life insurance on the named officer and Frontstep's matching contribution to the 401(K) Profit Sharing Plan of $3,375. (6) Includes $2,130 paid for premiums on split term life insurance on the named officer and Frontstep's matching contribution to the 401(K) Profit Sharing Plan of $5,364. (7) Includes $2,130 paid for premiums on split term life insurance on the named officer and Frontstep's matching contribution to the 401(k) Profit Sharing Plan of $4,132. (8) Mr. Yount terminated his employment with the Company in August 2002. (9) Includes a reduction of $37,500 to the principal balance outstanding on a loan made by Frontstep to the named officer, relocation costs of $14,754 and Frontstep's matching contribution of $1,553 to the 401(k) Profit Sharing Plan for the named officer. (10) Represents Frontstep's matching contribution to the 401(K) Profit Sharing Plan for the named officer. (11) Includes a reduction of $12,500 to the principal balance outstanding on a loan made by Frontstep to the named officer, and Frontstep's matching contribution of $1,413 to the 401(K) Profit Sharing Plan for the named officer. (12) Stock options issued in connection with the Company's exchange offer. Mr. Fox returned 28,000 outstanding options for cancellation. (13) Includes 68,800 stock options issued in connection with the Company's exchange offer. Mr. Wartluft returned 86,000 outstanding options for cancellation. STOCK OPTION GRANTS AND EXERCISES The following table sets forth certain information with respect to stock options awarded during fiscal year 2002 to executive officers named in the Summary Compensation Table. These option grants are also reflected in the Summary Compensation Table. In accordance with Securities and Exchange Commission ("Commission") rules, the hypothetical realizable values for each option grant are shown based on compound annual rates of stock price appreciation of 5% and 10% from the grant date to the expiration date. The assumed rates of appreciation are prescribed by the Commission and are for illustration purposes only; they are not intended to predict future stock prices, which will depend upon market conditions and Frontstep's future performance and prospects. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------------------------------ VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SHARES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------- NAME GRANTED (#) FISCAL YEAR ($/SHARE)(1) DATE 5% ($) 10% ($) - ---- ----------- ------------ ------------ ---------- ---------- ---------- Lawrence J. Fox.......... 22,400(3) 3.21% $3.12 6/10/2012 $ 43,952 $111,383 Stephen A. Sasser........ -0- N/A N/A N/A N/A N/A Stephen A. Yount......... 20,000 2.86% $3.92 11/07/2011 $ 49,305 $124,949 Lawrence W. DeLeon....... 30,000 4.30% $3.92 11/07/2011 $ 73,958 $187,424 Daryll L. Wartluft....... 98,800(4) 14.15% $3.12 6/10/2012 $193,861 $491,281
- --------------- (1) Represents the market price of the Shares on the date of grant. (2) The dollar amounts reflected in this table are the result of calculations at the 5% and 10% annual appreciation rates set by the Commission for illustrative purposes and assume the options are held until their expiration date. Such dollar amounts are not intended to forecast future financial performance or possible future appreciation in the price of the Company's common shares. Shareholders are therefore cautioned against 58 drawing any conclusions from the appreciation data shown, aside from the fact that the persons indicated will only realize value from the option grants shown when the price of the Company's common shares appreciates, which benefits all shareholders commensurately. (3) Stock options issued in connection with the Company's exchange offer. Mr. Fox returned 28,000 outstanding options for cancellation. (4) Includes 68,800 stock options issued in connection with the Company's exchange program. Mr. Wartluft returned 86,000 outstanding options for cancellation. Options granted to Frontstep executive officers generally vest and become exercisable in increments of 25% on each anniversary of the grant date, provided the executive officer continues in the employ of Frontstep, and provided further that, upon the occurrence of certain change in control events (defined in the Frontstep stock option agreements) all such options outstanding six months or more prior to the date of such change in control event will become fully vested. See discussion below regarding the Company voluntary option exchange program. We have outstanding under our employee stock option plans options granted pursuant to stock option agreements which contain provisions that provide that the options covered by the agreements will become fully exercisable as of the date of a "change in control" of the Company, as defined in the agreements, if the option has been outstanding six months or more at the time of such change in control. For purposes of the agreements, a "change in control" is deemed to have occurred on the date that any entity or person (including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1933, other than a trustee or other fiduciary of securities held under an employee benefit plan of the Company or its subsidiaries) becomes the beneficial owner of, or obtains voting control over, any percentage of our outstanding common shares greater than or equal to the percentage beneficially owned by Lawrence J. Fox. On August 12, 2002, as a result of the Convertible Note offering made by the Company and subsequent draws thereon, Morgan Stanley beneficially owned a greater number of our common shares and, consequently a greater percentage of our outstanding common shares than Mr. Fox. As a result, employee stock options covering 388,575 common shares, with exercise prices ranging from $3.55 to $20.50 per share, became vested. Of these, none were held by Mr. Fox and options for 192,000 common shares with exercise prices ranging from $3.92 to $10.69 per share were held by other executive officers of the Company. On October 30, 2001, the Company offered all participants, including executive officers, of its Non-Qualified Stock Option Plan for Key Employees and its 1999 Non-Qualified Stock Option Plan for Key Employees (collectively, "the Plans") the opportunity to participate in a voluntary stock option exchange program. The program generally allowed a participant to return options held at that time to the Company in exchange for new options to be granted at a future date at least six months and one day after the date of cancellation of the old options by the Company. As of the date of the offer, options to purchase 1,586,054 shares of the Company were outstanding pursuant to the Plans. The offer expired on December 7, 2001 and options to purchase 366,111 common shares were returned to the Company and cancelled. On June 10, 2002, the Company issued 333,764 new options with an exercise price of $3.12 per share, which was the market price per share of the Company's common shares on the date of grant. The new options have other terms and conditions substantially the same as the old options. Executive officers of the Company who participated in the exchange program returned options for 125,000 common shares for cancellation and were issued for new options on June 10, 2002 for 100,000 common shares in exchange for the cancelled options which vest over 2 years. 59 The following table shows the number of all vested (exercisable) and unvested (not yet exercisable) stock options held by each executive officer named in the Summary Compensation Table at the end of fiscal year 2002, and the value of all such options that were "in the money" (i.e., the market price of the common shares covered by the options was greater than the exercise price of the options) at the end of fiscal year 2002. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SHARES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE- SHARES OPTIONS AT MONEY OPTIONS HELD AT ACQUIRED ON VALUE FISCAL YEAR END (#) FISCAL YEAR END ($) EXERCISE REALIZED ------------------------- ------------------------- NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ----------- -------- ------------------------- ------------------------- Lawrence J. Fox -0- -0- 160,000/22,400 $0/$0 Stephen A. Sasser -0- -0- 540,000/0 $0/$0 Stephen A. Yount -0- -0- 122,500/22,500 $0/$0 Lawrence W. DeLeon -0- -0- 167,000/0 $0/$0 Daryll L. Wartluft -0- -0- 25,000/98,800 $0/$0
EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information regarding the Company's employee and outside directors stock option plans at September 15, 2002 and as of June 30, 2002:
SEPTEMBER 15, 2002 JUNE 30, 2002 ------------------------------------------- ------------------------------------------- NUMBER OF NUMBER OF SECURITIES SECURITIES NUMBER OF REMAINING NUMBER OF REMAINING SECURITIES TO WEIGHTED- AVAILABLE FOR SECURITIES TO WEIGHTED- AVAILABLE FOR BE ISSUED AVERAGE FUTURE BE ISSUED AVERAGE FUTURE UPON EXERCISE ISSUANCE UPON EXERCISE ISSUANCE EXERCISE OF PRICE OF UNDER EQUITY EXERCISE OF PRICE OF UNDER EQUITY OUTSTANDING OUTSTANDING COMPENSATION OUTSTANDING OUTSTANDING COMPENSATION PLAN CATEGORY OPTIONS OPTIONS PLANS OPTIONS OPTIONS PLANS - ------------- ------------- ----------- ------------- ------------- ----------- ------------- Equity compensation plans approved by security holders..... 1,776,136 $5.68 665,140 1,706,136 $5.97 626,620 Equity compensation plans not approved by security holders..... 400,000 $3.81 -0- 400,000 $3.81 -0- Total.................. 2,176,136 $4.63 665,140 2,106,136 $5.45 626,620
The Company has a Non-Qualified Stock Option Plan for Key Executives (the "Key Executives Plan") which has not been approved by shareholders of the Company. The Key Executive Plan provides for the grant of a total of 400,000 common shares and, as of June 30, 2002, all such options were issued and are outstanding. COMPENSATION OF DIRECTORS The Board of Directors held a total of seventeen meetings during 2002. The board has an Audit Committee, a Compensation Committee, a Stock Option Committee and a Corporate Development Committee. Each of these committees is responsible to the full Board of Directors and its activities are therefore subject to approval of the board. For the fiscal year ended June 30, 2002, the compensation arrangement between Frontstep and all directors who are not employees of Frontstep ("Outside Directors") was as follows: $500 for each Board meeting attended; and $1,250 per quarter. During the 2002 fiscal year, each of the Outside Directors agreed to defer the payment of such compensation. In addition, from time to time, the Outside Directors receive options to acquire common shares under the Frontstep, Inc. Stock Option Plan for Outside Directors (the "Directors' Plan"). 60 During the 2002 fiscal year, 20,000 options were granted under the Directors' Plan. In August 2002, each outside Director, excluding Mr. Goldsmith and Mr. de Chazal, received a grant of 25,000 options in consideration for deferral of their compensation in Fiscal 2002. Employee directors do not receive any additional compensation for serving as a director. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No current member of the compensation committee is an officer or employee of Frontstep. No member of the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Mr. Thomas is a partner of the law firm of Vorys, Sater, Seymour and Pease LLP. During fiscal 2002, Frontstep used, and anticipates that it will continue to use, the services of such firm. Mr. Goldsmith is the general partner of Fallen Angel Capital, L.L.C., which is the general partner of Fallen Angel Equity Fund. Fallen Angel Equity Fund is a holder of Series A preferred shares and Convertible Notes and Frontstep has issued warrants to purchase common shares to Fallen Angel Equity Fund relating to each of these transactions, as described above under the heading "Certain Transactions and Relationships" and in footnotes 6 and 7 under "Principal Holders of Securities." REPRESENTATION ARRANGEMENT On May 10, 2000, the Company entered into an Investor Rights Agreement with affiliates of Morgan Stanley, Fallen Angel Equity Fund ("Fallen Angel") and Lawrence J. Fox in connection with the sale of its preferred shares and warrants to the preferred shareholders of the Company. The agreement was amended and restated in March 2002 in connection with the issuance of convertible notes and warrants to certain of the preferred shareholders and to Mr. Fox and Mr. Rutherford. Pursuant to the terms of the Amended and Restated Investor Rights Agreement, each of the parties to the original agreement, including the Company, and Mr. Rutherford have agreed to take all reasonably necessary or desirable legal actions within its or his control so that, among other things, until May 10, 2004 (i) the authorized number of the Company's directors will be 8; (ii) one director on the Company's board will be designated by each of Morgan Stanley and Fallen Angel; (iii) one director on the Company's board will be Lawrence J. Fox; and (iv) management's slate of directors, including the designees of Morgan Stanley and Fallen Angel, and Mr. Fox, will be elected to the Company's board. Guy de Chazal currently serves as the representative of Morgan Stanley on the Frontstep Board of Directors. Mr. de Chazal is a Managing Director of Morgan Stanley & Co. Inc. and of MSDW Venture Partners IV, Inc., an entity controlled by Morgan Stanley and the managing member of MSDW Venture Partners IV, L.L.C., the general partner of each of the Morgan Stanley affiliate entities that hold outstanding preferred shares, warrants and/or convertible notes of the Company. See also footnotes 4 and 5 to the principal shareholders table in Item 12. Security Ownership of Certain Beneficial Owners and Management. Barry Goldsmith currently serves as the representative of Fallen Angel on the Frontstep Board of Directors. Mr. Goldsmith is the general partner of Fallen Angel Capital, L.L.C., which is the general partner of Fallen Angel. See also footnotes 6 and 7 to the principal shareholders table in Item 12. Security Ownership of Certain Beneficial Owners and Management. EMPLOYMENT AGREEMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Stephen A. Sasser. Frontstep has an employment agreement dated July 5, 1995, as amended on April 1, 1997 and December 15, 1998, with Stephen A. Sasser, President and Chief Executive Officer (the "Sasser Agreement"). Mr. Sasser also is a director of the Company. The term of the Agreement extends to July 5, 2002. The Sasser Agreement, however, provides for automatic renewal for one additional year to each July 4 thereafter unless prior notice of non-renewal is given by Frontstep at least 120 days before the expiration of the term of the Sasser Agreement. Under the Sasser Agreement, Mr. Sasser agrees to serve as President and Chief Executive 61 Officer of Frontstep. He further agrees to serve as director of Frontstep and as an officer and/or director of any of Frontstep's subsidiaries or affiliates if elected as such. The Sasser Agreement provides for an annual base salary of not less than $272,000 and additional compensation pursuant to a bonus plan approved by the Compensation Committee of the Frontstep Board of Directors with an annual target bonus opportunity of not less than $188,000. The Company did not meet the aggregate target bonus opportunity for the fiscal 2001, but Mr. Sasser did receive a bonus payment of $74,880 with respect to the Company's quarterly performance through December 2000. Mr. Sasser did not receive bonus payment in fiscal 2000 and his fiscal 1999 bonus payment was $101,520. If Mr. Sasser's employment with Frontstep is terminated as the result of his death or disability (as defined in the Sasser Agreement), or by Frontstep for cause (as defined in the Sasser Agreement), then he will be entitled to receive his base salary through the date of termination and bonus compensation as provided for under the Sasser Agreement on a pro rata basis to the extent that Frontstep has achieved annual targets and objectives as of the date of termination. In the event of termination of Mr. Sasser's employment by Frontstep other than for cause or disability (in each case, as defined in the Agreement) or by Mr. Sasser within one year after a "change in control" of Frontstep (as defined in the Sasser Agreement), in addition to the prorated base salary and bonus compensation previously described, Mr. Sasser will be entitled to receive an amount equal to his annual base salary, plus an amount equal to the highest bonus earned by him under the terms of the Sasser Agreement for any fiscal year prior to the date of termination, and other specified benefits. If any of this results in additional tax to him under Section 4999 of the Internal Revenue Code, Frontstep is required to make an additional payment to him so as to provide Mr. Sasser with the benefits he would have received in the absence of such tax. Pursuant to other terms of the Sasser Agreement, an option for 400,000 common shares was granted to Mr. Sasser effective in January 1996 and an option for an additional 140,000 common shares was granted to Mr. Sasser in July 1996. The Sasser Agreement also requires Frontstep to maintain a policy of insurance on Mr. Sasser's life in the amount of $1 million, the proceeds of which policy to be payable upon his death to beneficiaries designated by Mr. Sasser or to his estate if no such designation is made. Lawrence J. Fox. Pursuant to a resolution adopted by the Compensation Committee of the Board of Directors, the Company has agreed to maintain the salary of Mr. Fox, Chairman of the Board of Directors, at $250,000 a year, so long as any of the Notes held by him remain unpaid and outstanding. Severance Arrangements with Executive Officers. Each of the Company's executive officers, other than Mr. Fox and Mr. Sasser, have entered into severance agreements with the Company dated September 13, 2002. These agreements are intended to foster the continued employment of the executive officers with the Company in the event of a "Change in Control" as such term is defined in the agreements. Generally, for a period of six months following a Change in Control, the executive officers are entitled to an amount of severance equal to six months of their current base salary and benefits in effect at the time of their termination if, for certain reasons provided in the agreement, their employment is terminated. These agreements expire on August 31, 2004 or six months following a Change in Control. The term of the agreements will be automatically extended for one-year terms after August 31, 2004 unless otherwise terminated prior to such time by the Company's Board of Directors. Miscellaneous. Awards of stock options to Frontstep employees under any of Frontstep's stock option programs, including the named executive officers, generally will vest upon a change in control of Frontstep (as defined in Frontstep's employee stock option agreements). 62 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the names and addresses of, and the number and percentage of our common shares and Series A preferred shares, respectively, beneficially owned as of September 15, 2002 (except as otherwise noted) by, the only persons known to Frontstep to beneficially own more than 5% of each class of outstanding shares:
SERIES A COMMON SHARES PREFERRED SHARES ------------------------- ------------------------- AMOUNT AND AMOUNT AND NATURE OF NATURE OF NAME AND BENEFICIAL PERCENT BENEFICIAL PERCENT ADDRESS OWNERSHIP(1) OF CLASS OWNERSHIP(1) OF CLASS -------- ------------ -------- ------------ -------- Lawrence J. Fox.......................... 2,824,754(2) 33.19% None None 2800 Corporate Exchange Drive Columbus, Ohio 43231 Stephen A. Sasser........................ 567,199(3) 7.00% None None 2800 Corporate Exchange Drive Columbus, Ohio 43231 Morgan Stanley affiliated entities....... 3,026,886(4) 28.57% 400,266(5) 70.6% 1585 Broadway New York, New York 10036 Fallen Angel Equity Fund, L.P............ 1,260,368(6) 14.28% 166,667(7) 29.4% 960 Holmdel Road Holmdel, New Jersey 07733 James A. Rutherford...................... 424,397(8) 5.39% None None 15 South High Street New Albany, Ohio 43054
- --------------- (1) Unless otherwise indicated, each named person has voting and investment power over the listed shares and such voting and investment power is exercised solely by the named person or shared with a spouse. The Series A preferred shares are convertible on a 4-for-1 basis (subject to adjustment) into common shares. (2) Includes (i) 1,878,924 shares held directly by Mr. Fox, (ii) 180,000 shares issuable upon exercise of outstanding warrants exercisable within the next 60 days, (iii) 160,000 shares subject to options exercisable within the next 60 days, (iv) 602,991 shares issuable upon conversion of outstanding Convertible Notes within the next 60 days and (v) 2,839.1091 shares held for the account of Mr. Fox in the Company's 401(k) Plan. (3) Includes (i) 540,000 shares subject to options exercisable within the next 60 days and (ii) 6,199 shares held for the account of Mr. Sasser in the Company's 401(k) Plan. (4) As reported in a Schedule 13D filed on May 19, 2002 as amended with the Securities and Exchange Commission (the "MS Schedule 13D"). Includes (i) 1,601,064 shares issuable upon conversion of outstanding Series A Preferred shares which are convertible on a 4-for-1 basis within the next 60 days, (ii) 574,379 shares issuable upon exercise of outstanding warrants which are exercisable within the next 60 days and (iii) 851,443 shares issuable upon conversion of outstanding Convertible Notes within the next 60 days. According to the MS Schedule 13D, Morgan Stanley has shared voting and investment power with respect to 3,026,886 of the shares shown; MSDW Venture Partners IV, Inc. ("MSVP Inc.") and MSDW Venture Partners IV, L.L.C. ("MSVP LLC") each have shared voting and investment power with respect to 2,611,676 of the shares shown; Morgan Stanley Dean Witter Venture Partners IV, L.P. ("MSVP IV") has shared voting and investment power with respect to 2,261,135 of the shares shown; Morgan Stanley Dean Witter Venture Offshore Investors IV, L.P. ("MSVOI IV") has shared voting and investment power with respect to 88,214 of the shares shown; Morgan Stanley Dean Witter Venture Investors IV, L.P. ("MSVI IV") has shared investment and voting power with respect to 262,327 of the shares shown; Morgan Stanley Dean Witter Equity Funding, Inc. ("Equity Funding") has shared voting and investment power with respect to 394,445 of the shares shown; and Originators Investment Plan, L.P. ("OIP") has shared voting and investment power with respect to 20,765 of the shares shown. According to the MSDW Schedule 13D, the 63 general partner of each of MSVP IV, MSVI IV and MSVOI IV is MSVP LLC, and the corporate managing member of MSVP LLC is MSVP Inc. a wholly-owned subsidiary of Morgan Stanley ("MS"). Equity Funding also is a wholly-owned subsidiary of MS as reported in the MS Schedule 13D. The managing member of OIP is MSDW Investors, Inc. ("OIP Investors"), which is a wholly-owned subsidiary of MS. According to the MS Schedule 13D, the principal business address of MSVP Inc., MSVP LLC, MSVP IV, MSVOI IV, MSVI IV Equity Funding, OIP and OIP Investors address is 1585 Broadway, New York, New York 10036. Guy de Chazal, a director of Frontstep, is Managing Director of MSVP Inc., and may be deemed to share beneficial ownership of 2,611,676 of the shares shown. Mr. de Chazal disclaims beneficial ownership of these shares. (5) As reported in the MS Schedule 13D. Includes 400,266 shares which are convertible within the next 60 days on a 4-for-1 basis into 1,601,064 common shares. According to the MS Schedule 13D, MS has shared voting and investment power with respect to 400,266 of the shares shown, MSVP Inc. and MSVP LLC each have shared voting and investment power with respect to 313,764 of the shares shown, MSVP IV has shared voting and investment power with respect to 271,650 of the shares shown, MSVOI IV has shared voting and investment power with respect to 10,598 of the shares shown, MSVI IV has shared voting and investment power with respect to 31,516 of the shares shown, Equity Funding has shared voting and investment power with respect to 82,176 of the shares shown and OIP has shared voting and investment power with respect to 4,326 of the shares shown. Guy de Chazal, a director of Frontstep, is Managing Director of MSVP, Inc., and may be deemed to share beneficial ownership of 313,764 of the shares shown. Mr. de Chazal disclaims beneficial ownership of these shares. (6) As reported in a Schedule 13D filed on May 19, 2000 as amended with the Securities and Exchange Commission (the "Fallen Angel Schedule 13D"). Includes (i) 666,668 shares issuable upon conversion of outstanding Series A preferred shares which are convertible on a 4-for-1 basis into common shares within the next 60 days, (ii) 239,167 shares issuable upon exercise of outstanding warrants which are exercisable within the next 60 days and (iii) 354,533 shares issuable upon conversion of outstanding convertible notes within the next 60 days. According to the Fallen Angel Schedule 13D, Fallen Angel Capital, L.L.C. ("FAC"), the general partner of Fallen Angel Equity Fund, L.P., has shared voting and investment power with respect to these shares. The principal business address of FAC is 125 Half Mile Road, Red Bank, New Jersey 07701. Barry Goldsmith, a director of Frontstep, is the general partner of FAC and may be deemed to share beneficial ownership of the shares shown. Mr. Goldsmith disclaims beneficial ownership of these shares. (7) As reported in the Fallen Angel Schedule 13D. Includes 166,667 shares which are convertible on a 4-for-1 basis within the next 60 days into 666,668 shares. According to the Fallen Angel Schedule 13D, FAC, the general partner of Fallen Angel Equity Fund, L.P., has shared voting and investment power with respect to the shares shown. Barry Goldsmith, a director of Frontstep, is the general partner of FAC and may be deemed to share beneficial ownership of the shares shown. Mr. Goldsmith disclaims beneficial ownership of these shares. (8) Includes (i) 118,400 shares held directly by Mr. Rutherford , (ii) 60,000 shares issuable upon exercise of outstanding warrants exercisable within the next 60 days, (iii) 45,000 shares subject to options exercisable within the next 60 days and (iv) 200,997 shares issuable upon conversion of outstanding convertible notes within the next 60 days. 64 The following table sets forth, as of September 15, 2002, certain information with respect to the Shares beneficially owned by each director of Frontstep, each executive officer of Frontstep named in the Summary Compensation Table herein and by all directors and executive officers of Frontstep as a group. COMMON SHARES
AMOUNT AND NATURE OF NAME BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2) - ---- ----------------------- ------------------- Lawrence J. Fox.......................................... 2,824,754(3) 33.19% Duke W. Thomas........................................... 65,819(4) * James A. Rutherford...................................... 424,397(5) 5.39% Stephen A. Sasser........................................ 567,199(6) 7.00% Roger D. Blackwell....................................... 55,000(4) * Guy de Chazal............................................ None(7) None Barry Goldsmith.......................................... 20,000(8) * A. Zuheir Sofia.......................................... 45,000(4) * Lawrence W. DeLeon....................................... 176,000(9) 2.28% Stephen A. Yount......................................... 123,500(10) 1.61% Daryll L. Wartluft....................................... 25,000(11) * Aggie G. Haslup.......................................... 33,839(12) * Robert D. Williams....................................... 23,000(13) * Daniel P. Buettin........................................ 105,000(14) 1.37% All directors and executive Officers as a group (14 persons)............................................... 4,488,508(15) 45.10%
- --------------- * Represents less than 1% of the outstanding common shares. (1) Each named beneficial owner has sole voting and investment power with respect to the shares listed, except as otherwise noted. None of the persons listed hold any Series A Preferred Shares. See also footnotes 4, 5, 6 and 7 under "Principal Holders of Securities." (2) Percentage of beneficial ownership is based on 7,568,218 common shares outstanding as of September 15, 2002 and the other beneficially owned shares by the persons listed above. (3) Includes (i) 1,878,924 shares held directly by Mr. Fox, (ii) 180,000 shares issuable upon exercise of outstanding warrants exercisable within the next 60 days, (iii) 160,000 shares subject to options exercisable within the next 60 days, (iv) 602,991 shares issuable upon conversion of outstanding convertible notes within the next 60 days and (v) 2,839.1091 shares held for the account of Mr. Fox in the Company's 401(k) Plan. (4) Includes 45,000 shares subject to options exercisable within the next 60 days. (5) Includes (i) 118,400 shares held directly by Mr. Rutherford , (ii) 60,000 shares issuable upon exercise of outstanding warrants exercisable within the next 60 days, (iii) 45,000 shares subject to options exercisable within the next 60 days and (iv) 200,997 shares issuable upon conversion of outstanding Convertible Notes within the next 60 days. (6) Includes (i) 540,000 shares subject to options exercisable within the next 60 days and (ii) 6,199 shares held for the account of Mr. Sasser in the Company's 401(k) Plan. (7) Does not include shares beneficially owned by Morgan Stanley, as to which shares Mr. de Chazal disclaims beneficial ownership. See also footnotes 4 and 5 under "Principal Holders of Securities". (8) Does not include shares beneficially owned by Fallen Angel Equity Fund, L.P., as to which shares Mr. Goldsmith disclaims beneficial ownership. See also footnotes 6 and 7 under "Principal Holders of Securities." (9) Includes 167,000 shares subject to options exercisable within the next 60 days. 65 (10) Includes 122,500 shares subject to options exercisable within the next 60 days. Mr. Yount terminated his employment with the Company in August, 2002. (11) Includes 25,000 shares subject to options exercisable within the next 60 days. (12) Includes (i) 22,300 shares subject to options exercisable within the next 60 days and (ii) 1,811 shares held for the account of Mrs. Haslup in the Company's 401(k) Plan. Mrs. Haslup disclaims beneficial ownership of 5,065 shares. (13) Includes 22,000 shares subject to options exercisable within the next 60 days. (14) Includes 105,000 shares subject to options exercisable within the next 60 days. (15) Includes (i) 240,000 shares issuable upon exercise of outstanding warrants exercisable within the next 60 days, (ii) 1.339,800 shares subject to options exercisable within the next 60 days and (iii) $2,000,000 principal amount of Convertible Notes convertible into 803,988 shares within the next 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March and August 2002, the Company issued its convertible notes and warrants to certain of its preferred shareholders, including entities affiliated with Morgan Stanley and Fallen Angel Equity Fund, and two of its directors, Lawrence J. Fox and James A. Rutherford. In connection with the transaction, the Company's preferred shareholders, including the Morgan Stanley affiliates and Fallen Angel, agreed to waive pre-emptive and anti-dilution rights which they may have had under the original Investor Rights Agreement with the Company as a result of the convertible notes transaction. The Company agreed to reduce the conversion price on its outstanding preferred shares held by them from $12.00 per share to $6.00 per share. For more detailed information regarding this transaction, see Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- Sale of Unregistered Securities and Note 7 -- Long-Term Obligations to Financial Statements and Note 19 -- Subsequent Events to Financial Statements. On May 10, 2000, the Company sold its preferred shares and warrants to purchase its common shares to entities controlled by Morgan Stanley and Fallen Angel Equity Fund. The warrants originally were exercisable at an exercise price of $15.00 per share, subject to adjustment, until May 10, 2005. In connection with the Foothill transaction, we agreed to reduce the exercise price of the warrants to $3.36 per share and the warrant holders agreed to waive adjustments to the exercise price of the warrants and the conversion price for the preferred shares held by them as a result of the Foothill transaction. See Note 14 -- Preferred Stock to Financial Statements included herein in Item 8. Guy de Chazal, a director of Frontstep, is Managing Director of MSDW Venture Partners IV, Inc., an entity controlled by Morgan Stanley and the managing member of MSDW Venture Partners IV, LLC. See also footnotes 4 and 5 to the principal shareholders table under Item 12. Security Ownership of Certain Beneficial Owners and Management. Barry Goldsmith, a director of the Company, is the general partner of Fallen Angel Capital, L.L.C., the general partner of Fallen Angel. See also footnotes 6 and 7 to the principal shareholders table under Item 12. Security Ownership of Certain Beneficial Owners and Management. Messrs. Fox and Rutherford are directors and principal shareholders of the Company. See the principal shareholders table under Item 12. Security Ownership of Certain Beneficial Owners and Management. On February 25, 2002, the Company entered into an agreement with Updata Capital, Inc. ("Updata Capital") under which Updata Capital will provide various services to assist the Company in its evaluation of strategic and business alternatives and other financial advisory services as agreed upon by the parties. Under this agreement, Updata will be paid a fee, the amount and timing of which is contingent upon successful completion of its responsibilities. Barry Goldsmith, a director of the Company, is Managing Director of Updata Capital, Inc. See also footnotes 6 and 7 to the principal shareholders table under Item 12. Security Ownership of Certain Beneficial Owners and Management. In the current fiscal year, no fees were paid to Updata Capital. During the Company's last fiscal year, Vorys, Sater, Seymour and Pease LLP rendered legal services on behalf of Frontstep. Duke W. Thomas, a director of Frontstep, is a partner in that firm. 66 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the Company and its subsidiaries are included in Item 8: Reports of Independent Auditors Consolidated Balance Sheets as of June 30, 2002 and 2001 Consolidated Statements of Operations for the Years Ended June 30, 2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001 and 2000 Notes to Consolidated Financial Statements (a)(2) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instructions, are inapplicable and therefore have been omitted, or the required information is provided in the Consolidated Financial Statements of the Company and its subsidiaries or Notes thereto. (a)(3) Exhibits The following exhibits are included in this Annual Report on Form 10-K:
EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------- --------------------------------------- 3(a)(1) Amended Articles of Incorporation of Incorporated herein by reference to Frontstep, (f/k/a "Symix Systems, Exhibit 3(a)(1) to the Registrant's Inc.") (the "Registrant") (as filed Annual Report on Form 10-K Inc. for the with the Ohio Secretary of State on fiscal year ended June 30, 1997 (File February 8, 1991) No. 0-19024) 3(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation of the Exhibit 3(a)(2) to the Registrant's Registrant (as filed with the Ohio Annual Report on Form 10-K for the Secretary of State on July 16, 1996) fiscal year ended June 30, 1997 (File No. 0-19024) 3(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended Exhibit 3(a)(3) to the Registrant's of the Registrant (as filed with the Quarterly Report on Form 10-Q for the Ohio Secretary of State on May 10, fiscal quarter ended March 31, 2000 2000) (File No. 0-19024) 3(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended Exhibit 3(a)(4) to the Registrant's of the Registrant (as filed with the Quarterly Report on Form 10-Q for the Ohio Secretary of State on November 8, fiscal quarter ended September 30, 2000 2000) (File No. 0-19024) 3(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to amended of the Registrant (reflecting Exhibit 3(a)(5) to the Registrant's amendments through November 8, 2000 for Quarterly Report on Form 10-Q for the purposes of Securities and Exchange fiscal quarter ended September 30, 2000 Commission reporting compliance only) (File No. 0-19024) 3(b) Amended Regulations of the Registrant Incorporated herein by reference to Exhibit 3(b) to the Registrant's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on February 12, 1991 (Registration No. 33-38878) 4(a)(1) Amended Articles of Incorporation of Incorporated herein by reference to the Registrant (as filed with the Ohio Exhibit 3(a)(1) to the Registrant's Secretary of State on February 8, 1991) Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 0-19024)
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EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------- --------------------------------------- 4(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation of the Exhibit 3(a)(2) to the Registrant's Registrant (as filed with the Ohio Annual Report on Form 10-K for the Secretary of State on July 16, 1996) fiscal year ended June 30, 1997 (File No. 0-19024) 4(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended Exhibit 3(a)(3) to the Registrant's of the Registrant (as filed with the Quarterly Report on Form 10-Q for the Ohio Secretary of State on May 10, fiscal quarter ended March 31, 2000 2000) (File No. 0-19024) 4(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended Exhibit 3(a)(4) to the Registrant's of the Registrant (as filed with the Quarterly Report on Form 10-Q for the Ohio Secretary of State on November 8, fiscal quarter ended September 30, 2000 2000) (File No. 0-19024) 4(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to amended of the Registrant (reflecting Exhibit 3(a)(5) to the Registrant's amendments through November 8, 2000 for Quarterly Report on Form 10-Q for the purposes of Securities and Exchange fiscal quarter ended September 30, 2000 Commission reporting compliance only) (File No. 0-19024) 4(b) Amended Regulations of the Registrant Incorporated herein by reference to Exhibit 3(b) to the Registrant's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on February 12, 1991 (Registration No. 33-38878) 4(c) Amended and Restated Investor Rights Incorporated herein by reference to Agreement, dated as of March 7, 2002, Exhibit 4(a) to the Registrant's among the Registrant, the Investors Current Report on Form 8-K, as filed identified therein and Lawrence J. Fox with the Securities and Exchange Commission on March 11, 2002 (File No. 0-19024) 4(d) Warrant for the Purchase of Shares of Incorporated herein by reference to Common Stock of the Registrant issued Exhibit 4(e) to the Registrant's Annual to Morgan Stanley Dean Witter Venture Report on Form 10-K for the fiscal year Partners IV, L.P. on May 10, 2000, and ended June 30, 2001 (File No. 0-19024) Exhibit A, identifying other identical warrants issued to the investors identified on Exhibit A on the dates indicated, for the number of common shares listed on Exhibit A 4(e) Assignment and Assumption Agreement, by Incorporated herein by reference to and between Morgan Stanley Dean Witter Exhibit 4(g) to the Registrant's Equity Funding, Inc. and the Quarterly Report on Form 10-Q for the Originators Investment Plan, L.P., fiscal quarter ended December 31, 2000 dated November 24, 2000 (File No. 0-19024) 4(f) Amended and Restated Common Share Filed herein Purchase Warrant, dated November 15, 2001, issued to Foothill Capital Corporation 4(g) Registration Rights Agreement, dated Incorporated herein by reference to July 17, 2001, by and between the Exhibit 4(h) to the Registrant's Annual Registrant and Foothill Capital Report on Form 10-K for the fiscal year Corporation ended June 30, 2001 (File No. 0-19024) 4(h) Share Exchange Agreement, dated January Incorporated herein by reference to 9, 1997 Exhibit 99 to Registrant's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 24, 1997 (File No. 0-19024)
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EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------- --------------------------------------- 4(i) Form of Warrant for the purchase of Incorporated herein by reference to common shares of the Registrant dated Exhibit 4(b) to the Registrant's March 7, 2002 Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 11, 2002 (File No. 0-19024) 4(j) Form of Initial Note issued by Incorporated herein by reference to Registrant dated March 7, 2002 Exhibit 4(c) to the Registrant's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 11, 2002 (File No. 0-19024) 4(k) Convertible Subordinated Note issued Incorporated herein by reference to August 12, 2002 issued to Morgan Exhibit 4 to Registrant's Current Stanley Dean Witter Venture Partners Report on Form 8-K, as filed with the IV, L.P. and Exhibit A identifying Securities and Exchange Commission on other identical Notes issued to the August 15, 2002 (File No. 0-19024) investors identified, on the dates indicated, for the number of common shares listed on Exhibit A 4(l) Convertible Subordinated Note issued Incorporated herein by reference to August 28, 2002 issued to Morgan Exhibit 4 to Registrant's Current Stanley Dean Witter Venture Partners Report on Form 8-K, as filed with the IV, L.P. and Exhibit A identifying Securities and Exchange Commission on other identical Notes issued to the September 4, 2002 (File No. 0-19024) investors identified, on the dates indicated, for the number of common shares listed on Exhibit A 10(a) Lease Agreement dated June 26, 2002 for Filed herein corporate office located at 2800 Corporate Exchange Drive, Columbus, Ohio 10(b) Progress Software Application Partner Filed herein Agreement dated February 6, 2002 10(c)* Amended and Restated Stock Option Plan Filed herein for Outside Directors 10(d)* Non-Qualified Stock Option Plan for Key Incorporated herein by reference to Executives Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 0-19024) 10(e)* Amended and Restated Non-Qualified Filed herein Stock Option Plan for Key Employees 10(f)* Second Amended and Restated 1999 Non- Filed herein Qualified Stock Option Plan for Key Employees 10(g)* Employment Agreement for Stephen A. Incorporated herein by reference to Sasser Exhibit 10(b) to Registrant's Quarterly Report Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 0-19024) 10(h)* Amendment to Employment Agreement for Incorporated herein by reference to Stephen A. Sasser Exhibit 10(p) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 (File No. 0-19024) 10(i)* Second Amendment to Employment Incorporated herein by reference to Agreement for Stephen A. Sasser Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 (File No. 0-19024)
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EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------- --------------------------------------- 10(j)* Stock Option Agreement between the Incorporated herein by reference to Registrant and Stephen A. Sasser dated Exhibit 10(c) to Registrant's Quarterly January 17, 1996 Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 0-19024) 10(k) Employee Stock Purchase Plan, as Incorporated herein by reference to amended on November 11, 1998 Exhibit 10(a)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 0-19024) 10(l) Loan and Security Agreement, by and Incorporated by reference to Exhibit among the Registrant and certain of its 10(u) to Registrant's Annual Report on affiliates, as Borrowers, and the Form 10-K for the fiscal year ended Lenders signatory thereto, as Lenders, June 30, 2001 (File No. 0-19024) and Foothill Capital Corporation, as Arranger and Administrative Agent 10(m) First Amendment to Loan and Security Incorporated herein by reference to Agreement Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2001 (File No. 0-19024) 10(o) Second Amendment to Loan and Security Filed herein Agreement 10(p) Third Amendment to Loan and Security Filed herein Agreement 10(q) Fourth Amendment to Loan and Security Filed herein Agreement 10(r) Fifth Amendment to Loan and Security Filed herein Agreement 10(s) Sixth Amendment to Loan and Security Filed herein Agreement 10(t) Registration Rights Agreement, dated Incorporated herein by reference to July 17, 2001, by and between the Exhibit 4(h) to Registrant's Annual Registrant and Foothill Capital Report on Form 10-K for the fiscal year Corporation ended June 30, 2001 (File No. 0-19024) 10(u) Pledge and Security Agreement Incorporated herein by reference to (Foreign), date July 17, 2001, made by Exhibit 10(x) to Registrant's Annual the Registrant and Frontstep Solutions Report on Form 10-K for the fiscal year Group, Inc., in favor of Foothill ended June 30, 2001 (File No. 0-19024) Capital Corporation, as agent for certain Lenders 10(v) Pledge and Security Agreement Incorporated herein by reference to (Domestic), dated July 17, 2001, made Exhibit 10(y) to Registrant's Annual by the Registrant and Frontstep Report on Form 10-K for the fiscal year Solutions Group, Inc., in favor of ended June 30, 2001 (File No. 0-19024) Foothill Capital Corporation, as agent for certain Lenders 10(w) Copyright Security Agreement, dated Incorporated herein by reference to July 17, 2000, made by the Registrant Exhibit 10(z) to Registrant's Annual and certain of its affiliates, in favor Report on Form 10-K for the fiscal year of Foothill Capital Corporation, as ended June 30, 2001 (File No. 0-19024) agent for certain Lenders 10(x) Trademark Security Agreement, dated Incorporated herein by reference to July 17, 2001, made by the Registrant Exhibit 10(a)(a) to Registrant's Annual and certain of its affiliates, in favor Report on Form 10-K for the fiscal year of Foothill Capital Corporation, as ended June 30, 2001 (File No. 0-19024) agent for certain Lenders 10(y) Intercompany Subordination Agreement, Incorporated herein by reference to dated July 17, 2001, made among the Exhibit 10(a)(b) to Registrant's Annual Registrant, certain of its affiliates Report on Form 10-K for the fiscal year and Foothill Capital Corporation, as ended June 30, 2001 (File No. 0-19024) agent for certain Lenders
70
EXHIBIT NO. DESCRIPTION PAGE - ----------- --------------------------------------- --------------------------------------- 10(z) Securities Purchase Agreement, dated as Incorporated herein by reference to of May 10, 2000, between the Registrant Exhibit 10(a) to Registrant's Quarterly and the Investors identified therein Report on Form 10-Q for the fiscal quarter ended March 31, 2000 (File No. 0-19024) 10(a)(a) Amended and Restated Investor Rights Incorporated herein by reference to Agreement, dated March 7, 2002, among Exhibit 4(a) to Registrant's Current the Registrant, the Investors Report on Form 8-K, as filed with the identified therein and Lawrence J. Fox Securities and Exchange Commission on March 11, 2002 (File No. 0-19024) 10(a)(b) Warrant for the Purchase of Shares of Incorporated herein by reference to Common Stock of the Registrant issued Exhibit 4(e) to the Registrant's Annual to Morgan Stanley Dean Witter Venture Report on Form 10-K for the fiscal year Partners IV, L.P. and Exhibit A, ended June 30, 2001 (File No. 0-19024) identifying other identical warrants issued to the Investors identified on Exhibit A, for the number of common shares identified on Exhibit A, on the dates indicated 10(a)(c) Assignment and Assumption Agreement, by Incorporated herein by reference to and between Morgan Stanley Dean Witter Exhibit 4(g) to Registrant's Quarterly Equity Funding, Inc. and the Report on Form 10-Q for the fiscal Originators Investment Plan, L.P., quarter ended December 31, 2000 (File dated November 24, 2000 No. 0-19024) 10(a)(d) Securities Purchase Agreement dated as Incorporated herein by reference to of March 7, 2002 by and between the Exhibit 10 to Registrant's Current Registrant and the Investors named Report on Form 8-K, as filed with the therein Securities and Exchange Commission on March 11, 2002 (File No. 0-19024) 10(a)(e) Amendment Number One to Securities Incorporated herein by reference to Purchase Agreement dated as of July 9, Exhibit 10 to Registrant's Current 2002 Report on Form 8-K, as filed with the Securities and Exchange Commission on July 15, 2002 (File No. 0-19024) 10(a)(f)* Form of Severance Agreement with Filed herein Executive Officers 21 Subsidiaries of the Registrant Filed herein 23 Consents of Independent Auditors Filed herein 24 Powers of Attorney Filed herein 99(a) Certificates of Chief Executive Officer Filed herein and Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------- * Indicates management contracts or compensatory plans or arrangements that are required to be filed as an exhibit to this Annual Report on Form 10-K for the fiscal year ended June 30, 2002 (b) There were no reports on Form 8-K filed during the three months ended June 30, 2002. 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of September, 2002. FRONTSTEP, INC. By: /s/ STEPHEN A. SASSER ------------------------------------ Stephen A. Sasser President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 30th day of September, 2002.
