-----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, PftrDtwPG5GR+8hsuXtT0VmFyXes0ib91KAvHNMgBWFZoL+Obk9zj9DmVoiTRq3W mayCiRSRc3gIENWPi8uW9g== 0000950152-02-001243.txt : 20020414 0000950152-02-001243.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950152-02-001243 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020219 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-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19024 FILM NUMBER: 02552675 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-Q/A 1 l92741be10-qa.txt FRONTSTEP, INC. 10-Q/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q/A (AMENDED) (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 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) NOT APPLICABLE. (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 February 13, 2001 7,568,218 shares of the issuer's common stock, without par value, were outstanding. ================================================================================ FRONTSTEP, INC. AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2001 (unaudited) and June 30, 2001................3 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended December 31, 2001 and 2000.......................................................................4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended December 31, 2001 and 2000.......................................................................5 Notes to Consolidated Financial Statements (unaudited)...........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........11 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................17 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................................................18 Item 2. Changes in Securities and Use of Proceeds.......................................................18 Item 3. Defaults Upon Senior Securities.................................................................18 Item 4. Submission of Matters to a Vote of Security Holders.............................................19 Item 5. Other Information...............................................................................19 Item 6. Exhibits and Reports on Form 8-K................................................................19 SIGNATURES....................................................................................................20 EXHIBIT INDEX.................................................................................................21
Page 2 PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FRONTSTEP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, JUNE 30, 2001 2001 ----------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 6,611 $ 1,512 Trade accounts receivable, net 27,135 31,446 Prepaid expenses 4,255 3,756 Income taxes receivable - 47 Deferred income taxes 2,026 2,026 Inventories 685 738 Other current assets 373 979 ------------ ------------ 41,085 40,504 Capitalized software, net 15,329 15,094 Goodwill, net 7,902 7,911 Property and equipment, net 6,219 7,646 Other assets 1,506 1,438 ------------ ------------ Total assets $72,041 $72,593 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $13,810 $15,610 Deferred revenue 16,878 19,067 Current portion of long-term obligations 7,061 1,967 ------------ ------------ 37,749 36,644 Noncurrent liabilities: Long-term debt 9,387 8,337 Deferred income taxes 2,737 2,891 Other 188 405 ------------ ------------ 12,312 11,633 Minority interest 1,045 2,102 Shareholders' equity: Series A Convertible Participating Preferred Stock, no par value; 1,000,000 shares authorized; 566,933 shares issued and outstanding at December 31, 2001 and June 30, 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 December 31, 2001 and June 30, 2001, at stated capital amounts of $0.01 per share 79 79 Additional paid-in capital 38,746 37,470 Treasury stock, at cost; 304,200 shares (1,320) (1,320) Retained deficit (24,116) (21,562) Accumulated other comprehensive loss (3,319) (3,318) ------------ ------------ 20,935 22,214 ------------ ------------ Total liabilities and shareholders' equity $72,041 $72,593 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
Page 3 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------- ------------------------------ 2001 2000 2001 2000 --------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Revenue: License fees $ 9,366 $ 17,185 $ 18,695 $ 29,066 Service 5,197 8,041 11,383 15,994 Maintenance and support 8,952 8,837 18,355 17,036 --------------- -------------- -------------- -------------- Total revenue 23,515 34,063 48,433 62,096 Cost of revenue: License fees 4,421 5,489 8,671 9,934 Service, maintenance and support 7,326 9,566 14,252 19,408 --------------- -------------- -------------- -------------- Total cost of revenue 11,747 15,055 22,923 29,342 --------------- -------------- -------------- -------------- Gross margin 11,768 19,008 25,510 32,754 Operating expenses: Selling, general and administrative 11,995 15,991 22,818 28,254 Research and development 1,712 3,471 3,403 7,189 Amortization of acquired intangibles 380 831 910 1,668 Restructuring and other charges - - - 2,163 --------------- -------------- -------------- -------------- Total operating expenses 14,087 20,293 27,131 39,274 --------------- -------------- -------------- -------------- Operating income (loss) (2,319) (1,285) (1,621) (6,520) Other income (expense), net (380) (122) (908) (49) --------------- -------------- -------------- -------------- Income (loss) before income taxes (2,699) (1,407) (2,529) (6,569) Provision for (benefit from) income taxes - (450) 26 (2,063) --------------- -------------- -------------- -------------- Net income (loss) $ (2,699) $ (957) $ (2,555) $ (4,506) =============== ============== ============== ============== Net income (loss) per common share: Basic $ (0.36) $ (0.13) $ (0.34) $ (0.60) =============== ============== ============== ============== Diluted $ (0.36) $ (0.13) $ (0.34) $ (0.60) =============== ============== ============== ============== Shares used in computing per share amounts: Basic 7,568 7,505 7,568 7,505 Diluted 7,568 7,505 7,568 7,505 The accompanying notes are an integral part of these consolidated financial statements.
