10-Q 1 l84692ae10-q.txt FRONTSTEP, INC. FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 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 Identification Number) incorporation or organization) 2800 CORPORATE EXCHANGE DRIVE 43231 COLUMBUS, OHIO (Zip Code) (Address of principal executive offices) (614) 523-7000 (Registrant's telephone number, including area code) SYMIX SYSTEMS, INC. (Former name, former address and former fiscal year, if changed since last report) ------------------- 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 --- --- As of November 8, 2000, 7,505,157 shares of the issuer's common stock, without par value, were outstanding. ================================================================================ 2 FRONTSTEP, INC. AND SUBSIDIARIES INDEX
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2000 (unaudited) and June 30, 2000...............3 Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999 (unaudited)..........................................................5 Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2000 and 1999 (unaudited)..........................................................6 Notes to Consolidated Financial Statements (unaudited)...........................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................13 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................................................14 Item 2. Changes in Securities and Use of Proceeds.......................................................14 Item 3. Defaults Upon Senior Securities.................................................................14 Item 4. Submission of Matters to a Vote of Security Holders.............................................15 Item 5. Other Information...............................................................................15 Item 6. Exhibits and Reports on Form 8-K................................................................15 SIGNATURES................................................................................................16 EXHIBIT INDEX.............................................................................................17
2 3 PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FRONTSTEP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 4,163 $11,868 Trade accounts receivable, less allowance for doubtful accounts of $1,727 and $2,075 at September 30, 2000 and June 30, 2000, respectively 38,089 36,956 Inventories 838 861 Prepaid expenses 3,068 2,610 Other receivables 1,780 988 Income tax receivable 1,955 1,867 Deferred income taxes 1,510 1,510 ------- ------- 51,403 56,660 Other assets: Capitalized software, net of accumulated amortization of $14,775 and $13,687 at September 30, 2000 and June 30, 2000, respectively 17,526 18,329 Intangibles, net 9,322 9,113 Deposits and other assets 2,535 2,280 ------- ------- 29,383 29,722 Equipment and improvements: Furniture and fixtures 3,615 3,568 Computer and other equipment 19,147 18,410 Leasehold improvements 1,792 1,535 ------- ------- 24,554 23,513 Less accumulated depreciation and amortization 16,552 15,527 ------- ------- 8,002 7,986 ------- ------- Total assets $88,788 $94,368 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 3 4 FRONTSTEP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED (in thousands, except share data)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- -------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $12,718 $13,613 Deferred revenue 17,007 18,223 Current portion of long-term obligations 2,852 5,476 ------- ------- 32,577 37,312 Noncurrent liabilities: Long-term obligations 169 169 Bank credit agreement 6,813 3,000 Deferred income taxes 3,452 4,167 ------- ------- 10,434 7,336 Minority interest 2,110 2,146 Series A Convertible Participating Preferred Stock, no par value; 1,000,000 shares authorized; 566,933 shares issued and outstanding at September 30, 2000 and June 30, 2000; liquidation preference $24 per share 10,865 10,865 Shareholders' equity: Common stock; 20,000,000 shares authorized; 7,809,357 and 7,807,857 shares issued and outstanding at September 30, 2000 and June 30, 2000, respectively; at stated capital amounts of $0.01 per share 78 78 Capital in excess of stated value 37,226 37,216 Retained earnings (deficit) (257) 3,292 Accumulated other comprehensive loss (2,925) (2,557) ------- ------- 34,122 38,029 Less: Common stock in treasury 304,200 shares, at cost (1,320) (1,320) ------- ------- 32,802 36,709 ------- ------- Total liabilities and shareholders' equity $88,788 $94,368 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 5 FRONTSTEP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2000 1999 ------- ------- (UNAUDITED) Revenue: License fees $11,881 $13,392 Service, maintenance and support 16,152 18,679 ------- ------- Net revenue 28,033 32,071 Cost of revenue: License fees 4,445 4,238 Service, maintenance and support 9,842 10,130 ------- ------- Total cost of revenue 14,287 14,368 ------- ------- Gross margin 13,746 17,703 Operating expenses: Selling, general and administrative 12,263 11,590 Research and development 3,718 3,611 Amortization of intangibles from acquisitions 837 765 Non-recurring charges related to divested operations 2,163 -- ------- ------- Total operating expenses 18,981 15,966 ------- ------- Operating income (loss) (5,235) 1,737 Other income (expense), net 73 (270) ------- ------- Income (loss) before income taxes (5,162) 1,467 Provision (benefit) for income taxes (1,613) 572 ------- ------- Net income (loss) $(3,549) $ 895 ======= ======= Net income (loss) per share $ (0.47) $ 0.12 ======= ======= Net income (loss) per share, assuming dilution $ (0.47) $ 0.12 ======= ======= Weighted average number of common shares outstanding 7,504 7,354 Weighted average number of common shares outstanding, assuming dilution 7,504 7,720
The accompanying notes are an integral part of these consolidated financial statements. 5 6 FRONTSTEP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
THREE MONTHS ENDED SEPTEMBER 30, ------------------ 2000 1999 ------- ------- (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $(3,549) $ 895 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,006 2,551 Non-recurring charges related to divested operations 2,163 -- Net loss on disposal of assets 6 -- Provision for losses on accounts receivable (381) (10) Provision for deferred income taxes (716) (49) Changes in operating assets and liabilities: Trade accounts receivable (1,266) 2,374 Prepaid expenses and other receivables (1,325) 42 Inventories 23 (50) Deposits and other assets (448) 19 Accounts payable and accrued expenses (2,924) (4,778) Customer deposits 60 (42) Deferred revenue (1,111) 199 Income taxes payable/receivable (14) (336) ------- ------- Net cash provided by (used in) operating activities (6,476) 815 CASH FLOW FROM INVESTING ACTIVITIES: Purchase of equipment and improvements (1,095) (1,166) Additions to purchased and developed software (1,395) (1,135) ------- ------- Net cash used in investing activities (2,490) (2,301) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock and exercise of stock options 8 36 Proceeds from long-term obligations 3,814 1,114 Payments on long-term obligations (2,660) (847) ------- ------- Net cash provided by financing activities 1,162 303 Effect of exchange rate changes on cash 99 (76) ------- ------- Decrease in cash and cash equivalents (7,705) (1,259) Cash and cash equivalents at beginning of year 11,868 5,236 ------- ------- Cash and cash equivalents at end of period $ 4,163 $ 3,977 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 7 FRONTSTEP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (unaudited) NOTE A - 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 mid-sized manufacturing, distribution and other companies, including business units of larger companies. The Company primarily offers integrated enterprise resource planning software and services through its Symix channel. More recently, the Company has developed and also offers a comprehensive suite of integrated business to business ("b2b") e-business software and services, including customer relationship management ("CRM"), on-line sales and service, web-driven channel management, supply chain and e-procurement solutions, and collaboration and integration products. Also, through brightwhite solutions, inc. ("brightwhite"), the Company delivers related e-business consulting services. Founded in 1979, Frontstep is headquartered in Columbus, Ohio. The Company has more than 4,000 customers that it serves from 27 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 recently changed its name from Symix Systems, Inc. to Frontstep, Inc. The accompanying unaudited consolidated financial statements presented herein have been prepared by the Company and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of financial results for the three months ended September 30, 2000 and 1999, in accordance with generally accepted accounting principles for interim financial reporting and pursuant to Article 10 of Regulation S-X. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2000 ("Annual Report"). The results of operations for the three months ended September 30, 2000 are not necessarily indicative of the results to be expected for a full year. Comprehensive Income. The only item in addition to net income that would be included in comprehensive income is the foreign currency translation adjustment. Comprehensive income (loss) for the three months ended September 30, 2000 and 1999 is $(3,917,000) and $1,095,000, respectively. 