SIGNATURE TITLE --------- ----- * Chairman of the Board and Director - --------------------------------------------------- Lawrence J. Fox * President, Chief Executive Officer and Director - --------------------------------------------------- Stephen A. Sasser * Vice President, Finance, Chief Financial Officer - --------------------------------------------------- and Secretary Principal Financial and Accounting Daniel P. Buettin Officer * Director - --------------------------------------------------- Duke W. Thomas * Director - --------------------------------------------------- James A. Rutherford * Director - --------------------------------------------------- Roger D. Blackwell * Director - --------------------------------------------------- Guy L. de Chazal * Director - --------------------------------------------------- Barry M. Goldsmith * Director - --------------------------------------------------- A. Zuheir Sofia *By Power of Attorney /s/ DANIEL P. BUETTIN - --------------------------------------------------- Daniel P. Buettin (Attorney-in-Fact)
72 CERTIFICATIONS I, Stephen A. Sasser, certify that: 1. I have reviewed this report on Form 10-K of Frontstep, Inc.; 2. Based on my knowledge, this 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 annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 30, 2002 By: /s/ STEPHEN A. SASSER ------------------------------------ Stephen A. Sasser President and Chief Executive Officer I, Daniel P. Buettin, certify that: 1. I have reviewed this report on Form 10-K of Frontstep, Inc.; 2. Based on my knowledge, this 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 annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report. Date: September 30, 2002 By: /s/ DANIEL P. BUETTIN ------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer and Secretary, Principal Financial and Accounting Officer 73 EX-4.F 3 l96355aexv4wf.txt EXHIBIT 4(F) Exhibit 4(f) EXECUTION VERSION THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT. FRONTSTEP, INC. AMENDED AND RESTATED COMMON SHARE PURCHASE WARRANT No. W-1 November , 2001 Warrant to Purchase 550,000 Common Shares FRONTSTEP, INC., an Ohio corporation (the "Company"), for value received, hereby certifies that FOOTHILL CAPITAL CORPORATION, a California corporation, or its registered assigns (the "Holder"), is entitled to purchase from the Company 550,000 shares of duly authorized, validly issued, fully paid and nonassessable common shares, no par value, of the Company (the "Common Shares"), at a purchase price equal to the Purchase Price (this "Warrant"), at any time or from time to time but prior to 5:00 P.M., New York City time, on July 17, 2006 (the "Expiration Date"), all subject to the terms, conditions and adjustments set forth below in this Warrant. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned such terms in the Loan Agreement. This Warrant amends and restates in its entirety the Warrant issued to the Holder as of July 17, 2001 (the "Original Warrant"), pursuant to the Loan Agreement. 1. DEFINITIONS. As used herein, unless the context otherwise requires, the following terms shall have the meanings indicated: "ADDITIONAL COMMON SHARES" shall mean all Common Shares (including treasury shares) issued or sold (or, pursuant to Section 3.3 or 3.4, deemed to be issued) by the Company after July 17, 2001, whether or not subsequently reacquired or retired by the Company, other than (a) shares issued upon the exercise of this Warrant, (b) such number of additional shares as may become issuable upon the exercise of this Warrant by reason of adjustments required pursuant to the anti-dilution provisions applicable to this Warrant as in effect on the date hereof, (c) shares, warrants, options and other securities issued by the Company at any time to the Holder or any Affiliate thereof, (d) (i) Common Shares or options exercisable therefor, issued or to be issued under the Company's existing employee stock option and purchase plans and stock option plan for outside directors, each as may be amended from time to time or under any other employee stock option or purchase plan or plans, or pursuant to compensatory or incentive agreements, for officers, directors, employees or consultants of the Company or any of its Subsidiaries, in each case adopted or assumed after such date by the Company's Board of Directors; PROVIDED in each case that the exercise or purchase price for any such share shall not be less than 90% of the fair market value (determined in good faith by the Company's Board of Directors) of the Common Shares on the date of the grant, and (ii) such additional number of shares as may become issuable pursuant to the terms of any such plans by reason of adjustments required pursuant to antidilution provisions applicable to such securities in order to reflect any subdivision or combination of Common Shares, by reclassification or otherwise, or any dividend on Common Shares payable in Common Shares, (e) (i) Common Shares issued upon the exercise of any warrants or options, or upon conversion of any preferred shares of the Company outstanding on July 17, 2001 and (ii) such additional number of shares as may become issuable upon the exercise or conversion of any such securities by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on July 17, 2001, and (f) Common Shares (not to exceed 500,000 Common Shares in the aggregate as constituted on July 17, 2001 (and subject to adjustment for stock splits, subdivisions, stock dividends and similar such transactions)) issued in connection with acquisitions of assets and/or securities of another Person in a transaction or series of transactions, each of which is approved by the Board of Directors of the Company. "BUSINESS DAY" shall mean any day other than a Saturday or a Sunday or any day on which national banks are authorized or required by law to close. Any reference to "days" (unless Business Days are specified) shall mean calendar days. "COMMISSION" shall mean the Securities and Exchange Commission or any successor agency having jurisdiction to enforce the Securities Act. "COMMON SHARES" shall have the meaning assigned to it in the introduction to this Warrant, such term to include any stock into which such Common Shares shall have been changed or any stock resulting from any reclassification of such Common Shares, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "COMPANY" shall have the meaning assigned to it in the introduction to this Warrant, such term to include any corporation or other entity which shall succeed to or assume the obligations of the Company hereunder in compliance with Section 4. 2 "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares of stock (other than Common Shares) or other securities directly or indirectly convertible into or exchangeable for Additional Common Shares. "CURRENT MARKET PRICE" shall mean, on any date specified herein, the average of the daily Market Price during the 10 consecutive trading days before such date, except that, if on any such date the Common Shares are not listed or admitted for trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder, or any successor statute. "EXPIRATION DATE" shall have the meaning assigned to it in the introduction to this Warrant. "FAIR VALUE" shall mean, on any date specified herein (i) in the case of cash, the dollar amount thereof, (ii) in the case of a security, the Current Market Price, and (iii) in all other cases, the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by the Company's Board of Directors. "HOLDER" shall have the meaning assigned to it in the introduction to this Warrant. "INITIAL HOLDER" shall mean Foothill Capital Corporation. "LOAN AGREEMENT" shall mean that certain Loan and Security Agreement, dated as of July 17, 2001, among the Company, certain subsidiaries of the Company, the Lender parties thereto and Foothill Capital Corporation, as the Arranger and Administrative Agent, as amended by Amendment No. 1, dated as of November 15, 2001. "MARKET PRICE" shall mean, on any date specified herein, the amount per Common Share, equal to (i) the last reported sale price of such Common Shares, regular way, on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices thereof regular way on such date, in either case as officially reported on the principal national securities exchange on which such Common Shares are then listed or admitted for trading, (ii) if such Common Shares are not then listed or admitted for trading on any national securities exchange but is designated as a national market system security by the NASD, the last reported trading price of the Common Shares on such date, (iii) if there shall have been no trading on such date or if the Common Shares are not so designated, the average of the closing bid and asked prices of the Common Shares on such date as shown by the NASD automated quotation system, or (iv) if such Common Shares are not then listed or admitted for trading on any national exchange or quoted in the over-the-counter market, the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by the Company's Board of Directors. "NASD" shall mean the National Association of Securities Dealers, Inc. 3 "OPTIONS" shall mean any rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Common Shares or Convertible Securities. "OTHER SECURITIES" shall mean any stock (other than Common Shares) and other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Shares, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Shares or Other Securities pursuant to Section 4 or otherwise. "PERSON" shall mean any individual, firm, partnership, corporation, trust, joint venture, association, joint stock company, limited liability company, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof, and shall include any successor (by merger or otherwise) of such entity. "PURCHASE PRICE" shall mean initially $3.36 per share, subject to adjustment and readjustment from time to time as provided in Section 3, and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by Section 3. "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement, dated as of July 17, 2001 between the Company and the Initial Holder. "RESTRICTED SECURITIES" shall mean (i) any Warrants bearing the applicable legend set forth in Section 9.1, (ii) any Common Shares (or Other Securities) issued or issuable upon the exercise of Warrants which are (or, upon issuance, will be) evidenced by a certificate or certificates bearing the applicable legend set forth in such Section, and (iii) any Common Shares (or Other Securities) issued subsequent to the exercise of any of the Warrants as a dividend or other distribution with respect to, or resulting from a subdivision of the outstanding Common Shares (or other Securities) into a greater number of shares by reclassification, stock splits or otherwise, or in exchange for or in replacement of the Common Shares (or Other Securities) issued upon such exercise, which are evidenced by a certificate or certificates bearing the applicable legend set forth in such Section. "RIGHTS" shall have the meaning assigned to it in Section 3.10. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder, or any successor statute. "WARRANT" shall have the meaning assigned to it in the introduction to this Warrant. "WARRANT SHARES" means (a) the Common Shares issued or issuable upon exercise of this Warrant in accordance with Section 2, (b) all other securities or other property issued or issuable upon any such exercise or exchange in accordance with this Warrant and (c) any securities of the Company distributed with respect to the securities referred to in the preceding clauses (a) and (b). 4 2. EXERCISE OF WARRANT. 2.1. MANNER OF EXERCISE; PAYMENT OF THE PURCHASE PRICE. (a) This Warrant may be exercised by the Holder hereof, in whole or in part, at any time or from time to time prior to the Expiration Date, by surrendering to the Company at its principal office this Warrant, with a completed Election to Purchase Shares in the form attached hereto as Exhibit A (or a reasonable facsimile thereof) duly executed by the Holder and accompanied by payment of the Purchase Price for the number of Common Shares specified in such form (the "Aggregate Purchase Price"). Any partial exercise of this Warrant shall be for a whole number of Warrant Shares only. (b) Payment of the Aggregate Purchase Price may be made as follows (or by any combination of the following): (i) in United States currency by cash or delivery of a certified check or bank draft payable to the order of the Company or by wire transfer to the Company, (ii) by cancellation of all or any part of the unpaid principal amount, plus accrued interest thereon, of the then-outstanding Obligations (as defined in the Loan Agreement) in an amount equal to the Aggregate Purchase Price; PROVIDED, that any such cancellations shall be applied in accordance with Section 2.4(b) of the Loan Agreement, (iii) by cancellation of such number of Common Shares otherwise issuable to the Holder upon such exercise as shall be specified for cancellation in such Election to Purchase Shares, such that the excess of the aggregate Current Market Price of such specified number of shares on the date of exercise over the portion of the Aggregate Purchase Price attributable to such shares shall equal the Aggregate Purchase Price attributable to the Common Shares to be issued upon such exercise, in which case such excess amount shall be deemed to have been paid to the Company and the number of shares issuable upon such exercise shall be reduced by such number specified for cancellation, or (iv) by surrender to the Company for cancellation certificates representing Common Shares of the Company owned by the Holder (properly endorsed for transfer in blank) having a Current Market Price on the date of Warrant exercise equal to the Aggregate Purchase Price. 2.2. WHEN EXERCISE EFFECTIVE. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to, and the Purchase Price shall have been received by, the Company as provided in Section 2.1, and, to the extent permitted by law, at such time the Person or Persons in whose name or names any certificate or certificates for Common Shares (or Other Securities) shall be issuable upon such exercise as provided in Section 2.3 shall be deemed to have become the holder or holders of record thereof for all purposes. 2.3. DELIVERY OF STOCK CERTIFICATES, ETC.; CHARGES, TAXES AND EXPENSES. (a) As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within five Business Days thereafter, the Company shall cause to be issued in the name of and delivered to the Holder hereof or, subject to Section 9, as the Holder may direct, (i) a certificate or certificates for the whole number of Common Shares (or Other Securities) to which the Holder shall be entitled upon such exercise, and 5 (ii) in case such exercise is for less than all of the Common Shares purchasable under this Warrant, a new Warrant or Warrants of like tenor, for the balance of the Common Shares purchasable hereunder. (b) Issuance of certificates for Common Shares upon the exercise of this Warrant shall be made without charge to the Initial Holder hereof for any issue or transfer tax or other incidental expense, in respect of the issuance of such certificates, all of which such taxes and expenses shall be paid by the Company; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax that may be payable in respect of any issuance of any Warrant or any certificate for, or any other evidence of ownership of, Warrant Shares in a name other than that of the Initial Holder of this Warrant being exercised or exchanged. 2.4. TAX BASIS. The Company and the Holder shall mutually agree as to the tax basis of this Warrant as of the date of issuance of this Warrant, for purposes of the Internal Revenue Code of 1986, as amended, and the treatment of this Warrant under such Code by each of the Company and the Holder shall be consistent with such agreement. 3. ADJUSTMENT OF PURCHASE PRICE AND COMMON SHARES ISSUABLE UPON EXERCISE. 3.1. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Purchase Price as a result of the calculations made in this Section 3, this Warrant shall thereafter evidence the right to receive, at the adjusted Purchase Price, that number of Common Shares (calculated to the nearest one-hundredth) obtained by dividing (i) the product of the aggregate number of shares covered by this Warrant immediately prior to such adjustment and the Purchase Price in effect immediately prior to such adjustment of the Purchase Price by (ii) the Purchase Price in effect immediately after such adjustment of the Purchase Price. 3.2. ADJUSTMENT OF PURCHASE PRICE. 3.2.1. ISSUANCE OF ADDITIONAL COMMON SHARES. In case the Company at any time or from time to time after July 17, 2001 shall issue or sell Additional Common Shares (including Additional Common Shares deemed to be issued pursuant to Section 3.3 or 3.4 but excluding Additional Common Shares purchasable upon exercise of Rights referred to in Section 3.10) without consideration or for a consideration per share less than the greater of the Purchase Price and the Current Market Price in effect immediately prior to such issue or sale, then, and in each such case, subject to Section 3.8, the Purchase Price shall be reduced concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Purchase Price by a fraction (a) The numerator of which shall be the sum of (i) the number of Common Shares outstanding immediately prior to such issue or sale and (ii) the number of Common Shares which the aggregate consideration received by the Company for the total number of such Additional Common Shares so issued or sold would purchase at the greater of such Purchase Price and such Current Market Price, and 6 (b) The denominator of which shall be the number of Common Shares outstanding immediately after such issue or sale, provided that, for the purposes of this Section 3.2.1, (x) immediately after any Additional Common Shares are deemed to have been issued pursuant to Section 3.3 or 3.4, such Additional Shares shall be deemed to be outstanding, and (y) treasury shares shall not be deemed to be outstanding. 3.2.2. EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS. In the case the Company at any time or from time to time after July 17, 2001 shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Shares other than (a) a dividend payable in Additional Common Shares or (b) a regularly scheduled cash dividend (at a rate not in excess of 110% of the rate of the last regularly scheduled cash dividend theretofore paid) payable out of consolidated earnings or earned surplus, determined in accordance with generally accepted accounting principles, or (c) a dividend of Rights referred to in Section 3.10 hereof then, in each such case, subject to Section 3.8, the Purchase Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Purchase Price by a fraction (x) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Shares trade on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, less the Fair Value of such dividend or distribution applicable to one Common Share, and (y) the denominator of which shall be such Current Market Price. PROVIDED that, in the event that the amount of such dividend as so determined is equal to or greater than 10% of such Current Market Price or in the event that such fraction is less than 9/10ths, in lieu of the foregoing adjustment, adequate provision shall be made so that the Holder shall receive, upon Warrant exercise, a pro rata share of such dividend based upon the maximum number of Common Shares at the time issuable to the Holder (determined without regard to whether the Warrant is exercisable at such time.) 3.3. TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES. In case the Company at any time or from time to time after July 17, 2001 shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities of the Company entitled to receive, any Options or Convertible Securities (whether or not the rights thereunder are immediately exercisable), then, and in each such case, the maximum number of Additional Common Shares (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Common Shares issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Shares trade on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), 7 PROVIDED that such Additional Common Shares shall not be deemed to have been issued unless (i) the consideration per share (determined pursuant to Section 3.5) of such shares would be less than the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Shares trade on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, and (ii) such Additional Common Shares are not purchasable pursuant to Rights referred to in Section 3.10, and PROVIDED, FURTHER, that in any such case in which Additional Common Shares are deemed to be issued: (a) whether or not the Additional Common Shares underlying such Options or Convertible Securities are deemed to be issued, no further adjustment of the Purchase Price shall be made upon the subsequent issue or sale of Convertible Securities or Common Shares upon the exercise of such Options or the conversion or exchange of such Convertible Securities, except in the case of any such Options or Convertible Securities which contain provisions requiring an adjustment, subsequent to the date of the issue or sale thereof, of the number of Additional Common Shares issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities by reason of (x) a change of control of the Company, (y) the acquisition by any Person or group of Persons of any specified number or percentage of the voting securities of the Company or (z) any similar event or occurrence, each such case to be deemed hereunder to involve a separate issuance of Additional Common Shares, Options or Convertible Securities, as the case may be; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Common Shares issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Purchase Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Purchase Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Shares or Convertible Securities, the only Additional Common Shares issued or sold were the Additional Common Shares, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the 8 consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue or sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Common Shares deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 3.5) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to subdivision (b) or (c) above shall have the effect of decreasing the Purchase Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (e) in the case of any such Options which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Purchase Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subdivision (c) above. 3.4. TREATMENT OF STOCK DIVIDENDS, STOCK SPLITS, ETC. In case the Company at any time or from time to time after July 17, 2001 shall declare or pay any dividend on the Common Shares payable in Common Shares, or shall effect a subdivision of the outstanding Common Shares into a greater number of Common Shares (by reclassification or otherwise than by payment of a dividend in Common Shares), then, and in each such case, Additional Common Shares shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. 3.5. COMPUTATION OF CONSIDERATION. For the purposes of this Section 3, (a) the consideration for the issue or sale of any Additional Common Shares shall, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, be computed at the gross cash proceeds to the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale, 9 (ii) insofar as it consists of property (including securities) other than cash, be computed at the Fair Value thereof at the time of such issue or sale, and (iii) in case Additional Common Shares are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Common Shares, such allocation to be determined in the same manner that the Fair Value of property not consisting of cash or securities is to be determined as provided in the definition of 'Fair Value' herein; (b) Additional Common Shares deemed to have been issued pursuant to Section 3.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of Common Shares (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Common Shares deemed to have been issued pursuant to Section 3.4, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. 3.6. ADJUSTMENTS FOR COMBINATIONS, ETC. In case the outstanding Common Shares shall be combined or consolidated, by reclassification or otherwise, into a lesser number of Common Shares, the Purchase Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately decreased. 3.7. DILUTION IN CASE OF OTHER SECURITIES. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in Section 4) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any such other issuer or Person) for a consideration such 10 as to dilute, on a basis consistent with the standards established in the other provisions of this Section 3, the purchase rights, if any, with respect to such Other Securities, granted by this Warrant, then, and in each such case, the computations, adjustments and readjustments provided for in this Section 3 with respect to the Purchase Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution. 3.8. DE MINIMIS ADJUSTMENTS. If the amount of any adjustment of the Purchase Price required pursuant to this Section 3 would be less than one tenth (1/10) of one percent (1%) of the Purchase Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate a change in the Purchase Price of at least one tenth (1/10) of one percent (1%) of such Purchase Price. All calculations under this Warrant shall be made to the nearest one-hundredth of a share. 3.9. ABANDONED DIVIDEND OR DISTRIBUTION. If the Company shall take a record of the holders of its Common Shares for the purpose of entitling them to receive a dividend or other distribution (which results in an adjustment to the Purchase Price under the terms of this Warrant) and shall, thereafter, and before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then any adjustment made to the Purchase Price by reason of the taking of such record shall be reversed, and any subsequent adjustments, based thereon, shall be recomputed. 3.10. SHAREHOLDER RIGHTS PLAN. Notwithstanding the foregoing, in the event that the Company shall distribute "poison pill" rights pursuant to a "poison pill" shareholder rights plan (the "Rights"), the Company shall, in lieu of making any adjustment pursuant to Section 3.2.1 or Section 3.2.2 hereof, make proper provision so that each Holder who exercises a Warrant after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such exercise, in addition to the Common Shares issuable upon such exercise, a number of Rights to be determined as follows: (i) if such exercise occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of Common Shares equal to the number of Common Shares issuable upon such exercise at the time of such exercise would be entitled in accordance with the terms and provisions of and applicable to the Rights; and (ii) if such exercise occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares into which the Warrant so exercised was exercisable immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. 4. CONSOLIDATION, MERGER, ETC. 4.1. ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, 11 or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Shares or Other Securities shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Shares or Other Securities (other than (i) a capital reorganization or reclassification resulting in the issue of Additional Common Shares for which adjustment in the Purchase Price is provided in Section 3.2.1 or 3.2.2 or (ii) issuances or sales of shares or other securities by the Company which by the terms of this Warrant are excluded from the definition of Additional Common Shares), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant, upon the exercise hereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Purchase Price in effect at the time of such consummation for all Common Shares or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Shares or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such Holder would actually have been entitled as a shareholder upon such consummation if such Holder had exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in Sections 3 through 5, PROVIDED that if a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding Common Shares, and if the Holder so designates in a notice given to the Company on or before the date immediately preceding the date of the consummation of such transaction, the Holder of this Warrant shall be entitled to receive the highest amount of securities, cash or other property to which it would actually have been entitled as a shareholder if the Holder of this Warrant had exercised this Warrant prior to the expiration of such purchase, tender or exchange offer and accepted such offer, subject to adjustments as provided for in Section 3 through 5 hereof until the date of consummation of such purchase, tender or exchange offer. 4.2. ASSUMPTION OF OBLIGATIONS. Notwithstanding anything contained in this Warrant or in the Loan Agreement to the contrary, the Company shall not effect any of the transactions described in clauses (a) through (d) of Section 4.1 unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant), (b) the obligations of the Company under the Registration Rights Agreement and (c) the obligation to deliver to the Holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Section 4, the Holder may be entitled to receive. Nothing in this Section 4 shall be deemed to authorize the Company to enter into any transaction not otherwise permitted by the Loan Agreement. 12 5. NO DILUTION OR IMPAIRMENT. The Company shall not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) shall not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) shall take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all liens, security interests, encumbrances (in each of the foregoing cases, other than those imposed by the Holder), taxes, preemptive rights and charges on the exercise of the Warrants from time to time outstanding, and (c) shall not take any action which results in any adjustment of the Purchase Price if the total number of Common Shares (or Other Securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of Common Shares (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise. 6. ACCOUNTANTS' REPORT. In each case of any adjustment or readjustment in the number of Common Shares (or Other Securities) issuable upon the exercise of this Warrant or in the Purchase Price, the Company at its sole expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and cause independent certified public accountants of recognized national standing (which may be the regular auditors of the Company) selected by the Company to verify such computation (other than any computation of the Fair Value of property) and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Common Shares issued or sold or deemed to have been issued, (b) the number of Common Shares outstanding or deemed to be outstanding, and (c) the Purchase Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 3) on account thereof. The Company shall forthwith mail a copy of each such report to each holder of a Warrant. The Company shall also keep copies of all such reports at its principal office and shall cause the same to be available for inspection at such office during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by the holder thereof. 7. NOTICES OF CORPORATE ACTION. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any consolidation or merger involving the Company and any other Person, any transaction or series of transactions in which more than 50% 13 of the voting securities of the Company are transferred to another Person, or any transfer, sale or other disposition of all or substantially all the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall mail to each holder of a Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, sale, disposition, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Shares (or Other Securities) shall be entitled to exchange their Common Shares (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date therein specified. 8. REGISTRATION OF COMMON SHARES. If any Common Shares required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company shall, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be, PROVIDED, that the Company shall not be obligated to make any filing in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in order to effect such registration or approval unless the Company is already subject to service in such jurisdiction in the reasonable opinion of the Company's counsel. At any such time as Common Shares is listed on any national securities exchange, the Company shall, at its expense, obtain promptly and maintain the approval for listing on each such exchange, upon official notice of issuance, the Common Shares issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company shall also list on such national securities exchange, shall register under the Exchange Act and shall maintain such listing of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company. 9. RESTRICTIONS ON TRANSFER. 9.1. RESTRICTIVE LEGENDS. Except as otherwise permitted by this Section 9, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form: "THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE 14 STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT. Except as otherwise permitted by this Section 9, each certificate for Common Shares (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Shares (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE AMENDED AND RESTATED COMMON SHARE PURCHASE WARRANT ISSUED BY FRONTSTEP, INC., PURSUANT TO THE LOAN AND SECURITY AGREEMENT DATED AS OF JULY __, 2000 AMONG THE COMPANY, CERTAIN SUBSIDIARIES OF THE COMPANY, THE LENDERS PARTY THERETO AND FOOTHILL CAPITAL CORPORATION, AS ARRANGER AND ADMINISTRATIVE AGENT, AS AMENDED BY AMENDMENT NO. 1, DATED AS OF NOVEMBER _, 2001, A COMPLETE AND CORRECT COPY OF EACH OF WHICH IS AVAILABLE FOR INSPECTION AT THE COMPANY'S PRINCIPAL OFFICE AND WILL BE FURNISHED TO THE HOLDER OF SUCH SECURITIES UPON WRITTEN REQUEST AND WITHOUT CHARGE." 9.2. TRANSFER TO COMPLY WITH THE SECURITIES ACT. Restricted Securities may not be sold, assigned, pledged, hypothecated, encumbered or in any manner transferred or disposed of (a "Transfer"), in whole or in part, except in compliance with the provisions of the Securities Act and state securities or Blue Sky laws and the terms and conditions hereof. 9.3. NOTICE OF TRANSFER. Each Holder shall, prior to any Transfer of any Warrants, give written notice to the Company of such Holder's intention to Transfer. 9.4. TERMINATION OF RESTRICTIONS. The restrictions imposed by this Section 9 on the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities (a) when a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement and applicable state securities and blue sky laws, (b) when such securities are sold pursuant to Rule 144 (or any similar provision 15 then in force) under the Securities Act and applicable state securities and blue sky laws, or (c) when, in the reasonable opinion of both counsel for the Holder and counsel for the Company, such restrictions are no longer required or necessary in order to protect the Company against a violation of the Securities Act or applicable state securities and blue sky laws upon any sale or other disposition of such securities without registration thereunder. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the Holder shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing the applicable legends required by Section 9.1. 9.5. EXEMPT TRANSFERS. The restrictions on the transfer of this Warrant or the Warrant Shares set forth in this Section 9 shall not apply to any transfer made in compliance with applicable state and federal securities laws. 10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Holder that: (i) no event or transaction has occurred, or is deemed to have occurred pursuant to the terms of this Warrant, between the date of issuance of the Original Warrant through and including the date of issuance of this Warrant that, with or without the passage of time, would have resulted in a change in the Purchase Price or the number of Common Shares issuable upon exercise in full of the Warrant and (ii) the Company has not been and is not currently in breach or default under any terms of the Original Warrant or the Registration Rights Agreement. 11. RESERVATION OF STOCK, ETC. The Company shall at all times reserve and keep available, solely for issuance and delivery upon exercise of this Warrant, the number of Common Shares (or Other Securities) from time to time issuable upon exercise of this Warrant. All Common Shares (or Other Securities) issuable upon exercise of any Warrant shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and nonassessable, with no liability on the part of the holders thereof, and, in the case of all securities, shall be free from all liens, security interests, encumbrances (in each of the foregoing cases, other than those imposed by the Holder), taxes, preemptive rights and charges. The transfer agent for the Common Shares, and every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of any of the purchase rights represented by this Warrant, are hereby irrevocably authorized and directed at all times until the Expiration Date to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company shall keep copies of this Warrant on file with the Transfer Agent for the Common Shares and with every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by this Warrant. The Company shall supply such Transfer Agent with duly executed stock certificates for such purpose. All Warrant Certificates surrendered upon the exercise of the rights thereby evidenced shall be canceled, and such canceled Warrants shall constitute sufficient evidence of the number of shares of stock which have been issued upon the exercise of such Warrants. Subsequent to the Expiration Date, no shares of stock need be reserved in respect of any unexercised Warrant. 16 12. REGISTRATION AND TRANSFER OF WARRANTS, ETC. 12.1. WARRANT REGISTER; OWNERSHIP OF WARRANTS. Each Warrant issued by the Company shall be numbered and shall be registered in a warrant register (the "Warrant Register") as it is issued and transferred, which Warrant Register shall be maintained by the Company at its principal office or, at the Company's election and expense, by a Warrant Agent or the Transfer Agent. The Company shall be entitled to treat the registered Holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other Person, and shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes. Subject to Section 9, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. 12.2. TRANSFER OF WARRANTS. Subject to compliance with Section 9, if applicable, this Warrant and all rights hereunder are transferable in whole or in part, without charge to the Holder hereof, upon surrender of this Warrant with a properly executed Form of Assignment attached hereto as Exhibit B at the principal office of the Company. Upon any partial transfer, the Company shall at its expense issue and deliver to the Holder a new Warrant of like tenor, in the name of the Holder, which shall be exercisable for such number of Common Shares with respect to which rights under this Warrant were not so transferred. Prior to effecting any transfer of this Warrant or any part hereof, each prospective transferee shall represent in writing to the Company that: (i) such transferee is acquiring the Warrant hereunder for its own account, without a view to the distribution thereof; (ii) such transferee is an "accredited investor" within the meaning of Regulation D under the Securities Act and was not organized for the specific purpose of acquiring the Warrant or the Warrant Shares; (iii) such transferee has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the transferee and is able financially to bear the risks thereof; and (iv) if applicable, such transferee understands that (i) this Warrant and the Warrant Shares have not been registered under the Securities Act in reliance upon an exemption from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 506 promulgated under such act and under applicable state securities laws, (ii) this Warrant and the Warrant Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act and under applicable state securities laws or is exempt from such registration, (iii) this Warrant and the Warrant Shares will bear a legend to such effect, and (iv) the Company will make a notation on its transfer books to such effect. 17 12.3. REPLACEMENT OF WARRANTS. On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender of such Warrant to the Company at its principal office and cancellation thereof, the Company at its expense shall execute and deliver, in lieu thereof, a new Warrant of like tenor. 12.4. ADJUSTMENTS TO PURCHASE PRICE AND NUMBER OF SHARES. Notwithstanding any adjustment in the Purchase Price or in the number or kind of Common Shares purchasable upon exercise of this Warrant, any Warrant theretofore or thereafter issued may continue to express the same number and kind of Common Shares as are stated in this Warrant, as initially issued. 12.5. FRACTIONAL SHARES. Notwithstanding any adjustment pursuant to Section 3 in the number of Common Shares covered by this Warrant or any other provision of this Warrant, the Company shall not be required to issue fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company shall make payment to the Holder, at the time of exercise of this Warrant as herein provided, in an amount in cash equal to such fraction multiplied by the Current Market Price of a Common Share on the date of Warrant exercise. 13. REMEDIES; SPECIFIC PERFORMANCE. The Company stipulates that there would be no adequate remedy at law to the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant and accordingly, the Company agrees that, in addition to any other remedy to which the Holder may be entitled at law or in equity, the Holder shall be entitled to seek to compel specific performance of the obligations of the Company under this Warrant, without the posting of any bond, in accordance with the terms and conditions of this Warrant in any court of the United States or any State thereof having jurisdiction, and if any action should be brought in equity to enforce any of the provisions of this Warrant, the Company shall not raise the defense that there is an adequate remedy at law. Except as otherwise provided by law, a delay or omission by the Holder hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy shall be exclusive of any other remedy. All available remedies shall be cumulative. 14. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof any rights as a shareholder of the Company or as imposing any obligation on the Holder to purchase any securities or as imposing any liabilities on the Holder as a shareholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 15. NOTICES. All notices and other communications (and deliveries) provided for or permitted hereunder shall be made in writing by hand delivery, telecopier, any 18 nationally-recognized courier guaranteeing overnight delivery or first class registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Frontstep, Inc. 2800 Corporate Exchange Drive Columbus, Ohio 43231 Attn: Daniel P. Buettin Fax No. 614-895-2504 with copies to: Vorys, Sater Seymour & Pease LLP 52 East Gay Street Columbus, Ohio 43231 Attn: Ivery D. Foreman, Esq. Fax No. 614-464-6350 If to Holder: Foothill Capital Corporation 2450 Colorado Avenue Suite 3000 West Santa Monica, CA 90404 Attn: Business Finance Division Manager Fax No. 310-453-7443 with copies to: Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Attn: Frederic L. Ragucci, Esq. Fax No. (212) 593-5955 All such notices and communications (and deliveries) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when receipt is acknowledged, if telecopied; on the next Business Day, if timely delivered to a courier guaranteeing overnight delivery; and five days after being deposited in the mail, if sent first class or certified mail, return receipt requested, postage prepaid; PROVIDED, that the exercise of any Warrant shall be effective in the manner provided in Section 2. 16. AMENDMENTS. This Warrant and any term hereof may not be amended, modified, supplemented or terminated, and waivers or consents to departures from the provisions hereof may not be given, except by written instrument duly executed by the party against which enforcement of such amendment, modification, supplement, termination or consent to departure is sought. 17. DESCRIPTIVE HEADINGS, ETC. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Warrant otherwise requires: (1) words of any gender shall be deemed to include each other gender; (2) words using the singular or plural number shall also include the plural or singular number, respectively; (3) the words "hereof", "herein" and "hereunder" and words of similar import when used in this Warrant shall refer to 19 this Warrant as a whole and not to any particular provision of this Warrant, and Section and paragraph references are to the Sections and paragraphs of this Warrant unless otherwise specified; (4) the word "including" and words of similar import when used in this Warrant shall mean "including, without limitation," unless otherwise specified; (5) "or" is not exclusive; and (6) provisions apply to successive events and transactions. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of New York. 19. REGISTRATION RIGHTS AGREEMENT. The Common Shares (and Other Securities) issuable upon exercise of this Warrant (or upon conversion of any Common Shares issued upon such exercise) shall constitute Registrable Securities (as such term is defined in the Registration Rights Agreement). Each holder of this Warrant shall be entitled to all of the benefits afforded to a Holder of any such Registrable Securities under the Registration Rights Agreement and such Holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Registration Rights Agreement applicable to such holder as a Holder of such Registrable Securities. 20. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., New York City time, on July 17, 2006. 21. COSTS AND ATTORNEYS' FEES. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Warrant, the Company agrees and the Holder, by taking and holding this Warrant agrees, that the prevailing party shall recover from the non-prevailing party all of such prevailing party's costs and reasonable attorneys' fees incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom. 22. MOST FAVORED HOLDER. So long as the Loan Agreement or any extension thereof remains in effect or any Obligations thereunder remain unpaid, the Company agrees that if at any time or from time to time after July 17, 2001 and prior to the Expiration Date it enters into any agreement with, or issues Options or Convertible Securities to, any Person other than a Holder of this Warrant, which provides such Person with more favorable terms of the type set forth in Sections 3, 4, 5 and 6 of this Warrant, then the Company shall issue to the Holder a new Warrant in exchange for this Warrant, which shall contain such terms, effective from the date such agreement is consummated or Option or Convertible Security is issued until the Expiration Date. Notwithstanding the foregoing, no additional rights of any or all of the Holders by reason of this provision shall be created or triggered by the existence and/or exercise of any rights of the holders of the Company's presently outstanding preferred shares and/or warrants which arise under the Investors' Rights Agreement dated May 10, 2000 among the Company, Morgan Stanley Dean Witter Venture Partners IV, L.P. and the other investors identified on the signature pages thereto (the "Rights Agreement"), or which inure solely to the benefit of such investors in the Amended Articles of Incorporation, as amended, of the Company, the Regulations, as amended, of the Company and the terms and provisions of such outstanding warrants solely to the extent provided under such Rights Agreement, Articles, Regulations and warrants as of July 17, 2001. 