Page 4 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS ENDED DECEMBER 31, -------------------------- 2001 2000 ------------ ------------ (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ (2,555) $ (4,506) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 1,648 2,189 Amortization 3,022 3,658 Deferred income taxes (154) (1,085) Changes in operating assets and liabilities: Accounts receivable 3,797 (6,890) Prepaid expenses and other assets 48 (854) Accounts payable and accrued expenses (1,655) 384 Deferred revenue (1,341) 34 Income taxes payable/receivable 1,064 (366) ------------ ------------ Net cash provided by (used in) operating activities 3,874 (7,436) CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment (212) (2,806) Additions to capitalized software (3,169) (2,593) ------------ ------------ Net cash used in investing activities (3,381) (5,399) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net - 58 Proceeds from long-term obligations 38,443 28,735 Payments on long-term obligations (33,477) (26,557) ------------ ------------ Net cash provided by financing activities 4,966 2,236 Effect of exchange rate changes on cash (360) 62 ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,099 (10,537) Cash and cash equivalents at beginning of period 1,512 11,868 ------------ ------------ Cash and cash equivalents at end of period $ 6,611 $ 1,331 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
Page 5 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (unaudited) 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 mid-sized manufacturing, distribution and other 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. Founded in 1979, Frontstep is headquartered in Columbus, Ohio. The Company has more than 4,400 customers that it serves from 28 sales and service offices in North America, Europe and the Pacific Rim, as well as through independent software and support business partners worldwide. 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 and six months ended December 31, 2001 and 2000, 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, 2001 ("Annual Report"). The results of operations for the three and six months ended December 31, 2001 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 is included in comprehensive income is the foreign currency translation adjustment. Comprehensive income (loss) for the three and six months ended December 31, 2001 and 2000 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- ---------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- -------------- Net income (loss) $ (2,699) $ (957) $ (2,555) $ (4,506) Foreign currency translation adjustment (162) (19) (1) (272) ------------- ------------- ---------------------------- Comprehensive income (loss) $ (2,861) $ (976) $ (2,556) $ (4,778) ============= ============= ============================
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) for $2,000,000. No gain or loss was recognized on the sale of the subsidiary stock. The Company and the minority interest investor also entered into a put option agreement which provides that during a six month period commencing September 1, 2001, the minority interest investor has the right to put its shares in the subsidiary to the Company at a formula price as provided in the put agreement, not to be less than $2,000,000. The minority interest in the subsidiary will be adjusted to its expected redemption value each year as a credit or charge to income until the put is exercised or the redemption period expires. As of December 31, 2001 the Company has reclassed $1,060,000 from minority interest to current maturity of long-term debt because the minority interest investor had exercised a portion of its put option rights. The company and minority interest investor are currently negotiating the final terms of payment of amount due. However, the Company Page 6 anticipates the payment will be due with accrued interest by September 1, 2002. The minority interest investor has not elected to exercise the remaining put option. 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 - LONG-TERM DEBT 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. 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 is effective starting as of September 29, 2001. 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 as of the close of the deal ($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. As of December 31, 2001, the unamortized balance of the debt discount was $1,063,000. 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 preferred stock private placement that occurred in fiscal 2000, the exercise price of the 453,546 existing warrants to purchase the Company's common stock with an original exercise price of $15.00 per share 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. As of December 31, 2001, the Company was not in compliance with certain financial covenants under the Credit Facility as a result of its reported losses for the three months ended December 31, 2001. The noncompliance does not relate to any payment due under the Credit Facility. Subsequent to that date, Foothill has agreed to amend the Credit Facility to waive the conditions of noncompliance as of December 31, 2001 and to reset the related financial covenants for the remainder of the Credit Facility term. To support the Company's operating needs, Foothill also has agreed to provide the Company with certain additional borrowing availability on a temporary basis until July 15, 2002 and to defer principal payments due under the primary term note for a six-month period commencing in January 2002. The Company and Foothill have completed the amendment to the Credit Facility to reflect this agreement. NOTE 3 - RESTRUCTURING AND OTHER CHARGES Fiscal 2001 Restructuring. 