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 accompanying consolidated financial statements and related notes. Actual results could differ from those estimates. NOTE B - LINE OF CREDIT In June 1998, the Company entered into a revolving credit facility with a bank which, as amended and restated in May 2000, provides for a $15,000,000 secured revolving line of credit that expires on the earlier of a) July 1, 2001, or b) the date the amounts borrowed become due and payable (the "Credit Facility"). The Credit Facility is secured primarily by the Company's trade accounts receivable and certain other assets. Borrowings under the Credit Facility bear interest at either the bank prime rate or, at the Company's option, the LIBOR rate as adjusted for performance based pricing. The Company is required to pay a fee of 0.25% per year on the unused portion of the Credit Facility. The Credit Facility contains certain covenants, which, among other things, require the Company to maintain specified financial ratios and to satisfy certain tests, including minimum net worth, maximum leverage ratio, minimum EBITDA, minimum current ratio and limitations on future capital expenditures. At September 30, 2000, the Company was not in compliance with certain of these debt covenants. The Company's bank has proposed certain amendments to the Credit Facility and has provided a waiver relating to noncompliance upon execution of 7 8 the proposed amendments. The noncompliance does not relate to any payment due under the Credit Facility. The waiver has been granted for the period June 30, 2000, (the initial date of noncompliance) to the date of the execution of the amendment. Execution of the amendment is solely within the discretion of the Company. During the second quarter of fiscal 2001, the Company intends to execute the amendment if it is unable to obtain alternative financing that is more favorable. During the first quarter of fiscal 2001, the Company explored alternative credit arrangements with its current bank and with other banks and credit institutions and has received several proposals that are similar to the proposal made by the Company's current bank. The Company is focusing on one of these proposals and is currently pursuing completion of a new credit facility that would provide a line of credit of up to $20 million for a period of three years. Availability under this proposed credit facility would be based on qualifying accounts receivable and will be secured by the Company's trade accounts receivable. The Company would be subject to customary terms and conditions, including a financial covenant relating to maintenance of net worth. The Company expects to complete the execution of this new credit facility during the second quarter of fiscal 2001. NOTE C - NON-RECURRING CHARGES 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 of the Company's FieldPro subsidiary, discontinuing operations of its e-Mongoose 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 $3,011,000, pre-tax, in the three months ended June 30, 2000 and an additional $2,163,000, pre-tax, in the three months ended September 30, 2000. The non-recurring charge incurred in the three months ended September 30, 2000 primarily related to employee actions taken by the Company and costs related to those employee actions associated with the changes discussed above. Of the total $2,163,000 non-recurring charge incurred in the three months ended September 30, 2000, $896,000 is accrued as of September 30, 2000 for such charges expected to be paid in future quarters. NOTE D - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 ------- ------ Numerator for basic and diluted earnings (loss) per share - net income (loss) $(3,549) $ 895 ======= ====== Denominator for basic earnings (loss) per share - weighted average common shares outstanding 7,504 7,354 Effect of dilutive employee stock options -- 366 ------- ------ Denominator for diluted earnings (loss) per share - adjusted weighted average common shares and assumed conversions 7,504 7,720 ======= ====== Net income (loss) per share $ (0.47) $ 0.12 ======= ====== Net income (loss) per share, assuming dilution $ (0.47) $ 0.12 ======= ======
During the three months ended September 30, 2000, options to purchase 1,990,925 common shares at a weighted average price of $8.15 per share, warrants to purchase 453,546 common shares at an exercise price of 8 9 $15.00 per share and 566,933 shares of Series A Convertible Participating Preferred Stock convertible to common shares at a conversion rate of two shares of common for one share of preferred, subject to adjustment, were outstanding, but were not included in the computation of diluted income per share because the Company reported a net loss for the period and, therefore, the effect would be antidilutive. During the three months ended September 30, 1999, options to purchase 418,850 common shares at a weighted average price of $16.43 per share were outstanding, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares for that period and, therefore, the effect would be antidilutive. NOTE E - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company designs, develops, markets and supports business software and services for mid-sized manufacturing, distribution and other 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, except percentage data):