20 23. LIMITATION ON NUMBER OF WARRANT SHARES. The Company shall not be obligated to issue Warrant Shares upon exercise of this Warrant only to the extent that the issuance of such Common Shares would cause the Company to exceed that number of Common Shares which the Company may issue upon exercise of this Warrant (the "Exchange Cap") without breaching the Company's obligations under the rules or regulations of the Commission, the NASDAQ Stock Market, Inc. or any other national securities exchange or automated quotation system that regulates the Company, except that such limitation shall not apply in the event that the Company (a) obtains the approval of its stockholders as required by the Principal Market (or any successor rule or regulation) for issuances of Common Shares in excess of such amount or (b) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the holder of this Warrant. Until such approval or written opinion is obtained, the holder of this Warrant shall not be issued, upon exercise of this Warrant, Warrant Shares in an amount greater than the number that may be issued without such approval or written opinion. The Company shall use its reasonable best efforts to obtain the required stockholder approval of such issuance at its next stockholders meeting after determining that it is subject to the Exchange Cap. The Company shall continue to comply with the shareholder approval requirements under the NASDAQ Stock Market, Inc. rules in connection with the issuance of Common Shares under this Warrant during the term of this Warrant even if the Common Shares are no longer listed on the NASDAQ automated quotation system. 24. REDEMPTION. In the event the Company is prohibited from issuing additional Warrant Shares as required under the adjustment provisions contained in Section 3 hereof, then, at any time prior to submitting the matter to shareholders of the Company for their approval, upon the written request of the Holder, the Company shall redeem for cash those Warrant Shares which can not be issued, at a price equal to the excess, if any, of the Market Price of the Common Shares above the Exercise Price of such Warrant Shares as of the date of the attempted exercise. 21 25. LIMITATION ON EXERCISE. Notwithstanding any provision to the contrary contained herein, in no event shall the Holder be entitled to exercise this Warrant, nor will the Company recognize such exercise, such that upon giving effect to such exercise, the aggregate number of Common Shares then beneficially owned by the Holder and its "affiliates" as defined in Rule 144 of the Securities Act would exceed 4.99% of the total issued and outstanding shares of the Common Shares following such exercise; PROVIDED, HOWEVER, that Holder may elect to waive this restriction upon not less than sixty-one (61) days prior written notice to the Company. For purposes of this Section, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. FRONTSTEP, INC. By: /s/ Daniel P. Buettin ---------------------------------- Title: Vice President, Chief Financial Officer and Secretary ---------------------------------- 22 EXHIBIT A to COMMON SHARES PURCHASE WARRANT FORM OF ELECTION TO PURCHASE SHARES The undersigned hereby irrevocably elects to exercise the Warrant to purchase ____ common shares, no par value ("Common Shares"), of FRONTSTEP, INC. and hereby makes payment of $________ therefor [or] makes payment therefor by application pursuant to Section 2.1(b)(ii) of the Warrant of $_______ aggregate principal amount and accrued interest thereon of the then-outstanding Obligations (as provided in Section 2.4(b) in the Loan Agreement) [or] makes payment by reduction pursuant to Section 2.1(b)(iii) of the Warrant of the number of Common Shares otherwise issuable to the Holder upon Warrant exercise by ___ shares [or] makes payment therefor by delivery of the following Common Shares Certificates of the Company (properly endorsed for transfer in blank) for cancellation by the Company pursuant to Section 2.1(b)(iv) of the Warrant, certificates of which are attached hereto for cancellation ______________________ [list certificates by number and amount]. The undersigned hereby requests that certificates for such shares be issued and delivered as follows: ISSUE TO: ----------------------------------------------------------------------- (NAME) - -------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE) - -------------------------------------------------------------------------------- (SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER) DELIVER TO: ---------------------------------------------------------------------- (NAME) - -------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE) If the number of Common Shares purchased (and/or reduced) hereby is less than the number of Common Shares covered by the Warrant, the undersigned requests that a new Warrant representing the number of Common Shares not so purchased (or reduced) be issued and delivered as follows: ISSUE TO: ----------------------------------------------------------------------- (NAME OF HOLDER - -------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE) DELIVER TO: --------------------------------------------------------------------- (NAME OF HOLDER) - ------------------------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE) Dated: _____________, 20__ [NAME OF HOLDER] By ---------------------------------- Name: Title: 23 EXHIBIT B to COMMON SHARES PURCHASE WARRANT FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase Common Shares, no par value ("Common Shares") of FRONTSTEP, INC. represented by the Warrant, with respect to the number of Common Shares set forth below: NAME OF ASSIGNEE ADDRESS NO. OF SHARES and does hereby irrevocably constitute and appoint ________ Attorney to make such transfer on the books of maintained for that purpose, with full power of substitution in the premises. Dated: _______________, 20__ NAME OF HOLDER By ----------------------------------- Name: Title: EX-10.A 4 l96355aexv10wa.txt EXHIBIT 10(A) Exhibit 10(a) LEASE THIS LEASE AGREEMENT (the "Lease") is made and entered into as of the latest date on which it is executed by either of the parties hereto (the "Lease Date"). 1. TERMS AND DEFINITIONS. The following capitalized terms shall be defined as follows: 1.1 LANDLORD: Corporate Exchange Buildings IV and V Limited Partnership, an Ohio limited partnership, 383 South Third Street, Columbus, Ohio 43215. 1.2 TENANT: Frontstep Solutions Group, Inc., 2800 Corporate Exchange Drive, Columbus, Ohio 43231 (the "Tenant"). 1.3 BUILDING: Corporate Exchange Building V, 2800 Corporate Exchange Drive, Columbus, Franklin County, Ohio. 1.4 PREMISES: Approximately 68,309 rentable square feet (the "Area") of office and storage space on the lower level, third and fourth floors of the Building as set forth in Section 2.1 and shown on the diagram attached as Exhibit A, consisting of approximately 66,118 rentable square feet of office space on the lower level, third and fourth floors (the "Office Area") and approximately 2,191 rentable square feet of storage space on the lower level (the "Storage Area"). 1.5 TERM: Two consecutive "Lease Years" (defined in Section 3). The "Commencement Date" shall be July 1, 2002 and the "Termination Date" shall be June 30, 2004. 1.6 TENANT IMPROVEMENT ALLOWANCE: Provided Tenant is not in default of its obligations pursuant to this Lease or under the Lease Agreement with 2600 Realty Corp. V (Landlord's predecessor) dated April 3, 1991 as amended, Landlord shall pay Tenant a Tenant Improvement Allowance in the amount of $100,000.00 upon receipt of the executed Commencement Agreement required by Section 3. 1.7 BASE RENT: $81,998.10 per month, payable as set forth in Section 4. 1.8 TENANT'S SHARE: Tenant's "Share" for Lease calculations shall be 51.38% and shall exclude the Storage Area. 1.9 OPERATING EXPENSES AND REAL PROPERTY TAXES: Operating Expenses and Real Property Taxes are included in Base Rent. 2. PREMISES AND BUILDING. 2.1 LEASED PREMISES. The Premises shall include all appurtenances and improvements at any time located thereon. The Area, Office Area and Storage Area set forth in Section 1.4 shall be used for all purposes of this Lease. 2.2 BUILDING. The Building shall include the Premises, all space leased to other tenants, all "Common Areas" (defined in Section 2.4), easements, rights of way and access, and all public, non-public or quasi-public areas. The real estate on which the Building and parking lot are located is referred to as the "Land". Landlord retains the right at any time and from time to time to change the name and/or street address of the Building as Landlord deems advisable, and Landlord shall not incur any liability to Tenant as a consequence thereof. 2.3 PARKING. Provided Tenant is not in default of its Lease obligations, Tenant shall have a license to use, without additional cost, (i) any unassigned parking provided on the exterior parking lots adjacent to the Building; and (ii) sixteen parking spaces in the underground parking garage provided for the Building. One garage parking space will be designated for Tenant's exclusive use (the "Designated Space") and fifteen garage spaces will be available in common with other tenants on a first-come-first-served basis. Landlord will provide sixteen key cards to allow Page 1 entry into the underground parking area. Tenant shall pay Landlord's actual costs for replacing lost or damaged cards. Tenant shall not use more than sixteen garage spaces. Landlord is not responsible for policing or enforcing the exclusivity of any parking spaces, but will use reasonable efforts to effect exclusivity for Tenant's Designated Space. The location of any non-exclusive parking space may or may not be assigned and the location of assigned parking spaces, including Tenant's Designated Space, may be reassigned from time to time in Landlord's sole discretion. Use of the underground parking spaces and all other parking areas shall be subject to Landlord's reasonable rules and regulations. 2.4 COMMON AREAS. "Common Area(s)" shall include both interior and exterior Common Areas, and shall mean all areas and improvements located on the Land or in the Building as provided from time to time by Landlord, subject to Landlord's control and to reasonable rules and regulations prescribed from time to time by Landlord, for the general use, in common, of tenants, their officers, agents, employees, and customers, including, but not limited to, parking areas, walkways, concourses, approaches, elevators, ground floor lobby area, exits, entrances, stairways, sidewalks, service areas, garbage and refuse disposal facilities, maintenance and operation facilities, signs, security, docks and loading areas, and equipment and services at or on the Land or Building. Landlord may, in its sole discretion, increase, decrease, or change the interior or exterior Common Areas from time to time and may close all or part of the Common Areas if necessary to prevent dedication thereof or the accrual of rights to the public or any person. 3. TERM. The Term of this Lease shall begin on the Commencement Date and shall expire on the Termination Date without further notice from Landlord, unless sooner terminated as provided herein. A "Lease Year" shall be twelve consecutive calendar months starting on the Commencement Date; thereafter, a Lease Year shall consist of successive periods of twelve calendar months. Within ten business days after the Commencement Date, Tenant shall deliver to Landlord an executed Commencement Agreement in the form attached hereto as Exhibit B. 4. RENT. 4.1 BASE RENT. Tenant shall pay Landlord "Base Rent" for the Premises in advance in twelve equal monthly installments due and payable on the first day of each calendar month, without set off or demand, beginning on the Commencement Date and continuing each calendar month until the expiration of the Term in the amount set forth in Section 1.7. 4.2 OPERATING EXPENSES. Tenant's Share of the Operating Expenses is included in the Base Rent. 4.2.1 DEFINITIONS. "Operating Expenses" shall mean all expenses, costs and disbursements of every kind and nature relating to or incurred or paid in connection with the ownership, management, service, repair, improvement and operation of the Building and Land, including, but not limited to, the following: (i) wages, salaries, taxes, insurance and benefits of all persons directly engaged in, or properly allocable to, management, operation, maintenance, security or access control for the Building or Land; (ii) supplies, tools, equipment and materials used in the management, operation and maintenance of the Building or Land; (iii) all utilities for the Common Areas, including, but not limited to, water and power for heating, lighting, air conditioning and ventilation; (iv) trash removal services; (v) all management, maintenance and service agreements for the Building and Land and the equipment therein, including, but not limited to, property management, security service, Page 2 window cleaning, elevator maintenance and janitorial service; (vi) repairs, replacements, repainting, decorating and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by tenants or other third parties); (vii) amortization of "Designated Capital Investment Items" (defined below); (viii) all insurance obtained by Landlord for the Building and Land, which may include, without limitation, fire and extended coverage insurance, rental insurance and liability insurance applicable to the Building and Land and to Landlord's personal property used in connection therewith; (ix) license, permit and inspection fees; (x) snow and ice removal; (xi) paving, striping and repair of parking areas; (xii) interior and exterior landscaping services; (xiii) reasonable legal fees of outside or special counsel retained by Landlord in connection with proceedings to reduce real estate taxes, labor relations or other matters of general benefit to tenants in the Building; and (xiv) an administrative charge equal to 10% of all other Operating Expenses. Landlord, or its affiliate, may perform services for the Building and Land, provided that the charges are commercially reasonable compared to then current charges for similar services in comparable buildings in the Columbus area. "Operating Expenses" shall exclude the following: (1) payments of principal and interest on mortgages, loans or ground leases; (2) leasing commissions; (3) costs of preparing, improving or altering any space in preparation for occupancy of any new or renewal tenant; (4) depreciation or amortization of the Building, or any equipment or other property; (5) any and all collection costs, including legal fees and/or bad debt losses or reserves; (6) any costs or expenses arising from Landlord's violation of any laws or ordinances or governmental rules, regulations or orders with which it is Landlord's obligation to comply pursuant to this Lease; and (7) costs incurred by Landlord to the extent that Landlord is reimbursed by insurance proceeds, governmental agencies or entities, or any tenant or other person. "Designated Capital Investment Items" shall mean capital investment items which are installed to reduce or avoid increases in Operating Expenses, are required by governmental authority, or improve the operating efficiency of the Building or Land. Costs of Designated Capital Investment Items shall be amortized over the item's useful life as reasonably determined by Landlord. 4.2.2 COMPUTATION AND PAYMENT. If Tenant's Share of the Operating Expenses is not included in Base Rent, then Tenant's Share of the Operating Expenses shall be payable on the first day of each month, in advance, in an amount equal to 1/12th of the initially estimated annual rate per square foot. Landlord may adjust the estimated monthly charge at the end of each calendar quarter based on Landlord's reasonably anticipated costs for the next quarter. Within 120 days after the end of each calendar year during the Term and any renewals or extensions thereof, Landlord shall furnish Tenant with a written statement of the actual Operating Expenses for that calendar year. If Tenant's Share of the actual Operating Expenses for any year of occupancy exceeds Tenant's payments for that year, Tenant shall pay Landlord the deficiency within ten days after receipt of written notice of the deficiency. If Tenant's payments for any year exceed Tenant's Share, the excess shall be applied to future payments or refunded at the end of the Term if no renewal options exist or have been exercised and if Tenant surrenders the Premises without default. Operating Expenses shall be computed annually on a calendar year basis using the accrual method. Tenant's Share of Operating Expenses for a partial first and/or last Lease Year shall be pro-rated based on the number of days of the applicable Lease Year falling within the calendar year. Page 3 4.2.3 AUDIT. Provided there is no Event of Default continuing under this Lease and provided that Tenant strictly complies with the provisions of this Section 4.2.3, Tenant shall have the right, during normal business hours and upon reasonable advance notice to Landlord, to reasonably review, at its expense, supporting data for any portion of Landlord's annual statement of Operating Expenses; provided, however, that the audit shall not be conducted by a third-party contingency auditor. The audit shall be conducted at Landlord's offices located at 383 South Third Street, Columbus, Ohio 43215. Tenant must notify Landlord and commence its audit within sixty days after receipt of Landlord's statement of reconciled Operating Expenses for the calendar year it seeks to audit, or Tenant's right to audit shall be waived as to that calendar year. Tenant must have paid all outstanding balances required by Landlord's statement of reconciled Operating Expenses before requesting the review and must complete its audit within ninety days. Tenant agrees that all documents and data reviewed hereunder are confidential information of Landlord and shall not be disclosed to anyone other than those persons performing the review and principals of Tenant. Any improper disclosure is a material breach of the Lease. Any discrepancies which Tenant's auditor proves by clear and convincing evidence shall be paid by Landlord to Tenant, or by Tenant to Landlord, within thirty days after proof is made. This provision shall survive the termination of this Lease for sixty days. 4.3 REAL PROPERTY TAXES. "Real Property Taxes" means all real property taxes and general and special assessments levied against the Land, Premises, Building and all improvements thereon. Tenant's Share of the Real Property Taxes is included in Base Rent. 4.4 PAYMENT OF RENT. Tenant shall pay its Share of Operating Expenses and Real Property Taxes together with Base Rent, in twelve equal installments, in advance, on the first day of each calendar month during the Term and any extensions and renewals thereof. Tenant's obligation to pay Base Rent, its Share of Operating Expenses and Real Property Taxes, and all other charges due and payable hereunder (collectively, "Rent") shall be an independent covenant, separate from any covenants of Landlord in this Lease, and Rent shall be paid without set off, recoupment or demand, and without any counterclaim or abatement. Installments of Base Rent, Operating Expenses and Real Property Taxes for partial calendar month(s) shall be pro-rated and the pro-rated installments shall be paid in advance. 4.5 LATE CHARGE. Delinquent installments or payments of Rent shall be subject to a late charge equal to 5% of the delinquent amount. The late charge is intended to compensate Landlord for loss and expense occasioned by the delinquency in payment. The provisions herein for a late charge shall not be construed to extend the date for payment of any installment of Rent, to relieve Tenant of its obligation to pay Rent when due, or as a waiver or cure of any default by Tenant. In addition, all Rent shall bear interest from the date when due until paid at the lesser of eighteen percent per year or the maximum rate of interest allowed by law. Page 4 5. USE OF PREMISES. 5.1 PERMITTED USE. The Tenant named in Section 1.2 of this Lease shall use and occupy the Premises solely for the purpose of providing business software and services for manufacturing, distribution and other companies and related e-business consulting services ("Tenant's Use"). The Premises shall not be used or occupied for any other purpose or business or by any other occupant, nor shall any activity inconsistent with the permitted use be conducted without Landlord's prior written consent. All uses must be legal and comply with all applicable governmental and quasi-governmental rules, regulations, laws, codes, and ordinances. 5.2 GENERAL USE AND OCCUPANCY OBLIGATIONS. Tenant shall use, occupy and keep the Premises in a careful, safe, clean and proper manner and condition, and shall comply with all local ordinances and the lawful direction of proper public officers. Tenant shall at its own expense: (i) conduct its business in all respects in a dignified manner in accordance with the high standards of operation of a first class building; (ii) keep all mechanical and electrical apparatus in good repair, free of vibration and noise which may be transmitted beyond the Premises; (iii) keep any garbage, trash, rubbish or refuse in appropriate containers within the interior of the Premises until removed; (iv) Tenant may use any trash dumpsters provided by Landlord for tenants in the Building, provided that if Tenant's use exceeds the amount Landlord deems reasonable, Tenant shall pay additional charges imposed by Landlord upon presentation of an invoice therefor. Tenant shall not permit or commit waste on the Premises. 5.3 GENERAL USE AND OCCUPANCY PROHIBITIONS. Tenant shall not without Landlord's prior written consent: (i) place or maintain any merchandise, trash, refuse or other articles in any vestibule or entry of the Premises or the Building, on the foot walks, corridors, sidewalks or parking areas adjacent thereto, or elsewhere on the exterior of the Premises or the Building, or obstruct any driveway, foot walk, aisle or stairway; (ii) use or permit the use of any audible, moving or flashing advertising medium which is in any manner audible or visible outside the Premises; (iii) cause or permit odors to emanate or be dispersed from the Premises; (iv) solicit business in the Common Areas; (v) park delivery trucks or other vehicles, or load or unload merchandise, equipment or personal property in a way that interferes other tenants or with the use of any driveway, foot walk, aisle, stairway or other common facility; (vi) block or impede access to the Building; (vii) receive or ship articles of any kind except at times which Landlord may establish, in its discretion; (viii) use foot walks or other Common Areas for the sale or display of any merchandise; (ix) conduct or permit to be conducted any wholesale, auction, fire, going out of business, bankruptcy, or other similar sale in or connected with the Premises; (x) suffer or commit waste; (xi) use or permit the use of any portion of the Premises for any unlawful purposes; or (xii) store merchandise, equipment or other personal property outside the Premises. 5.4 COMPLIANCE WITH LAWS. Tenant, at its own expense, shall comply with the present and future requirements of law and with all present and future ordinances, statutes, regulations, directives, orders, or other lawful enactments or pronouncements of any federal, state, municipal or other lawful authority applicable to the Premises and of any insurance company insuring the Premises or insuring Landlord against liability for accident or injury in or upon the Premises. Tenant shall obtain and maintain in effect all permits and licenses necessary for the operation of Tenant's business and shall pay all licenses, fees and taxes arising out of its business or its use and occupancy of the Premises. Tenant shall make all repairs, alterations, additions or replacements to the Premises required by any present or future law, statute, ordinance, order or regulation of any governmental authority. Specifically, and without limiting the generality of the foregoing, Page 5 after the Premises are delivered to Tenant, Tenant shall be wholly responsible for any accommodations or alterations that are required by any applicable governmental codes, ordinances, rules, regulations and laws to be made to the Premises to accommodate disabled employees, licensees and invitees of Tenant, including, without limitation, compliance with the Americans with Disabilities Act of 1990 ("ADA") . Notwithstanding the foregoing, Tenant shall not be responsible for structural alterations to the Premises required by this Section, unless required because of Tenant's particular use of the Premises. 6. QUIET ENJOYMENT. If and so long as Tenant pays the Rent reserved hereunder and observes and performs all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant may peaceably and quietly have, hold and enjoy possession of the Premises during the Term without hindrance by Landlord or any party lawfully claiming through Landlord, subject to all of the provisions of this Lease. 7. TENANT'S RESPONSIBILITY REGARDING HAZARDOUS SUBSTANCES. 7.1 HAZARDOUS SUBSTANCES. The term "Hazardous Substances" as used in this Lease, shall include, without limitation, flammables, explosives, radioactive materials, asbestos, polychlorinated biphenyls, chemicals known to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances or related materials, petroleum and petroleum products, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority. 7.2 TENANT'S RESTRICTIONS. Neither Tenant, nor any of its employees, agents, contractors, representatives, licensees, customers or invitees shall: (i) violate any federal, state, or local law, ordinance, or regulation now or hereafter enacted, related to environmental conditions on, under, or about the Premises, or arising from Tenant's use or occupancy of the Premises, including, but not limited to, soil and ground water conditions; or (ii) cause or permit the use, generation, release, manufacture, refining, production, processing, storage, or disposal of any Hazardous Substance on, under, or about the Premises, or the transportation to or from the Premises of any Hazardous Substance. 7.3 ENVIRONMENTAL CLEAN-UP. Tenant shall, at Tenant's own expense, comply with all laws regulating the use, generation, storage, transportation, or disposal of Hazardous Substances ("Laws"). Tenant shall, at Tenant's own expense, make all submissions to, provide all information required by, and comply with all requirements of all governmental authorities (the "Authorities") under the Laws. Should any Authority or any third party demand that a clean-up plan be prepared and/or that a clean-up be undertaken because of any deposit, spill, discharge, and/or other release of Hazardous Substances that occurs during the Term (as extended), of this Lease, originating at or from the Premises, and/or which arises at any time from Tenant's use or occupancy of the Premises, then Tenant shall, at Tenant's own expense, prepare and submit the required plans and all related bonds and other financial assurances; and Tenant shall carry out all clean-up plans. Tenant shall promptly provide all information regarding the use, generation, storage, transportation, or disposal of Hazardous Substances that is reasonably requested by Landlord. If Tenant fails to fulfill any duty imposed under this Section 7.3 within a reasonable time, Landlord may but shall not be required to do so; and Tenant shall cooperate with Landlord in order to prepare all documents Landlord deems necessary or appropriate to determine the applicability of the Laws to the Premises and Tenant's use thereof, and for compliance therewith, Tenant shall execute all documents promptly upon Landlord's request and Tenant shall pay, as additional Rent, all of Landlord's costs (including reasonable attorneys' and consultants' fees) in Page 6 fulfilling Tenant's obligations hereunder. No such action by Landlord and no attempt made by Landlord to mitigate damages under any Law shall constitute a waiver of any of Tenant's obligations under this Section 7. 7.4 TENANT'S INDEMNITY AS TO ENVIRONMENTAL MATTERS. Tenant shall indemnify, defend, and hold harmless Landlord, the property manager, and their respective officers, directors, beneficiaries, shareholders, partners, agents, and employees from all fines, suits, procedures, claims, and actions of every kind, and all costs associated therewith (including reasonable attorneys' and consultants' fees) arising out of or in any way connected with a breach of its covenants set forth in Sections 7.2 and 7.3. 7.5 LANDLORD'S WARRANTY AND INDEMNITY. Landlord warrants to Tenant, to the best of its actual knowledge without any duty of inquiry, that as of the Commencement Date the Premises and Building do not contain any Hazardous Substances, including asbestos. Landlord agrees to indemnify, defend and hold Tenant harmless from a breach of the foregoing warranty and all related fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including reasonable attorneys' and consultants' fees). 7.6 SURVIVAL. Tenant's obligations and liabilities under this Section 7 shall survive the expiration of this Lease. 8. LEASEHOLD ALTERATIONS. 8.1 TENANT IMPROVEMENTS. By occupying the Premises, Tenant accepts the Premises in their "AS IS-WHERE IS" condition and acknowledges that they fully comply with Landlord's covenants and obligations hereunder. Neither Landlord nor its agents or employees make any warranty or representation, express or implied, regarding the condition of the Premises or its fitness for any particular use or purpose. 8.2 SUBSEQUENT ALTERATIONS. Tenant shall not make, or allow to be made, any alterations, additions or improvements to the Premises without Landlord's prior written consent. Tenant shall submit a statement of all planned alterations, together with drawings, plans, specifications, and description of materials before starting any work. Neither Landlord's review and approval of Tenant's plans and specifications, nor its observation or supervision of the construction or installation thereof, shall constitute any warranty or agreement by Landlord that they comply with applicable codes, ordinances, rules, regulations and/or laws ("Codes"). Tenant's alterations shall be approved by all appropriate governmental or quasi-governmental agencies, and Tenant shall obtain all applicable permits and authorizations before commencing work. After obtaining Landlord's consent, and prior to commencing work, Tenant shall deliver to Landlord copies of all required building permits, an executed construction contract, an executed Notice of Commencement pursuant to Ohio Revised Code Section 1311 et seq., and, if not previously provided, property damage and liability insurance policies naming Landlord as an additional insured. All changes and alterations shall be made at Tenant's cost in strict compliance with the approved plans and specifications, shall be performed in a good and workmanlike manner, shall not affect any Building systems or any structural parts of the Building, and shall not interfere with the quiet enjoyment of other tenants. Landlord shall have the right to inspect the alterations during and after construction. Tenant shall immediately correct any alterations which do not comply with Codes, do not conform to permits or to the approved plans and specifications, or adversely affect the Building structure or any Building systems ("Non-Conforming Alterations"). Page 7 Tenant shall pay Landlord $150.00 per day for each day after the 5th day following Landlord's written notice that the Non-Conforming Alterations remain uncorrected. All alterations, additions, fixtures, or improvements made or installed by either party (except Tenant's moveable trade fixtures, personal property, furniture and signs), shall become a part of the Premises when made and shall remain upon and be surrendered with the Premises at the termination of this Lease for any reason; except, however, if Landlord requires that Tenant remove any specified alterations, additions, improvements or fixtures, then Tenant, at its expense shall remove the designated items and restore the Premises to their original condition. 9. MECHANICS' LIENS. Tenant shall keep the Premises, the Building, and the Land free and clear of all mechanics' and/or materialman's liens resulting from work done by or for Tenant. If any mechanics' or materialman's liens are filed against the Premises or the Building as a result of or purporting to be the result of any work for or act of Tenant, Tenant shall discharge the lien within thirty days of notice thereof by payment, or by notice and bond meeting the requirements of the Ohio Revised Code. If Tenant does not timely discharge the lien, Landlord may pay the lien for Tenant's account without inquiring into its validity and treat the amount of the payment as additional Rent immediately due from Tenant; and/or treat Tenant's failure to discharge the lien as a default. Nothing in this Lease shall be construed as constituting the express or implied consent or request of Landlord to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials, fuel, machinery or supplies or any specific improvements, alterations of or repair to the Building or the Premises or any improvement thereto, nor as giving Tenant any right, power or authority to act as Landlord's agent to contract for, or to permit the performance or furnishing of any labor, materials, fuel, machinery or supplies on any basis which would entitle any person to assert and/or perfect a mechanic's lien or other claim encumbering the Building, the Premises or Landlord's interests in the Premises. Tenant shall post and maintain at the Premises the executed and recorded Notice of Commencement, as required by the Ohio Revised Code, Section 1311 et seq. 10. SIGNS. Subject to the repair, removal and governmental approval requirements of this Section, Tenant shall have the right to maintain the existing signs described on Exhibit C. Tenant shall not place any sign, banner or advertising display of any kind on the exterior of the Premises, or any part of the interior visible from the exterior, without (i) Landlord's prior written approval and (ii) obtaining all required governmental approvals. Disapproval based on color, size, sign material, method of mounting, support or attachment, location or non-conformance to style or architectural integrity of the Building is deemed reasonable. Tenant shall maintain all signs, banners, decorations, lettering or advertising displays permitted hereunder in good condition and repair at all times and shall remove them and restore the Building to its previous condition at the termination of this Lease, unless otherwise directed by Landlord. 11. LANDLORD SERVICES. Provided that no Event of Default has occurred and is continuing, and subject to the provisions of Section 11.7, Landlord will furnish the utilities and services described below. All normal charges for utilities and services, including water, heating, ventilation, air-conditioning, Building electricity, janitorial services, security, and maintenance are included in Operating Expenses. 11.1 HEATING AND AIR-CONDITIONING. Landlord shall provide heating, ventilation, and air-conditioning ("HVAC") necessary, in Landlord's estimation, for comfortable occupancy of the Premises under normal business conditions on Monday through Friday from 8:00 A.M. to 6:00 Page 8 P.M., and Saturday from 8:00 A.M. to 1:00 P.M., holidays excepted ("Building Hours"). Landlord shall not be liable to Tenant if HVAC services are interrupted or terminated because of repairs or alterations, local, county, state, and federal laws, regulations and curtailments, or causes beyond Landlord's reasonable control. Landlord will take reasonable steps to restore the interrupted services. Tenant shall cooperate with Landlord and abide by all regulations and requirements which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC systems. 11.2 ELECTRICITY. Landlord shall provide electricity for a reasonable level of illumination using 2x4 florescent light fixtures or other equipment providing substantially similar illumination. Landlord is not required to provide electricity for reproduction equipment other than machinery requiring standard 110 volt power, for computers or other equipment except standard personal computers, electric typewriters and desk adding machines, nor for any equipment requiring greater voltage than the lighting circuits standard in the Building. Any installation of nonstandard office equipment must have Landlord's prior approval, which will not be unreasonably withheld, conditioned or delayed, and shall be subject to special charges and regulations. Landlord shall provide all light bulbs, light globes, florescent tubes, ballasts and/or starters used in the Premises and maintain the florescent lighting equipment located in the Premises. The expense of lighting supplies and maintenance is included in Operating Expenses. 11.3 ELEVATOR SERVICE. Landlord shall provide public passenger elevator service during Building Hours, and shall have one elevator subject to call at times when normal passenger service is not furnished. 11.4 JANITORIAL SERVICES. Landlord shall provide janitorial service for and maintain the Common Areas of the Building. Landlord shall also provide the following janitorial services for the Premises: trash removal and ordinary dusting and vacuuming according to building standards. Janitorial services shall not include shampooing carpets or rugs, cleaning draperies or furniture, or other unusual services. 11.5 WATER. Landlord shall provide water for drinking, lavatory, and toilet purposes in the Common Areas drawn through fixtures installed by Landlord, and to the Premises, if applicable. 11.6 ADDITIONAL SERVICES. If Tenant requires more cleaning services, HVAC, electricity, elevator or other services than Landlord reasonably determines is customary for similar office space in the Columbus area or if Tenant requires utility or other services outside Building Hours, Landlord may, upon advance notice to Tenant, furnish the additional services and Tenant shall pay Landlord upon demand an expense charge, determined by Landlord, for the costs incurred in providing the additional service. Payment for these additional services shall be made by Tenant directly to Landlord, and shall not be included in Operating Expenses. If Tenant requires new or additional electrical facilities or other utility installations, such as wiring, plumbing, conduit and/or mains, Tenant shall submit detailed plans and specifications to Landlord for written approval. Upon receipt of Landlord's written approval, Tenant shall make all arrangements for and pay all the costs of the additional services, including construction, meters, and connections, in conformance with Sections 8.2 and 9. The additional utilities shall be metered and billed to Tenant. 11.7 PAYMENT. Tenant shall pay for any additional services billed directly to Tenant within ten days after the date of Landlord's invoice. Failure to pay additional service charges or any Rent Page 9 when due, shall entitle Landlord, upon not less than five days' written notice, to stop furnishing the additional services. Discontinuing services pursuant to this Section 11.7 shall be cumulative with Landlord's other remedies, and shall not be deemed an eviction or disturbance of Tenant's use and occupancy of the Premises, render Landlord liable to Tenant for damages, relieve Tenant from the performance of Tenant's covenants and agreements hereunder, or prejudice Landlord's exercise of any other remedies available to it at law or in equity. 11.8 LIABILITY FOR SERVICE. Landlord shall not be liable for damages, by abatement of rent or otherwise, for failure to furnish or delay in furnishing any service, or for any diminution in the quality or quantity thereof, when the failure or delay or diminution is occasioned, in whole or in part, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building after reasonable effort so to do, by any accident or casualty, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and failures, delays and/or diminution shall not be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from the obligation to pay Rent or perform any of its other obligations under this Lease. Landlord also reserves the right temporarily to suspend, delay or discontinue furnishing any of the services to be provided by Landlord under this Lease, without abatement or diminution in Rent and without any liability to Tenant as a result thereof, for inspections, cleaning, repairs, replacements, alterations, improvements or renewals which Landlord deems necessary or desirable, provided that Landlord shall make reasonable efforts to minimize interference with Tenant's normal business operations and shall, to the extent reasonably possible under the circumstance, give Tenant advance notice of any proposed suspension of services. If any utility service furnished by Landlord is interrupted, delayed or terminated because of repairs, alterations, or any cause beyond Landlord's reasonable control, Landlord will take all reasonable steps to restore the interrupted utility or service promptly. 12. REPAIRS. Tenant shall keep the Premises at all times in a clean, neat and sanitary condition, as required by Section 5.2 of this Lease. Landlord will make all repairs necessary to maintain the structure, plumbing, HVAC, and electrical and mechanical systems serving the Building and, if installed by Landlord, the Premises provided, as to the Premises, Tenant gives written notice of the necessity for repair. All repairs by Landlord shall be Operating Expenses. Notwithstanding the foregoing, if any damage to the Premises or Building is caused by the negligence or willful act of Tenant, its concessionaires, officers, agents, invitees, employees, licensees or contractors, Landlord shall perform the repairs and Tenant shall pay the costs thereof plus Landlord's supervisory fee of 15% of the cost thereof. All other maintenance, alterations and repairs to the Premises or to any plumbing, sewer lines, electrical or other mechanical installation placed in the Premises by Tenant, or to any of Tenant's improvements or fixtures, are solely Tenant's responsibility; provided, however, if the repairs affect the Building's structural components or the major mechanical, electrical, plumbing, HVAC or other systems servicing the Building, Landlord shall perform the repairs on behalf of Tenant and Tenant shall pay Landlord on demand for the cost thereof plus Landlord's 15% supervisory fee. If Tenant refuses or neglects to make and/or diligently complete any repairs which are its obligation to make hereunder after written notice from Landlord of the need therefor, Landlord may, but shall not be obligated to, make the repairs at Tenant's expense. The expense of the repairs plus Landlord's 15% supervisory fee shall be collectible on demand as additional Rent. 13. ACCESS TO PREMISES. Landlord, its employees and agents shall have the right to enter the Premises at all reasonable times and upon reasonable notice for the purpose of examining or inspecting the same; showing the same to mortgagees or to prospective purchasers, mortgages or Page 10 tenants of the Building; for performing all janitorial and custodial services and providing all utilities required by this Lease; for inspection by public officials for health, building code, or fire and safety purposes; and/or for making any replacements, alterations, repairs, improvements or additions to the Premises or the Building that Landlord deems necessary or desirable. If Tenant's representatives are not be present to open and permit entry into the Premises at any time when entry by Landlord is necessary or permitted hereunder, Landlord may enter by means of a master key (or forcibly in the event of an emergency) without liability to Tenant and without the entry constituting an eviction of Tenant or termination of this Lease. Landlord shall not be liable for any expense, loss or damage resulting from any emergency entry. 14. DAMAGE FROM CERTAIN CAUSES. Landlord shall not be liable for any damage done or caused by the electrical, HVAC, plumbing, sewer, or sprinkler systems in the Premises or the Building, nor for damage from water, snow or ice coming through roofs, ceilings, walls, windows or otherwise, nor for the willful or negligent acts of other tenants, or their agents, employees, representatives, contractors, licensees or invitees. Landlord shall not be liable for damage occasioned by the construction of the Premises and/or Building or by failure to repair, except that Landlord shall be liable to Tenant for actual (but not consequential) damages suffered by Tenant if Landlord fails to perform a repair which Landlord is obligated to perform under this Lease within a reasonable time after Landlord has actual notice of the need for the repair. Landlord shall not at any time be liable for any damage to Tenant or to Tenant's materials, personal property, fixtures, furniture, furnishings, equipment, ceiling, floor and wall coverings, stock or merchandise regardless of the cause thereof unless the damage is caused solely by the gross negligence or willful misconduct of Landlord. In no event shall Landlord be obligated under any provision of this Lease to repair any damage caused by any act, omission or negligence of Tenant or its employees, agents, invitees, licensees, sublessees, or contractors. 15. TRANSFER, ASSIGNMENT AND SUBLETTING. 