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. In Page 7 relation to this restructuring plan, the Company also wrote-off certain accounts receivable and other non-performing assets. 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. As a result of this restructuring plan, the Company recorded pre-tax restructuring and other charges of $8,493,000 and $4,500,000 in the three months ended March 31, 2001 and June 30, 2001, respectively. The following table displays a rollforward of the accruals established for the restructuring and other charges from the announcement of the plan to December 31, 2001 (in thousands):
(In Thousands) Initial Amounts used Accrual Amounts Amounts Accrual at Charge in fiscal balance Reclassified Used in December 2001 at June in 2002 Fiscal 31, 2001 30, 2001 2002 ----------- -------------- ----------- -------------- ----------- ---------- Termination costs related to employees $ 2,182 $ 1,770 $ 412 $723 $528 $ 607 Exit costs: Facility closure costs 1,158 280 878 (248) 187 443 Contract termination liabilities 900 120 780 (475) 215 90 Accounts receivable write-offs 6,840 6,840 -- -- -- -- Product asset write-offs: Write-off of capitalized software balances 1,913 1,913 -- -- -- -- ----------- -------------- ----------- -------------- ----------- ---------- Total $12,993 $10,923 $2,070 $ 0 $930 $1,140 =========== ============== =========== ============== =========== ==========
The amounts used of $930,000 and $10,923,000 in fiscal 2002 and 2001, respectively, reflects cash payments of $3,020,000 and non-cash utilization of $8,833,000. During the quarter ended December 31, 2001 the Company reclassified estimated amounts previously allocated in the restructuring reserve, as noted in the above chart, to reflect the actual amounts needed for each category. The remaining accrual of $1,140,000, which is included in accounts payable and accrued expenses in the Consolidated Balance Sheets, represents cash payments to be made over the course of remaining contracts, through 2004. Fiscal 2000 Restructuring. 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. 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 non-recurring charge of $2,163,000, pre-tax, in the three months ended September 30, 2000. All restructuring payments were paid during the year ended June 30, 2001 and no accruals remain for these costs as of June 30, 2001. Page 8 The following table displays a rollforward of the accruals at June 30, 2000 and June 30, 2001 established for the structural changes: 2000
(In Thousands) Initial Charge in Amounts Used in Accrual at June 30, 2000 Fiscal 2000 2000 ------------------- --------------------- --------------------- Loss on sale of Visual Applications Software, Inc. assets $429 $429 -- Accounts receivable write-offs 714 714 -- Product asset write-offs: Write-off of e-mongoose capitalized software 1,868 1,868 -- ------------------- --------------------- --------------------- Total $3,011 $3,011 $-- =================== ===================== =====================
2001 (In Thousands) Initial Charge in Amounts Used in Accrual at June 30, 2001 Fiscal 2001 2001 ------------------- --------------------- --------------------- Termination costs to employees $2,163 $2,163 --
NOTE 4 - 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 SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Numerator for basic and diluted income (loss) per share - net income (loss) $ (2,699) $ (957) $ (2,555) $ (4,506) ============= ============= ============= ============= Denominator for basic income (loss) per share - weighted average common shares outstanding 7,568 7,505 7,568 7,505 Effect of dilutive warrants - - - - ------------- ------------- -------------- ------------ Denominator for diluted income (loss) per share - adjusted weighted average common shares and assumed conversions 7,568 7,505 7,568 7,505 ============= ============= ============= ============= Basic net income (loss) per share $ (0.36) $ (0.13) $ (0.34) $ (0.60) ============= ============= ============= ============= Diluted net income (loss) per share $ (0.36) $ (0.13) $ (0.34) $ (0.60) ============= ============= ============= =============