NORTH AMERICA ASIA/PACIFIC EUROPE ------------- ------------ ------ THREE MONTHS ENDED SEPTEMBER 30, 2000 Net revenue $21,606 77% $3,119 11% $ 3,308 12% Operating income (loss) before amortization of intangibles and special charges* (2,327) 104% (33) 2% 125 (6)% Operating income (loss) (5,190) 99% (50) 1% 5 --% Identifiable assets 71,548 81% 8,326 9% 8,914 10% THREE MONTHS ENDED SEPTEMBER 30, 1999 Net revenue $25,538 80% $3,328 10% $ 3,205 10% Operating income (loss) before amortization of intangibles 2,546 102% 326 13% (370) (15)% Operating income (loss) 1,939 111% 306 18% (508) (29)% Identifiable assets 65,880 76% 8,783 10% 12,462 14%
------------- * Exclusive of non-recurring charges of $2,163,000. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q AND OTHER WRITTEN AND ORAL STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ARE "FORWARD-LOOKING" STATEMENTS, INCLUDING STATEMENTS REGARDING FUTURE ECONOMIC PERFORMANCE OF THE COMPANY AND THE PLANS, OBJECTIVES AND EXPECTATIONS OF THE COMPANY'S MANAGEMENT. THE WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "ESTIMATE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS PROVIDE CURRENT EXPECTATIONS AND FORECASTS OF FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, KNOWN AND UNKNOWN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE PLANS, OBJECTIVES AND EXPECTATIONS REFLECTED IN OR SUGGESTED BY THE FORWARD-LOOKING STATEMENTS ARE BASED UPON REASONABLE ASSUMPTIONS, NO ASSURANCE CAN BE GIVEN THAT SUCH PLANS, OBJECTIVES OR EXPECTATIONS WILL BE ACHIEVED. IN SOME CASES, INFORMATION REGARDING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM A FORWARD-LOOKING STATEMENT APPEAR TOGETHER WITH SUCH STATEMENT. OTHER UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S TRANSITION TO E-BUSINESS; THE DEMAND FOR AND MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS AND SERVICES; THE IMPACT OF COMPETITIVE PRODUCTS; THE COMPANY'S ABILITY TO MAINTAIN EFFICIENT MARKETING AND DISTRIBUTION OPERATIONS DOMESTICALLY AND INTERNATIONALLY; FUTURE WORLDWIDE POLITICAL, ECONOMIC, COMPETITIVE AND MARKET CONDITIONS; THE COMPANY'S ABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED TECHNICAL, MANAGERIAL, SALES, MARKETING, SERVICE AND SUPPORT STAFF AND TO RETAIN KEY TECHNICAL AND MANAGEMENT PERSONNEL; TIMING OF PRODUCT DEVELOPMENT AND GENERAL RELEASE; EXCHANGE RATE FLUCTUATIONS; THE COMPANY'S ABILITY TO PROTECT ITS PROPRIETARY TECHNOLOGY; RISKS GENERALLY ASSOCIATED WITH NEW PRODUCT INTRODUCTION; PRODUCT PRICING; AND OTHER FACTORS DETAILED IN THE ANNUAL REPORT AND IN OTHER FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS NOT POSSIBLE TO IDENTIFY OR FORESEE ALL SUCH RISKS OR UNCERTAINTIES. CONSEQUENTLY, THE FOREGOING SHOULD NOT BE CONSIDERED AN EXHAUSTIVE STATEMENT OF ALL RISKS, UNCERTAINTIES OR POTENTIALLY INACCURATE ASSUMPTIONS RELATING TO SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY IS NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW EVENTS OR CIRCUMSTANCES. The following information should be read in conjunction with the unaudited Consolidated Financial Statements and related notes included elsewhere in this Form 10-Q. The following information should also be read in conjunction with the Company's audited Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended June 30, 2000, as contained in the Annual Report. OVERVIEW Since the second quarter of fiscal 2000, the Company has experienced a decline in revenues related to a sluggish demand for its software products and services. The Company believes that this decline is related to the continued industry-wide trend of delays in new business system purchases caused initially by the Year 2000 market dynamics and subsequently by a desire by potential customers to better understand the internet and the role of e-business solutions on their overall systems strategy. As a direct result of these market conditions and related sluggish demand, the Company recorded operating losses before non-recurring items of $7.1 million and $3.1 million in fiscal year 2000 and the three months ended September 30, 2000 (the "fiscal 2001 quarter"), respectively. The Company also chose to make 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. In connection with these changes, the Company recorded a non-recurring charge of $3.0 million, pre-tax, in fiscal year 2000 and an additional $2.2 million, pre-tax, in the fiscal 2001 quarter. The combination of the sluggish demand causing declining revenues and the Company's decision to make structural changes resulted in net after tax losses of $10.2 million and $3.5 million in fiscal 2000 and the fiscal 2001 quarter, respectively. 