15.1 BY TENANT. Tenant shall not assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld, provided that Landlord's determination that (i) the proposed assignee or subtenant would adversely affect the Building, other tenants in the Building, or the image or reputation of the Building, (ii) the proposed assignee's or subtenant's business would cause a material increase in Operating Expenses, (iii) the financial condition of the proposed assignee or subtenant are unacceptable to Landlord, or (iv) the proposed tenant's business would be disruptive or would violate an exclusive use provision contained in any other lease in the Building, (v) the proposed tenant is an existing tenant or occupant of Corporate Exchange Buildings IV or V or a person or entity with whom Landlord is negotiating or has negotiated for the lease of space in Corporate Exchange Buildings IV or V, shall be a reasonable basis for withholding consent. No assignment shall be effective, whether or not Landlord's consent is required, unless and until Landlord receives an executed copy of the assignment, in recordable form, under which the assignee assumes this Lease and agrees to perform and observe Tenant's covenants and conditions. Tenant may assign this Lease or sublet any portion of the Premises without Landlord's consent to any of the following: an affiliate or subsidiary of Tenant; a corporation resulting from the merger or consolidation of Tenant; or a person or entity which acquires Tenant or substantially all the assets of Tenant's business, provided that the acquiring entity's net worth is greater than Tenant's net worth on the Commencement Date. For the purpose of this Section 15, an "affiliate" shall Page 11 mean an entity which directly or indirectly controls, is controlled by, or is under common control with Tenant; "control" shall mean direct or indirect power to direct the management and policies of the corporation through ownership of voting securities, by contract or otherwise; and "subsidiary" shall mean an entity for which Tenant owns more than 50% of the outstanding stock. There shall not be more than one subletting during the Term, or any extensions or renewals, without Landlord's consent which may be withheld for any reason. Tenant shall pay Landlord as Rent, the entire amount of any and all rents, additional rents, additional charges or other consideration payable under or in connection with any approved sublease, which exceeds the Rent accruing under this Lease, including all sums paid for the sale or rental of Tenant's fixtures, leasehold equipment, furniture or other personal property. The sums due hereunder shall be Rent, due and payable at the time they are payable by the subtenant under the sublease. Regardless of Landlord's consent, no subletting or assignment shall release Tenant from Tenant's obligations or alter the primary liability of Tenant to pay Rent and to perform all other obligations to be performed by Tenant hereunder. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against any assignee or successor. Landlord may consent to subsequent assignment or subletting of this Lease or amendments or modifications to this Lease with assignees of Tenant without notifying Tenant or any successor of Tenant, and without obtaining its or their consent thereto and such action shall not relieve Tenant of liability under this Lease. Tenant shall reimburse Landlord for Landlord's costs, including reasonable attorney's fees, incurred in connection with processing any proposed assignment or sublease hereunder. 15.2 BY LANDLORD. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building, and Tenant shall look to the purchaser, assignee or transferee of Landlord's interest in this Lease for the performance of Landlord's obligations hereunder, and Landlord shall from and after the conveyance, assignment or transfer be relieved and discharged from any and all liabilities and obligations under this Lease. Tenant shall attorn to any the purchaser, assignee or transferee. 16. SURRENDER OF PREMISES. At the end of the Term through expiration, early termination, or otherwise, Tenant shall surrender the Premises to Landlord, together with all alterations, additions and improvements thereto, in as good condition, broom clean and free of Tenant's property and any subtenancies, as it was on the Commencement Date, ordinary wear and tear excepted. If Tenant is not in default, Tenant shall have the right at the end of the Term to remove any equipment, furniture, inventory or other personal property placed in the Premises by Tenant provided that removal does not cause structural damage. If requested by Landlord as provided in Section 8.2, Tenant shall remove any alterations, additions, improvements or installations designated by Landlord. Within seven calendar days after the Termination Date, Tenant at its cost shall repair any damage to the Premises, Building and/or Land caused by the removal of Tenant's property and shall restore the Premises, Building and/or Land to the condition in which they were prior to the installation of the items removed, ordinary wear and tear excepted. 17. INDEMNIFICATION AND LIABILITY. Tenant shall indemnify, and save Landlord harmless and, at Landlord's option, defend Landlord (with counsel acceptable to Landlord) from and against any and all costs, expenses (including attorney's fees), liabilities, losses, damages (actual and/or Page 12 punitive), suits, penalties, actions, fines, claims, judgments or demands of any kind asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with the Premises or Tenant's use thereof, and Landlord shall not be liable to Tenant on account of: (i) Tenant's failure to perform any of the agreements, covenants, terms or conditions of this Lease required to be performed by Tenant, (ii) any failure by Tenant to comply with any statutes, ordinances, regulations or orders of any governmental authority, or (iii) any accident, death or personal injury, or damage to or loss or theft of property, which shall occur in or about the Premises unless caused solely by the gross negligence of Landlord, its employees or agents. This Section shall not be construed to impose upon Landlord any liability as to which rights of subrogation have been waived pursuant to Section 18.4 of this Lease. 18. INSURANCE. 18.1 TENANT'S COVERAGE. Tenant at its cost shall maintain commercial general liability and property damage insurance with a minimum single combined liability limit of $1,000,000 or split limits of $1,000,000 and $2,000,000, with Fire Legal Liability endorsements, insuring against all liability of Tenant, its employees, agents and guests, licensees and invitees, arising out of or in connection with Tenant's use or occupancy of the Premises and including a contractual liability endorsement covering the matters set forth in Section 17 and insuring Tenant's performance of all indemnification provisions of this Lease. Tenant shall insure the full replacement cost of all alterations and improvements made by Tenant in and to the Premises and all of Tenant's trade fixtures, furniture, decorations, equipment, floor and wall coverings and all other items of personal property of Tenant located on or within the Premises. Tenant also shall maintain insurance, in form and amount satisfactory to Landlord, against injury of any kind to person or property suffered by others as a result of the intentional or negligent acts of Tenant or those persons in the Premises or Building or on the Land in connection with Tenant. If, in the reasonable opinion of Landlord, Landlord's mortgagee or Landlord's insurance carrier, the amount of public liability or property damage insurance coverage provided in this Section 18.1 is not adequate, Tenant shall increase the insurance coverage as required by Landlord or by Landlord's mortgagee or insurance carrier. No damages, compensation, loss of income, inconvenience, loss of business, annoyance or other claims shall be payable by Landlord arising from any fire or other casualty or from any repair or restoration of any portion of the Premises, Building or Land. Before occupying or using the Premises, Tenant shall provide to Landlord certificates evidencing Tenant's insurance coverage and, if requested by Landlord, a copy of Tenant's policies of insurance, together with all riders, attachments, schedules, etc. Tenant's insurance shall provide that Landlord and Landlord's managing agent are named on the certificates, policies and all attachments thereto as additional insureds, shall contain a waiver of subrogation endorsement, shall contain a standard mortgagee clause, and shall bear endorsements requiring the insurer to notify Landlord not less than thirty days in advance of any modification or cancellation. Tenant's insurance policies shall permit waiver of any claim against Landlord and Landlord's managing agent for loss or damage within the scope of the insurance and Tenant, for itself and its insurers, waives all claims against Landlord. 18.2 LANDLORD'S COVERAGE. Landlord shall carry policies insuring Landlord's improvements and the Building against those perils and losses that Landlord or Landlord's mortgagee reasonably deems appropriate, including, without limitation, fire, vandalism, malicious mischief, and other perils covered by extended coverage endorsements. Tenant shall have no rights in the Page 13 insurance policy or policies maintained by Landlord and shall not be entitled to be a named insured. 18.3 LANDLORD'S INSURANCE COVERAGE ADVERSELY AFFECTED BY TENANT. If Tenant uses the Premises in a manner which voids, suspends or otherwise adversely affects Landlord's insurance coverage, Tenant shall hold Landlord harmless from any liability to Tenant resulting therefrom or occurring during the suspension, and shall reimburse or refund to Landlord as additional Rent any reasonable costs incurred by Landlord as a result thereof, including any rate increases which Landlord's insurance carrier attributes to any activity of Tenant. 18.4 WAIVER OF RECOVERY AND SUBROGATION RIGHTS. Landlord and Tenant each hereby waives any and all rights of recovery, claims, actions or causes of action, against the other, its agents, servants, partners, shareholders, officers or employees, for any loss or damage that may occur to the Premises or the Building, or any improvements thereto, or any personal property therein, by reason of fire, the elements or any other cause which is insured against under the terms of the insurance policies required to be maintained pursuant to Sections 18.1 and 18.2 or actually maintained by the other party, regardless of cause or origin, including negligence of the other party hereto, its agents, officers, partners, shareholders, servants or employees, and covenants that no insurer shall hold any right of subrogation against the other party; provided, however, the waiver set forth in this Section 18.4 shall not apply to any deductibles. If an insurance policy required hereunder does not permit a waiver without an appropriate endorsement, the policy holder shall notify its insurer of the waiver set forth herein and secure an appropriate endorsement covering the waiver. 19. FIRE OR OTHER CASUALTY. If the Premises are partially or totally damaged or rendered wholly untenantable by fire or other casualty, or if the Building is substantially damaged, and if Landlord decides to demolish it or not to rebuild or restore the Building or the Premises, then within sixty days after the fire or other casualty, Landlord shall give Tenant written notice of its decision, and the Term shall end on the later of the third day after notice is given or the date Tenant vacates the Premises. Tenant shall vacate the Premises and surrender them to Landlord promptly after receipt of Landlord's notice. If this Lease is not terminated in accordance with the preceding provisions of this Section 19, Landlord will repair the damage, and replace, restore and rebuild the Premises and the Building using available insurance proceeds. Landlord has no obligation to expend more than the available insurance proceeds. Landlord will commence repair, replacement, restoration or rebuilding as soon as practicable after receiving notice of the damage or destruction, but under no circumstances later than the last to occur of: (i) thirty days after settlement and receipt of insurance proceeds, or (ii) sixty days after receipt of the notice. Landlord shall restore the Premises substantially to their condition on the Commencement Date. Landlord is not obligated to restore or rebuild any tenant improvements to the Premises. Tenant shall bear the entire risk of loss, damage or destruction of all additions, improvements, fixtures and other property in or on the Premises or the Building. If the Premises are partially damaged or destroyed, Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes shall abate in proportion to the applicable part of the Premises rendered untenantable by the casualty from the date of the damage until the Premises are substantially restored. If the Premises are totally or substantially damaged, destroyed or rendered unfit for Tenant's use, the entire Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes shall abate from the date of the damage until the Premises are substantially restored. Page 14 If, however, Tenant reoccupies a portion of the Premises while the restoration work is taking place and before the entire Premises are substantially restored, Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes shall be payable by Tenant in proportion to the part of the Premises occupied by Tenant. 20. CONDEMNATION. If the Premises or any material part thereof are condemned for public use, this Lease shall terminate upon the vesting of title for public use. If this Lease terminates due to condemnation, Rent shall be paid through the date of termination and Tenant shall remain liable for matters described in Sections 7, 9, 17, 23 and 27.4. If only a part of the Premises are taken and the part not taken is sufficient for the operation of Tenant's business, Tenant shall retain the part not taken and Base Rent and Tenant's Share of Operating Expenses and Real Property Taxes shall be reduced proportionately. All compensation awarded or paid upon a total or partial taking of the Premises shall belong to Landlord without any participation by Tenant. Tenant may prosecute any claim directly against the condemning authority for moving expenses, or depreciation to, damage to, or cost of removal of trade fixtures, furniture and other personal property belonging to Tenant; provided, however, that no claim by Tenant shall diminish or otherwise adversely affect Landlord's award or the award of any mortgagee of Landlord. 21. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE. Tenant accepts this Lease subject and subordinate to all mortgages (including, without limitation, the notes or other obligations secured thereby, any assignments of leases and rents securing such notes and any and all renewals, modifications, consolidations, replacements or extensions of any mortgages, notes or other obligations secured thereby) now in existence or hereinafter made by Landlord as mortgagor from time to time, affecting the fee title or the leasehold estate to the Building or any part thereof or Landlord's interest therein, provided that so long as Tenant complies with all the terms, obligations, and conditions of this Lease, Tenant's use and possession of the Premises shall remain undisturbed and this Lease shall not terminate. Tenant also accepts this Lease subject and subordinate to all instruments in the chain of fee title and/or the leasehold estate of Landlord to the Building or the Land, including, without limitation, any and all renewals, modifications, consolidations, replacements or extensions of such instruments. This clause shall be self-operative and no further instrument of subordination shall be required in confirmation thereof. Notwithstanding the foregoing, Tenant shall execute, acknowledge and deliver to the holder of any mortgages or to any of the parties to such instruments, at any time upon demand by the holder or by any such party, any releases, certificates, further assurances or other documents that may be required by the holder or by any such party, for the purpose of evidencing the subordination of this Lease to the mortgages or instruments or to any renewals, modifications, consolidations, replacements or extensions thereof. In the event of a sale under any mortgage (or any note or other obligation secured thereby) to which this Lease is subordinate, or a taking of possession of the Premises by the mortgagee or other person acting for or through the mortgagee under any mortgage to which this Lease is subordinate, then and upon the happening of any such events, if the mortgagee or other person acting under or through the mortgagee shall so request, Tenant shall attorn to and recognize the mortgagee as Landlord. This attornment shall be effective and self-operative, without the execution of any other instruments, immediately upon the mortgagee succeeding to Landlord's interest. Tenant shall attorn to any successor in interest to Landlord (whether succession is by purchase, foreclosure, sale in lieu of foreclosure, power of sale, any sale-leaseback transaction, or otherwise), if required by Landlord; provided that so long as Tenant complies with all the terms, obligations and conditions of this Lease, Tenant's use and possession of the Premises shall remain undisturbed and this Lease shall not terminate. Tenant shall, upon demand, execute any agreement or agreements confirming its attornment. Tenant shall give any mortgagee notice of any default by Landlord under this Lease and Page 15 shall afford any mortgagee the same right (but not the obligation) to cure the default as Landlord, but not less than thirty days to cure. Landlord, Landlord's mortgagee or any other similarly secured party, may, at their option, make this Lease superior to any mortgage, ground lease or other security instrument by giving Tenant ten days prior written notice. No other documentation shall be necessary to effect this change. This Lease will, in all events, be prior to all other mortgages or deeds of trust on the Premises at any time recorded. Tenant will not subordinate this Lease to any other mortgage without the prior written consent of Landlord and Landlord's mortgagee, and any attempted subordination without such consent shall be void. 22. ESTOPPEL CERTIFICATES. Tenant, at any time and from time to time, within ten days after Landlord's written request, shall execute, acknowledge and deliver to Landlord any estoppel certificates requested by Landlord certifying that this Lease is in full force and effect and has not been assigned , amended, extended or modified (or stating the nature of the change); the date to which the Rent reserved hereunder has been paid; that there are no uncured defaults by Landlord, or specifying the defaults if any are claimed; that possession has been assumed, Tenant is in occupancy, and all improvements to be provided by Landlord have been completed; that Tenant's address shown on the estoppel is accurate; and other matters as Landlord reasonably may require. Any such statement may be relied upon by any prospective assignee, purchaser or mortgagee of all or any part of the Building or the Land. Tenant shall pay to Landlord a fine in the amount of Five Hundred Dollars for each day after the tenth day from Landlord's request that delivery of the estoppel certificate is delayed. 23. DEFAULT AND REMEDIES. 23.1 DEFINED EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an Event of Default by Tenant: (i) Tenant fails to make any payment required by this Lease and the failure continues for five calendar days after Landlord gives written notice to Tenant; (ii) Tenant fails to comply with any term, provision or covenant of the Lease other than a required payment and does not cure the failure within ten calendar days after Landlord gives written notice to Tenant, or if the default cannot reasonably be cured within ten days, if Tenant does not commence the cure within ten days and thereafter diligently prosecute it to completion; (iii) Tenant becomes insolvent, makes a transfer in favor of creditors, makes an assignment for the benefit of creditors, files or has filed against it a petition under any section or chapter of the Bankruptcy Reform Act, or any law or statute of the United States or any state thereof relating to bankruptcy (collectively, the "Bankruptcy Code"), or a receiver or trustee is appointed for all or part of Tenant's assets. 23.2 REMEDIES. If an Event of Default occurs, Landlord shall have the option to pursue any one or more of the remedies set forth herein. These remedies are not exclusive; they are cumulative and in addition to any other remedies contained herein or any remedies now or later allowed by law or in equity. 23.2.1 Terminate this Lease by written notice to Tenant and forthwith repossess the Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (i) the cost of recovering the Premises (including reasonable attorneys' fees and costs of suit), (ii) the cost of removing and storing any personal property, (iii) the unpaid Rent earned at the time of termination, plus interest thereon at the rate described in Section 4.5, (iv) the present value (discounted at the rate of 5% per year) of the balance of the Rent for the remainder of the Term, subject to subsequent reimbursement by Landlord to Tenant of rents actually received from other tenants of the Premises after using reasonable efforts to Page 16 re-let, after deducting the reasonable cost to prepare the Premises for occupancy and the other costs (such as leasing commissions and reasonable attorneys' fees) incurred by Landlord in connection therewith, (v) the unamortized portion of the Tenant Improvement Allowance, (vi) the unamortized portion of the Tenant Improvement Allowance paid pursuant to Sections 1.6, (vii) the full amount of all Rent concessions including Base Rent, Additional Operating Expenses, Additional Real Property Taxes and all other abated amounts, (viii) the unamortized portion of the real estate commission paid to CB Richard Ellis pursuant to Section 27.8, and (ix) all other sums of money and damages owed by Tenant to Landlord under this Lease or recoverable by Landlord from Tenant pursuant to applicable law. 23.2.2 Terminate Tenant's right of possession (but not this Lease) and repossess the Premises by forcible entry and detainer suit or otherwise, without thereby releasing Tenant from any liability hereunder and without demand or notice of any kind to Tenant and without terminating this Lease. Landlord shall use reasonable efforts under the circumstances to re-let the Premises on terms and conditions determined by Landlord, in its discretion, which may include a term different than the Term of this Lease, Rent concessions, and alterations and repairs to the Premises; provided that Landlord makes reasonable efforts to mitigate its damages by reletting the Premises. Listing the Premises (on an exclusive or non-exclusive basis) with a broker in Franklin County or advertising the Premises for rent in a Franklin County newspaper for sixty days, and Landlord's willingness to enter into a new lease with a financially responsible tenant at the same rent as provided in this Lease shall be conclusively deemed to be a reasonable attempt to relet. Notwithstanding anything to the contrary, Landlord hereby reserves the right (i) to lease any other comparable space available in the Building before offering the Premises for lease, and (ii) to refuse to lease the Premises to any potential tenant which does not meet Landlord's standards and criteria for leasing comparable space in the Building. Provided that Landlord complies with the mitigation requirements contained in this Section 23.2.2, Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of Landlord's failure or refusal to re-let the Premises for the reasons specified herein, any re-letting of the Premises except to the extent the rent actually received by Landlord exceeds all amounts owed from Tenant to Landlord, or for any other reason except as provided by then applicable law. Landlord shall have the right to make any repairs, changes, alterations or additions in or to the Premises as may be reasonably necessary or desirable for re-letting them. If the Premises are re-let and the net proceeds of re-letting are not sufficient to satisfy the Rent after first deducting all unpaid Rent and all other amounts due hereunder at the time of re-letting plus interest at the rate specified in Section 4.5, the cost of recovering possession (including costs of suit and reasonable attorneys' fees), all costs and expenses of repairs, changes, alterations and additions to the Premises, the expense of re-letting and the cost of collecting the rent accruing therefrom, then Tenant shall pay to Landlord as damages a sum equal to the amount of the deficiency plus all other damages recoverable by Landlord from Tenant pursuant to applicable law. Any payments due Landlord pursuant to this Section 23 shall be made upon demand and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section 23 from time to time. No delivery to or recovery by Landlord of any portion due Landlord hereunder shall be any defense in any action to recover any amount not theretofore reduced to judgment in favor of Landlord, nor shall any re-letting be construed as an election by Landlord to terminate this Lease unless Landlord gives Tenant a written termination notice. Notwithstanding any termination of Tenant's right of possession, Landlord may at any time thereafter elect to Page 17 terminate this Lease. In any proceedings to enforce this Lease under this Section 23, Landlord shall be presumed to have used reasonable efforts to re-let the Premises, and Tenant shall bear the burden of proof to establish that reasonable efforts were not used. 23.2.3 Alter any and all locks and other security devices at the Premises, and if it does so Landlord shall not be required to provide a new key or other access right to Tenant unless Tenant has cured all Events of Default; provided, however, that during Landlord's normal business hours and at Landlord's convenience, and upon the written request of Tenant accompanied by any written waivers and releases that Landlord requires, Landlord will escort Tenant or its authorized personnel to the Premises to retrieve any personal belongings or other property of Tenant. 23.2.4 Seek to obtain a restraining order and/or injunction against all violations, actual, attempted or threatened, of any covenant, condition or provision of this Lease. 23.3 NON-WAIVER AND CUMULATION OF REMEDIES. Pursuit of any of the foregoing remedies by Landlord shall not preclude pursuit of other remedies provided to Landlord under this Lease, by law or in equity, nor shall pursuit of any of the other remedies constitute a forfeiture or waiver of any Rent due hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein. The forbearance, failure or delay on the part of Landlord to enforce or exercise at any time any of the provisions, rights or remedies in this Lease shall in no way be construed to be a waiver thereof, nor in any way to affect the validity of this Lease or any part hereof, or Landlord's right to thereafter enforce each and every provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Landlord of Rent when an Event of Default has occurred shall not be construed as a waiver of the Event of Default. The receipt by Landlord of a lesser amount than the Rent due shall not be construed to be other than a payment on account of the Rent then due, nor shall any statement on Tenant's check be deemed an accord and satisfaction, and Landlord may accept payment without prejudice to Landlord's right to recover the balance of the Rent due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's agents or employees during the Term (as extended), including acceptance of the keys to the Premises, shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. 23.4 DEFAULT RENT COMPUTATION. Unpaid Rent which would have accrued and become payable under this Lease shall consist of the sum of: (i) the total Base Rent for the balance of the Term, (ii) Tenant's Additional Operating Expenses and Additional Real Property Taxes for the balance of the Term, plus (iii) the full amount of all Rent concessions including abatements of Base Rent, Additional Operating Expenses, Additional Real Property Taxes and all other abated amounts. Additional Operating Expenses and Additional Real Property Taxes for the calendar year of the default and each future calendar year in the Term (as extended) shall be equal to the Additional Operating Expenses and Additional Real Property Taxes for the calendar year before the year in which default occurs compounded at a rate equal to the average rate of inflation for the three calendar years preceding the calendar year of the default, as determined by using the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index (All Urban Consumers, all items, 1982-84 equals 100) for Columbus, Ohio. 23.5 LANDLORD'S RIGHT TO CURE DEFAULTS. All agreements and provisions to be performed by Tenant under any of the terms of this Lease shall be at Tenant's sole cost and expense and without Page 18 any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Base Rent, or shall fail to perform any other act or obligation under this Lease after the failure becomes an Event of Default as provided in Section 23.1, or in the event of an emergency when Landlord believes protection of property or persons is required, then Landlord may, but shall not be obligated so to do, and without waiving or releasing Tenant from any obligations, make any payment or perform any such act on Tenant's part. All sums paid by Landlord and all costs incurred by Landlord in taking such action shall be deemed additional Rent hereunder and shall be paid to Landlord on demand, and Landlord shall have (in addition to all other rights and remedies of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of Rent. 23.6 ATTORNEYS' FEES. If either party defaults in the performance of any of the terms, agreements or conditions contained in this Lease and the other party places the enforcement of this Lease, or any part thereof, or the collection of any Rent due or to become due hereunder, or recovery of the possession of the Premises, in the hands of an attorney who files suit, the defaulting party shall pay the reasonable attorneys' fees incurred by the non-defaulting party, provided that the non-defaulting party prevails in any the legal proceeding. 24. BANKRUPTCY. If a petition is filed by or against Tenant for relief under Title 11 of the United States Code, as amended (the "Bankruptcy Code"), and Tenant (including for purposes of this Section, Tenant's successor in bankruptcy, whether a trustee or Tenant as debtor in possession) assumes and proposes to assign, or proposes to assume and assign, this Lease pursuant to the provisions of the Bankruptcy Code to any person or entity who has made or accepted a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of the proposed assignment setting forth the name and address of the proposed assignee, all of the terms and conditions of the offer and proposed assignment, and the adequate assurance to be furnished by the proposed assignee of its future performance under the Lease, shall be given to Landlord by Tenant no later than twenty days after Tenant has made or received the offer, but in no event later than ten days prior to the date on which Tenant applies to a court of competent jurisdiction for authority and approval to enter into the proposed assignment. Landlord shall have the prior right and option, to be exercised by notice to Tenant given at any time prior to the date on which the court order authorizing the assignment becomes final and non-appealable, to receive an assignment of this Lease upon the same terms and conditions, and for the same consideration, if any, as the proposed assignee, less any brokerage commissions which may otherwise be payable out of the consideration to be paid by the proposed assignee for the assignment of this Lease. If this Lease is assigned pursuant to the provisions of the Bankruptcy Code, Landlord may require from the assignee a deposit or other security for the performance of its obligations under the Lease in an amount substantially the same as Landlord requires on initial leasing to a tenant similar to the assignee. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or documentation, to have assumed all of Tenant's obligations arising under this Lease on and after the date of the assignment. Any assignee shall, upon demand, execute and deliver to Landlord an instrument confirming the assumption. No provision of this Lease shall be deemed a waiver of Landlord's rights or remedies under the Bankruptcy Code to oppose any assumption and/or assignment of this Lease, to require a timely performance of Tenant's obligations under this Lease, or to regain possession of the Premises if this Lease has neither been assumed on or rejected within sixty days after the date of the order for relief or within any additional time set by a court of competent jurisdiction. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as Rent, shall constitute Rent for the purposes of Section 502(b)(6) of the Bankruptcy Code. Page 19 25. LIABILITY OF LANDLORD. Landlord and Landlord's managing agent (and in case Landlord or its managing agent is a joint venture, partnership, tenancy in common, association or other form of joint ownership, the members of the joint venture, partnership, tenancy in common, association or other from of joint ownership) shall have absolutely no personal liability with respect to any provision of this Lease or any obligation or liability arising from or in connection with this Lease. In the event of a breach or default by Landlord of any of its obligations, Tenant shall look solely to the Landlord's equity in the Building at the time of the breach or default (or if Landlord's interest is a leasehold interest at that time, Tenant shall look solely to the leasehold interest) for the satisfaction of any remedies of Tenant. This exculpation of liability shall be absolute and without any exception. In the event of sale or other transfer of Landlord's right, title and interest in the Building, Landlord shall be released from all liability and obligations hereunder. Wherever Landlord's liability is limited by the terms of this Lease and wherever Landlord is indemnified and defended hereunder, the same limitations, indemnifications, and defense requirements shall apply to Landlord's managing agent. 26. UNFORESEEN DELAY. The provisions of this Section shall be applicable if there shall occur, during the Term, or any renewal or extension thereof, any strike, lockout, or labor dispute; inability to obtain labor or materials or act of God, governmental restriction, regulation, or control, enemy or hostile governmental action, civil commotion, insurrection, revolution, sabotage, or fire or other casualty, or other similar condition beyond the reasonable control of Landlord or Tenant including fuel shortages. If Landlord or Tenant shall, as the result of such event, fail punctually to perform any obligation except for payment of Rent or other changes due from Tenant to Landlord, then the obligation shall be punctually performed as soon as practicable after the event shall abate. If Landlord or Tenant shall, as a result of the event, be unable to exercise any right or option within any time limit provided therefor in this Lease, the time limit shall be deemed extended for a period equal to the duration of the event. 27. MISCELLANEOUS. 27.1 SUCCESSORS. Except as provided in Section 15, this Lease and all covenants, provisions and conditions herein shall inure to the benefit of and be binding upon Landlord, its legal representatives, heirs, executors, administrators, successors and assigns, shall be binding upon Tenant, its heirs, administrators, legal representatives, successors and assigns, and shall inure to the benefit of Tenant and its Landlord-approved assigns. 27.2 GOVERNING LAW. This Lease shall be construed, governed and enforced in accordance with the laws of the State of Ohio. 27.3 SEVERABILITY. If any provisions of this Lease or the application thereof to any person or circumstance shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall in no way be affected or impaired and the remaining provisions shall remain in full force and effect. 27.4 HOLDING OVER. Tenant shall indemnify and hold harmless Landlord from and against any and all loss or liability resulting from Tenant's failure to surrender possession of the Premises in accordance with the terms and conditions of this Lease. No receipt of money by Landlord from Tenant after termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the Term or affect any notice, demand or suit, or imply consent for any action Page 20 for which Landlord's consent is required. If Tenant remains in possession of the Premises after termination of this Lease and without executing a new Lease, Tenant, at Landlord's option, shall be deemed to be occupying the Premises as a Tenant from month to month, at twice the Base Rent and subject to all other charges, conditions, provisions, and obligations of this Lease which are applicable to a month to month tenancy. 27.5 CAPTIONS. Marginal captions, titles or exhibits and riders and the table of contents to this Lease are for convenience and reference only, and are in no way to be construed as defining, limiting or modifying the scope or intent of the various provisions of this Lease. 27.6 NOTICES. Notices shall be given and received on the date of actual receipt or refusal thereof. Either party may change its Notice Address by written notice to the other. Landlord and Tenant shall give notices to each other in writing and delivered as follows: 27.6.1 TO LANDLORD by sending the notice by certified or registered United States mail, return receipt requested, postage prepaid, or by private courier service utilizing a return receipt, addressed to Landlord at the address specified in Section 1.1, attention Steve Skilken. 27.6.2 TO TENANT by sending the notice by certified or registered United States mail, return receipt requested, postage prepaid, or by private courier service utilizing a return receipt addressed to Tenant at the Premises. 27.7 COMPLIANCE NOTICES. Within five days after receipt, Tenant shall advise Landlord, in writing, and provide Landlord with copies if applicable of any notices alleging violation(s) of the ADA or any other governmental requirements relating to any portion of the Premises; any claims made or threatened in writing regarding non-compliance with the ADA or any other governmental requirements; or any governmental or regulatory actions or investigations instituted or threatened regarding non-compliance with the ADA or any other Requirements; and advise Landlord of the measures Tenant is undertaking to remedy the situation and/or achieve compliance. 27.8 BROKERS. After Tenant delivers a fully executed Commencement Agreement, Landlord will pay CB Richard Ellis a leasing commission in the maximum amount of $78,718.18. The commission shall be payable monthly during the Term in the amount of 4% of the Base Rent actually received from Tenant for that month. Landlord shall not be obligated to pay any monthly leasing commission installment unless and until it has received good funds in the full amount of the Base Rent due for that month. Tenant and Landlord each hereby certify that no real estate broker other than CB Richard Ellis ("Tenant's Broker") has or will represent it in this transaction, that no brokerage or finder's fees have been earned by any third party other than Tenant's Broker and that Landlord has no obligation to Tenant's Broker other than as set forth in this Section 27.8. Each party shall indemnify and hold the other party harmless from any liability or expense that may arise from such claims, including reasonable attorney's fees. 27.9 NO RECORDATION. Tenant shall not record this Lease or any notice of this Lease, and if Tenant does so, Landlord may terminate the Lease by recording a Notice of Termination which shall be effective with only Landlord's signature appearing therein. Tenant hereby irrevocably constitutes Landlord its attorney-in-fact for the purpose of executing such instrument in recordable form. Page 21 27.10 LANDLORD-TENANT RELATIONSHIP. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party as creating any relationship between the parties hereto other than the relationship of Landlord and Tenant. 27.11 AUTHORIZATION OF TENANT. This Lease and the instruments and documents contemplated hereby, and the execution and delivery hereof by Tenant, and the consummation of the transactions herein provided, do not violate any provision of the constitution or bylaws of Tenant or any agreement to which Tenant is a party or by which Tenant is bound, and constitute valid and binding obligations of Tenant enforceable against it in accordance with their respective terms. No consent or governmental approval is required in connection with the consummation of the transactions contemplated hereby. Tenant represents and warrants to Landlord that it has full right, power and authority to enter into the transactions provided for in this Lease; and that it has not, at any time, subleased, pledged, hypothecated, assigned or encumbered the Lease or in any other manner encumbered the Premises and will not do so. Tenant has provided evidence of authority to Landlord substantially in the form attached as Exhibit D. 27.12 NO THIRD PARTY BENEFICIARY. Tenant is the individual or business entity whose name appears in Section 1.2 of this Lease. This Lease does not give any rights to any third party. 27.13 JOINT AND SEVERAL LIABILITY. If two or more individuals, corporations, partnerships, limited liability companies or other business associations (or any combination thereof), sign this Lease as Tenant, the liability of each individual, corporation, partnership, limited liability company or other business association to pay Rent and perform all other obligations hereunder shall be joint and several. If a Tenant named in this Lease is a partnership or other business association, the members of which are, by virtue of statute or general law, subject to personal liability, the liability of each member shall be joint and several. 27.14 EXHIBITS. All Exhibits referenced in this Lease are incorporated herein for all purposes as if fully set forth within the text of this Lease. Exhibit A - Depiction of Premises Exhibit B - Commencement Agreement Exhibit C - Tenant's Approved Signs Exhibit D - Tenant's Authorization 27.15 SURVIVAL OF TENANT'S OBLIGATIONS. All obligations of Tenant which, by their nature, involve performance in any particular after the end of the Term, or which cannot be ascertained to have been fully performed until after the end of the Term, shall survive the expiration or sooner termination of this Lease. 27.16 NEGOTIATIONS. This Lease has been negotiated by Landlord and Tenant and this Lease, together with all the terms and provisions hereof, shall not be deemed to have been prepared by either Landlord or Tenant, but by both equally and shall be construed as an arm's length transaction. The respective legal counsel of the parties hereto have reviewed this Lease, and each has obtained the advice of its own legal counsel regarding this Lease and the transactions contemplated herein. 27.17 ENTIRE AGREEMENT. This Lease, including the Exhibits and any riders hereto, contains all the agreements, conditions, understandings, representations and warranties made between the Page 22 parties hereto with respect to the subject matter hereof, and may not be modified orally or in any manner other than by an agreement in writing signed by both parties hereto or their respective successors in interest. 27.18 NO VERBAL WARRANTIES. Tenant acknowledges and agrees that, except as expressly set forth in this Lease, there have been no representations or warranties made by or on behalf of Landlord with respect to the Premises, the Building or the Land with respect to the suitability of any thereof for the conduct of Tenant's business, present or future rents, expenses, profits, operations, tenancies, or any other matters. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises, the Building and the Land were then in satisfactory condition, order and repair. 27.19 WAIVER OF JURY TRIAL. To the extent that a waiver is permitted by law, Landlord and Tenant hereby knowingly, voluntarily and unconditionally waive trial by jury in any action, proceeding or counterclaim brought in connection with this Lease or any other document executed and delivered by either party in connection herewith, or the Premises, Building or Land. 27.20 FINANCING CONDITION. Tenant acknowledges that the provisions of this Lease may require approval by the institutional lender that finances or refinances the purchase, construction and improvements to the Building and Premises (the "Institutional Lender"). If, as a condition to financing, the Institutional Lender requires modification of this Lease, Tenant shall approve the required modification provided that the modification does not change the dimensions or location of the Premises or the improvements that are a part of the Premises, or increase the Rent Tenant is obligated to pay hereunder. Landlord's obligations under this Lease are conditioned upon approval of this Lease by the Institutional Lender. 27.21 ACKNOWLEDGMENT OF LANDLORD WAIVER. Landlord acknowledges the Waiver and Consent by Real Property Owner(s) made and entered into between Landlord and Foothill Capital Corporation on July 2, 2001 (the "Landlord Waiver") and agrees that the Lease (as defined in the Landlord Waiver) shall include this Lease. The intent of this Section 27.21 is to provide to Foothill Capital Corporation all of the benefits, rights and protections afforded by the original Landlord Waiver, notwithstanding the execution of this Lease. 