During the three and six months ended December 31, 2001, 1,622,293 common equivalent shares in stock options and 2,137,412 common equivalent shares in warrants, convertible and preferred stock were outstanding. However, such options 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 antidilutive. During the three and six months ended December 31, 2000, common equivalent shares in stock options and warrants were outstanding. However, such options 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 antidilutive. NOTE 5 - INTANGIBLE ASSETS Page 9 In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company has adopted the provisions of SFAS No. 142 effective on July 1, 2001. As of December 31, 2001, the Company had unamortized intangible assets consisting only of goodwill of $7,902,000. The Company's amortizable intangible assets include only purchased software. The gross carrying amount of purchased software as of December 31, 2001 was $2,696,000 and accumulated amortization of purchased software was $1,949,000. In accordance with the provisions of SFAS No. 142, the Company performed the appropriate transitional impairment tests and determined that there is no transitional impairment loss as of July 1, 2001. Also in accordance with the provisions of SFAS No. 142, the Company reassessed the useful lives of all purchased software and determined that no adjustments were necessary. 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):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------- ------------------------- 2001 2000 2001 2000 ------------- -------------- ------------- ------------- Net income (loss) $ (2,699) $ (957) $ (2,554) $ (4,506) Goodwill amortization - 289 - 577 ------------- -------------- ------------- ------------- Adjusted net income (loss) $ (2,699) (668) $ (2,554) $ (3,930) ============= ============== ============= ============= Basic and diluted net income (loss) per share: Net income (loss) $ (0.36) (0.13) $ (0.34) $ (0.60) Goodwill amortization - 0.04 - 0.08 ------------- -------------- ------------- ------------- Adjusted net income (loss) $ (0.36) (0.09) $ (0.34) $ (0.52) ============= ============== ============= =============
NOTE 6 - 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):
NORTH ASIA/ AMERICA EUROPE PACIFIC ------------------------------------------ THREE MONTHS ENDED DECEMBER 31, 2001 Total revenue $16,884 $4,263 $2,368 Operating income before amortization of intangibles (2,081) 312 (170) Operating income (2,514) 365 (170) THREE MONTHS ENDED DECEMBER 31, 2000 Total revenue $27,404 $3,615 $3,044 Operating income (loss) before amortization of intangibles and special charges (12) 158 (600) Operating income (loss) (713) 44 (616) SIX MONTHS ENDED DECEMBER 31, 2001
Page 10
Total revenue $35,624 $7,816 $4,993 Operating income before amortization of intangibles (1,138) 507 (80) Operating income (2,005) 464 (80) SIX MONTHS ENDED DECEMBER 31, 2000 Total revenue $49,010 $6,923 $6,163 Operating income (loss) before amortization of intangibles and special charges (2,339) 283 (633) Operating income (loss) (5,903) 49 (666)
NOTE 7 - VOLUNTARY STOCK OPTION EXCHANGE PROGRAM On October 30, 2001, the Company offered the participants 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. Subject to the terms and conditions of the offer, the Company expects to grant options to purchase 341,111 common shares on or about June 11, 2002 with an exercise price per share equal to the market price per share of the Company's common shares on the date of grant. The new options will have other terms and conditions substantially the same as the old options. The exchange program is not expected to result in any additional compensation charges or variable plan accounting. NOTE 8 - SUBSEQUENT EVENTS On February 12, 2002, the Company's Board of Directors approved an agreement in principle pursuant to which holders of its Series A Convertible Participating Preferred Stock and certain members of the Company's Board, including the Company's founder, would provide $4.5 to $5.0 million to the Company for working capital needs in exchange for convertible notes (the "Convertible Notes") with a term expiring May 2004. The Convertible Notes would be entitled to conversion features similar to the Series A preferred shares of the Company, based on a conversion price equal to 80% of the market value of the Company's common stock at closing. The Convertible Notes would be subordinated to Foothill and would bear interest at 10%. Also under the terms of the offering, $1.5 million in the form of a "Bridge Note" would be provided to the Company upon execution of a definitive agreement and would be due August 31, 2002 or would be exchanged for Convertible Notes. The Company would issue 600,000 warrants to the Bridge Note holders with an exercise price of $0.01 per share. Under the terms of the agreement, the conversion price for the Company's Series A Convertible Participating Preferred Shares would be reset from $12.00 per share to $6.00 per share and all other anti-dilution rights with respect to the agreement would be waived. The completion of the offer is subject to, among other things, shareholder approval which the Company expects to obtain before June 30, 2002. The Company expects to record non-recurring, non-cash charges in each of the March and June quarters when the warrants and the Convertible Notes are issued to reflect the difference between the market price of the Company's common stock and the price of these equity instruments at the date of issuance. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management's Discussion and Analysis of Financial Condition and Results of Operations 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. Such risks and uncertainties are set forth herein and in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes 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 set forth in each of the Company's reports or documents filed from time to time with the Securities and Exchange Commission. 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 Page 11 Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended June 30, 2001, as contained in the Annual Report. OVERVIEW The Company is a leading provider of integrated ERP software and services for mid-market manufacturing and distribution companies and business units of larger companies. Current Financial Results and Events. After nearly two years of difficult economic and market conditions, during which the Company undertook significant efforts to enhance its product capabilities, the Company reported positive financial results for the quarter ended September 30, 2001. The Company reported operating income of $0.7 million and net income of $0.1 million for the September 2001 quarter. In spite of the negative impact of the tragic events of September 11, 2001, the Company believes it was able to achieve these positive results primarily due to the cost reductions initiated in April 2001 and the careful management of the Company's costs since that time. Throughout the quarter ended December 31, 2001 (the "current fiscal quarter" or "fiscal 2002 quarter"), the Company believed that it was on track to continue to be profitable and to maintain a positive cash flow, both as a result of the cost savings achieved and a belief that our customers and potential customers would not continue to defer their buying decisions as they did in the September 2001 quarter. We had previously indicated that further economic slowdown and lessening of demand or a continuation of the uncertainty created by the war against terrorism could have a negative impact on the Company. In fact, these factors did impact our results for the current quarter and we did not achieve our revenue expectations, primarily due to continued delays by our customers and potential customers in making critical buying decisions, particularly those in North America. As a result, we reported an operating loss of $2.3 million and a net loss of $2.7 million. Shortly after the end of the current quarter, we announced that we would further reduce our operating costs by $5.0 to $7.0 million through reductions in personnel, facilities and other related costs. We expect to complete these cost reduction actions, now estimated at more than $8 million, during the March 2002 quarter which will allow us to return to profitability and positive cash flows in the June 2002 quarter. The country has been in a recession since early in calendar 2001. It is not yet clear whether this recession will continue, whether there will be a further slowdown of the economy or whether a gradual improvement of the economy will occur. Differing conditions will alter the Company's beliefs about its financial results in the coming quarters and there can be no assurance that the Company will return to profitability and positive cash flows. Prior Financial Results and Events. Since the second quarter of fiscal 2000, the Company has experienced changing market conditions resulting from a recession in many manufacturing industries and a lessening of demand for ERP systems. Well before these market changes began to affect results of operations, the Company began to enhance its product offerings beyond traditional ERP systems to participate in higher growth market segments. These enhancements included a comprehensive suite of integrated software and services that (1) support the management and resources of an enterprise, (2) support customer relationship management and other front office business activities and (3) support an enterprise's supply chain management activities. In the March 2001 quarter, customers and potential customers appeared to react to the slowing economy by electing to defer their buying decisions. As a result, the Company, the information technology industry in general and many other enterprise software providers began to experience significant reductions in revenues and incurred net losses for the March and June 2001 quarters as compared to an expectation of continued improvements in financial results from increased demand for their products. Consequently, in April 2001, the Company initiated a broad restructuring program in order to reduce operating costs. The Company's worldwide workforce was reduced by approximately 20%, certain product development and other non-essential activities were discontinued and certain offices around the world were closed. In the March and June 2001 quarters, the Company recorded an aggregate of approximately $13.0 million, pre-tax, in related restructuring charges and write-downs of related product assets and accounts receivable. Earlier, in July 2000, the Company had previously conducted cost reduction activities and had made structural changes to discontinue certain business operations and to write off non-performing assets to better focus on its core Page 12 business strategy. In connection with these changes, the Company recorded a $3.0 million, pre-tax, non-recurring charge in the June 2000 quarter and an additional $2.2 million, pre-tax, non-recurring charge in the September 2000 quarter. GENERAL 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 contingent upon customer acceptance criteria, the Company defers that revenue until the contingencies are resolved. 