10 11 As a result of the changing market conditions, the Company has been in the process of a transformation to enhance its product offerings beyond its traditional integrated enterprise resource planning software and services to include a comprehensive suite of integrated b2b e-business software and services, including CRM, on-line sales and service, web-driven channel management, supply chain and e-procurement solutions, and collaboration and integration products. In that regard, in fiscal 2000, the Company created its Frontstep subsidiary to develop the infrastructure and sales channels to support these new products and services and created its brightwhite subsidiary to provide related e-business consulting services. During fiscal year 2000 and the fiscal 2001 quarter, the Company invested heavily in the product development activities for the Company's e-business software products and capabilities, development of future releases of the Company's enterprise resource planning software and development of interfaces with third-party software products. The Company has also been investing in the infrastructure and sales and marketing activities to support the e-business initiatives and product offerings. In conjunction with these transformation efforts, the Company changed its name from Symix Systems, Inc. to Frontstep, Inc. after obtaining approval from the Company's shareholders at its most recent annual shareholders meeting held in November 2000. The Company will continue to offer integrated enterprise resource planning software and services through its Symix channel. RESULTS OF OPERATIONS Net Revenue. The Company's net revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on a subscription basis. Revenue is accounted for in accordance with Statement of Position 97-2 on Software Revenue Recognition. Net revenue decreased $4.0 million, or 12.6%, to $28.0 million in the fiscal 2001 quarter from $32.1 million in the three months ended September 30, 1999 (the "fiscal 2000 quarter"). The net revenue mix for each fiscal quarter is shown in the table below (in thousands, except percentage data):
THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 2000 1999 ------------------ ----------------- License fees revenue $11,881 42.4% $13,392 41.8% Service, maintenance and support revenue 16,152 57.6% 18,679 58.2% ------- ----- ------- ----- Net revenue $28,033 100.0% $32,071 100.0% ======= ===== ======= =====
License fees revenue decreased 11.3% in the fiscal 2001 quarter from the fiscal 2000 quarter. The Company believes that the decline in net revenue in the fiscal 2001 quarter is due to the continued industry-wide trend of delays in new business system purchases caused initially by the Year 2000 market dynamics and subsequently by a desire by potential customers to better understand the internet and the role of e-business solutions on their overall systems strategy. Service, maintenance and support revenue decreased 13.5% in the fiscal 2001 quarter from the fiscal 2000 quarter. The decrease is primarily the result of the decrease in license activity during the fiscal 2001 quarter and similar decreases in the quarters of fiscal year 2000. Generally, maintenance and support contract renewals are billed annually and revenue is recognized ratably over the contract period, which is typically twelve months. Deferred revenue on the Company's balance sheet, which relates primarily to such maintenance and support contracts, decreased to $17.0 million at September 30, 2000 from $18.2 million at June 30, 2000, primarily as a result of decreases in maintenance renewal and the decreases in license fees revenue discussed above. Cost of Revenue. Total cost of revenue as a percentage of net revenue increased to 51.0% for the fiscal 2001 quarter from 44.8% for the fiscal 2000 quarter. 11 12 Cost of license fees revenue includes royalties, amortization of capitalized software development costs and software delivery expenses. Cost of license fees revenue increased $0.2 million, or 4.9%, to $4.4 million in the fiscal 2001 quarter from $4.2 million in the fiscal 2000 quarter and as a percentage of license fees revenue, increased to 37.4% in the fiscal 2001 quarter from 31.6% in the fiscal 2000 quarter. The percentage increase is primarily attributable to the decline in license fees revenue affecting certain fixed and related costs. 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. Cost of service, maintenance and support revenue decreased $0.3 million, or 2.8%, to $9.8 million in the fiscal 2001 quarter from $10.1 million in the fiscal 2000 quarter and as a percentage of service, maintenance and support revenue, increased to 60.9% in the fiscal 2001 quarter from 54.2% in the fiscal 2000 quarter. The percentage increase is primarily attributable to a decline in service revenue resulting from sluggish license fees revenue in preceding quarters and a related decrease in utilization of services personnel and to the Company's infrastructure investments supporting its e-business initiatives. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of personnel, facilities and related overhead costs, together with other operating costs of the Company, including advertising and promotional costs. Selling, general and administrative expenses increased $0.7 million, or 5.8%, to $12.3 million in the fiscal 2001 quarter from $11.6 million in the fiscal 2000 quarter. Such expenses as a percentage of net revenue increased to 43.7% in the fiscal 2001 quarter from 36.1% in the fiscal 2000 quarter. The percentage increase is primarily due to the impact of the decline in the Company's net revenues and the costs associated with the Company's transformation discussed above. Selling, general and administrative expenses decreased $5.5 million sequentially from the three months ended June 30, 2000 primarily as a result of the restructuring and other changes described under Non-Recurring Charges below. Research and Development. Research and development expenses include personnel and related overhead costs for product development, enhancement, upgrades, quality assurance and testing. Total research and development expenses, including amounts capitalized, increased $0.4 million or 7.7%, to $5.1 million for the fiscal 2001 quarter from $4.7 million for the fiscal 2000 quarter and increased as a percentage of net revenues to 18.2% in the fiscal 2001 quarter from 14.8% in the fiscal 2000 quarter. Increases in the amount of such expenses and as a percentage of net revenues are due primarily to the continued investment in the Company's e-business software products and capabilities, development of future releases of the Company's enterprise resource planning software and development of interfaces with third-party software products. The Company capitalized research and development costs of $1.4 million during the fiscal 2001 quarter and $1.1 million during the fiscal 2000 quarter. 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 years and recorded as license fee cost of revenue. Non-recurring Charges. 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 of the Company's FieldPro subsidiary, discontinuing operations of its e-Mongoose 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 $3.0 million, pre-tax, in the three months ended June 30, 2000 and an additional $2.2 million, pre-tax, in the fiscal 2001 quarter. The non-recurring charge incurred in the fiscal 2001 quarter primarily related to employee actions taken by the Company and costs related to those employee actions associated with the changes discussed above. Of the total $2.2 million non-recurring charge incurred in the fiscal 2001 quarter, $0.9 million is accrued as of September 30, 2000 for such charges expected to be paid in future quarters. 12 13 Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes for the fiscal 2001 and 2000 quarters reflects an effective tax rate of 31% and 39%, respectively. The effective tax rate in the fiscal 2001 quarter differs from the expected corporate tax rate primarily due to a valuation allowance offset to net operating losses of certain foreign subsidiaries, foreign taxable earnings in countries with higher effective tax rates and the non-deductibility of the amortization of intangibles. QUARTERLY RESULTS The Company's results of operations have fluctuated on a quarterly basis. The Company's 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 by a significant portion of the shortfall. LIQUIDITY AND CAPITAL RESOURCES During the fiscal 2001 quarter, the Company used $7.7 million of cash. Cash was used primarily to fund the Company's pre-tax loss of $5.2 million, which included the non-recurring charges described above. Cash was also used for the payment of $2.5 million on the PSI acquisition note, the increase in accounts receivable of $1.3 million and other working capital increases of $1.8 million. During the fiscal 2001 quarter, borrowings under the Credit Facility increased from $3.0 million to $6.8 million. As of September 30, 2000, the Company had cash and cash equivalents of $4.2 million and working capital of $18.8 million. In addition to its present working capital, the Company has a $15.0 million secured revolving bank line of credit that expires in fiscal 2002. The line of credit is secured primarily by the Company's trade accounts receivable and certain other assets. As of September 30, 2000, $6.8 million was drawn under the line of credit to fund the Company's working capital needs. As of September 30, 2000, the Company was not in compliance with certain covenants under this agreement as a result of its reported losses for the quarter ended as of that date. The Company's bank has proposed certain amendments to the Credit Facility and has provided a waiver relating to noncompliance upon execution of the proposed amendments. The noncompliance does not relate to any payment due under the Credit Facility. The waiver has been granted for the period June 30, 2000, (the initial date of noncompliance) to the date of the execution of the amendment. Execution of the amendment is solely within the discretion of the Company. During the second quarter of fiscal 2001, the Company intends to execute the amendment if it is unable to obtain alternative financing that is more