27.22 SIGNATURE REQUIREMENT. This document does not constitute an offer or option to lease and is not valid unless it is signed by and a signed copy delivered to both Landlord and Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the respective dates set forth below. WITNESSES: LANDLORD: Corporate Exchange Buildings IV and V Limited Partnership, an Ohio limited partnership, by Joseph Skilken & Co., General Partner /s/ Christine Caruso - ------------------------------ By: /s/ Steve Skilken ------------------------------------- Page 23 Printed Name/Date: Christine Caruso 6/26/02 ------------ Steve Skilken, President Date: 6/26/02 /s/ Guthery D. Crim ------------------------------------ - ------------------------------ Printed Name/Date: Guthery D. Crim TENANT: Frontstep Solutions Group Inc., an Ohio corporation /s/ Annette L. Ford - ------------------------------ Printed Name/Date: By: /s/ Lawrence J. Fox Annette L. Ford / 6/17/02 ------------------------------------- Printed Name & Title: Lawrence J. Fox, Chairman of Board ------------------------------ Date: 6/17/02 /s/ Stephen D. Browning ------------------------------------ - ------------------------------ Printed Name/Date: Stephen D. Browning / 6/17/02 NOTARIZATION FOR LANDLORD STATE OF OHIO COUNTY OF FRANKLIN On this 26th day of June, 2002, before me, a Notary Public in and for said County and State, personally appeared Steve Skilken, President of Joseph Skilken & Co., an Ohio corporation and the General Partner of Corporate Exchange Buildings IV and V Limited Partnership, who acknowledged that he did sign the foregoing instrument on behalf of the corporation and limited partnership. /s/ Christine Caruso - ------------------------------------------ Notary Public My commission expires: 11/12/05 -------------------- Page 24 NOTARIZATION FOR TENANT COUNTY OF FRANKLIN SS STATE OF OHIO On this 17 day of June, 2002, before me, a Notary Public in and for said County and State, personally appeared Lawrence J. Fox, the Chairman of the Board of Frontstep Solutions Group, Inc., an Ohio corporation, who represented that he did sign the foregoing Lease Amendment on behalf of the corporation. /s/ Stephen D. Browning - ------------------------------------------ Notary Public My commission expires: Does not expire -------------------- Page 25 TABLE OF CONTENTS 1. TERMS AND DEFINITIONS................................................Page 1 1.1 Landlord........................................................Page 1 1.2 Tenant..........................................................Page 1 1.3 Building........................................................Page 1 1.4 Premises........................................................Page 1 1.5 Term............................................................Page 1 1.6 Tenant Improvement Allowance....................................Page 1 1.7 Base Rent.......................................................Page 1 1.8 Tenant's Share..................................................Page 1 1.9 Operating Expenses and Real Property Taxes:.....................Page 1 2. PREMISES AND BUILDING................................................Page 1 2.1 Leased Premises.................................................Page 1 2.2 Building........................................................Page 1 2.3 Parking.........................................................Page 1 2.4 Common Areas....................................................Page 2 3. TERM.................................................................Page 2 4. RENT.................................................................Page 2 4.1 Base Rent.......................................................Page 2 4.2 Operating Expenses..............................................Page 2 4.3 Real Property Taxes.............................................Page 4 4.4 Payment of Rent.................................................Page 4 4.5 Late Charge.....................................................Page 4 5. USE OF PREMISES......................................................Page 4 5.1 Permitted Use...................................................Page 4 5.2 General Use and Occupancy Obligations...........................Page 4 5.3 General Use and Occupancy Prohibitions..........................Page 4 5.4 Compliance with Laws............................................Page 5 6. QUIET ENJOYMENT......................................................Page 5 7. TENANT'S RESPONSIBILITY REGARDING HAZARDOUS SUBSTANCES...............Page 5 7.1 Hazardous Substances............................................Page 5 7.2 Tenant's Restrictions...........................................Page 5 7.3 Environmental Clean-up..........................................Page 6 7.4 Tenant's Indemnity as to Environmental Matters..................Page 6 7.5 Landlord's Warranty and Indemnity...............................Page 6 7.6 Survival........................................................Page 6 8. LEASEHOLD ALTERATIONS................................................Page 6 8.1 Tenant Improvements.............................................Page 6 8.2 Subsequent Alterations..........................................Page 6 9. MECHANICS' LIENS.....................................................Page 7 10. SIGNS................................................................Page 7 11. LANDLORD SERVICES....................................................Page 7 11.1 Heating and Air-Conditioning....................................Page 8 11.2 Electricity.....................................................Page 8 11.3 Elevator Service................................................Page 8 11.4 Janitorial Services.............................................Page 8 11.5 Water...........................................................Page 8 11.6 Additional Services.............................................Page 8 11.7 Payment.........................................................Page 8 Page 26 11.8 Liability for Service.........................................Page 9 12. REPAIRS............................................................Page 9 13. ACCESS TO PREMISES.................................................Page 9 14. DAMAGE FROM CERTAIN CAUSES.........................................Page 10 15. TRANSFER, ASSIGNMENT AND SUBLETTING................................Page 10 15.1 By Tenant....................................................Page 10 15.2 By Landlord..................................................Page 11 16. SURRENDER OF PREMISES..............................................Page 11 17. INDEMNIFICATION AND LIABILITY......................................Page 11 18. INSURANCE..........................................................Page 12 18.1 Tenant's Coverage............................................Page 12 18.2 Landlord's Coverage..........................................Page 12 18.3 Landlord's Insurance Coverage Adversely Affected by Tenant...Page 12 18.4 Waiver of Recovery and Subrogation Rights....................Page 12 19. FIRE OR OTHER CASUALTY.............................................Page 13 20. CONDEMNATION.......................................................Page 13 21. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE......................Page 13 22. ESTOPPEL CERTIFICATES..............................................Page 14 23. DEFAULT AND REMEDIES...............................................Page 14 23.1 Defined Events of Default....................................Page 14 23.2 Remedies.....................................................Page 15 23.3 Non-Waiver and Cumulation of Remedies........................Page 16 23.4 Default Rent Computation.....................................Page 16 23.5 Landlord's Right to Cure Defaults............................Page 17 23.6 Attorneys' Fees..............................................Page 17 24. BANKRUPTCY.........................................................Page 17 25. LIABILITY OF LANDLORD..............................................Page 18 26. UNFORESEEN DELAY...................................................Page 18 27. MISCELLANEOUS......................................................Page 18 27.1 Successors...................................................Page 18 27.2 Governing Law................................................Page 18 27.3 Severability.................................................Page 18 27.4 Holding Over.................................................Page 18 27.5 Captions.....................................................Page 19 27.6 Notices......................................................Page 19 27.7 Compliance Notices...........................................Page 19 27.8 Brokers......................................................Page 19 27.9 No Recordation...............................................Page 19 27.10 Landlord-Tenant Relationship.................................Page 19 27.11 Authorization of Tenant......................................Page 19 27.12 No Third Party Beneficiary...................................Page 20 27.13 Joint and Several Liability..................................Page 20 27.14 Exhibits.....................................................Page 20 27.15 Survival of Tenant's Obligations.............................Page 20 27.16 Negotiations.................................................Page 20 27.17 Entire Agreement.............................................Page 20 27.18 No Verbal Warranties.........................................Page 20 27.19 Waiver of Jury Trial.........................................Page 21 27.20 Financing Condition..........................................Page 21 Page 27 27.21 Acknowledgment of Landlord Waiver............................Page 21 27.22 Signature Requirement........................................Page 21 Page 28 EX-10.B 5 l96355aexv10wb.txt EXHIBIT 10(B) Exhibit 10(b) PROGRESS SOFTWARE CORPORATION INDEPENDENT SOFTWARE VENDOR AGREEMENT PROGRESS SOFTWARE CORPORATION INDEPENDENT SOFTWARE VENDOR (ISV) AGREEMENT Independent Software Vendor: Frontstep Solutions Group, Inc. --------------------------------------------------- Address: 2800 Corporate Exchange Drive ----------------------------------------------------------------------- City, State, Zip Code: Columbus, Ohio 43231 --------------------------------------------------------- Contact: VP, CFO - Daniel P. Buettin ----------------------------------------------------------------------- E-mai1: dan.buettin@frontstep.com ------------------------------------------------------------------------ Telephone: (614) 523-7000 --------------------------------------------------------------------- Fax No.: (614) 895~2972 ----------------------------------------------------------------------- Territory: Worldwide --------------------------------------------------------------------- Progress Software Corporation ("PSC") and the Independent Software Vendor ("ISV") listed above agree as follows: 1. RIGHTS AND OBLIGATIONS 1.1 PSC hereby grants to ISV, and ISV hereby accepts from PSC, the right to obtain PSC's (check the applicable box) (X) PROGRESS(R) 4GL Product line or (X) WebSpeed(TM) products (hereinafter "PSC products") on a non-exclusive basis and to market such products to ISV customers within the Territory set forth above (or the United States if no Territory is indicated) provided that, in PSC's judgment, the products and/or services ISV supplies constitute Substantial Value-Add and ISV or ISV's customers are not attempting to market PSC products within such Territory in violation of this Agreement, ISV customers shall mean those persons, end-users, companies and associations supplied by ISV with ISV's Progress based application software and/or PSC products. 1.2 "Substantial Value-Add" shall mean (check the applicable box): (X) ISV's revenues for ISV's PROGRESS-based software product(s) (inclusive of PSC products supplied) for use on any single CPU, exclusive of hardware, support services and non-PSC Application Development Tools, shall not be less than two (2) times ISV's cost for the purchase of the PROGRESS product(s) for that CPU; or (X) ISV's revenues for ISV's WebSpeed-based software product(s) (inclusive of PSC products supplied) for use on any single CPU, exclusive of hardware and non-PSC Application Development Tools, and/or ISV's services in connection with ISV's WebSpeed-based software product(s) shall not be less than two (2) times ISV's cost for the purchase of the total number of Transaction Agents (as such term is defined in the documentation accompanying the WebSpeed products) for the WebSpeed Transaction Server for that CPU. "Application Development Tools" is defined as products whose primary purpose is to facilitate the development of other applications. 1.3 ISV agrees to attend PSC training within sixty (60) days of signing this Agreement and maintain a sufficient number (minimum of one (1) each) of capable technical and sales personnel to carry out the obligations and responsibilities of ISV under this Agreement. 1.4 ISV agrees to actively market PSC's then current annual maintenance plan to ISV's customers. 1.5 Upon placement of each order for PSC products, ISV agrees to notify PSC of each ISV customer to which it ships such PSC products, including, but not necessarily limited to, product designation, quantity, serial number, complete name and address of the ISV customer where the products are being installed (including street, city and country), and contact name. For licenses purchased for inventory or stock but not immediately deployed, ISV will notify PSC of the customer registration information required herein upon the date of such deployment. 2. PRICES, DISCOUNTS AND PAYMENT TERMS 2.1 Prices and discounts for PSC products to be supplied to ISV hereunder shall be as set forth in PSC's then-current price list and ISV discount schedule. Such prices, discounts, payment and credit terms may be changed by PSC subject to the provisions of Sections 2.2, 2.3, and 2.4. 2.2 If any change referred to in Section 2.1 results in an increase in cost to ISV, then such change shall become effective only upon thirty (30) days prior written notice by PSC. 2.3 If the change results in a decrease in cost to ISV, then PSC will grant ISV credit for the difference in cost on all PSC products purchased within thirty (30) days prior to the effective date of the change and not yet resold by ISV on the effective date of the decrease. 2.4 Payment shall be made to PSC by ISV within thirty (30) days of shipment provided ISV meets PSC's credit requirements. Otherwise, payment shall be made in advance or on a C.O.D. basis. Interest shall accrue on any delinquent amounts owed by ISV for PSC products at the lesser of eighteen percent (18%) per annum or the maximum rate permitted by applicable usury law. 3. ORDERING PROCEDURE 3.1 Each order placed by ISV for products shall be deemed to incorporate all of the terms and conditions of this Agreement, and any terms and conditions of such order which are in addition to or inconsistent with the terms of this Agreement shall be deemed stricken from such order. 3.2 PSC shall ship products ordered by ISV as soon as practical after acceptance of ISV's order. Delivery of products shall be FOB PSC's Massachusetts headquarters. ISV shall pay all transportation, handling charges and insurance costs. All sales, use, personal property, withholding and other taxes relating to this Agreement shall be paid by ISV unless ISV provides PSC with valid tax exemption certificates or the equivalent thereof. ISV shall not be responsible for taxes based on PSC's net income. 3.3 Each product shall be delivered to ISV in a package which may contain one or more system media, manuals and license agreement. ISV shall deliver each product to ISV's customer unopened. PSC's shrinkwrap or clickwrap license agreement that accompanies the PSC products will govern the ISV customer's use of such products. Such PSC End User Product License Agreement will be solely between PSC and the ISV customer. 4. PROPRIETARY RIGHTS 4.1 Title to PSC products (including the manual, media and program contained therein) shall remain with PSC or PSC's licensors. ISV acknowledges that PSC products constitute a valuable asset of PSC and agrees to hold all such products strictly confidential in accordance with the terms of this Agreement. ISV shall, by all appropriate means, prevent unauthorized disclosure, publication, display or use of PSC products. ISV shall not, and shall require in any contracts with ISV's customers that such ISV customers shall not copy, modify or reverse engineer any PSC products, nor remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed or embedded by PSC on or in any part of the PSC products. ISV shall be responsible for notifying PSC of such violations as they come to ISV's attention. 4.2 PSC, through this Agreement, shall acquire no rights to any ISV application programs developed or resold by ISV. 4.3 PSC shall have the right to inspect and audit all the accounting, sales, customer registration information and customer service books and records of ISV to ensure compliance with the terms of this Agreement. Any such audit shall be conducted only by PSC staff or a Certified Public Accountant whose fee is paid by PSC and all audits shall be conducted during normal business hours at ISV's offices and in such a manner as not to interfere unreasonably with ISV's normal business activities. 4.4 Because of the unique and proprietary nature of the products, it is understood and agreed that PSC's remedies at law for a breach by ISV of its obligations under this Section 4 will be inadequate and that PSC shall, in the event of any such breach, be entitled to equitable relief (including without limitation provisional and permanent injunctive relief and specific performance) in addition to all other remedies provided under this Agreement or available to PSC at law. 5. WARRANTIES 5.1 OTHER THAN THE LIMITED WARRANTY, IF ANY, ACCOMPANYING THE PRODUCT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER PSC NOR PSC'S LICENSORS MAKE ANY WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF PSC PRODUCTS OR AS TO SERVICE TO ISV OR ANY OTHER PERSON. PSC RESERVES THE RIGHT TO CHANGE THE WARRANTY AND SERVICE POLICY SET FORTH IN SUCH LIMITED WARRANTY, OR OTHERWISE, AT ANY TIME, WITHOUT FURTHER NOTICE AND WITHOUT LIABILITY TO ISV OR ANY OTHER PERSON. 5.2 TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ALL IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT, ARE HEREBY EXCLUDED. 5.3 ISV SHALL MAKE NO REPRESENTATION OR WARRANTY CONCERNING THE QUALITY, PERFORMANCE OR OTHER CHARACTERISTICS OF THE PSC PRODUCTS OTHER THAN THOSE 1 PROGRESS SOFTWARE CORPORATION INDEPENDENT SOFTWARE VENDOR AGREEMENT WHICH ARE CONSISTENT IN ALL RESPECTS WITH, AND DO NOT EXPAND THE SCOPE OF, THE WARRANTIES OF PSC SET FORTH IN THIS AGREEMENT. 5.4 ISV agrees to take all actions reasonably specified by PSC in writing from time to time in order to insure that the Limited Warranty is made in compliance with all applicable law. 6. LIMITATION OF LIABILITIES 6.1 To the maximum extent permitted by applicable law, the liability, if any, of PSC for damages relating to any PSC products and/or services shall be limited to the actual amounts paid by ISV for such PSC products or services and shall in no event include incidental or consequential damages of any kind, even if PSC has been informed of the possibility of such damages. PSC's licensors and their suppliers shall have no liability to ISV or ISV's customers for any damages suffered by ISV or any third party as a result of using the PSC products or distributing any portion thereof, or as a result of any services relating thereto. Notwithstanding the foregoing, in no event shall PSC, its licensors, or any of their respective suppliers be liable for any lost revenue, profit or data, or for indirect, punitive, special, incidental or consequential damages of any character, including, without limitation, any commercial damages or losses, however caused and regardless of the theory of liability, arising out of the use or inability to use the PSC products, or any portion thereof, or any services, even if PSC, its licensors and/or any of their respective suppliers have been informed of the possibility of such damages. Some states do not allow the exclusion of incidental or consequential damages, so the above limitations may not apply. 7. TRADEMARKS 7.1 For the term of this Agreement, PSC hereby grants and ISV hereby accepts a license to use the Trademarks (as herein after defined) in the Territory in connection with the marketing and distribution of the PSC Products. ISV shall not use the Trademarks or confusingly similar marks in connection with any goods or services other than the PSC Products. All rights in the Trademarks shall remain at all times the sole property of PSC and all use of the Trademarks shall inure to the benefit of PSC. For purposes of this Agreement, the term "PSC Trademark" shall mean those names and designations by which any of the PSC products are known, and the name "Progress Software Corporation" or "PSC". ISV shall insure that none of the PSC Trademarks (or any variation thereof) appear in any portion of ISV's name or any name under which ISV does business. 8. SUPPORT 8.1 ISV shall bear primary responsibility for developing applications or for assisting ISV's customers in developing applications with PSC products, and will provide appropriate support to ISV's customers in using PSC products and/or using applications developed with PSC products. PSC will provide generally available technical support to ISV from PSC's Massachusetts offices. 9. INDEMNIFICATION 9.1 TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ISV AGREES TO INDEMNIFY AND HOLD HARMLESS PSC AND ITS OFFICERS, DIRECTORS, EMPLOYEES, LICENSORS AND AGENTS, FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, COSTS AND LIABILITIES (INCLUDING ALL REASONABLE ATTORNEY'S FEES) OF ANY KIND WHATSOEVER, ARISING DIRECTLY OR INDIRECTLY OUT OF ANY ACTION OR OMISSION BY ISV, INCLUDING, WITHOUT LIMITATION, ISV's PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT. 10. TERMS 10.1 This Agreement shall become effective upon the date the Agreement is accepted by PSC and shall continue in force for twelve (12) months. Thereafter, it shall automatically renew for successive twelve (12) month periods. Notwithstanding the foregoing, either party may terminate this Agreement upon ninety (90) days written notice to the other party. 10.2 Notwithstanding the foregoing, so long as any material breach of this Agreement by ISV continues after thirty (30) days written notice by PSC, PSC may immediately terminate this Agreement, including any orders issued by ISV, on written notice to ISV. 10.3 So long as any material breach under this Agreement by PSC continues after thirty (30) days written notice by ISV, ISV may immediately terminate this Agreement on written notice to PSC. 10.4 In addition to any material breach of this Agreement, the application or adjudication in bankruptcy of ISV, or the dissolution of ISV shall immediately terminate this Agreement. 11. GENERAL 11.1 This Agreement may not be assigned by ISV, except in connection with a merger or sale of substantially all assets of ISV which does not materially affect its business activities nor its abilities to carry out its obligations under this Agreement. 11.2 This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts without regard to its principles of conflicts of laws. The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. The parties agree that exclusive jurisdiction and venue of any action with respect to this Agreement shall be in a court of competent subject matter jurisdiction located in the Commonwealth of Massachusetts and each of the parties hereby submits itself to jurisdiction and venue of such courts for the purpose of any such action. 11.3 Neither PSC nor ISV shall be liable for any delay or failure to take any action required hereunder (except for payment) due to any cause beyond the reasonable control of PSC or ISV, as the case may be, including, but not limited to unavailability or shortages of labor, materials, or equipment, failure or delay in the delivery of vendors and suppliers and delays in transportation. 11.4 If any provision of this Agreement is held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provision will not be affected or impaired thereby. 11.5 ISV agrees that it is an independent contractor and that this Agreement and the relations between PSC and ISV hereby established do not constitute a partnership, joint venture, agency or contract of employment between them, or any other similar relationship. 11.6 No waiver, alteration, modification or cancellation of any of the provisions of this Agreement shall be binding unless made in writing and signed by both PSC and ISV. The failure of either PSC or ISV at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce such provision. 11.7 All notices required or permitted to be given under this Agreement shall be in writing and shall be sent by certified or registered mail, if to PSC to Progress Software Corporation, 14 Oak Park, Bedford, MA 01730, Attention: Vice President, Sales and Service, cc: Vice President and General Counsel; if to ISV to the address specified on the first page hereof. Either party may by such notice to the other party change such address. 11.8 ISV agrees that the provisions of Sections 2.4, 4, 5, 6 and 9 shall survive the expiration or earlier termination of this Agreement. 11.9 This Agreement is the complete and exclusive agreement between the parties and supersedes any prior agreements, proposals, representations, or understandings relating to the subject matter hereof. This Agreement may only be modified if agreed to in writing and executed by duly authorized representatives of PSC and ISV. Agreed to: Frontstep Solutions Group, Inc. - ------------------------------------- Independent Software Vendor By: /s/ Daryll Wartluft ---------------------------------- Name: Daryll Wartluft Title: Exec. VP, Products Group Date: 2/5/02 Accepted by: Progress Software Corporation By: /s/ Justin P. Wright ---------------------------------- Name: Justin P. Wright Title: VP, North American Operations Date: 2/6/02 "This document has been reviewed & approved by the PSC Legal Dept. DLK Initials" 2 AMENDMENT TO PROGRESS SOFTWARE INDEPENDENT SOFTWARE VENDOR AGREEMENT AMENDMENT to the Progress Software Corporation Independent Software Vendor Agreement is effective as February 1, 2002 ("Effective Date"), by and between Progress Software Corporation, a Massachusetts corporation with its principal place of business at 14 Oak Park, Bedford, Massachusetts 01730 ("PSC") and Frontstep Solutions Group, Inc., formerly known as Symix Computer Systems, Inc., an Ohio corporation with its principal place of business at 2800 Corporate Exchange Drive, Columbus, Ohio 43231 ("ISV"). WHEREAS, PSC and ISV entered into a Progress Software Application Partner Agreement effective as of February 8, 1995 (the "AP Agreement"); and WHEREAS, PSC and ISV previously amended the AP Agreement by entering into an Amendment to the AP Agreement as of July 1, 1997 specifying special pricing for designated PSC products distributed by ISV in conjunction with certain ISV PROGRESS-based applications (the "Amendment"); WHEREAS, ISV and PSC further amended the AP Agreement by entering into a Second Amendment whereby the parties agreed to expand the geographic scope of the special pricing terms and conditions in the Amendment to apply on a worldwide basis, specified additional terms and conditions pursuant to which ISV would have the right to copy and distribute an evaluation version of certain PSC products in combination with an evaluation version of ISV's PROGRESS-based application(s), and obtained the right to distribute the WebSpeed transaction server product in conjunction with ISV's SyteWeb application; WHEREAS, ISV and PSC desire to merge the AP Agreement, the Amendment and the Second Amendment into this one new ISV Agreement and Percent of Application ("POA") Amendment to the ISV Agreement to support all worldwide ordering and licensing of ISV's PSC based application(s). NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1) Capitalized terms used but not defined in this Amendment shall have the same meaning as in the Agreement. 2) The following terms as used herein shall have the following meanings: a) "Net License Fee" shall mean the then-current total license fee charged by ISV to each customer for the ISV Application Modules bundled with the Selected PSC Products in accordance with Section 5 below, net of any and all discounts, sales tax and shipping fees. The term "Net License Fee" shall not include revenue obtained by ISV for hardware, implementation, training, customization or support services. b) "Selected PSC Products" shall mean the PSC products listed in Exhibit A. c) "Application Modules" shall mean the PROGRESS(R)-based ISV application software modules and add-on modules listed in Exhibit B to this Amendment and any other software modules (PROGRESS-based) supplied by ISV to ISV's customers for use as a component of or in conjunction with the PROGRESS-based ISV application software modules and add-on modules listed in Exhibit B. ISV may update Exhibit B from time to time to reflect new modules added to the ISV application suite by providing PSC with written notice of such updates. d) "Bundled Product" - as used throughout this Amendment, a bundled product shall be the Application Modules combined with the required Progress licenses necessary to deploy ISV's PSC based application. Note: ISV agrees that any development licenses provided within the POA bundle shall be for the use of ISV or limited use by the End User to modify the Application Modules only. End Users will receive no technical support from PSC. End users desiring to do further development in conjunction with the ISV application, or obtain technical support from PSC may purchase development products outside of the POA bundle, at list price. ISV will receive the agreed upon discount for the product. As PSC agrees to provide support for these licenses, there will be a 15% ISV discount off of PSC's then-current list price for maintenance. e) "Distributor(s)" shall mean a third party authorized by ISV to distribute the Bundled Product. A list of Distributor(s) as of the Effective Date of this Amendment is attached hereto as Exhibit D. Exhibit D may be updated from time to time upon the prior written approval of PSC, such approval shall not be unreasonably withheld. 3) TERRITORY: ISV shall have the right to distribute the Selected PSC products worldwide solely in conjunction with the deployment of the Application Modules subject to the terms and conditions of the Agreement and this Amendment. 4) DISTRIBUTOR(S) RIGHTS: ISV is granted the right to distribute the Bundled Product through Distributors. ISV hereby agrees that such sublicenses between ISV and Distributors shall be in writing and contain provisions no less restrictive than the terms contained within this Amendment. 5) DISTRIBUTOR PRICING: PSC product and maintenance royalties for sales through ISV's authorized Distributors shall be 1.5 times the royalty rates stated in Section 9 below. 6) This Section intentionally left blank. 7) ISV PRICING: ISV will, in its sole discretion, establish and maintain a product price schedule setting forth the license fees for the Application Modules. A copy of ISV's current price schedules, both domestic and international, are attached hereto as Exhibit B. ISV shall provide PSC with written notice of any updates to the above-mentioned price schedules. Notwithstanding the foregoing, the special pricing terms and conditions set forth in this Amendment are based upon ISV's pricing model set forth in Exhibit B. In the event ISV substantially alters its pricing model from the one set forth in Exhibit B, ISV's license royalty fee and maintenance fee for the Selected PSC Product(s) deployed under such new pricing model shall be mutually negotiated by the parties. 8) ISV'S AGREEMENT WITH ITS CUSTOMERS: For each bundled software license (meaning the Application Module(s) and Selected PSC Products), ISV shall, prior to grant of such license, enter into a license agreement with its customer, specifying in such agreement the terms and conditions pertaining to the above-mentioned bundled software license. Such agreement at a minimum shall include the following limiting terms and conditions: i) The ISV customer's license to use the Selected PSC Products is limited to use of the Selected PSC Products by no more than the maximum number of users licensed to use the licensed Application Module(s) and solely in conjunction with such licensed Application Module(s). The Selected PSC Products licensed hereunder may not be used with other applications provided by a third party; ii) Use of the Selected PSC Products by an ISV customer, regardless of whether or not the Selected PSC Products were provided by ISV, an ISV subsidiary, or an ISV authorized Distributor, shall be subject to the standard terms and conditions set forth in PSC's then-current End User Product License ("Shrinkwrap") Agreement (a current copy of which is attached hereto as Exhibit C) that accompanies any Selected PSC Products shipped by PSC. ISV agrees to enter into a license agreement with such customer that is in writing or acknowledged by customer in electronic format, that contains terms and conditions no less restrictive and substantially similar to those contained in the Shrinkwrap. Furthermore, ISV and ISV's authorized Distributors agree to include in any such license agreement with their respective customer all third party license terms, conditions and restrictions contained in the Shrinkwrap, including, but not necessarily limited to, license restrictions of Sun Microsystems (Java technology), IBM (XML Parser) and RSA. If PSC includes additional third party products in the Selected PSC Products, ISV agrees to update its customer license agreement to include any additional license requirements associated with such additional third party products prior to shipping the Bundled Product containing the additional third party products to customer(s). iii) PSC and its suppliers shall be considered intended beneficiaries under the agreement between ISV and ISV customer, and PSC and its suppliers shall have the right to enforce the provisions of the agreement pertaining to limitations on ISV customer's use of the Selected PSC Products. iv) Selected PSC Products listed in Exhibit A and licensed as part of ISV's Application Modules will have no trade-in value. Furthermore, these licenses can only be used with ISV's Application Modules with which they were acquired. 9) PSC LICENSE ROYALTIES: ISV shall pay PSC a royalty on all Net License and Maintenance fee revenue generated from any source if directly related to the sale, subscription, rental, lease or other form of license or sale for all of ISV's Application Modules (Progress based) worldwide, whether sold directly by ISV or through one of the ISV's business partners or distributors. Annual revenue used to determine the correct royalty rates and percentage discounts will include: Product, New Maintenance, Application Service Provider ("ASP") and Consulting Services revenue, paid to PSC under this agreement. Any revenue generated outside of this Agreement will not be counted towards the annual total used to determine the percentage listed in the table below. The parties agree that ISV's initial annual revenue commitment to PSC from December 1, 2001 to November 30, 2002 shall be $2,400,000. As such, PSC hereby grants to ISV an initial 11% Product Percent of Application ("POA") Rate, a 40% non-POA Product Discount, a 10% Maintenance Royalty Rate for POA Products, and a 30% Maintenance Discount on non-POA Products as defined in the table below. On December 1, 2002, and every December, 1 thereafter, PSC will evaluate ISV's revenue attainment for the prior year and adjust all POA rates and discounts from that point forward based on the following table:
Total Product, New Product Percent of Non-POA Maintenance Maintenance Maintenance, Consulting Application Rate Product Royalty Rate Discount on Services, and ASP Revenue Discount for POA non POA Products Products* 0-$999,999 13% 40% 10% 25% $1,000,000 - 12% 40% 10% 27% $2,399,000 $2,400,000 - 11% 40% 10% 30% $2,999,999 $3,000,000 - 10.5% 40% 10% 35% $3,999,999 Over $4,000,000 10% 50% 10% 35%
- Per Section 2d, ISV shall receive a 15% maintenance discount for End User development products as PSC is providing support for those users. - ISV may also order PSC products solely for ISV's internal development and technical support purposes only, and not for internal or external deployment or any other purpose, for an annual license usage fee of $20,000, the first $20,000 to be due and payable on July 30, 2002, and each July 30 thereafter, for so long as the Agreement and this Amendment remain in effect. Annual maintenance for such licenses is included in the $20,000 annual fee. 10) PSC MAINTENANCE ROYALTIES: a) INITIAL MAINTENANCE TERM: In connection with ISV's initial distribution of Selected PSC Products in conjunction with each ISV license of Application Module(s) to an ISV customer, PSC maintenance coverage for such Selected PSC Products during the initial maintenance term shall be subject to a maintenance royalty based on the table above. Such royalty shall be calculated against ISV's yearly maintenance charge to its customer for the covered application. The above-mentioned fee is based upon a twelve (12) month initial maintenance term. b) RENEWAL MAINTENANCE TERM: For each ISV Application Module license, upon expiration of an initial term of maintenance as described in paragraph lOa of this Section, PSC's maintenance coverage for a twelve (12) month renewal term shall be subject to the appropriate percentage, from the table in section 9 above, of the yearly maintenance charge to ISV's customer. The maintenance fee for renewal maintenance for ISV customers who have allowed their maintenance to lapse beyond a sixty (60) day grace period shall be subject to a reinstatement charge of 2X the maintenance royalty rates listed above. 11) UPDATES/UPGRADES OF THE APPLICATION MODULES. For each Selected PSC Product license purchased for an ISV customer pursuant to Section 9, PSC shall be entitled to payment from ISV when additional application and/or maintenance revenue is generated from such ISV customer in connection with: i) The sale or license of additional Application Modules (with or without Selected PSC Products) ii) Any applicable upgrade or update to the Application Modules and/or the Selected PSC Products iii) Any increase in the licensed user count. PSC's portion of such revenue shall be based upon the then-current product royalty and maintenance royalty formulas in effect at the time of the applicable update, upgrade or license of additional Application Modules. ISV shall include information about any such PSC Product and/or Maintenance Royalties in accordance with the reporting requirements of Section 16 herein. 12) SCOPE OF ROYALTIES: ISV agrees to pay PSC the royalties due hereunder for all software licensed directly or through entities with whom ISV has now (or in the future) entered into resale or other distribution arrangements, including ASP (rental / subscription) or other licensing models that may come into use. The parties agree that, at present, ISV has not yet entered into an ASP Agreement with PSC that would allow ISV to license it's products in an ASP environment. The parties agree to negotiate in good faith the terms and conditions that will govern the parties ASP relationship. Such agreement will be executed as an addendum to the Agreement and this Amendment. 13) SPECIAL PRICING PROVISIONS: The special pricing provisions set forth in this Amendment apply only to the Selected PSC Products distributed solely in conjunction with ISV's Application Modules for installation worldwide in accordance with the terms and conditions of this Amendment and the Agreement. In the event a new ISV customer or existing ISV customer desires to purchase a new PSC product license or upgrade an existing PSC product license for a PSC product not included in the definition of Selected PSC Products listed above, the PSC license and maintenance fees for such new PSC product license or upgrade shall be subject to PSC's then-current price list, terms, and conditions. 14) BUNDLING OF PSC PRODUCTS WITH ISV APPLICATION MODULES: ISV agrees to bundle Selected PSC Products with the Application Modules when submitting proposals and invoices to ISV's customers. ISV agrees that it will not list separately the price for any of the Progress products listed in Exhibit A (Selected PSC Products). The special pricing terms and conditions set forth in this Amendment shall not apply if ISV discounts the bundled application software, together with the Selected PSC Products, at a percentage higher than the discount applied to any other software components of the total sale to its customer. In particular, ISV has informed PSC that if ISV discounts the Bundled Product by more than forty percent (40%), ISV will nevertheless remit to PSC a royalty based on a maximum discount of forty percent (40%). This provision shall exclude sales of the Bundled Products through ISV Distributors. 15) LICENSE ASSIGNMENTS TO SUPPORT MERGER AND ACQUISITION ACTIVITY BY END USERS OF ISV: PSC does not allow the assignment of licenses to a new entity. However, PSC will allow a new license bundle to be provided under POA, to the new company, as long as ISV remits to PSC a POA royalty that is based on the revenue received by ISV for such re-licensing of the Bundled Product; in no case will the royalty be calculated on less than forty percent (40%) of the published list price for the Bundled Products that are being acquired by the new company. This special pricing provision is only allowed to facilitate the merger and acquisition activities of end user companies, and for no other reason. Any sales of new Bundled Products, made under this paragraph, that are reported to PSC more than forty-five (45) days after such sale has occurred, will have the PSC royalty calculated from the full published list price of ISV's Bundled Products that were acquired by the new company, regardless of whether or not the customer paid ISV a fee. 16) LICENSE TRANSFERS: PSC will allow the PSC bundled licenses, acquired under POA, to be transferred within the same legal entity, as long as ISV remits to PSC a POA royalty that is based on the revenue received by ISV for such transfer. 17) PLATFORM CHANGES: PSC will allow the PSC bundled licenses, acquired under POA, to be transferred to a different hardware or software platform, as long as ISV remits to PSC a POA royalty that is based on the revenue received by ISV for such platform change; in no case will the royalty be calculated on less than twenty percent (20%) of the published list price for the Bundled Products that are being transferred to the new platform. Any platform changes that are reported and paid to PSC more than forty-five (45) days after such platform change has occurred will have the PSC royalty calculated from the full published list price of ISV's Bundled Products that were transferred to the new platform, regardless of whether or not the customer paid ISV a fee. Bundled Products must be current on maintenance to be moved to a new platform. Platform change fees required hereunder shall only be payable to PSC for new licenses issued from the Effective Date forward, and shall not be required for licenses previously granted by ISV, where ISV has not, and will not, collected any platform change fees from such customers. 18) SUPPORT: ISV and ISV appointed distributors shall obtain support and maintenance for the Products from the applicable local Progress Software entity, its subsidiary or its authorized distributor company, or in territories where there is no such subsidiary or authorized distributor presence, support and maintenance shall be obtained directly from PSC. ISV and or its Business partners or distributors shall provide first line support for all of ISV's customers. 19) ORDERING AND REPORTING PROCEDURES: a) FOR NEW CUSTOMER ORDERS, INCLUDING UPGRADES AND UPDATES: ISV shall provide a report on a weekly basis of all shipments to customers. During the last five (5) business days of each month, ISV shall provide this report on a daily basis. Such report (as well as all purchase orders provided hereunder) shall contain at least the following information: Customer name, Location, ISV's Net License Fee, Product Royalty owed to PSC, ISV's Net Maintenance Fee, Maintenance Royalty owed to PSC and number of users licensed to use ISV's application. b) FOR RENEWAL MAINTENANCE ORDERS: ISV shall provide PSC with a report on a weekly basis for each ISV customer who has elected to purchase a renewal maintenance term. Such report shall contain at least the following for each customer: customer name, location, serial number, ISV's net maintenance fee charged to the ISV customer for the renewal maintenance term, and PSC's Maintenance Royalty for the renewal maintenance term (in accordance with Section 9 and section 10). c) ORDER FORM TEMPLATE: For all purchase orders submitted by ISV to PSC, ISV shall use the purchase order form template attached hereto as Exhibit F. d) DISPUTED ORDERS, ADMINISTRATIVE CORRECTIONS: ISV's requests for administrative corrections to orders place with PSC under this Amendment will be made in writing by ISV within sixty (60) days of the original order date. e) ORDER PROCESSING AND INVOICING: The parties intend that all of ISV's worldwide software ordering and invoicing hereunder shall be pursuant to the terms of this Agreement and shall take place from each parties respective U.S. based headquarters. Notwithstanding the foregoing, orders may be processed and invoiced in the local country as local sales and customer service conditions require. ISV shall still provide a detailed report to PSC of all worldwide sales per the requirements of this Section 19, regardless of how and where the transaction originated. 20) PAYMENTS. All payments, and reports will be made in US dollars and sent to PSC, 14 Oak Park Bedford, MA 01730. For product, new maintenance and upgrades/updates ordered under section 19a and 19b, ISV shall make payment to PSC within thirty (30) days of ISV's order date. Interest shall accrue on any delinquent amounts owed by ISV to PSC at the lesser of eighteen percent (18%) per annum or the maximum rate permitted by applicable usury law. 21) LICENSE TRANSFERS TO THE POA BUNDLE: Progress licenses purchased originally through ISV, and or one of ISV's distributors can be transferred to the POA bundle for $225 per user paid to Progress. 22) MASTER MEDIA FOR EVALUATION SOFTWARE: a) Upon ISV's request, PSC shall provide ISV with a master copy of generally available evaluation versions of the Selected PSC products on all available operating platforms, and shall grant ISV a license to copy and distribute such evaluation versions of the Selected PSC products to ISV customers in combination with an evaluation version of the Covered Applications subject to the following terms and conditions: b) ISV must display an evaluation agreement in a prominent location in the packaging and/or the installation routines, said evaluation agreement including terms and conditions substantially similar to those set forth in PSC's standard form of evaluation license agreement attached hereto as Exhibit E. Such evaluation agreement between ISV and ISV's customer shall, at a minimum, contain the following terms and conditions: i) Warranty and liability limitations, confidentiality obligations and limitations on copying, modifying, reverse engineering, or altering the evaluation software, which are no less restrictive than those set forth in PSC standard evaluation agreement attached hereto; ii) An express provision notifying ISV's customer that the evaluation software may contain a disabling function triggered automatically upon expiration of the evaluation license period; iii) A provision specifying that the evaluation software should not be used in connection with ISV customer's regular data processing activities; and iv) A provision stating that title to software products of ISV's supplier, including patents, copyrights and property rights applicable thereto, shall at all times remain solely and exclusively with such supplier; c) ISV shall maintain sole control over all copies of the master media and shall not release any such copies to any other party, including, but not limited to, ISV's authorized distributors and replication companies; d) ISV shall indemnify, defend and hold PSC, and its officers, directors, employees and agents harmless from and against any costs, damages, and expenses, including but not limited to reasonable attorney's fees, resulting from any demand, claim, or cause of action against PSC arising out of ISV's distribution of the evaluation version of the Selected PSC Products to ISV customers; and e) Following the termination of this Amendment, ISV shall immediately return to PSC all master copies of the evaluation software for the Selected PSC Products. 23) RESTRICTED COUNTRIES: ISV agrees that it will not distribute or sell Progress products in restricted international countries as defined by the United States Federal government, including the United States Department of Commerce and Office of Munitions Control, United States Department of Treasury. 24) FORECASTING: ISV shall provide a monthly ninety (90) day (3 month) rolling forecast to PSC detailing prospective ISV direct sales and distribution sales information. 25) TERM: Notwithstanding anything to the contrary set forth in Section 10.1 of the Agreement, the initial term of the Agreement and this Amendment shall commence on the Effective Date of this Amendment (with full implementation to occur or before April 1, 2002) and shall continue for twenty four (24) months from such Effective Date or until 01/31/2004, whichever is later. Thereafter, the provisions of this Amendment shall continue in force subject to termination: a) automatically upon termination of the Agreement pursuant to Article 10 of the Agreement b) thirty (30) days after written notice of termination by PSC. In the event PSC terminates this Amendment in accordance with this subsection, ISV's distribution of all PSC products, including the Selected PSC Products described herein shall be subject to the standard terms and conditions of the Agreement (prior to this Amendment) and PSC's then-current pricing policies. 