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. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000 Revenue. Total revenue decreased $10.5 million, or 31.0%, to $23.5 million in the current fiscal quarter from $34.1 million in the three months ended December 31, 2000 (the "prior year fiscal quarter" or "fiscal 2001 quarter"). The total revenue mix is shown in the table below (in thousands, except percentage data):
THREE MONTHS ENDED DECEMBER 31, --------------------------------------------- 2001 2000 --------------------- --------------------- License fees revenue $9,366 39.8% $17,185 50.5% Service revenue 5,197 22.1% 8,041 23.6% Maintenance and support revenue 8,952 38.1% 8,837 25.9% --------------------- --------------------- Total revenue $23,515 100.0% $34,063 100.0% ===================== =====================
Page 13 License fees revenue decreased 45.5% in the fiscal 2002 quarter from the fiscal 2001 quarter. The Company believes that the decrease in license fees revenue in the fiscal 2002 quarter is industry wide and due to the current economic climate that is causing the Company's customers and potential customers to defer their buying decisions related to large capital investments, particularly information technology investments. The Company expects that license fees revenues will remain stable for the remainder of the fiscal year and will not begin to significantly grow again until the current economic climate improves and demand for our product improves as a result. Service revenue decreased 35.4% in the fiscal 2002 quarter from the fiscal 2001 quarter. The decrease is primarily the result of sluggish license fees revenue experienced by the Company in the last year. Service revenues in particular are directly dependent on new license purchases by new and existing customers. The Company expects that service revenues will remain stable in the short-term and will improve in the quarters that follow increased license fee revenues. Maintenance and support revenue increased 1.3% in the fiscal 2002 quarter from the fiscal 2001 quarter. Maintenance and support contracts and the related revenue from these contracts have been steadily improving over the last few years as the base of customers under such programs has continued to grow. The Company expects such revenues to remain stable in the short-term. Cost of Revenue. Total cost of revenue as a percentage of total revenue increased to 50.0% for the fiscal 2002 quarter from 44.2% for the fiscal 2001 quarter. Cost of license fees revenue decreased $1.1 million, or 19.5%, to $4.4 million in the fiscal 2002 quarter from $5.5 million in the fiscal 2001 quarter and as a percentage of license fees revenue, increased to 47.2% in the fiscal 2002 quarter from 31.9% in the fiscal 2001 quarter. The percentage increase is primarily attributable to 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 $2.2 million, or 23.4%, to $7.3 million in the fiscal 2002 quarter from $9.6 million in the fiscal 2001 quarter and as a percentage of service and maintenance and support revenue, decreased to 51.8% in the fiscal 2002 quarter from 56.7% in the fiscal 2001 quarter. The decrease is attributable to the continued growth of maintenance and support revenues which have higher margins than services revenues as a percentage of the total of service and maintenance and support revenue. This is offset by lower margins in the quarter on service revenue as a result of lower service revenues affecting certain fixed costs of service revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.0 million, or 25.0%, to $12.0 million in the fiscal 2002 quarter from $16.0 million in the fiscal 2001 quarter. Such expenses as a percentage of total revenue increased to 51.0% in the fiscal 2002 quarter from 46.9% in the fiscal 2001 quarter. The decrease in costs is attributable to the restructuring that was undertaken during the June 2001 quarter. The Company expects that these costs will decrease as a percentage of total revenue when total revenue increases since many of these costs are fixed in nature. Research and Development. Total research and development costs, including amounts capitalized, decreased $1.4 million or 29.8% to $3.3 million for the fiscal 2002 quarter from $4.7 million for the fiscal 2001 quarter and increased as a percentage of total revenue to 14.0% in the fiscal 2002 quarter from 13.7% in the fiscal 2001 quarter. Although total research and development spending decreased from the fiscal 2001 quarter, the Company is continuing to