favorable. During the first quarter of fiscal 2001, the Company explored alternative credit arrangements with its current bank and with other banks and credit institutions and has received several proposals that are similar to the proposal made by the Company's current bank. The Company is focusing on one of these proposals and is currently pursuing completion of a new credit facility that would provide a line of credit of up to $20 million for a period of three years. Availability under this proposed credit facility would be based on qualifying accounts receivable and will be secured by the Company's trade accounts receivable. The Company would be subject to customary terms and conditions, including a financial covenant relating to maintenance of net worth. The Company expects to complete the execution of this new credit facility during the second quarter of fiscal 2001. The Company anticipates that cash on hand, cash flow from operations and available borrowings as described above will be sufficient to satisfy expected cash needs for the next 12 months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange. During the fiscal 2001 quarter, Frontstep's revenues originating outside the United States were 22.9% of net revenues and during the fiscal 2000 quarter were 20.4% of net revenues. International revenues for the fiscal 2001 and 2000 quarters were broken out by geographic region as follows: Europe, 11.8% and 10.0% of net revenues, respectively; and Asia Pacific, 11.1% and 10.4% of net revenues, respectively. International sales are made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated 13 14 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. The Company's 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 the Company's 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. The Company is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall profitability. To date, the Company has not realized material fluctuations due to foreign exchange rates. Due to the growth of the international business, however, management is reviewing the possibility of a foreign exchange hedge program in order to minimize this particular exposure. PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is subject to legal proceedings and claims which 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 the Company's business, financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. As previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (the "Form 10-Q"), the Company sold its Series A Convertible Participating Preferred Shares in a private placement to a group of unaffiliated accredited investors (the "Investors") on May 10, 2000. An Investor Rights Agreement, dated as of May 10, 2000, among the Company and the Investors was filed as Exhibit 4(c) and Exhibit 10(b) to the Form 10-Q. Subsequent to the filing of the Form 10-Q, the parties executed an amendment to the Investor Rights Agreement, dated August 15, 2000 (the "Amendment"), which was filed as Exhibit 4(c) to the Company's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on August 30, 2000. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. (a) As of September 30, 2000, the Company was not in compliance with certain covenants under the Credit Facility as a result of its reported losses for the quarter ended as of that date. The Company's bank has proposed certain amendments to the Credit Facility and has provided a waiver relating to noncompliance upon execution of the proposed amendments. The noncompliance does not relate to any payment due under the Credit Facility. The waiver has been granted for the period June 30, 2000, (the initial date of noncompliance) to the date of the execution of the amendment. Execution of the amendment is solely within the discretion of the Company. During the second quarter of fiscal 2001, the Company intends to execute the amendment if it is unable to obtain alternative financing that is more favorable. During the first quarter of fiscal 2001, the Company explored alternative credit arrangements with its current bank and with other banks and credit institutions and has received several proposals that are similar to the proposal made by the Company's current bank. The Company is focusing on one of these proposals and is currently pursuing completion of a new credit facility that would provide a line of credit of up to $20 million for a period of three years. Availability under this proposed credit facility would be based on qualifying accounts receivable and will be secured by the Company's trade accounts receivable. The Company would be subject to customary terms and conditions, including a financial covenant 14 15 relating to maintenance of net worth. The Company expects to complete the execution of this new credit facility during the second of quarter fiscal 2001. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits filed with this Quarterly Report on Form 10-Q following the Signature Page. (b) Reports on Form 8-K. The Company filed a current report on Form 8-K, dated August 15, 2000, to report under Item 5 (Other Events) that the registrant and unaffiliated accredited investors (the "Investors") executed an amendment dated August 15, 2000 to the Investor Rights Agreement dated as of May 10, 2000 among the registrant and the Investors. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTSTEP, INC. Dated: November 14, 2000 By: /s/ Daniel P. Buettin ----------------- -------------------------- Daniel P. Buettin Vice President and Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) 16 17 INDEX TO EXHIBITS