26) Nothing in this Amendment shall alter or modify PSC's rights, pursuant to Section 10.2 of the Agreement, to terminate the Agreement and this Amendment at any time if ISV fails to cure a material breach of its obligations within thirty (30) days of receipt of written notice from PSC. 27) COMPLIANCE REVIEW: Consistent with Section 4.3 of the Agreement, PSC will review compliance with the terms and conditions of the Agreement and this Amendment. PSC intends to conduct such a review two times per year. PSC's failure to perform the compliance review will not prevent PSC from performing future compliance reviews. 28) ASSIGNMENT OF AGREEMENT: Notwithstanding anything to the contrary set forth in Section 11.1 of the Agreement, the special pricing and distribution terms and conditions set forth in this Amendment may not be assigned by ISV. 29) MASTER MEDIA: Upon execution of this Amendment, PSC shall provide ISV with master media, including a set of master control codes, for each of ISV's deployment operating system platforms listed in the attached Exhibit B. Upon request thereafter, PSC shall provide one master media set for each additional ISV operating system platform, provided that the Selected PSC Products are generally available on such operating system platform, or updates to Selected PSC Products generally available on the existing operating system platform, subject to PSC's then-current media handling charges, if any. ISV shall have the right to reproduce and distribute copies for deployment to its customers in accordance with the terms and conditions of the Agreement and this Amendment. ISV shall maintain sole control over all copies of the master media and shall not release any such copies to any other party, including its authorized distributors. PSC reserves the right to withhold shipment of new master media if ISV is not current in reporting and payment to PSC. 30) SEVERABILITY: In the event any provision of the Agreement or this Amendment is held to be invalid or unenforceable, the remaining provisions will remain in full force and effect. 31) NO WAIVER: PSC's failure to enforce, or insist that ISV comply with a term in this Agreement is not a waiver of PSC's rights. Acceptance of royalties or maintenance payments by PSC is not a waiver of PSC's rights. The rights and remedies of PSC are separate and in addition to each other. 32) SCOPE: PSC and ISV agree that this is the complete agreement between the parties regarding the subject matter herein. Furthermore, PSC and ISV agree that any business entities doing business under the ownership or control of either party (including a division, subsidiary, etc.), shall also be bound by the terms and conditions of the Agreement and this Amendment. The parties agrees to furnish each of their respective subsidiaries or authorized distributor companies with a copy of the Agreement and this Amendment and shall use reasonable efforts to request that each such subsidiary or authorized distributor adhere to the terms herein and keep such terms confidential. 33) CONTRACTS AND AMENDMENTS: Additional agreements or amendments between the parties will be written as amendments to this Amendment. If subsequent to the signing of this Amendment, ISV enters into agreements that are in conflict with the terms of this Amendment and such conflict is not cured by ISV within thirty (30) days notice from PSC of the conflict, PSC may, at its option, terminate this Amendment, including the special pricing offered herein. If PSC chooses to terminate this Amendment, ISV will be granted the right to procure PSC products under ISV's original AP agreement dated February 8, 1995. ISV discount on PSC product shall then be forty percent (40%) off of PSC's then-current list prices, and the ISV discount on maintenance shall be twenty five percent (25%) off of PSC's then-current list prices. Except as modified herein, all provisions of the Agreement are hereby confirmed and in all respects this Amendment (including Exhibits A through F hereto) and the Agreement shall be read and construed together as if the provisions of this Amendment had been part of the Agreement. The Agreement, concerning the subject matter hereof as modified by this Amendment, completely supersedes any earlier agreements between the parties. No other modifications or additions are made to the Agreement. Except as may be modified or amended by this Amendment, the terms and conditions of the Agreement shall remain in effect until termination of the Agreement. In the event of conflict between the terms and conditions of the Agreement and this Amendment, the terms and conditions of this Amendment shall govern. IN WITNESS WHEREOF, this Amendment has been executed under seal for and on behalf of each of the parties hereto by their duly authorized representative. ISV: FRONTSTEP SOLUTIONS GROUP, INC. PROGRESS SOFTWARE CORPORATION By: /s/ Daryll Wartluft By: /s/ Justin P. Wright -------------------------------- --------------------------------- Name: Daryll Wartluft Name: Justin P. Wright ------------------------------ ------------------------------- Title: Exec. VP, Products Group Title: VP, North American Operations ------------------------------ ------------------------------ "This document has been reviewed & approved by the PSC Legal Dept. DLK Initials" EXHIBIT A SELECTED PSC PRODUCTS: Versions 8.3b and above of: Progress Products: Enterprise Database Server Client Networking Query Results AppServer WebSpeed Transaction Server 1 User 4GL Development System 1 User Provision (Available platforms only) SQL Client Access (Available versions only) EXHIBIT B ISV CURRENT APPLICATION MODULES AND PRICING: Application Modules: Application Prices: EXHIBIT C PSC's END USER PRODUCT LICENSE ("SHRINKWRAP") AGREEMENT -- Version 9.1C End User Product License Agreement ("Agreement") CAUTION: BY INSTALLING THE SOFTWARE OR ENTERING THE CONTROL CODES YOU ACKNOWLEDGE YOUR UNDERSTANDING AND ACCEPTANCE OF THE FOLLOWING TERMS AND CONDITIONS. PLEASE CAREFULLY READ THESE TERMS AND CONDITIONS BEFORE INSTALLING THE SOFTWARE OR ENTERING THE CONTROL CODES. IF YOU DO NOT AGREE WITH THEM, PROMPTLY RETURN THE SOFTWARE, DOCUMENTATION, AND ALL COPIES THEREOF TO PROGRESS SOFTWARE CORPORATION OR THE SUPPLIER FROM WHICH IT WAS ACQUIRED FOR A FULL REFUND OF THE LICENSE FEES, IF ANY, PAID FOR SAID SOFTWARE. Subject to the following terms and conditions, Progress Software Corporation ("PSC") grants to you ("User") a non-exclusive license to use the enclosed software product(s) for which User has purchased a valid license and has received the requisite control codes (each such software product referred to individually herein as "Product" or collectively as "Products") and related manuals in written or electronic form ("Documentation"). The media on which the Products are recorded may also contain other software products for which User has not purchased a license. User shall have no right to use those other software products. 1. Scope of License 1.1 This license allows User to install and use the Products solely for internal use subject to the terms and conditions of this Agreement and the licensing use restrictions set forth in the attached Exhibit A, and as set forth in the applicable license addendum, accepted purchase order (subject to Section 9 below), or other PSC documentation. If a Product licensed to User hereunder is a development product, then the following additional restrictions apply: (a) User's license to use the Product shall be limited to use for internal application development and support purposes only, and (b) if the Product includes database or server components, such components are limited to use by the User for development and support purposes only. 1.2 Neither the Products nor the Documentation may be transferred, sold, assigned, or otherwise conveyed by User to another party. User may not sell, rent, license, or grant sublicenses, leases, or other rights in the Products or Documentation to others. This Agreement automatically terminates if User transfers possession of any copy of the Products, Product Updates or Documentation to another party. User shall have no right to use the Products to provide time sharing services or act as or operate a service bureau or provide subscription or hosting services for others. 1.3 For the purposes of this Agreement a "Product Update" shall mean any update, patch, new release and/or new version of a licensed Product delivered to User subject to and in accordance with PSC's then-current maintenance and support policies, fee requirements, and license terms and conditions in effect at the time such update, patch, new release and/or new version is delivered to User. Nothing herein shall be construed as an obligation of PSC to deliver any Product Update to User under this Agreement. A Product Update replaces part or all of a Product or Product Update previously licensed. Use of a Product Update terminates the license to use the Product or that part of the Product which the Product Update replaces and User shall destroy or return to PSC all copies of any prior Product or Product Update. In the event User obtains a Product Update, then, subject to the provisions above, User's continued use of the Product and/or the Product Update will be subject to the terms and conditions of the license agreement accompanying the Product Update. 1.4 For Products that contain Java(TM) Technology, the following provisions apply: Java Platform Interface In the event that User creates any Java-related API and distributes such API to others for applet or application development, User must promptly publish an accurate specification for such API for free use by all developers of Java-based software. User may not modify the Java Platform Interface ("JPI", identified as classes contained within the "java" or "sun" package), by creating additional classes within the JPI or otherwise causing the addition to or modification of the classes in the JPI. Java software technology is not designed or intended for use in on-line control of aircraft, air traffic, aircraft navigation or aircraft communications; or in the design, construction, operation or maintenance of any nuclear facility. User will not use or, if applicable, redistribute the Java software technology for such purposes. PSC AND ITS LICENSORS EXPRESSLY DISCLAIM ANY LIABILITIES, REPRESENTATIONS OR WARRANTIES (EITHER EXPRESS OR IMPLIED) FOR SUCH USE. For Products that contain technology of RSA Security, Inc., the following provisions apply: User agrees not to remove, alter or destroy any proprietary, trademark or copyright notices placed upon or contained within the RSA software, user manuals or any related materials or documentation. User acquires no rights of any kind in or to any RSA trademark, trade name, logo or product designation under which the RSA software was or is marketed and shall not make any use of the same for any reason. 1.5 If one or more of the Products contain any files including a notice stating that the contents of such files are subject to the terms and conditions of the POSSENET Public License, such files, to the extent that they are supplied as part of the Products, will be subject to the terms and conditions of this Agreement which will supercede the POSSENET Public License. The above-referenced files are also available, apart from the Products, on the POSSENET.org web site at http://www.possenet.org. If User obtains the above-referenced files other than as part of the Products, then User's use of such files will be subject to the terms and conditions of the POSSENET Public License, a copy of which can be obtained at hpp://www.possenet.org/license.html. 2. Progress Software's Rights The Products and Documentation are proprietary products of PSC, or its licensors, and are protected by copyright law. By virtue of this Agreement, User acquires only the non-exclusive right to use the Products and does not acquire any rights of ownership in the Products or the media upon which they are embodied. PSC, or its licensors, shall at all times retain all right, title, and interest in the Products and the media. 3. Non-Disclosure; Copies; Alterations User acknowledges that the Products are the valuable proprietary and trade secret information of PSC or its licensors. User shall (i) limit use and disclosure of the Products to its employees and to its consultants who agree to be bound by the terms of this Agreement; (ii) not provide or disclose any of the Products to another party; and (iii) take all reasonable precautions to maintain the confidentiality of the Products. User agrees not to cause or permit the reverse engineering, disassembly, copying, or decompilation of the Products, except to reproduce machine-readable object code portions for backup purposes and installation of new releases, under penalty of license termination but not exclusive of any other remedies. If the Products are licensed to User for use in a country which is a member of the European Community, User may reverse engineer and/or decompile the Products to the extent that sufficient information is not available for the purpose of creating an interoperable software program (but only for such purposes and to the extent that sufficient information is not provided by PSC upon written request). Furthermore, User is not restricted in a country which is a member of the European Community from observing, studying or testing the functioning of the Products solely in order to understand the ideas and principles which underly any element of the Products. User may copy the Products for installation, backup, or other purposes as described in the Documentation. User may not copy nor allow others to copy the Products or any Product Update for any other purpose. User agrees not to remove any product identification, copyright notices, or other notices or proprietary restrictions from the Products. User agrees not to disclose any benchmark results relating to its use of the Products without the prior written consent of PSC. 4. Limited Warranty PSC warrants that the materials of both the Product media and Documentation are not defective and that the software is properly recorded on the media. If either the media (such as the diskettes, cartridges, CD-ROMs, and magnetic tapes) or the Documentation is physically defective, PSC will replace it free of charge during the ninety (90) day warranty period. User's remedy is limited to return of the media and/or Documentation to the supplier or to PSC for replacement. This Limited Warranty is in effect for claims made within ninety (90) days from User's purchase of a Product. PSC warrants that it has the right to license the Products. PSC will defend User against any claim based on an allegation that a Product infringes a U.S. patent or copyright, but only if PSC is notified promptly in writing of such claim and is given sole control of the defense thereof and all related settlement negotiations relating thereto. Notwithstanding the foregoing, PSC shall not be liable to User for any claim arising from or based upon the alteration or modification of any of the Products. THE LIMITED WARRANTY SPECIFIED IN THIS SECTION 4 SETS FORTH THE ENTIRE WARRANTIES AND REPRESENTATIONS PROVIDED BY PSC TO USER WITH RESPECT TO THE PRODUCTS. SUCH LIMITED WARRANTY IS PROVIDED SOLELY BY PSC AND NOT PSC'S LICENSORS. EXCEPT FOR THE LIMITED WARRANTY PROVIDED SOLELY BY PSC TO USER PURSUANT TO THIS SECTION 4, NEITHER PSC NOR ITS LICENSORS, NOR ANY OF THEIR RESPECTIVE SUPPLIERS, MAKE ANY EXPRESS WARRANTIES OR REPRESENTATIONS RELATING TO THE PRODUCTS OR ANY SERVICES RELATED THERETO, AND FURTHER, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, DISCLAIM ALL IMPLIED WARRANTIES AND REPRESENTATIONS INCLUDING BUT NOT LIMITED TO ALL IMPLIED WARRANTIES AND REPRESENTATIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT, WITH RESPECT TO THE PRODUCTS AND ANY SERVICES RELATED THERETO. For example, PSC does not warrant that there are no discrepancies between the Products and the Documentation, nor that errors cannot arise during the use of the Products. Without limiting the foregoing warranty disclaimers, User acknowledges that if the Product or Products licensed to User hereunder contain IBM's XML Parser for C++, then such IBM technology is licensed to User "AS IS" without warranty of any kind, whether express or implied. Neither PSC nor IBM assume any liability for any claim that may arise regarding the use of such IBM technology. THE LIMITED WARRANTY SPECIFIED IN THIS SECTION 4 GIVES THE USER SPECIFIC LEGAL RIGHTS, AND MAY ALSO IMPLY OTHER RIGHTS WHICH VARY FROM STATE TO STATE. SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF IMPLIED WARRANTIES, AND DO NOT ALLOW A LIMITATION ON HOW LONG ANY IMPLIED WARRANTY LASTS, SO THE ABOVE LIMITATIONS MAY NOT APPLY. No PSC employee, supplier, or agent is authorized to make any modification or addition to this warranty. 5. Limitation of Liability TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, THE LIABILITY OF PSC, IF ANY, FOR DAMAGES RELATING TO ANY PRODUCT AND/OR SERVICE SHALL BE LIMITED TO THE ACTUAL AMOUNTS PAID BY USER FOR SUCH PRODUCT AND/OR SERVICE. PSC'S LICENSORS AND THEIR SUPPLIERS SHALL HAVE NO LIABILITY TO USER FOR ANY DAMAGES SUFFERED BY USER OR ANY THIRD PARTY AS A RESULT OF USING THE PRODUCTS OR DISTRIBUTING ANY PORTION THEREOF, OR AS A RESULT OF ANY SERVICES RELATING THERETO. NOTWITHSTANDING THE FOREGOING, IN NO EVENT SHALL PSC, ITS LICENSORS, OR ANY OF THEIR RESPECTIVE SUPPLIERS BE LIABLE FOR ANY LOST REVENUE, PROFIT OR DATA, OR FOR INDIRECT, PUNITIVE, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER, INCLUDING, WITHOUT LIMITATION, ANY COMMERCIAL DAMAGES OR LOSSES, HOWEVER CAUSED AND REGARDLESS OF THE THEORY OF LIABILITY, ARISING OUT OF THE USE OR INABILITY TO USE THE PRODUCTS, OR ANY PORTION THEREOF, OR ANY SERVICES, EVEN IF PSC, ITS LICENSORS AND/OR ANY OF THEIR RESPECTIVE SUPPLIERS HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. SOME STATES DO NOT ALLOW THE EXCLUSION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATIONS MAY NOT APPLY. 6. Export Administration User agrees to comply fully with all relevant regulations of the United States Department of Commerce and with the United States Export Administration Act to assure that the Products and Documentation are not exported or re-exported in violation of United States law. Further, User shall not directly or indirectly export or re-export any Product, Documentation, or the direct product thereof without first obtaining PSC's written approval. THE RSA SOFTWARE AND TECHNOLOGIES LICENSED UNDER THIS AGREEMENT ARE SUBJECT TO UNITED STATES EXPORT CONTROL LAWS AND REGULATIONS WHICH RESTRICT EXPORTS, REEXPORTS AND DISCLOSURES TO FOREIGN PERSONS OF CRYPTOGRAPHIC ITEMS AND ARE ALSO SUBJECT TO CERTAIN FOREIGN LAWS WHICH MAY RESTRICT THE EXPORT, REEXPORT, IMPORT AND/OR USE OF SUCH ITEMS. PERFORMANCE OF THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO ANY EXPORT LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS IMPOSED BY THE UNITED STATES OF AMERICA, OR BY ANY OTHER COUNTRY OR GOVERNMENTAL ENTITY ON THE RSA SOFTWARE, PRE-RELEASE SOFTWARE OR OF INFORMATION RELATING TO EITHER. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, LICENSEE SHALL NOT IMPORT, EXPORT, OR REEXPORT, DIRECTLY OR INDIRECTLY, ANY RSA SOFTWARE OR PRE-RELEASE SOFTWARE OR INFORMATION PERTAINING THERETO TO ANY COUNTRY OR FOREIGN PERSON TO WHICH SUCH IMPORT, EXPORT, OR REEXPORT IS RESTRICTED OR PROHIBITED, OR AS TO WHICH SUCH COUNTRY, GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF IMPORT, EXPORT, OR REEXPORT WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL. LICENSEE UNCONDITIONALLY ACCEPTS FULL RESPONSIBILITY FOR LICENSEE'S COMPLIANCE WITH THESE REQUIREMENTS. 7. U.S. Government Restricted Rights The Products are provided with RESTRICTED RIGHTS. Use, duplication or disclosure by the U.S. Government is subject to restrictions as set forth in this Agreement and as provided in DFARS 227.7202-1 (a) and 227.7202-3 (a) (1995), DFARS 252.227-7013 (c) (1) (ii) (Oct 1988), FAR 12.212 (a) (1995), FAR 52.227-19 (June 1987), or FAR 52.227-14 (ALT III) (June 1987), as applicable. Contractor/manufacturer is Progress Software Corporation, 14 Oak Park, Bedford, MA 01730. Unpublished--all rights reserved under the copyright laws of the United States. 8. Records Inspection User shall maintain books and records in connection with User's actions under this Agreement. Such records shall include at a minimum the number of licenses purchased and being used by User. PSC may, at its expense, audit the records of User to ensure compliance with the terms of this Agreement. Any such audit shall be conducted during regular business hours at User's offices and shall not interfere unreasonably with User's activities. If any audit reveals that User has underpaid license and/or maintenance fees to PSC, User shall be invoiced for such underpaid fees based on PSC's list price in effect at the time the audit is conducted. If the underpaid fees are in excess of five percent (5%) of the license fees paid by User, then User shall pay PSC's reasonable costs of conducting the audit. 9. Miscellaneous THIS AGREEMENT IS THE COMPLETE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE PRODUCTS AND SUPERCEDES ANY OTHER COMMUNICATION OR ADVERTISING WITH RESPECT TO THE PRODUCTS. If User has signed a license agreement with PSC or one of PSC's subsidiary corporations, and if there is a conflict between the terms and conditions of the signed license agreement and this Agreement, the terms and conditions of such signed license agreement shall govern with respect to such conflict. To the extent there are any terms and conditions contained in User's purchase order or other documentation supplied by User ("User Documents") that are in conflict with or in addition to those terms and conditions specified in this Agreement, the terms and conditions contained in the User Documents shall be deemed to be stricken and the terms and conditions of this Agreement shall govern. Except as otherwise expressly set forth herein, this Agreement is governed by the laws of the Commonwealth of Massachusetts, excluding conflict of laws provisions. 10. Special Canadian Provisions FOR USERS LOCATED IN CANADA, UNLESS EXPRESSLY STATED OTHERWISE, THE FOLLOWING SPECIAL TERMS AND CONDITIONS SHALL APPLY IN LIEU OF ANY CORRESPONDING PROVISION IN THE END USER PRODUCT LICENSE AGREEMENT. ALL OTHER PROVISIONS OF THE END USER PRODUCT LICENSE AGREEMENT SHALL APPLY IN ALL RESPECTS. PSC will defend User against any claim based on an allegation that a Product infringes a Canadian patent or copyright, but only if PSC is notified promptly in writing of such claim and is given sole control of the defense thereof and all related settlement negotiations relating thereto. However, except as specifically stated above, PSC MAKES NO WARRANTY, CONDITION, OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, INCLUDING WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THIS PRODUCT AND DOCUMENTATION. User agrees to comply fully with all relevant laws and regulations of Canada and with the Governor in Council to assure that the Product and Documentation are not exported or re-exported in violation of Canadian law. The terms and conditions specified in the immediately preceding sentence are in addition to, and do not supercede, User's obligations to comply with the United States Export Control laws and regulations pursuant to Section 6 above. The parties have required that this Agreement and all documents relating thereto be drawn up in English. Les parties ont demand e que cette convention ainsi que tous les documents qui s'y rattachent soient rediges en anglais. This Agreement shall be governed by the laws of the Province of Ontario and the laws of Canada therein. EXHIBIT A TO PSC END USER PRODUCT LICENSE AGREEMENT Depending on each of the Products licensed, your license grant is subject to the following descriptions and use restrictions: LICENSE TYPES PSC products identified by PSC as being licensed under the "Client" license type are licensed to the combination of a specific network, vendor operating system, and site. A site is defined as a single building or campus of buildings. These PSC products need to be re-licensed (subject to PSC's consent) if there is a change to any of these elements of the license. These PSC products are licensed on a per-concurrent user basis (as described in further detail below). In wide-area network configurations, individual licenses must be purchased for each site. PSC products identified by PSC as being licensed under the "Server" license type are licensed to the combination of a specific machine, vendor operating system, and site (as defined in the immediately preceding paragraph). These PSC products need to be re-licensed (subject to PSC's consent) if there is a change to any of these elements of the license. Unless otherwise expressly agreed to in writing by PSC, PSC licenses the Server type PSC products under one of the following licensing models: (1) per-concurrent user accessing the server, (2) per agent (a process executing in the server) or (3) flat fee per machine. If multiple machines are running a PSC product, each must be licensed separately. CONCURRENT USER LICENSES PSC products of the "Client" license type, including, without limitation, Progress(R) Client Networking, Progress(R) Personal RDBMS, and Progress(R) Results, are licensed on a per-concurrent user basis. The licensed concurrent user count for each such "Client" type PSC product must be at least equal to the total number of machines or display devices that may be running the PSC product or application simultaneously. A PSC product of the "Client" license type may run on any number of machines or display devices on the network as long as the total number of concurrent users does not exceed the number licensed. Certain PSC products of the "Server" type, including, without limitation, Progress(R) Workgroup RDBMS, Progress(R) Enterprise RDBMS, Progress(R) DataServer, and Progress(R) AppServer(TM) products, are licensed on a per-concurrent user basis. The licensed user count for each such Server type PSC product must be at least equal to the total number of display devices that may be accessing the server simultaneously. A "display device" is any machine or device being actively used by a person or process, which could at any time access or use the Server type PSC product. It does not matter when or for how long the display device is actually connected to, or accessing the Server type PSC product, only that it has the potential to do so at any time, depending on actions or instructions from a user or process that is actively using the display device. All display devices must be licensed as users regardless of how they are accessing the Server type PSC product, including, without limitation, directly via a host/terminal connection, via a client-server connection, via a Progress(R) AppServer product, or via any other server or client proxy system. This includes, for example (and without limitation), J2EE servers that can multiplex a single database connection to support multiple users. It also includes, but again is not limited to, intermediate data structures, such as (but not limited to) OLAP cubes or CorVu Dynamarts, that are accessed by multiple users but may retrieve data via only one database connection. All display devices that can access the database server directly or indirectly must be counted as users. In general, the user count will equal the actual number of people or devices actively using the Server type PSC product. However, in cases where background jobs exceed the number of active users, the licensed user count is the number of background jobs. Each Server type PSC product licensed on a per-concurrent user basis must be licensed for the peak number of concurrent users required. AGENT-BASED LICENSES Progress(R) WebSpeed(R) Transaction Server is a "Server" type PSC product licensed on a per agent basis where an agent is a process executing in the server. Such PSC product is licensed according to the total number of agents available to the licensed machine, not by the number of users accessing the agents. The licensed agent count must be equal to or exceed the total number of concurrent WebSpeed(R) Transaction Server agents running on the licensed machine. A dedicated Progress(R) RDBMS or Progress(R) DataServer user must be licensed for each licensed WebSpeed(R) Transaction Server agent. As further clarification, the licensed Progress RDBMS or Progress DataServer user count must be equal to or greater than the sum of the total number of licensed Progress(R) WebSpeed(R) Transaction Server agents, plus the total number of simultaneous display devices that are not connected via WebSpeed, but also are accessing the Progress RDBMS or DataServer. MACHINE-BASED LICENSES Certain PSC product(s) of the "Server" type, including, without limitation, Progress(R) Name Server Load Balancer, are licensed to a specific machine for a flat fee, regardless of number of users or CPUs in the licensed machine. A license must be purchased for each machine running such Server type PSC product. Product Specific Licensing Requirements Progress Database Servers Progress Workgroup RDBMS and Enterprise RDBMS are "Server" type PSC products licensed on a concurrent-user basis. A user does not have to be connected to the database to be a concurrent user. If products are used that could reduce the number of direct database connections needed to less than the actual number of concurrent users being served (examples of such products include, without limitation, AppServer or Citrix), the "Server" type PSC product licenses must still be licensed based on the number of concurrent display devices in use. For illustration purposes, and without limiting the foregoing provisions, assuming the User has a 10 user Client/Server configuration on a system running Citrix, then the User must obtain a 10 concurrent-user license for Progress Client Networking and a 10 concurrent user license for Progress RDBMS, even if Citrix uses a local connection to the database through shared memory. The provisions above also apply with regard to all Progress or third party application servers and intermediate data stores (such as OLAP cubes) that reduce the number of database connections need to access multiple users. All display devices that access data from the database, directly or indirectly, must be licensed as a user. Progress AppServers Progress AppServer is a "Server" type PSC product licensed on a concurrent-user basis. The licensed user count for such Server type PSC product must be at least equal to the total number of display devices (and background jobs) that can connect to the licensed Progress AppServer simultaneously. In distributed processing environments where Progress AppServers are licensed to run on multiple machines (each machine requires a separate Progress AppServer license), each display device counts as one user for each Progress AppServer connected to that display device. Concurrent-user based licensing applies for stateless AppServers as well. For illustration purposes, and without limiting the foregoing, assume an application uses 10 stateless AppServers to service 50 clients, a 50 user AppServer license is required. All types of client display devices that can connect to the Progress AppServer must be licensed as Progress AppServer users. For illustration purposes, and without limiting the foregoing, all display devices in use that can connect to a Progress AppServer via a Java or ActiveX client or application are considered users and must be counted when determining the correct Progress AppServer user license. All Progress WebClient users must be similarly licensed as Progress AppServer users. The Progress WebClient product is licensed under a separate license agreement. Progress AppServer Plus Progress AppServer Plus products are "Server" type PSC products licensed on a concurrent-user basis. The Progress AppServer Plus products consist of a bundled license of Progress AppServer and Progress Client Networking. The licensed user count must be calculated in accordance with the immediately preceding section titled "Progress AppServers". User is not required to purchase a separate Client Networking license when purchasing a license to use a Progress AppServer Plus product because Client Networking is part of the bundle. The Progress AppServer Plus products are subject to certain minimum user count purchase requirements. EXHIBIT D ISV Authorized Distributors: Exhibit E PROGRESS SOFTWARE EVALUATION LICENSE AGREEMENT Company Name (User)________________________________________________________ Contact Name_______________________________________________________________ Address____________________________________________________________________ City, State, Zip Code______________________________________________________ Telephone No. ________________________________ Fax No._____________________ Date _________________________________________ Agreement made this date by and between User listed above and Progress Software Corporation (PSC): PSC grants you a non-transferable, non-exclusive license to use the following PSC computer software and/or documentation, herein known as PRODUCT, Solely for the purposes of evaluation and testing. Core Product ________________________________________________________ ________________________________________________________ Optional Product ________________________________________________________ ________________________________________________________ Computer Model/ ________________________________________________________ Operating System ________________________________________________________ Version ________________________________________________________ Media Type ________________________________________________________ Expiration Date ________________________________________________________ PSC will provide User with such PRODUCT provided that all Representatives of User agree to limit the use of PRODUCT as follows: 1. The license to use the PRODUCT shall be effective upon the User's receipt of a copy of the PRODUCT and remain effective for a period of thirty (30) days thereafter, or until such time as PSC withdraws the PRODUCT from the evaluation, whichever occurs first. 2. User shall have the right to use the PRODUCT on User's computer system only for the purposes of evaluation and testing the PRODUCT. The license granted herein includes the right to copy the PRODUCT for the purposes of using the PRODUCT on User's computer system and for archive purposes. No other right to copy or reproduce the PRODUCT or the PRODUCT documentation is granted hereunder. 3. User shall, during the term of this Agreement, periodically provide to PSC information describing the results of all evaluations and tests of the PRODUCT. User agrees to treat the test results as confidential, will not divulge the results to any third party and will not make any use of such information except in connection with it's evaluation of the PRODUCT. 4. User shall have the right to use the PRODUCT at no charge during the term of this Agreement. 5. If User fails to comply with any of it's obligations hereunder, PSC will have the right to terminate the license and take immediate possession of the PRODUCT and all copies. 6. The PRODUCT and all copies thereof are PSC proprietary property and title thereto remains in PSC. All applicable right in copyrights, trademarks and trade secrets in the PRODUCT are and will remain in PSC. User shall not sell, transfer, publish, disclose, display or otherwise make available the PRODUCT or copies thereof in any form to any third parties without the prior written approval of PSC. User agrees to secure and protect the PRODUCT AND COPIES THEREOF IN A MANNER CONSISTENT WITH THE MAINTENANCE OF PSC's right therein and to take appropriate action by instruction or agreement with its employees and other parties who have access to the PRODUCT or copies thereof to satisfy its obligations hereunder. 7. PSC MAKES NO REPRESENTATIONS OR WARRANTIES REGARDING THE USE OF THE PRODUCT, INCLUDING BUT NOT LIMITED TO, MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE. User shall have the sole responsibility for adequate protection and back-up of all data use in connection with the PRODUCT. 8. Promptly after any termination or expiration of this Agreement, User shall, unless otherwise agreed in writing between PSC and User, deliver to PSC the PRODUCT and destroy or render unusable all backup or other copies thereof. In addition, an authorized employee of User shall certify in writing to PSC that the PRODUCT has been destroyed or rendered unusable. This agreement will be governed by, and construed and enforced in accordance with, the substantive laws of the Commonwealth of Massachusetts. User By:_________________________________________________ Duly Authorized Title:______________________________________________ Date:_______________________________________________ Progress Software Corporation By:_________________________________________________ Duly Authorized Title:______________________________________________ Date:_______________________________________________ page 20 EXHIBIT F ISV to Progress Order Form Template REPORT - PROGRESS ORDER
CO# Date: Type: Installed : Cust# (cust#) (name)(city)(state)(country) Phone: - -------------------------------------------------------------------------------- Ship To: Company: Phone: Addressl: Fax: Address2: Email: Address3: Address4: Ship Via: City, State, Zip Country: ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- DETAIL Send SEQ. TYPE QTY ITEM USERS VERS PLATFORM MEDIA SN# MEDIA ------------------------------------------------------------------------------- Dollars PSC PSC PSC PSC POA POA POA Reinstate Reinstate Product Product Maint Maint Product Product Maint Maint Maint SEQ. TYPE QTY SKU LTSL ROYALTY LIST ROYALTY NET ROYALTY ROYALTY LIST --------------------------------------------------------- - --------------------------------------------------------------------------------
page 21 EX-10.C 6 l96355aexv10wc.txt EXHIBIT 10(C) Exhibit 10(c) AMENDED AND RESTATED FRONTSTEP, INC. STOCK OPTION PLAN FOR OUTSIDE DIRECTORS 1. Purpose. The purpose of this Frontstep, Inc. Stock Option Plan for Outside Directors (the "Plan") is to secure the benefits which accrue from a program of offering to the Outside Directors of Frontstep, Inc. (the "Company") the opportunity to acquire and increase their proprietary interest in the success of the Company and thereby to attain the objectives of this Plan which are: (a) to obtain and retain the services of Participants; (b) to encourage and reward efficient and profitable operation; and (c) to promote the development of the business of the Company. 2. Definitions. Whenever used herein, the following terms shall have the meaning set forth below: (a) "1933 Act" means the Securities Act of 1933, as amended. (b) "1934 Act" means the Securities Exchange Act of 1934, as amended. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (e) "Committee" means the committee of the Board, whose membership shall be determined as provided under Section 3 hereof, appointed to administer the Plan. (f) "Common Shares" means the common shares of the Company. (g) "Company" means Frontstep, Inc. (h) "Director" means a member of the Board of the Company. (i) "Fair Market Value" means the average of the highest and lowest prices quoted for the Common Shares as reported on the Nasdaq National Market System on a particular day, or, if Common Shares were not traded on such date, on the next preceding day on which Common Shares were traded. (j) "For Cause" means on account of any act of (i) fraud or intentional misrepresentation, (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary, (iii) the conviction of a felony or (iv) intentional and repeated violations of written policies of the Company. (k) "Option" means any option to purchase Common Shares under this Plan, all of which options shall be non-qualified stock options under the Code. (l) "Outside Director" shall mean a Director who is not an employee of the Company or any Subsidiary. (m) "Participant" means an individual to whom an Option is granted under this Plan. (n) "Plan" means this Amended and Restated Frontstep, Inc. Stock Option Plan for Outside Directors. 1 (o) "Rule 16b-3" means Rule 16b-3 as promulgated and interpreted by the SEC under the 1934 Act, or any successor rule or regulation thereto as in effect from time to time. (p) "SEC" means the Securities and Exchange Commission or any successor thereto and includes the staff thereof. (q) "Subsidiary" means any corporation (other than the Company) in an unbroken ownership chain of corporations beginning with the Company if, at the time of the granting of any Options under the Plan, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3. Administration. (a) Composition of Committee. This Plan shall be administered by a Committee consisting of not less than three (3) Directors of the Company designated from time to time by the Board, provided each member of the Committee shall qualify to administer the Plan as contemplated by Rule 16b-3. (b) Authority of Committee. In addition to the other powers granted to the Committee hereunder, the Committee shall have the authority, subject to the terms of this Plan, to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan. A majority of the members of the Committee shall constitute a quorum for the transaction of business at any meeting of the Committee. The Committee may act by a majority of its members at a meeting or by a writing or writings signed by all of its members. Whenever this Plan authorizes or requires the Committee to take any action, make any determination, or form any opinion, then any such action, determination, decision or opinion by or of the Committee shall be conclusively binding upon all persons. Notwithstanding anything else contained in this Plan to the contrary, any action that may be taken by the Committee pursuant to this Plan also may be taken by the Board. 4. Common Shares Subject to this Plan. The Common Shares subject to Options shall be either authorized and unissued Common Shares or treasury Common Shares of the Company. Subject to the provisions of Section 8 hereof, the aggregate number of Common Shares which may be issued pursuant to the exercise of Options under this Plan shall be 200,000. Except as otherwise provided herein, if an Option shall expire and terminate for any reason, in whole or in part, without being exercised, the number of Common Shares as to which such expired or terminated Option shall not have been exercised may again become available for the grant of Options. 5. Grant of Options. (a) Eligibility. Persons eligible for Options under this Plan shall consist of Outside Directors. In selecting the Outside Directors to whom Options will be awarded pursuant to Section 5(b)(i) below and the number of Common Shares subject to such Options, the Committee shall consider the value of their services to the Company and any other factors the Committee may deem relevant. (b) Grant of Options to Outside Directors. (i) Options under this Plan shall automatically be granted to each Outside Director, whether or not he is a member of the Committee, as provided in subsection 5(b)(ii) below and additional options may be granted under this Plan in the discretion of the Committee on terms and conditions not inconsistent with the provisions of this Plan. 2 (ii) An Option to purchase 20,000 Common Shares shall be granted automatically to each Outside Director who is elected or otherwise chosen to serve as an Outside Director, regardless of whether the Outside Director is a member of the Committee. Said Option shall be granted on the second business day after the day such individual is elected or otherwise chosen to serve as an Outside Director. (iii) The foregoing subparagraphs (i) and (ii) notwithstanding, Options shall not be granted to any Outside Director at any time when such grant would result in a violation or possible violation of federal or state securities laws. 6. Terms and Conditions of Options. Each Option shall be evidenced by an option agreement which shall be in such form as the Committee shall from time to time approve and which shall comply with and be subject to the following terms and conditions: (a) Number of Shares. Each option agreement shall state the number of Common Shares covered by the agreement, as determined by the Committee for discretionary grants of Options pursuant to Section 5(b)(i) or as set forth in Section 5(b)(ii) for automatic grants of Options. (b) Option Price and Method of Payment. The purchase price pursuant to which Common Shares may be purchased under each Option granted hereunder shall be one hundred percent (100%) of the Fair Market Value of the Common Shares subject to such Option on the date the Option is granted. An Option may be exercised by giving to the Company notice in writing (in such form as may from time to time be specified by the Committee) stating the number of Common Shares subject to the Option in respect of which it is being exercised, accompanied by a check or cash in full payment of all Common Shares in respect of which the Option is being exercised. Each such notice of exercise of an Option shall be delivered to the General Counsel of the Company, or if no General Counsel is serving the Company at such time, to the Secretary of the Company. The Company shall have a reasonable time after receipt of any such notice in which to make delivery of share certificates for the Common Shares in respect of which an Option is exercised. Notwithstanding the foregoing, no Option granted hereunder shall be exercisable during the first six months after the date such Option is granted, unless otherwise permitted by the rules pertaining to Section 16 of the 1934 Act. In addition, no Option shall be exercisable prior to the approval of this Plan by the shareholders of the Company. (c) Option Period, General. Options shall be effective on and shall have a term of ten years from the date of grant. Each such Option shall be subject to earlier termination as provided in subsection (d) of this Section 6. (d) Exercisability of Options. (i) Except as otherwise provided in this subsection (d), any Option is exercisable only by the Participant and is exercisable only while the Participant is a Director. (ii) Except as otherwise set forth herein, each Option shall be exercisable upon grant. (iii) Any Option which is exercisable by its terms at the time the Participant ceases to be a Director must be exercised on or before the earlier of ninety calendar days after the date the Participant ceases to be a Director or the expiration date of such Option, whichever is earlier, after which period such Option shall expire. Notwithstanding the foregoing, if a Participant's status as a Director is terminated For Cause (as herein defined), all Options granted to such Participant shall, to the extent not previously exercised, expire immediately upon such termination. 3 (e) Non-transferability. No Option shall be transferable or assignable otherwise than by will or the laws of descent and distribution, and an Option may not be exercised during the lifetime of a Participant except by him or by his legal guardian or representative. 7. Effective Date. This Plan shall become effective on the date the Plan is first adopted by the Board; effectiveness shall be subject, however, to approval by the shareholders of the Company. 