spend a substantial portion of total revenue on the development of its expanded product offerings and product capabilities and development of future releases of the Company's ERP software. The Company believes that these investments are critical to the success and market acceptance of its new product offerings and total suite of integrated collaborative business systems. The Company capitalized research and development costs of $1.6 million during the fiscal 2002 quarter and $1.2 million during the fiscal 2001 quarter. Provision for (Benefit from) Income Taxes. The provision for (benefit from) income taxes for the fiscal 2002 and 2001 quarters reflects an effective tax rate of 0% and 32%, respectively. The effective tax rate in both periods differs from the expected corporate tax rate primarily due to valuation allowances recorded against the deferred tax Page 14 assets related to net operating losses incurred domestically and foreign losses incurred in countries where no tax benefits will be received for the losses. SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2000 Revenue. Total revenue decreased $13.7 million, or 22.0%, to $48.4 million in the six months ended December 31, 2001 (the "current fiscal six month period") from $62.1 million in the six months ended December 31, 2000 (the "prior fiscal six month period"). The total revenue mix is shown in the table below (in thousands, except percentage data):
SIX MONTHS ENDED DECEMBER 31, --------------------------------------------- 2001 2000 --------------------- --------------------- License fees revenue $18,695 38.6% $29,066 46.8% Service revenue 11,383 23.5% 15,994 25.8% Maintenance and support revenue 18,355 37.9% 17,036 27.4% --------------------- --------------------- Total revenue $48,433 100.0% $62,096 100.0% ===================== =====================
License fees revenue decreased 35.7% in the current fiscal six month period from the prior fiscal six month period. The Company believes that the decrease in license fees revenue in fiscal 2002 is industry wide and due to the current economic climate that is causing the Company's customers and potential customers to defer their buying decisions related to large capital investments, particularly information technology investments. The Company expects that license fees revenues will remain stable for the remainder of the fiscal year and will not begin to significantly grow again until the current economic climate improves and demand for our product improves as a result. The Company believes that such improved demand for ERP systems is directly related to the completeness and integration of the Company's entire product offering, including e-business applications. Service revenue decreased 28.8% in the current fiscal six month period from the prior fiscal six month period. The decrease is primarily the result of sluggish license fees revenue experienced by the Company in the last year. Service revenues in particular are directly dependent on new license purchases by new and existing customers. The Company expects that service revenues will remain stable over the next several months and will improve in the quarters that follow increased license fee revenues. Maintenance and support revenue increased 7.7% in the current fiscal six month period from the prior fiscal six month period. Maintenance and support contracts and the related revenue from these contracts have been steadily improving over the last few years as the base of customers under such programs has continued to grow. The Company expects such revenues to remain stable over the coming year. Cost of Revenue. Total cost of revenue as a percentage of total revenue increased to 47.3% for the current fiscal six month period from 47.3% for the prior fiscal six month period. Cost of license fees revenue decreased $1.3 million, or 12.7%, to $8.7 million in the current fiscal six month period from $9.9 million in the prior fiscal six month period and as a percentage of license fees revenue, increased to 45.5% in the current fiscal six month period from 34.2% in the prior fiscal six month period. The percentage increase is primarily attributable to an increase in the number of third party product vendors included in the Company's new product offerings, discounting and lower license fees revenue affecting certain fixed and related costs. Cost of service, maintenance and support revenue decreased $5.2 million, or 26.6%, to $14.3 million in the current fiscal six month period from $19.4 million in the prior fiscal six month period and as a percentage of service, maintenance and support revenue, decreased to 47.9% in the current fiscal six month period from 58.8% in the prior fiscal six month period. The decrease is attributable to the continued growth of maintenance and support revenues which have higher margins than services revenues as a percentage of the total of service and maintenance and support revenue. This is offset by lower margins on service revenue as a result of lower service revenues affecting certain fixed costs of service revenues. Page 15 Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $5.4 million, or 