Exhibit No. Description Page ----------- ----------- ---- 3(a)(1) Amended Articles of Incorporation of Incorporated herein by reference to Frontstep, Inc. (f/k/a "Symix Systems, Exhibit 3(a)(1) to the Company's Annual Inc.") (the "Company") (as filed with the Report on Form 10-K for the fiscal year Ohio Secretary of State on February 8, ended June 30, 1997 1991) 3(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation of the Company Exhibit 3(a)(2) to the Company's Annual (as filed with the Ohio Secretary of Report on Form 10-K for the fiscal year State on July 16, 1996) ended June 30, 1997 3(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended of Exhibit 3(a)(3) to the Company's Quarterly the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter Secretary of State on May 10, 2000) ended March 31, 2000 3(a)(4) Certificate of Amendment to the Amended Filed Herein Articles of Incorporation, as amended of the Company (as filed with the Ohio Secretary of State on November 8, 2000) 3(a)(5) Amended Articles of Incorporation, as Filed Herein amended of the Company (reflecting amendments through November 8, 2000 for purposes of Securities and Exchange Commission reporting compliance only) 3(b) Amended Regulations of the Company Incorporated herein by reference to Exhibit 3(b) to the Company'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 the Incorporated herein by reference to Company (as filed with the Ohio Secretary Exhibit 3(a)(1) to the Company's Annual of State on February 8, 1991) Report on Form 10-K for the fiscal year ended June 30, 1997 4(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation of the Company Exhibit 3(a)(2) to the Company's Annual (as filed with the Ohio Secretary of Report on Form 10-K for the fiscal year State on July 16, 1996) ended June 30, 1997
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Exhibit No. Description Page ----------- ----------- ---- 4(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended of Exhibit 3(a)(3) to the Company's Quarterly the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter Secretary of State on May 10, 2000) ended March 31, 2000 4(a)(4) Certificate of Amendment to the Amended Filed Herein at Exhibit 3(a)(4) Articles of Incorporation, as amended of the Company (as filed with the Ohio Secretary of State on November 8, 2000) 4(a)(5) Amended Articles of Incorporation, as Filed Herein at Exhibit 3(a)(5) amended of the Company (reflecting amendments through November 8, 2000 for purposes of Securities and Exchange Commission reporting compliance only) 4(b) Amended Regulations of the Company Incorporated herein by reference to Exhibit 3(b) to the Company'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) Share Exchange Agreement, dated January Incorporated herein by reference to 9, 1997 Exhibit 99 to the Company's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 24, 1997 4(d) Investor Rights Agreement, dated as of Incorporated herein by reference to May 10, 2000, among the Company, the Exhibit 4(c) to the Company's Quarterly Investors identified therein and Lawrence Report on Form 10-Q for the fiscal quarter J. Fox ended March 31, 2000 4(e) Amendment to Investor Rights Agreement, Incorporated herein by reference to dated as of August 15, 2000, among the Exhibit 4(c) to the Company's Current Company, the Investors identified therein Report on Form 8-K, as filed with the and Lawrence J. Fox Securities and Exchange Commission on August 30, 2000 4(f) Warrant for the Purchase of Shares of Incorporated herein by reference to Common Stock of the Company issued to Exhibit 4(d) to the Company's Quarterly Morgan Stanley Dean Witter Venture Report on Form 10-Q for the fiscal quarter Partners IV, L.P., and Exhibit A, ended March 31, 2000 identifying other identical warrants issued to the Investors identified on Exhibit A, for the number of common shares identified on Exhibit A
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Exhibit No. Description Page ----------- ----------- ---- 10(a) Amendment to Investor Rights Incorporated herein by reference to Agreement, dated as of August 15, 2000, Exhibit 4(c) to the Company's Current among the Company, the Investors Report on Form 8-K, as filed with identified therein and Lawrence J. Fox the Securities and Exchange Commission on August 30, 2000 27 Financial Data Schedule Filed Herein