8. Adjustment Provisions. (a) The existence of this Plan and the Options granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Company's capital stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding. (b) In the event of any change in capitalization affecting the Common Shares, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Shares, the Committee shall make proportionate adjustments to reflect such change with respect to the aggregate number of Common Shares for which Options in respect thereof may be granted under the Plan, the maximum number of Common Shares covered by each outstanding Option and the price per share in respect of outstanding Options. (c) The Committee also shall make such adjustments in the number of shares covered by, and the price or other value of any outstanding Options in the event of a spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders. 9. Restrictions and Compliance with Securities Laws. Anything contained in the Plan or elsewhere to the contrary notwithstanding: (1) No Option shall be exercisable for the purchase of any Common Shares subject thereto except for: (A) Common Shares subject thereto which at the time of such exercise and purchase are registered under the 1933 Act or which, upon the completion of such exercise, would be issued in a transaction exempt from registration under the 1933 Act; and (B) Common Shares subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction, are registered by description, by coordination, or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and (C) Common Shares subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. (2) If Common Shares subject to an Option are sold and transferred upon the exercise thereof to a person who (at the time of such exercise or thereafter) controls, is controlled by or is under common control with the Company, or are sold and transferred in reliance upon an exemption claimed in respect of the 1933 Act, then upon such sale and transfer: (A) Such Common Shares shall not be transferable by the holder thereof, and neither the Company nor its transfer agent or registrar, if any, shall be required to 4 register or otherwise to give effect to any transfer thereof and may prevent any such transfer, unless the Company shall have received an opinion from its counsel to the effect that any such transfer would not violate the 1933 Act or the applicable laws of any state; and (B) The Company shall cause each share certificate evidencing such Common Shares to bear a legend reflecting applicable restrictions on the transfer thereof and may use the following or any other appropriate legend for that purpose: SHARES EVIDENCED BY THIS CERTIFICATE ARE OWNED BY A PERSON WHO MAY BE DEEMED AN AFFILIATE OF THE COMPANY WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISTRIBUTED EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE SHARES UNDER THE ACT OR (2) UNTIL THE COMPANY HAS RECEIVED AN OPINION FROM ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER DOES NOT VIOLATE THE ACT OR THE APPLICABLE LAWS OF ANY STATE. (3) Nothing contained in the Plan or elsewhere shall be construed to require the Company to take any action whatsoever to make exercisable any Option granted under the Plan or to make transferable any Common Shares issued upon the exercise of any such Option. (4) Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 10. Amendment of the Plan. The Board may from time to time suspend or discontinue this Plan or revise or amend it in any respect whatsoever except as follows: (1) No revision or amendment may be made to any provision pertaining to the amount, price or timing of Options within six (6) months of any other revision or amendment to such provision, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder; and (2) No revision, amendment, suspension or discontinuation of the Plan shall be made without shareholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the 1934 Act for which or with which the Committee deems it necessary or desirable to qualify or comply. No such revision, amendment, suspension or discontinuation shall in any manner affect any grant theretofore made without the consent of the Participant or the transferee of the Plan, unless necessary to comply with applicable law. 5 EX-10.E 7 l96355aexv10we.txt EXHIBIT 10(E) Exhibit 10(e) FRONTSTEP, INC. AMENDED AND RESTATED NON-QUALIFIED STOCK OPTION PLAN FOR KEY EMPLOYEES ARTICLE ONE PURPOSE The purpose of this Frontstep, Inc. Amended and Restated Non-Qualified Stock Option Plan for Key Employees (the "Plan") is to secure the benefits which accrue from a program of offering to the Key Employees of Frontstep, Inc. (the "Company") and any Subsidiary the opportunity to acquire and increase their proprietary interest in the success of the Company and thereby to attain the objectives of this Plan which are: (1) To obtain and retain the services of Participants; (2) To encourage and reward efficient and profitable operation; and (3) To promote the development of the business of the Company. ARTICLE TWO DEFINITIONS For purposes of the Plan, the following terms when capitalized shall have the meaning designated herein unless a different meaning is plainly required by the context. Where applicable, the masculine pronoun shall mean or include the feminine, and the singular shall include the plural. (a) "Board of Directors" shall mean the Board of Directors of the Company. (b) "Committee" shall be the Committee of the Board of Directors, whose membership shall be determined as provided under Article Four, appointed to administer the Plan. (c) "Common Shares" shall mean the Common Shares of the Company. (d) "Company" shall mean Frontstep, Inc. (e) "Director" shall mean a member of the Board of Directors of the Company. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, or any successor statute. (g) "Fair Market Value" on a particular day shall mean the average of the highest and lowest prices of the Common Shares, as reported on the NASDAQ National Market System on a particular day, or, if Common Shares were not traded on such date, on the next preceding day on which Common Shares were traded. 1 (h) "Key Employees" shall mean employees of the Company or a Subsidiary who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial measure to the success of the Company. (i) "Participant" shall mean a Key Employee selected by the Committee to receive stock options under the Plan. (j) "Plan" shall mean the Frontstep, Inc. Amended and Restated Non-Qualified Stock Option Plan for Key Employees as herein set forth. (k) "Securities Act" shall mean the Securities Act of 1933, as amended. (l) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of any options under the Plan, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. ARTICLE THREE SHARES SUBJECT TO THE PLAN 2,653,070 of the Company's authorized but unissued Common Shares shall be reserved by the Board of Directors for the purpose of granting options under the Plan to Key Employees, in each case at a price of not less than one hundred percent of the Fair Market Value of such shares at the time of the granting of an option and upon such other terms and conditions as the Committee might impose. In the event that options granted under the Plan shall terminate, any shares covered thereby and not purchased thereunder may again be the subject of an option under the Plan. ARTICLE FOUR ADMINISTRATION The Plan shall be administered by a Committee appointed by the Board of Directors. The Committee shall consist of two or more Directors, as the Board of Directors may determine, provided each member of the Committee shall qualify to administer the Plan as contemplated by Rule l6b-3 of the Exchange Act. The Board of Directors may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed. Subject to the express provisions of the Plan, the Committee may determine the individuals to whom and the time or times at which options shall be granted, the number of shares to be subject to each option, the period of each option, the vested rights of each Participant in his options (including the vesting schedule and acceleration of exercise of such options) and other terms and conditions thereof and shall report its determination to the Board of Directors. The proper officers of the Company shall carry such determination into effect, but no action of the Committee or of an officer of the Company shall bind or become binding upon the Company or create any obligation of the Company whatsoever unless and until the Company shall have entered into a written and definitive contract with a proposed Participant in respect of an option for the purchase of shares of the Company and no such contract shall obligate the Company to any person other than the Participant who is a party to such written contract and to such persons, if any, as shall be expressly named or provided for in such written contract. The Committee is authorized to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may designate persons other than members of the Committee to carry out its responsibilities under such conditions and limitations as it may prescribe, except that the Committee may not delegate its authority with regard to 2 selection for, participation of and the granting of options to persons subject to Section 16(a) and 16(b) of the Exchange Act. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all Participants and any person validly claiming under or through Participants. ARTICLE FIVE ELIGIBILITY Options may be granted only to those Key Employees as may from time to time be designated by the Committee. Neither the provisions of the Plan nor its adoption by the Board of Directors shall be deemed to give any person a contractual or other right to receive an option under the Plan. ARTICLE SIX OPTION PRICE The purchase price pursuant to which Common Shares may be purchased under each option granted hereunder shall be fixed by the Committee, but such purchase price shall in no event be less than one hundred percent (100%) of the Fair Market Value of the Common Shares on the date on which the option is granted. ARTICLE SEVEN TERM OF OPTION The term of each option shall be fixed by the Committee, but in no event shall any option permit the purchase of shares thereunder after the tenth (10th) anniversary of the date on which the option is granted. ARTICLE EIGHT EXERCISE OF OPTION Subject to the provisions of the written option agreement pursuant to which it is granted, an option may be exercised by giving to the Company notice in writing (in such form as may from time to time be specified by the Committee) stating the number of Common Shares subject to the option in respect of which it is being exercised, accompanied by a check or cash in full payment of all Common Shares in respect of which the option is being exercised. Each such notice of exercise of an option shall be delivered to the General Counsel of the Company. The Company shall have a reasonable time after receipt of any such notice in which to make delivery of share certificates for the Common Shares in respect of which an option is exercised. ARTICLE NINE TERMINATION OF SERVICE In case a Participant shall cease to be a Key Employee for any reason, within ninety (90) days next succeeding such termination, but not later than ten (10) years from the date of grant of the option, the Participant (or the executor or administrator of his estate) may exercise such option rights as he then has under this Plan. Options not exercised within the period set forth in the preceding sentence shall thereupon expire and shall not be exercisable thereafter. 3 ARTICLE TEN NON-TRANSFERABILITY OF OPTION No option granted under this Plan shall be transferable otherwise than by will, the laws of descent and distribution, or to a Participant's spouse or former spouse pursuant to a domestic relations order in settlement of marital property rights. The provisions hereof shall be applicable to all options previously or in the future granted by the Company under this Plan. Any and all options transferred by a Participant pursuant hereto shall be deemed transferred subject to the terms and conditions of this Plan, including all vesting, termination and other provisions applicable thereto. In the event that any agreement pursuant to which options under this Plan have been granted contains provisions contrary to the provisions set forth herein, the provisions hereof shall control. ARTICLE ELEVEN ADJUSTMENTS In the event of any change in the outstanding Common Shares by stock dividend, stock split-up, stock combination, reclassification, recapitalization, merger, reorganization or other change in the Common Shares, the Committee, upon the advice of accountants and counsel for the Company, shall determine appropriate adjustments, if any, to be made in the number of Common Shares and the prices per share in respect of Common Shares subject to outstanding options and the number of Common Shares then reserved for options which may thereafter be granted. ARTICLE TWELVE AMENDMENT AND TERMINATION OF THE PLAN The Company, by action of the Board of Directors, reserves the right to amend, modify or terminate this Plan at any time, except that the Company may not, without shareholder approval, increase the total number of Common Shares subject to options under this Plan (except increases attributable to the adjustments authorized in Article Eleven hereof), materially increase the benefits or materially modify the requirements as to eligibility. ARTICLE THIRTEEN RESTRICTIONS AND COMPLIANCE WITH SECURITIES LAWS Anything contained in the Plan or elsewhere to the contrary notwithstanding: (1) No option granted under the Plan shall be exercisable for the purchase of any Common Shares subject thereto except for: (A) Common Shares subject thereto which at the time of such exercise and purchase are registered under the Securities Act, or which, upon the completion of such exercise, would be issued in a transaction exempt from registration under the Securities Act; and (B) Common Shares subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction, are registered by description, by coordination, or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and 4 (C) Common Shares subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. (2) If Common Shares subject to an option are sold and transferred upon the exercise thereof to a person who (at the time of such exercise or thereafter) controls, is controlled by or is under common control with the Company, or are sold and transferred in reliance upon an exemption claimed in respect of the securities Act, then upon such sale and transfer; (A) such Common Shares shall not be transferable by the holder thereof, and neither the Company nor its transfer agent or registrar, if any, shall be required to register or otherwise to give effect to any transfer thereof and may prevent any such transfer, unless the Company shall have received an opinion from its counsel to the effect that any such transfer would not violate the Securities Act or the applicable laws of any state; and (B) the Company shall cause each share certificate evidencing such Common Shares to bear a legend reflecting applicable restrictions on the transfer thereof and may use the following or any other appropriate legend for that purpose: SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS, ARE RESTRICTED SECURITIES WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE ACT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISTRIBUTED EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE SHARES UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS OR (2) UNTIL THE COMPANY HAS RECEIVED AN OPINION FROM ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER DOES NOT VIOLATE THE ACT OR THE APPLICABLE SECURITIES LAWS OF ANY STATE. (3) Nothing contained in the Plan or elsewhere shall be construed to require the Company to take any action whatsoever to make exercisable any option granted under the Plan or to make transferable any Common Shares issued upon the exercise of any such option. ARTICLE FOURTEEN TAX WITHHOLDING Any person exercising an option shall be required to pay to the Company the amount of any taxes the Company is required by law to withhold with respect to the exercise of such option. Such payment shall be due on the date the Company is required by law to withhold such taxes. In the event that such payment is not made when due, the Company shall have the right to deduct, to the extent permitted by law, from any payment of any kind (but only as permitted by Rule l6b-3 of the Exchange Act for persons subject to Section 16 of the Exchange Act) otherwise due to such person from the Company all or part of the amount required to be withheld. 5 EX-10.F 8 l96355aexv10wf.txt EXHIBIT 10(F) Exhibit 10(f) FRONTSTEP, INC. SECOND AMENDED AND RESTATED 1999 NON-QUALIFIED STOCK OPTION PLAN FOR KEY EMPLOYEES ARTICLE ONE PURPOSE The purpose of this Frontstep, Inc. Second Amended and Restated 1999 Non-Qualified Stock Option Plan (the "Plan") is to secure the benefits which accrue from a program of offering to the Key Employees of Frontstep, Inc. (the "Company") and any Subsidiary the opportunity to acquire and increase their proprietary interest in the success of the Company and thereby to attain the objectives of this Plan which are: (1) To obtain and retain the services of Participants; (2) To encourage and reward efficient and profitable operation; and (3) To promote the development of the business of the Company. ARTICLE TWO DEFINITIONS For purposes of the Plan, the following terms when capitalized shall have the meaning designated herein unless a different meaning is plainly required by the context. Where applicable, the masculine pronoun shall mean or include the feminine, and the singular shall include the plural. (a) "Board of Directors" shall mean the Board of Directors of the Company. (b) "Committee" shall be the Committee of the Board of Directors, whose membership shall be determined as provided under Article Four, appointed to administer the Plan. (c) "Common Shares" shall mean the common shares, no par value, of the Company. (d) "Company" shall mean Frontstep, Inc. (f/k/a Symix Systems, Inc.). (e) "Director" shall mean a member of the Board of Directors of the Company. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time, or any successor statute. (g) "Fair Market Value" on a particular day shall mean the average of the highest and lowest prices of the Common Shares, as reported on the NASDAQ National Market System on a particular day, or, if Common Shares were not traded on such date, on the next preceding day on which Common Shares were traded. 1 (h) "Key Employees" shall mean employees of the Company or a Subsidiary who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial measure to the success of the Company. (i) "Participant" shall mean a Key Employee selected by the Committee to receive stock options under the Plan. (j) "Plan" shall mean the Frontstep, Inc. Second Amended and Restated 1999 Non-Qualified Stock Option Plan as herein set forth. (k) "Securities Act" shall mean the Securities Act of 1933, as amended. (l) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of any options under the Plan, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. ARTICLE THREE SHARES SUBJECT TO THE PLAN Nine Hundred Thousand (900,000) of the Company's authorized but unissued Common Shares shall be reserved by the Board of Directors for the purpose of granting options under the Plan to Key Employees, in each case at a price of not less than one hundred percent of the Fair Market Value of such Common Shares at the time of the granting of an option and upon such other terms and conditions as the Committee might impose. In the event that options granted under the Plan shall terminate, any Common Shares covered thereby and not purchased thereunder may again be the subject of an option under the Plan. ARTICLE FOUR ADMINISTRATION The Plan shall be administered by a Committee appointed by the Board of Directors. The Committee shall consist of two or more Directors, as the Board of Directors may determine, provided each member of the Committee shall qualify to administer the Plan as contemplated by Rule l6b-3 of the Exchange Act. The Board of Directors may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed. Subject to the express provisions of the Plan, the Committee may determine the individuals to whom and the time or times at which options shall be granted, the number of Common Shares to be subject to each option, the period of each option, the vested rights of each Participant in his options (including the vesting schedule and acceleration of exercise of such options) and other terms and conditions thereof and shall report its determination to the Board of Directors. The proper officers of the Company shall carry such determination into effect, but no action of the Committee or of an officer of the Company shall bind or become binding upon the Company or create any obligation of the Company whatsoever unless and until the Company shall have entered into a written and definitive contract with a proposed Participant in respect of an option for the purchase of Common Shares and no such contract shall obligate the Company to any person other than the Participant who is a party to such written contract and to such persons, if any, as shall be expressly named or provided for in such written contract. The Committee is authorized to construe and interpret the Plan, to promulgate, amend and rescind rules and regulations relating to the implementation of the Plan and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may designate persons other than members of the Committee to carry out its responsibilities under such conditions and limitations as it may prescribe, except that the Committee may not delegate its authority 2 with regard to selection for, participation of and the granting of options to persons subject to Section 16(a) and 16(b) of the Exchange Act. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all Participants and any person validly claiming under or through Participants. ARTICLE FIVE ELIGIBILITY Options may be granted only to those Key Employees as may from time to time be designated by the Committee. Neither the provisions of the Plan nor its adoption by the Board of Directors shall be deemed to give any person a contractual or other right to receive an option under the Plan. ARTICLE SIX OPTION PRICE The purchase price pursuant to which Common Shares may be purchased under each option granted hereunder shall be fixed by the Committee, but such purchase price shall in no event be less than one hundred percent (100%) of the Fair Market Value of the Common Shares on the date on which the option is granted. ARTICLE SEVEN TERM OF OPTION The term of each option shall be fixed by the Committee, but in no event shall any option permit the purchase of Common Shares thereunder after the tenth (10th) anniversary of the date on which the option is granted. ARTICLE EIGHT EXERCISE OF OPTION Subject to the provisions of the written option agreement pursuant to which it is granted, an option may be exercised by giving to the Company notice in writing (in such form as may from time to time be specified by the Committee) stating the number of Common Shares subject to the option in respect of which it is being exercised, accompanied by a check or cash in full payment of all Common Shares in respect of which the option is being exercised. Each such notice of exercise of an option shall be delivered to the Chief Financial Officer of the Company. The Company shall have a reasonable time after receipt of any such notice in which to make delivery of share certificates for the Common Shares in respect of which an option is exercised. ARTICLE NINE TERMINATION OF SERVICE In case a Participant shall cease to be a Key Employee for any reason, within ninety (90) days next succeeding such termination, but not later than ten (10) years from the date of grant of the option, the Participant (or the executor or administrator of his estate) may exercise such option rights as he then has under this Plan. Options not exercised within the period set forth in the preceding sentence shall thereupon expire and shall not be exercisable thereafter, except that the Committee may, in its sole discretion, allow options to remain outstanding and exercisable after termination of such Participant's employment if the Participant's employment has been terminated because of the Participant's retirement or disability or for any other reason approved by the Committee. 3 ARTICLE TEN NON-TRANSFERABILITY OF OPTION No option granted under this Plan shall be transferable otherwise than by will, the laws of descent and distribution, or to a Participant's spouse or former spouse pursuant to a domestic relations order in settlement of marital property rights. The provisions hereof shall be applicable to all options previously or in the future granted by the Company under this Plan. Any and all options transferred by a Participant pursuant hereto shall be deemed transferred subject to the terms and conditions of this Plan, including all vesting, termination and other provisions applicable thereto. In the event that any agreement pursuant to which options under this Plan have been granted contains provisions contrary to the provisions set forth herein, the provisions hereof shall control. ARTICLE ELEVEN ADJUSTMENTS In the event of any change in the outstanding Common Shares by stock dividend, stock split, stock combination, reclassification, recapitalization, merger, reorganization or other change in the Common Shares, the Committee, upon the advice of accountants and counsel for the Company, shall determine appropriate adjustments, if any, to be made in the number of Common Shares and the prices per share in respect of Common Shares subject to outstanding options and the number of Common Shares then reserved for options which may thereafter be granted. ARTICLE TWELVE AMENDMENT AND TERMINATION OF THE PLAN The Company, by action of the Board of Directors, reserves the right to amend, modify or terminate this Plan at any time, except that the Company may not, without shareholder approval, increase the total number of Common Shares subject to options under this Plan (except increases attributable to the adjustments authorized in Article Eleven hereof), materially increase the benefits or materially modify the requirements as to eligibility. ARTICLE THIRTEEN RESTRICTIONS AND COMPLIANCE WITH SECURITIES LAWS Anything contained in the Plan or elsewhere to the contrary notwithstanding: (l) No option granted under the Plan shall be exercisable for the purchase of any Common Shares subject thereto except for: (A) Common Shares subject thereto which at the time of such exercise and purchase are registered under the Securities Act or which, upon the completion of such exercise, would be issued in a transaction exempt from registration under the Securities Act; and (B) Common Shares subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction, are registered by description, by coordination, or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and (C) Common Shares subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. 4 (2) If Common Shares subject to an option are sold and transferred upon the exercise thereof to a person who (at the time of such exercise or thereafter) controls, is controlled by or is under common control with the Company, or are sold and transferred in reliance upon an exemption claimed in respect of the securities Act, then upon such sale and transfer: (A) such Common Shares shall not be transferable by the holder thereof, and neither the Company nor its transfer agent or registrar, if any, shall be required to register or otherwise to give effect to any transfer thereof and may prevent any such transfer, unless the Company shall have received an opinion from its counsel to the effect that any such transfer would not violate the Securities Act and the applicable laws of any state; and (B) the Company shall cause each share certificate evidencing such Common Shares to bear a legend reflecting applicable restrictions on the transfer thereof and may use the following or any other appropriate legend for that purpose: SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS, ARE RESTRICTED SECURITIES WITHIN THE MEANING OF RULE 144 PROMULGATED UNDER THE ACT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISTRIBUTED EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE SHARES UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS, IF REQUIRED OR (2) UNTIL THE COMPANY HAS RECEIVED AN OPINION FROM ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER DOES NOT VIOLATE THE ACT AND THE APPLICABLE SECURITIES LAWS OF ANY STATE. (3) Nothing contained in the Plan or elsewhere shall be construed to require the Company to take any action whatsoever to make exercisable any option granted under the Plan or to make transferable any Common Shares issued upon the exercise of any such option. ARTICLE FOURTEEN TAX WITHHOLDING Any person exercising an option shall be required to pay to the Company the amount of any taxes the Company is required by law to withhold with respect to the exercise of such option. Such payment shall be due on the date the Company is required by law to withhold such taxes. In the event that such payment is not made when due, the Company shall have the right to deduct, to the extent permitted by law, from any payment of any kind (but only as permitted by Rule l6b-3 of the Exchange Act for persons subject to Section 16 of the Exchange Act) otherwise due to such person from the Company all or part of the amount required to be withheld. 5 EX-10.O 9 l96355aexv10wo.txt EXHIBIT 10(O) Exhibit 10(o) SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- SECOND AMENDMENT dated as of February 14, 2002 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001 (the "LOAN AGREEMENT"), between and among, on the one hand, the lenders identified on the signature pages thereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "LENDER" and collectively as the "LENDERS"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("AGENT"), and, on the other hand, FRONTSTEP, INC., an Ohio corporation ("PARENT"), and each of the Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER", and individually and collectively, jointly and severally, as "BORROWERS"). WHEREAS, the Borrowers have (a) requested the Agent to amend the Loan Agreement to provide for, among other things, (i) an overadvance limit through and including July 15, 2002 and (ii) the deferment of the monthly amortization payments due in respect of the Term Loan A through July 31, 2002 and (b) advised the Agent that the Borrowers are in default under the Minimum EBITDA, Tangible Net Worth and Leverage Ratio covenants set forth in the Loan Agreement and have requested the Lenders to waive such defaults, and the Agent, on behalf of the Lenders, has agreed to such waiver. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 2. DEFINITIONS IN THE LOAN AGREEMENT. Section 1.1 of the Loan Agreement is hereby amended as follows: (a) A definition of the term "Bridge Loan" is hereby inserted, in appropriate alphabetical order, to read as follows: "'BRIDGE LOAN' means an unsecured term loan in the original principal amount of $1,500,000 to be made by a Person (other than a Borrower) to one or more of the Borrowers prior to April 15, 2002, the proceeds of which are remitted by the maker of such loan directly to the Lender and applied by the Lender to repay the Advances." (b) A definition of the term "Maximum Amount" is hereby inserted, in appropriate alphabetical order, to read as follows: "'MAXIMUM AMOUNT' means $16,250,000, from January 1, 2002 to and including July 15, 2002, PROVIDED that, if the Bridge Loan is not funded by April 15, 2002, the Maximum Amount shall reduce as follows: (i) $15,750,000, from April 15, 2002 to and including April 30, 2002; (ii) $15,250,000, from May 1, 2002 to and including May 31, 2002; (iii) $14,750,000, from June 1, 2002 to and including June 14, 2002; and (iv) $14,250,000, from June 15, 2002 to and including July 15, 2002." (c) The definition of the term "Maximum Revolver Amount" is hereby amended in its entirety to read as follows: "'MAXIMUM REVOLVER AMOUNT' means (a) from January 1, 2002 to and including July 15, 2002, the applicable Overadvance Amount, and (b) after July 15, 2002, $25,000,000 minus the Term Loan A Amount." (d) The definition of the term "Overadvance Amount" is hereby amended in its entirety to read as follows: "'OVERADVANCE AMOUNT' means (a) $2,500,000, from January 1, 2002 to and including July 15, 2002, PROVIDED that, if the Bridge Loan is not funded by April 15, 2002, the Overadvance Amount shall reduce as follows: (i) $2,000,000, from April 15, 2002 to and including April 30, 2002; (ii) $1,500,000, from May 1, 2002 to and including May 31, 2002; (iii) $1,000,000, from June 1, 2002 to and including June 14, 2002; and (iv) $500,000, from June 15, 2002 to and including July 15, 2002; and (b) $0.00, after July 15, 2002." (e) A definition of the term "Second Amendment Effective Date" is hereby inserted, in appropriate alphabetical order, to read as follows: "'SECOND AMENDMENT EFFECTIVE DATE' means the date on which all of the conditions precedent to the effectiveness of Second Amendment to Loan Agreement dated as of February 14, 2002, by and among the Borrowers, the Agent and the Lenders have been fulfilled or waived." 3. REVOLVER ADVANCES; MAXIMUM AMOUNT. (a) The first sentence of Section 2.1(a) of the Loan Agreement is hereby amended in its entirety to read as follows: "(a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Advances") to Borrowers in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to (i) prior to July 15, 2002, the Maximum Revolver Amount and (ii) thereafter, the lesser of (A) the Maximum Revolver Amount LESS the Letter of Credit Usage, or (B) the Borrowing Base less the Letter of Credit Usage." 2 (b) Section 2.1 of the Loan Agreement is hereby amended by inserting new clauses (f) and (g) at the end thereof to read as follows: "(f) Prior to July 15, 2002, the Lenders with Revolver Commitments shall have no obligation to make additional Advances hereunder to the extent such Advances would cause the Revolver Usage as of the last Business Day of the applicable calendar week to exceed Borrowers' projected Revolver Usage for such week by more than $1,000,000 during any consecutive two calendar week period, and an Event of Default shall occur in the event any such excess exists. The provisions set forth in this paragraph (f) shall not be applicable after July 15, 2002. (g) Prior to July 15, 2002, the Lenders with Revolver Commitments shall have no obligation to make additional Advances hereunder to the extent such Advances would cause the sum of the Revolver Usage and the Term Loan A Amount to exceed the Maximum Amount. The provisions set forth in this paragraph (g) shall not be applicable after July 15, 2002." 4. TERM LOANS. (a) The first sentence of Section 2.2(a)(ii) of the Loan Agreement is hereby amended in its entirety to read as follows: "(ii) The Term Loan A shall be repaid in consecutive monthly installments each in a principal amount equal to 1/36th of the Term Loan A Amount, plus accrued interest on the amount of principal so repaid, on the first day of each month, commencing on August 1, 2002. All amortization payments in respect of the Term Loan A that were required, prior to the Second Amendment Effective Date, to be made by Borrowers for the six-month period commencing on January 1, 2002 through July 1, 2002 have been deferred by the Lenders pursuant to the Second Amendment to the Loan Agreement. Any such amortization payments made by Borrowers between January 1, 2002 and the Second Amendment Effective Date shall be promptly returned by Lenders to Borrowers. (b) Section 2.2(b) of the Loan Agreement is hereby amended in its entirety to read as follows: "(b) (i) Subject to the terms and conditions of this Agreement, on the First Amendment Effective Date each Lender with a Term Loan B Commitment agrees (severally, not jointly or jointly and severally) to make a term loan (collectively, the "Term Loan B") to Borrowers in an amount equal to such Lender's Pro Rata Share of $900,000. The Term Loan B shall be repaid on the first day of each month, commencing on August 1, 2002, in equal monthly installments of $75,000. (ii) Borrowers may, at any time, prepay all or a portion of the Term Loan B without penalty or premium. The outstanding unpaid principal balance and all accrued and unpaid interest under the Term Loan B shall be due and payable upon the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term Loan B shall constitute Obligations." 3 5. INTEREST RATES. Section 2.6(a)(iii) of the Loan Agreement is hereby amended in its entirety to read as follows: "(iii) the Term Loan B Amount shall not bear interest on the amount thereof outstanding." 6. COLLATERAL REPORTING. Section 6.2 of the Loan Agreement is hereby amended by deleting the "Monthly" collateral reporting requirements from the collateral reporting table set forth therein and inserting new "Monthly" collateral reporting requirements in the collateral reporting table therein to read as follows: - --------------------------------------------------------------------------------------------------------------------- (f) a calculation of Dilution for the prior month, and Monthly (not later than (g) (i) a list of any software license agreements, Maintenance the 10th day of Contracts or other agreements giving rise to Accounts of a Borrower each month) which contain proscriptions of, or limitations on, a Borrower's right to assign such agreements, and (ii) a Maintenance Contract Summary Valuation Report for the prior month, in form and substance reasonably acceptable to Agent. - ---------------------------------------------------------------------------------------------------------------------
7. INDEBTEDNESS. Section 7.1 of the Loan Agreement is hereby amended by (a) deleting the word "and" at the end of clause (g) thereof, (b) deleting the period at the end of clause (h) thereof and inserting the word "; and" at the end thereof and (c) inserting a new clause (i) therein to read as follows: "(i) the Bridge Loan." 8. FINANCIAL COVENANTS. Section 7.20 of the Loan Agreement is hereby amended by deleting the phrase "Fail to maintain:" set forth as the introductory clause thereof and by amending clauses (i), (ii) and (iii) thereof as follows: (a) MINIMUM EBITDA. Clause (i) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(i) MINIMUM EBITDA. Fail to maintain EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto: --------------------------- ------------------------------------------- APPLICABLE AMOUNT APPLICABLE PERIOD ----------------- ----------------- --------------------------- ------------------------------------------- $657,000 For the 9 month period ending March 31, 2002 --------------------------- ------------------------------------------- $2,388,000 For the 12 month period ending June 30, 2002 --------------------------- ------------------------------------------- 4 Borrowers' EBITDA for the 12 month period ending each month after June 30, 2002 shall be determined based upon Borrowers' projected EBITDA for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the EBITDA covenant number based upon Borrowers' projected EBITDA, for purposes of this Section 7.20(a)(i), Borrowers' EBITDA for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be less than $2,388,000." (b) TANGIBLE NET WORTH. Clause (ii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(ii) TANGIBLE NET WORTH. Fail to maintain Tangible Net Worth of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto: ------------------------------ --------------------------------------- APPLICABLE AMOUNT APPLICABLE DATE ------------------------------ --------------------------------------- $8,100,000 March 31, 2002 ------------------------------ --------------------------------------- $8,300,000 June 30, 2002 ------------------------------ --------------------------------------- Borrowers' Tangible Net Worth for each fiscal quarter ending after June 30, 2002 shall be determined based upon Borrowers' projected Tangible Net Worth for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Tangible Net Worth covenant number based upon Borrowers' projected Tangible Net Worth, for purposes of this Section 7.20(a)(ii), Borrowers' Tangible Net Worth for such fiscal quarter shall be determined by Agent in its Permitted Discretion and shall not be less than $8,300,000." (c) LEVERAGE RATIO. Clause (iii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(iii) LEVERAGE RATIO. Permit the ratio (the "Leverage Ratio") of (i) the aggregate amount of the Indebtedness of Parent and its Subsidiaries divided by (ii) EBITDA, for the applicable period set forth below to be less than the applicable ratio set forth below: 5 --------------------------- ------------------------------------------ LEVERAGE RATIO APPLICABLE PERIOD -------------- ----------------- --------------------------- ------------------------------------------ 18:1 For the 9 month period ending March 31, 2002 --------------------------- ------------------------------------------ 4.5:1 For the 12 month period ending June 30, 2002 --------------------------- ------------------------------------------ Borrowers' Leverage Ratio for the 12 month period ending each month after June 30, 2002 shall be determined based upon Borrowers' projected Leverage Ratio for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Leverage Ratio covenant based upon Borrowers' projected Leverage Ratio, for purposes of this Section 7.20(a)(iii), Borrowers' Leverage Ratio for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be less than 4.5:1." 9. LENDERS' COMMITMENT SCHEDULE. Schedule C-1 to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex I to this Amendment. 10. CONDITIONS. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "AMENDMENT EFFECTIVE DATE"): (a) REPRESENTATIONS AND WARRANTIES; NO EVENT OF DEFAULT. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. (b) DELIVERY OF DOCUMENTS. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; (ii) a revised copy of Borrowers' Projections, in form and substance satisfactory to Agent; and 6 (iii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. (c) AMENDMENT FEE. The Borrowers shall have paid to the Agent, for the benefit of the Lenders, in immediately available funds, a fully earned and nonrefundable amendment fee equal to $900,000, the payment of which shall be effected by Agent applying the proceeds of the Term Loan B made pursuant to the Loan Agreement (as amended hereby). (d) PROCEEDINGS. All proceedings in connection with the transactions contemplated by this Amendment, and all documents incidental thereto, shall be reasonably satisfactory to the Agent and its special counsel, and the Agent and such special counsel shall have received all such information and such counterpart originals or certified copies of documents, and such other agreements, instruments, approvals, opinions and other documents, as the Agent or such special counsel may reasonably request. 11. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) subject to Section 12 hereof, no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. 7 (d) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or agency or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment, or for the performance of the Loan Agreement, as amended hereby. (e) This Amendment, the Loan Agreement, as amended hereby, and each other Loan Document to which such Borrower is a party is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by equitable principles or by or subject to any bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. 12. WAIVER AND CONSENT. (a) Pursuant to the request of the Parent, the Lenders hereby consent to and waive any Event of Default that would arise under the Loan Agreement from any noncompliance by the Borrowers with Section 7.20 of the Loan Agreement to the extent specifically described below: (i) the Borrowers and their Subsidiaries having a Minimum EBITDA of less than $3,100,000 for the 6 month period ending December 31, 2001; PROVIDED that the actual Minimum EBITDA of the Borrowers and their Subsidiaries for such period was not less than $13,000; (ii) the Borrowers and their Subsidiaries having a Tangible Net Worth of less than $11,500,000 as of December 31, 2001; PROVIDED that the actual Tangible Net Worth of the Borrowers and their Subsidiaries as of December 31, 2001 was not less than $878,000; and (iii) the Borrowers and their Subsidiaries having a Leverage Ratio of less than 5.00:1 for the 6 month period ending December 31, 2001; PROVIDED that the actual Leverage Ratio of the Borrowers and their Subsidiaries for such period was not less than 1,266:1. (b) The Lenders' waiver and consent provided for in this Amendment (i) shall be effective as of December 31, 2001 upon the execution of this Amendment by the Lenders, (ii) shall be effective only in this specific instance and for the specific purposes set forth herein, and (iii) does not allow for any other or further departure from the terms and conditions of the Loan Agreement or any other Loan Document, which terms and conditions shall continue in full force and effect. 13. CONTINUED EFFECTIVENESS OF THE LOAN AGREEMENT. (a) Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment. 8 (b) The Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if any representation or warranty made by the Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made. 14. COSTS AND EXPENSES. The Borrowers shall pay all reasonable out-of-pocket costs and expenses of the Lender Group (including, without limitation, the reasonable fees and charges of counsel to any member of the Lender Group) in connection with this Amendment. 15. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York except to the extent governed by the Bankruptcy Code. 16. THE BORROWERS, LENDERS AND THE AGENT EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE LENDER GROUP IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. [Remainder of this page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ Daniel P. Buettin --------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin --------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin --------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Trent A. Smart --------------------------------------------- Name: Trent A. Smart Title: Vice President 10 ANNEX I ------- SCHEDULE C-1 COMMITMENTS
========================= ===================== ========================= ======================== =================== REVOLVER TERM LOAN A TERM LOAN B TOTAL LENDER COMMITMENT SUB-FACILITY COMMITMENT* COMMITMENT COMMITMENT - ------------------------- --------------------- ------------------------- ------------------------ ------------------- Foothill Capital $25,000,000 $15,000,000 $900,000 $25,900,000 Corporation - ------------------------- --------------------- ------------------------- ------------------------ ------------------- - ------------------------- --------------------- ------------------------- ------------------------ ------------------- All Lenders $25,000,000 $15,000,000 $900,000 $25,900,000 ========================= ===================== ========================= ======================== ===================
*The Term Loan A Commitment is a sub-facility of the Revolver Commitment. 11 EX-10.P 10 l96355aexv10wp.txt EXHIBIT 10(P) Exhibit 10(p) THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- THIRD AMENDMENT dated as of May 13, 2002 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001 and the Second Amendment dated as of February 14, 2002 (the "LOAN AGREEMENT"), between and among, on the one hand, the lenders identified on the signature pages thereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "LENDER" and collectively as the "LENDERS"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("AGENT"), and, on the other hand, FRONTSTEP, INC., an Ohio corporation ("PARENT"), and each of the Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER", and individually and collectively, jointly and severally, as "BORROWERS"). WHEREAS, the Borrowers have requested the Agent and the Lenders to amend the Loan Agreement to, among other things, reset the Minimum EBITDA, Tangible Net Worth and Leverage Ratio covenants set forth therein, and the Agent, on behalf of the Lenders, has agreed to such request subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 2. FINANCIAL COVENANTS. Section 7.20 of the Loan Agreement is hereby amended by amending clauses (i), (ii) and (iii) thereof as follows: (a) MINIMUM EBITDA. Clause (i) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(i) MINIMUM EBITDA. Fail to maintain EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto: ---------------------------------- ------------------------------------ APPLICABLE AMOUNT APPLICABLE PERIOD ----------------- ----------------- ---------------------------------- ------------------------------------ $(656,000) For the 9 month period ending March 31, 2002 ---------------------------------- ------------------------------------ $800,000 For the 12 month period ending June 30, 2002 ---------------------------------- ------------------------------------ Borrowers' EBITDA for the 12 month period ending each quarter after June 30, 2002 shall be determined based upon Borrowers' projected EBITDA for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the EBITDA covenant number based upon Borrowers' projected EBITDA, for purposes of this Section 7.20(a)(i), Borrowers' EBITDA for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be less than $800,000." (b) TANGIBLE NET WORTH. Clause (ii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(ii) TANGIBLE NET WORTH. Fail to maintain Tangible Net Worth of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto: ------------------------------ ------------------------------------- APPLICABLE AMOUNT APPLICABLE DATE ----------------- --------------- ------------------------------ ------------------------------------- $6,681,000 March 31, 2002 ------------------------------ ------------------------------------- $6,500,000 June 30, 2002 ------------------------------ ------------------------------------- Borrowers' Tangible Net Worth for each fiscal quarter ending after June 30, 2002 shall be determined based upon Borrowers' projected Tangible Net Worth for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Tangible Net Worth covenant number based upon Borrowers' projected Tangible Net Worth, for purposes of this Section 7.20(a)(ii), Borrowers' Tangible Net Worth for such fiscal quarter shall be determined by Agent in its Permitted Discretion and shall not be less than $6,500,000." (c) LEVERAGE RATIO. Clause (iii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(iii) LEVERAGE RATIO. Permit the ratio (the "Leverage Ratio") of (i) the aggregate amount of the Indebtedness of Parent and its Subsidiaries divided by (ii) EBITDA, for the applicable period set forth below to be more than the applicable ratio set forth below: 2 ------------------------------ ---------------------------------------- LEVERAGE RATIO APPLICABLE PERIOD -------------- ----------------- ------------------------------ ---------------------------------------- (27.30):1 For the 9 month period ending March 31, 2002 ------------------------------ ---------------------------------------- 26:1 For the 12 month period ending June 30, 2002 ------------------------------ ---------------------------------------- Borrowers' Leverage Ratio for the 12 month period ending each quarter after June 30, 2002 shall be determined based upon Borrowers' projected Leverage Ratio for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Leverage Ratio covenant based upon Borrowers' projected Leverage Ratio, for purposes of this Section 7.20(a)(iii), Borrowers' Leverage Ratio for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be more than 26:1." 3. MITSUI INDEBTEDNESS. Section 7.1(h) of the Loan Agreement is hereby amended by deleting the name "Mitsui & Co. Ltd." set forth therein and inserting the following phrase in lieu thereof to read as follows: "Mitsui & Co., Asia Investment Ltd., a company established under the laws of Singapore, and MVC Corporation, a company established under the laws of Japan" 4. MITSUI LIENS. The definition of the term "Permitted Liens" is hereby amended by (a) deleting the word "and" at the end of clause (j) thereof, (b) deleting the period at the end of clause (k) thereof and inserting "; and" at the end thereof and (c) inserting a new clause (l) therein to read as follows: "(l) Liens in favor of Mitsui & Co., Asia Investment Ltd., a company established under the laws of Singapore, and MVC Corporation, a company established under the laws of Japan, on the Stock of Frontstep (Singapore) Pte Ltd. that is owned by Parent to the extent such Liens secure Parent's obligations in respect of the Indebtedness permitted under SECTION 7.1(h) hereof." 5. FINANCIAL REPORTING. (a) Section 6.3(a) of the Loan Agreement is hereby amended by deleting the introductory clause of such Section and inserting a new introductory clause therein to read as follows: "(a) as soon as available, but in any event within 45 days after the end of each of the first 3 fiscal quarters in each of Parent's fiscal years," (b) Section 6.3(a)(ii)(A) of the Loan Agreement is hereby amended in its entirety to read as follows: "A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end 3 audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries," 6. CONDITIONS. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "AMENDMENT EFFECTIVE DATE"), provided that the amendments set forth in Section 2 of this Amendment shall be deemed effective as of March 29, 2002: (a) REPRESENTATIONS AND WARRANTIES; NO EVENT OF DEFAULT. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. (b) DELIVERY OF DOCUMENTS. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; and (ii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. (c) AMENDMENT FEE. The Borrowers shall have paid to the Agent, for the benefit of the Lenders, in immediately available funds, a fully earned and nonrefundable amendment fee equal to $10,000, the payment of which shall be effected by Agent charging such fee to Borrowers' Loan Account. (d) PROCEEDINGS. All proceedings in connection with the transactions contemplated by this Amendment, and all documents incidental thereto, shall be reasonably satisfactory to the Agent and its special counsel, and the Agent and such special counsel shall have received all such information and such counterpart originals or certified copies of documents, and such other agreements, instruments, approvals, opinions and other documents, as the Agent or such special counsel may reasonably request. 7. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to 4 the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. (d) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or agency or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment, or for the performance of the Loan Agreement, as amended hereby. (e) This Amendment, the Loan Agreement, as amended hereby, and each other Loan Document to which such Borrower is a party is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by equitable principles or by or subject to any bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. 8. CONTINUED EFFECTIVENESS OF THE LOAN AGREEMENT. (a) Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment. 5 (b) The Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if any representation or warranty made by the Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made. 9. COSTS AND EXPENSES. The Borrowers shall pay all reasonable out-of-pocket costs and expenses of the Lender Group (including, without limitation, the reasonable fees and charges of counsel to any member of the Lender Group) in connection with this Amendment. 10. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York except to the extent governed by the Bankruptcy Code. 11. THE BORROWERS, LENDERS AND THE AGENT EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE LENDER GROUP IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. [Remainder of this page intentionally left blank] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin --------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin ------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Trent A. Smart --------------------------------------------- Name: Trent A. Smart Title: Vice President 7 EX-10.Q 11 l96355aexv10wq.txt EXHIBIT 10(Q) Exhibit 10(q) FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- FOURTH AMENDMENT dated as of July 9, 2002 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001, the Second Amendment dated as of February 14, 2002 and the Third Amendment dated as of May 13, 2002 (the "LOAN AGREEMENT"), between and among, on the one hand, the lenders identified on the signature pages thereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "LENDER" and collectively as the "LENDERS"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("AGENT"), and, on the other hand, FRONTSTEP, INC., an Ohio corporation ("PARENT"), and each of the Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER", and individually and collectively, jointly and severally, as "BORROWERS"). WHEREAS, the Borrowers have requested the Agent and the Lenders to amend the Loan Agreement to, among other things, permit the incurrence of certain unsecured Indebtedness, and the Agent, on behalf of the Lenders, has agreed to such request subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 2. DEFINITIONS IN THE LOAN AGREEMENT. Section 1.1 of the Loan Agreement is hereby amended as follows: (a) The definition of the term "Bridge Loan" is hereby deleted in its entirety. (b) A definition of the term "Convertible Loans" is hereby inserted, in appropriate alphabetical order, to read as follows: "'CONVERTIBLE LOANS' means the unsecured term loans in the aggregate original principal amount of $5,000,000 to be made by Persons (other than a Borrower) to one or more of the Borrowers on and after July 9, 2002 (inclusive of the bridge loans made to the Borrowers on or about May 13, 2002 in the aggregate original principal amount of $1,500,000 that are being refinanced and/or replaced by such Convertible Loans) pursuant to that certain Securities Purchase Agreement dated as of March 7, 2002 by and among the Parent and the investors named therein, as amended by Amendment Number One dated as of July 9, 2002 and as further amended, modified or supplemented from time to time with the prior written consent of the Agent." 3. CONVERTIBLE LOANS. Section 7.1(i) of the Loan Agreement is hereby amended by (a) deleting the phrase "the Bridge Loan" set forth therein and (b) inserting the following provision in lieu thereof: "(i) the Convertible Loans, PROVIDED that the proceeds of such Convertible Loans are remitted by the makers of such loans directly to the Agent and applied by the Agent to repay the Advances then outstanding." 4. MITSUI INDEBTEDNESS. Section 7.1(h) of the Loan Agreement is hereby amended in its entirety to read as follows: "(h) subordinated Indebtedness owing to Mitsui & Co., Asia Investment Ltd., a company established under the laws of Singapore, Mitsui & Co. Ltd., a company established under the laws of Japan, and MVC Corporation, a company established under the laws of Japan, the terms and conditions of which, including provisions subordinating such Indebtedness to the Obligations, are in form and substance satisfactory to the Lenders; PROVIDED that Borrowers may make scheduled payments in respect of such subordinated Indebtedness so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) after giving effect to the making of each such payment, the sum of (A) Excess Availability and (B) all of Borrowers' unrestricted cash and Cash Equivalents is not less than $3,000,000." 5. MITSUI LIENS. Clause (l) of the definition of the term "Permitted Liens" is hereby amended in its entirety to read as follows: "(l) Liens in favor of Mitsui & Co., Asia Investment Ltd., a company established under the laws of Singapore, Mitsui & Co. Ltd., a company established under the laws of Japan, and MVC Corporation, a company established under the laws of Japan, on the Stock of Frontstep (Singapore) Pte Ltd. that is owned by any Borrower to the extent such Liens secure such Borrower's obligations in respect of the Indebtedness permitted under SECTION 7.1(h) hereof." 6. CONDITIONS. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "AMENDMENT EFFECTIVE DATE"): (a) REPRESENTATIONS AND WARRANTIES; NO EVENT OF DEFAULT. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. 2 (b) DELIVERY OF DOCUMENTS. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; and (ii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. (c) PROCEEDINGS. All proceedings in connection with the transactions contemplated by this Amendment, and all documents incidental thereto, shall be reasonably satisfactory to the Agent and its special counsel, and the Agent and such special counsel shall have received all such information and such counterpart originals or certified copies of documents, and such other agreements, instruments, approvals, opinions and other documents, as the Agent or such special counsel may reasonably request. 7. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. 3 (d) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or agency or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment, or for the performance of the Loan Agreement, as amended hereby. (e) This Amendment, the Loan Agreement, as amended hereby, and each other Loan Document to which such Borrower is a party is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by equitable principles or by or subject to any bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. 8. CONTINUED EFFECTIVENESS OF THE LOAN AGREEMENT. (a) Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment. (b) The Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if any representation or warranty made by the Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made. 9. COSTS AND EXPENSES. The Borrowers shall pay all reasonable out-of-pocket costs and expenses of the Lender Group (including, without limitation, the reasonable fees and charges of counsel to any member of the Lender Group) in connection with this Amendment. 10. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York except to the extent governed by the Bankruptcy Code. 4 11. THE BORROWERS, LENDERS AND THE AGENT EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE LENDER GROUP IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. [Remainder of this page intentionally left blank] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Trent A. Smart ---------------------------------------------- Name: Trent A. Smart Title: Vice President 6 EX-10.R 12 l96355aexv10wr.txt EXHIBIT 10(R) Exhibit 10(r) FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT --------------------------- FIFTH AMENDMENT dated as of July ___, 2002 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001, the Second Amendment dated as of February 14, 2002, the Third Amendment dated as of May 13, 2002 and the Fourth Amendment dated as of July 9, 2002 (the "LOAN AGREEMENT"), between and among, on the one hand, the lenders identified on the signature pages thereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "LENDER" and collectively as the "LENDERS"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("AGENT"), and, on the other hand, FRONTSTEP, INC., an Ohio corporation ("PARENT"), and each of the Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER", and individually and collectively, jointly and severally, as "BORROWERS"). WHEREAS, the Borrowers have requested the Agent to amend the Loan Agreement to provide for, among other things, an extension of the overadvance limit through and including August 15, 2002, and the Agent, on behalf of the Lenders, has agreed to such request. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 2. DEFINITIONS IN THE LOAN AGREEMENT. Section 1.1 of the Loan Agreement is hereby amended as follows: (a) A definition of the term "Maximum Amount" is hereby amended in its entirety to read as follows: "'MAXIMUM AMOUNT' means $15,650,000, from July 15, 2002 to and including August 15, 2002." (b) The definition of the term "Maximum Revolver Amount" is hereby amended in its entirety to read as follows: "'MAXIMUM REVOLVER AMOUNT' means (a) from January 1, 2002 to and including August 15, 2002, the applicable Overadvance Amount, and (b) after August 15, 2002, $25,000,000 minus the Term Loan A Amount." (c) The definition of the term "Overadvance Amount" is hereby amended in its entirety to read as follows: "'OVERADVANCE AMOUNT' means (a) $1,000,000, from July 15, 2002 to and including August 15, 2002; and (b) $0.00, after August 15, 2002." 3. REVOLVER ADVANCES; MAXIMUM AMOUNT. (a) The first sentence of Section 2.1(a) of the Loan Agreement is hereby amended by deleting the reference to "July 15, 2002" set forth therein and inserting "August 15, 2002" in lieu thereof. (b) Paragraphs (f) and (g) of Section 2.1 of the Loan Agreement are hereby amended by deleting each reference to "July 15, 2002" set forth therein and inserting "August 15, 2002" in lieu thereof. 4. CONVERTIBLE LOANS. Section 7.1(i) of the Loan Agreement is hereby amended in its entirety to read as follows: "(i) the Convertible Loans, PROVIDED that (i) the proceeds of such Convertible Loans are remitted by the makers of such loans directly to the Agent and applied by the Agent to repay the Advances then outstanding and (ii) unless otherwise consented to by Agent, from July 15, 2002 to and including August 15, 2002, Parent shall maintain at least $1,000,000 of unutilized borrowing availability under the Securities Purchase Agreement (as referenced in the definition of the term "Convertible Loans")." 5. CONDITIONS. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "AMENDMENT EFFECTIVE DATE"): (a) REPRESENTATIONS AND WARRANTIES; NO EVENT OF DEFAULT. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. (b) DELIVERY OF DOCUMENTS. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; and 2 (ii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. (c) AMENDMENT FEE. The Borrowers shall have paid to the Agent, for the benefit of the Lenders, in immediately available funds, a fully earned and nonrefundable amendment fee equal to $75,000, the payment of which shall be effected by Agent charging such fee to Borrowers' Loan Account pursuant to Section 2.6(d) of the Loan Agreement. (d) PROCEEDINGS. All proceedings in connection with the transactions contemplated by this Amendment, and all documents incidental thereto, shall be reasonably satisfactory to the Agent and its special counsel, and the Agent and such special counsel shall have received all such information and such counterpart originals or certified copies of documents, and such other agreements, instruments, approvals, opinions and other documents, as the Agent or such special counsel may reasonably request. 6. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. 3 (d) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or agency or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment, or for the performance of the Loan Agreement, as amended hereby. (e) This Amendment, the Loan Agreement, as amended hereby, and each other Loan Document to which such Borrower is a party is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by equitable principles or by or subject to any bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. 7. CONTINUED EFFECTIVENESS OF THE LOAN AGREEMENT. (a) Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment. (b) The Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if any representation or warranty made by the Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made. 8. COSTS AND EXPENSES. The Borrowers shall pay all reasonable out-of-pocket costs and expenses of the Lender Group (including, without limitation, the reasonable fees and charges of counsel to any member of the Lender Group) in connection with this Amendment. 9. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 4 (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York except to the extent governed by the Bankruptcy Code. 10. THE BORROWERS, LENDERS AND THE AGENT EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE LENDER GROUP IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. [Remainder of this page intentionally left blank] 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Trent A. Smart ---------------------------------------------- Name: Trent A. Smart Title: Vice President 6 EX-10.S 13 l96355aexv10ws.txt EXHIBIT 10(S) Exhibit 10(s) SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT SIXTH AMENDMENT dated as of September 10, 2002 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001, the Second Amendment dated as of February 14, 2002, the Third Amendment dated as of May 13, 2002, the Fourth Amendment dated as of July 9, 2002 and the Fifth Amendment dated as of July 15, 2002 (the "LOAN AGREEMENT"), between and among, on the one hand, the lenders identified on the signature pages thereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "LENDER" and collectively as the "LENDERS"), FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("AGENT"), and, on the other hand, FRONTSTEP, INC., an Ohio corporation ("PARENT"), and each of the Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER", and individually and collectively, jointly and severally, as "BORROWERS"). WHEREAS, the Borrowers have requested the Agent and the Lenders to amend the Loan Agreement to, among other things, reset the Minimum EBITDA, Tangible Net Worth and Leverage Ratio covenants set forth therein, and the Agent, on behalf of the Lenders, has agreed to such request subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, agreements and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. CAPITALIZED TERMS. All capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 2. FINANCIAL COVENANTS. Section 7.20(a) of the Loan Agreement is hereby amended by amending clauses (i), (ii) and (iii) thereof as follows: (a) MINIMUM EBITDA. Clause (i) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(i) MINIMUM EBITDA. Fail to maintain EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto: ------------------------------------------------------------------------ APPLICABLE AMOUNT APPLICABLE PERIOD ------------------------------------------------------------------------ $354,000 For the 12 month period ending June 30, 2002 ------------------------------------------------------------------------ ------------------------------------------------------------------------ APPLICABLE AMOUNT APPLICABLE PERIOD ------------------------------------------------------------------------ ($107,000) For the 12 month period ending September 30, 2002 ------------------------------------------------------------------------ $4,175,000 For the 12 month period ending December 31, 2002 ------------------------------------------------------------------------ $6,493,000 For the 12 month period ending March 31, 2003 ------------------------------------------------------------------------ $6,974,000 For the 12 month period ending June 30, 2003 ------------------------------------------------------------------------ Borrowers' EBITDA for the 12 month period ending each quarter after June 30, 2003 shall be determined based upon Borrowers' projected EBITDA for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the EBITDA covenant number based upon Borrowers' projected EBITDA, for purposes of this Section 7.20(a)(i), Borrowers' EBITDA for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be less than $6,974,000." (b) TANGIBLE NET WORTH. Clause (ii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(ii) TANGIBLE NET WORTH. Fail to maintain Tangible Net Worth of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto: ------------------------------------------------------------------------- APPLICABLE AMOUNT APPLICABLE DATE ------------------------------------------------------------------------- $5,335,000 June 30, 2002 ------------------------------------------------------------------------- $5,436,000 September 30, 2002 ------------------------------------------------------------------------- $5,715,000 December 31, 2002 ------------------------------------------------------------------------- $5,618,000 March 31, 2003 ------------------------------------------------------------------------- $5,918,000 June 30, 2003 ------------------------------------------------------------------------- Borrowers' Tangible Net Worth for each fiscal quarter ending after June 30, 2003 shall be determined based upon Borrowers' projected Tangible Net Worth for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Tangible Net Worth covenant number based upon 2 Borrowers' projected Tangible Net Worth, for purposes of this Section 7.20(a)(ii), Borrowers' Tangible Net Worth for such fiscal quarter shall be determined by Agent in its Permitted Discretion and shall not be less than $5,918,000." (c) LEVERAGE RATIO. Clause (iii) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(iii) LEVERAGE RATIO. Permit the ratio (the "Leverage Ratio") of (i) the aggregate amount of the Indebtedness of Parent and its Subsidiaries divided by (ii) EBITDA, for the applicable period set forth below to be more than the applicable ratio set forth below: --------------------------------------------------------------------- LEVERAGE RATIO APPLICABLE PERIOD --------------------------------------------------------------------- 48.15:1 For the 12 month period ending June 30, 2002 --------------------------------------------------------------------- 236.45:1 For the 12 month period ending September 30, 2002 --------------------------------------------------------------------- 3.97:1 For the 12 month period ending December 31, 2002 --------------------------------------------------------------------- 2.35:1 For the 12 month period ending March 31, 2003 --------------------------------------------------------------------- 1.95:1 For the 12 month period ending June 30, 2003 --------------------------------------------------------------------- Borrowers' Leverage Ratio for the 12 month period ending each quarter after June 30, 2003 shall be determined based upon Borrowers' projected Leverage Ratio for such period as set forth in the Projections delivered to Agent in accordance with Section 6.3(c), which Projections are in form and substance acceptable to Agent; provided, that if Agent and Borrowers cannot agree on the Leverage Ratio covenant based upon Borrowers' projected Leverage Ratio, for purposes of this Section 7.20(a)(iii), Borrowers' Leverage Ratio for such 12 month period shall be determined by Agent in its Permitted Discretion and shall not be more than 1.95:1." 3. CONDITIONS. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "AMENDMENT EFFECTIVE DATE"), provided that the amendments set forth in Section 2 of this Amendment shall be deemed effective as of June 28, 2002: (a) REPRESENTATIONS AND WARRANTIES; NO EVENT OF DEFAULT. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material 3 respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. (b) DELIVERY OF DOCUMENTS. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; and (ii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. (c) PROCEEDINGS. All proceedings in connection with the transactions contemplated by this Amendment, and all documents incidental thereto, shall be reasonably satisfactory to the Agent and its special counsel, and the Agent and such special counsel shall have received all such information and such counterpart originals or certified copies of documents, and such other agreements, instruments, approvals, opinions and other documents, as the Agent or such special counsel may reasonably request. 4. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on 4 or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. (d) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or agency or other regulatory body is required in connection with the due execution, delivery and performance by such Borrower of this Amendment, or for the performance of the Loan Agreement, as amended hereby. (e) This Amendment, the Loan Agreement, as amended hereby, and each other Loan Document to which such Borrower is a party is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by equitable principles or by or subject to any bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally. 5. CONTINUED EFFECTIVENESS OF THE LOAN AGREEMENT. (a) Except as otherwise expressly provided herein, the Loan Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the Amendment Effective Date (i) all references in the Loan Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment and (ii) all references in the other Loan Documents to the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment. (b) The Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if any representation or warranty made by the Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made. 6. COSTS AND EXPENSES. The Borrowers shall pay all reasonable out-of-pocket costs and expenses of the Lender Group (including, without limitation, the reasonable fees and charges of counsel to any member of the Lender Group) in connection with this Amendment. 7. MISCELLANEOUS. (a) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 5 (b) Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. (c) This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York except to the extent governed by the Bankruptcy Code. 8. THE BORROWERS, LENDERS AND THE AGENT EACH HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE LENDER GROUP IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. [Remainder of this page intentionally left blank] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ Daniel P. Buettin --------------------------------------- Name: Daniel P. Buettin Title: Vice President & Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin --------------------------------------- Name: Daniel P. Buettin Title: Vice President & Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin --------------------------------------- Name: Daniel P. Buettin Title: Vice President & Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Trent A. Smart --------------------------------------- Name: Trent A. Smart Title: Vice President 7 EX-10.A.G 14 l96355aexv10wawg.txt EXHIBIT 10(A)(G) Exhibit 10(a)(f) FORM OF SEVERANCE AGREEMENT WITH EXECUTIVE OFFICERS September 13, 2002 Daniel P. Buettin Frontstep, Inc. 2800 Corporate Exchange Drive Columbus, Ohio 43231 Dear Dan: Frontstep, Inc. (the "Company") considers it essential to the best interests of the Company and its shareholders to foster the continuous employment of key management personnel. In this connection, should the Company receive a proposal from a third party, whether solicited by the Company or unsolicited, concerning a possible business combination with, or the acquisition of a substantial share of the equity or voting securities of, the Company, the Board of Directors of the Company (the "Board") has determined that it is imperative that it and the Company be able to rely upon your continued services without concern that you might be distracted by the personal uncertainties and risks that such a proposal might otherwise entail. In order to induce you to remain in the employ of the Company and its subsidiaries, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company and its subsidiaries is terminated subsequent to a Change in Control (as defined in Section 3 hereof) under the circumstances described below. 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through August 31, 2004; provided, however, that the term of this Agreement shall automatically be extended for one additional year commencing on September 1, 2004 and each September 1 thereafter, unless, not later than March 31, 2004 and March 31 of each additional year, the Company shall have given notice that it does not wish to extend this Agreement; PROVIDED, FURTHER, that, notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of six (6) months beyond the expiration of the term in effect immediately before such Change in Control. 2. EMPLOYMENT-AT-WILL. Notwithstanding anything to the contrary contained in this Agreement, you acknowledge and understand that (i) the current employment relationship between you and the Company is that of "employment-at-will", and (ii) the obligations of the parties under this Agreement will not be triggered unless and until there is a "Change in Control" of the Company as defined in Section 3 hereof. 3. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, and subject to the proviso set forth in clause (B) of this Section 3 below, a "Change in Control" of the Company shall be deemed to have occurred if (A) any "person", other than Lawrence Fox or Morgan Stanley, or its affiliates, or Fallen Angel Equity Fund or its affiliates, (as such term "person" is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as determined for purposes of Regulation 13D-G under the Exchange Act as currently in effect), directly or indirectly, of securities of the Company representing thirty three and one third percent (33 1/3%) or more of the combined voting power of the Company's then outstanding securities; or (B) the shareholders of the Company approve (1) a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the holders of the voting securities of the Company outstanding immediately prior thereto holding immediately thereafter securities representing more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (2) an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events described in Section 3 hereof constituting a Change in Control shall have occurred, or if a Change in Control has been publicly announced during the term of this Agreement and the announced Change in Control thereafter occurs during the term of this Agreement, you shall be entitled to the benefits provided in Section 5 hereof upon the subsequent termination of your employment with the Company and its subsidiaries during the term of this Agreement unless such termination is (A) a result of your death or Retirement, or (B) by you for other than Good Reason, or (C) by the Company or any of its subsidiaries for Disability or for Cause. (i) DISABILITY; RETIREMENT. For purposes of this Agreement, "Disability" shall mean permanent and total disability from your occupation as such term is defined under the terms of the Company's then existing employee disability benefit plan, or if no such plan then exists, as defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family or your legal representative) and approved by the Company, said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. For purposes of this Agreement, "Retirement" shall mean your voluntary termination of employment with the Company in accordance with the Company's retirement policy (excluding early retirement) generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) CAUSE. For purposes of this Agreement, "Cause" shall mean your willful breach of duty in the course of your employment, or your habitual neglect of your employment duties. For purposes of this Section 4(ii), no act, or failure to act, on your part shall 2 be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company and its subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct described above in this Section 4(ii) and specifying the particulars thereof in detail. (iii) GOOD REASON. You shall be entitled to terminate your employment for Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances unless, in the case of paragraphs 4(iii)(A) or (C), such circumstances are fully corrected prior to the Date of Termination (as defined in Section 4(v)) specified in the Notice of Termination (as defined in Section 4(iv)) given with respect thereof: (A) the assignment to you of duties substantially inconsistent with your status as an executive officer of the Company, your removal from that position, or a substantial diminution in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control; (B) a material reduction by the Company or any of its subsidiaries in your annual base salary or bonus plan as in effect on the date of any Change in Control, unless consistent with a company wide pay and bonus adjustment; (C) the failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (D) the Company requires you to have your principal location of work changed to any location that is in excess of 50 miles from the location thereof immediately prior to the Change in Control. (iv) NOTICE OF TERMINATION. Any purported termination of your employment by the Company and its subsidiaries or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (B) if your employment is terminated pursuant to Section 4(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of 3 Termination (which, in the case of a termination pursuant to Section 4(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 4(iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); PROVIDED THAT, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); PROVIDED FURTHER that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company and its subsidiaries will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary and bonus) and continue you as a participant in all incentive compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 4(v). Amounts paid under this Section 4(v) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 5. COMPENSATION UPON TERMINATION OR DURING DISABILITY FOLLOWING A CHANGE IN CONTROL. Following a Change in Control of the Company, as defined by Section 3, upon termination of your employment or during a period of Disability you shall be entitled to the following benefits, provided that such period of Disability or Date of Termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company and its subsidiaries as a result of your Disability, you shall continue to receive an amount equal to your base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, your benefits shall be determined in accordance with the insurance programs of the Company and its subsidiaries then in effect. (ii) If your employment shall be terminated by the Company or any of its subsidiaries for Cause or by you other than for Good Reason, the Company (or one of its subsidiaries, if applicable) shall pay you your full base salary and bonus earned through the Date of Termination at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to you pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment shall be terminated by reason of your death or Retirement, your benefits shall be determined in accordance with the retirement and insurance programs of the Company and its subsidiaries then in effect. (iv) If your employment by the Company and its subsidiaries shall be terminated by (a) the Company and its subsidiaries other than for Cause, your death, Retirement, 4 or Disability or (b) you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company (or one of its subsidiaries, if applicable) shall pay to you your full base salary through the date of Termination at the rate in effect at the time the Notice of Termination is given, no later than the fifth business day following the Date of Termination, plus all other amounts to which you are entitled under any compensation plan of the Company applicable to you, at the time such payments are due. (B) The Company shall pay to you, equally each month over a period of six months following the Date of Termination, as severance pay, a total amount equal to six months of your full annual base salary and benefits in effect at the time the Notice of Termination is given. 6. SUCCESSORS; BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the address set forth on the first page of this Agreement with respect to the Company and on the signature page hereof with respect to you, provided that all notices to the Company shall be directed to the attention of the President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provisions of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws of the State of Ohio, without regards to conflict of law principles. All references to sections of the Code shall be deemed also to refer to any 5 successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required to be made by the Company under federal, state or local law. The obligations of the Company under Section 5 shall survive the expiration of the term of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the American Arbitration Association's National Rules for the Resolution of Employment Disputes then in effect. Any and all such arbitration proceedings shall be held in Franklin County, Ohio. Judgment may be entered on the arbitrator's award in any court having competent jurisdiction. 12. EFFECT ON EXISTING AGREEMENT. This Agreement supersedes and replaces that certain [letter] agreement, pertaining only to a corporate Change in Control dated ______________, between you and the Company, which shall have no further continuing force or effect. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on such subject. Sincerely, FRONTSTEP, INC., an Ohio corporation By: ------------------------------------ Stephen A. Sasser President and Chief Executive Officer 6 Agreed to this ____ day of _____, 2002 By: --------------------------------------------- Name: Daniel P. Buettin -------------------------------------------- Title: Vice President, Chief Financial Officer --------------------------------------------- 7 SCHEDULE A In September, 2002, Frontstep entered into separate severance agreements with each of its executive officers, except Messrs. Fox and Sasser, which are substantially identical to the severance agreement with Mr. Buettin being included as Exhibit 10(a)(f) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 (the "Form 10-K). In accordance with Rule 12b-31 promulgated under the Securities Exchange Act of 1934 and Item 601(b)(10) of Regulation S-K, the following table identifies those other persons with whom the Company executed severance agreements similar to that included as Exhibit 10(a)(f) to the Form 10-K: Lawrence W. DeLeon Daryl L. Warluft Robert D. Williams Aggie G. Haslup EX-21 15 l96355aexv21.txt EXHIBIT 21 Frontstep, B.V. (formerly Symix Systems, B.V.) Frontstep (Canada), Inc. (formerly Symix Computer Systems (Canada) Inc.) Frontstep distribution.com, inc. (formerly e-mongoose, inc.) Frontstep (Europe) Limited Frontstep, GmbH (formerly Symix Systems, GmbH) Frontstep (Hong Kong) Limited (formerly Symix Computer Systems (Hong Kong) Limited) Frontstep, Limited (formerly Symix New Zealand, Limited) Frontstep (Malaysia) Sdn., Bhd. (formerly Symix Computer Systems (Malaysia) Sdn., Bhd.) Frontstep Pty. Ltd. (formerly Symix Computer Systems (Australia) Pty. Ltd.) Frontstep (Singapore) Pte. Ltd. (formerly Symix Computer Systems (Singapore) Pte. Ltd.) Frontstep Solutions Group, Inc. (formerly Symix Computer Systems, Inc.) Frontstep (Thailand) Ltd. Symix Computer Systems (Mexico) S. De R.L. De C.V. Frontstep (Shanghai) Co. Ltd. (formerly Symix Computer Systems (Shanghai) Co. Ltd.) Symix Computer Systems (UK) Ltd. Symix France, SA Frontstep Italia S.r.l. (formerly Symix Italia, S.r.l.) Symix Japan Ltd. Frontstep (UK) Ltd. (formerly Symix (U.K.) Ltd.) EX-23 16 l96355aexv23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Frontstep, Inc.: We consent to the incorporation by reference in the registration statements on Form S-3 (Nos. 333-42894) and Form S-8 (Nos. 33-40546, 33-45416, 33-73014, 33-73016, 333-660, 333-10631, 333-10633, 333-43947, and 333-91811) of Frontstep, Inc. of our report dated September 30, 2002, relating to the consolidated balance sheets of Frontstep, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended, which report appears in June 30, 2002 annual report on Form 10-K of Frontstep, Inc. /s/ KPMG LLP Columbus, Ohio September 30, 2002 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-40546, No. 33-45416, No. 33-73014, No. 33-73016, No. 333-660, No. 333-10631, No. 333-10633, No. 333-43947 and No. 333-91811, and Form S-3 No. 333-42894) of Frontstep, Inc. (formerly Symix Systems, Inc.) of our report dated July 27, 2000, with respect to the consolidated financial statements of Frontstep, Inc. for the year ended June 30, 2000 included in this Annual Report (Form 10-K). /s/ Ernst & Young Columbus, Ohio September 30, 2002 EX-24 17 l96355aexv24.txt EXHIBIT 24 FRONTSTEP, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and/or officers of Frontstep, Inc., an Ohio corporation, hereby constitutes and appoints each of Lawrence J. Fox, Stephen A. Sasser and Daniel P. Buettin as the true and lawful attorney or attorney-in-fact, with full power of substitution and revocation, for each of the undersigned and in the name, place and stead of each of the undersigned, to sign on behalf of each of the undersigned an Annual Report on Form 10-K for the fiscal year ended June 30, 2002 pursuant to the Securities Exchange Act of 1934, as amended, and to sign any amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to each attorney or attorney-in-fact full power and authority to do so and to perform any act requisite and necessary to be done as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that each attorney or attorney-in-fact or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it. IN WITNESS WHEREOF, the undersigned have subscribed these presents as of the 28th day of September, 2002. /s/ Lawrence J. Fox /s/ Stephen A. Sasser ----------------------------------------------------- ------------------------------------------------ Lawrence J. Fox Stephen A. Sasser Chairman of the Board and Director President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Daniel P. Buettin /s/ Guy de Chazal ----------------------------------------------------- ------------------------------------------------ Daniel P. Buettin Guy de Chazal Vice President, Finance, Chief Financial Officer and Director Secretary (Principal Financial and Accounting Officer) /s/ Duke W. Thomas /s/ Barry Goldsmith ----------------------------------------------------- ------------------------------------------------ Duke W. Thomas Barry Goldsmith Director Director /s/ James A. Rutherford /s/ Roger D. Blackwell ----------------------------------------------------- ------------------------------------------------ James A. Rutherford Roger D. Blackwell Director Director /s/ A. Zuheir Sofia ----------------------------------------------------- A. Zuheir Sofia Director
EX-99.A 18 l96355aexv99wa.txt EXHIBIT 99(A) Exhibit 99(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF FRONTSTEP, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report of Frontstep, Inc. (the "Company") on Form 10-K for the year ended June 30, 2002, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ STEPHEN A. SASSER ------------------------------------- Stephen A. Sasser President and Chief Executive Officer Date: September 30, 2002 ---- CERTIFICATION OF CHIEF FINANCIAL OFFICER OF FRONTSTEP, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report of Frontstep, Inc. (the "Company") on Form 10-K for the year ended June 30, 2002, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ DANIEL P. BUETTIN ------------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer And Secretary, Principal Financial and Accounting Officer Date: September 30, 2002 ---- -----END PRIVACY-ENHANCED MESSAGE-----