19.2%, to $22.8 million in the current fiscal six month period from $28.3 million in the prior fiscal six month period. Such expenses as a percentage of total revenue increased to 47.1% in the current fiscal six month period from 45.6% in the prior fiscal six month period. Strict cost savings measures were put in place to reduce overall selling, general and administrative expenses. However, reduced revenue levels account for the percentage increase in selling, general and administrative expenses in the current fiscal six month period. Research and Development. Total research and development expenses, including amounts capitalized, decreased $3.1 million or 31.6%, to $6.7 million for the current fiscal six month period from $9.8 million for the prior fiscal six month period and decreased as a percentage of total revenues to 13.2% in the current fiscal six month period from 15.8% in the prior fiscal six month period. This decrease is due to a reduction in headcount from the fiscal year 2001 restructuring. The Company is continuing to spend a substantial portion of total revenues on the development of its e-business software products and capabilities, development of future releases of the Company's ERP software and development of interfaces with third-party software products. The Company believes that these investments are critical to the success and market acceptance of its new e-business offerings and the total suite of integrated collaborative business systems. The Company capitalized research and development costs of $3.2 million during the current fiscal six month period and $2.6 million during the prior fiscal six month period. Restructuring and Other Charges. The restructuring program undertaken by the Company in July 2000 and its related costs are discussed above. Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes for the current and prior fiscal six month periods reflects an effective tax rate of 0% and 31%, respectively. The effective tax rate in the current fiscal six month period 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 and foreign losses incurred in countries where no tax benefits will be received for the losses. 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. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, the Company had cash and cash equivalents of $6.6 million and working capital of $3.3 million. During the current fiscal year, the Company had net cash provided by operating activities of $3.9 million, including the restructuring and other charges described above. The Company purchased $0.2 million of property and equipment and used $3.2 million in relation to capitalized software. Net cash provided by financing activities for the current fiscal year was $5.0 million. Gross borrowings on term note A were $13.9 million at December 31, 2001. Gross borrowings on term note B were $2.5 million at December 31, 2001. There were no borrowings on the revolving credit facility as of December 31, 2001. In July 2001, the Company executed the Credit Facility with Foothill. The Credit Facility includes a $15.0 million, three-year term note ("Term Note A") and a $10.0 million 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. Page 16 On November 9, 2001, the Company and Foothill amended the Credit Facility to allow for temporary increased borrowing capacity of $2.5 million in term notes (Term Note B) 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 covenant was made effective starting as of September 29, 2001. As of December 31, 2001, the Company was not in compliance with certain financial covenants under the Credit Facility as a result of its reported losses for the three months ended December 31, 2001. The noncompliance does not relate to any payment due under the Credit Facility. Subsequent to that date, Foothill has agreed to amend the Credit Facility to waive the conditions of noncompliance as of December 31, 2001 and to reset the related financial covenants for the remainder of the Credit Facility term. To support the Company's operating needs, Foothill also has agreed to provide the Company with certain additional borrowing availability on a temporary basis until July 15, 2002 and to defer principal payments due under the primary term note for a six-month period commencing in January 2002. The Company and Foothill have completed the amendment to the Credit Facility to reflect this agreement. On February 12, 2002, the Company's Board of Directors approved an agreement in principle pursuant to which holders of its Series A Convertible Participating Preferred Stock and certain members of the Company's Board, including the Company's founder, would provide $4.5 to $5.0 million to the Company for working capital needs in exchange for convertible notes (the "Convertible Notes") with a term expiring May 2004. The Convertible Notes would be entitled to conversion features similar to the Series A preferred shares of the Company, based on a conversion price equal to 80% of the market value of the Company's common stock at closing. The Convertible Notes would be subordinated to Foothill and would bear interest at 10%. Also under the terms of the offering, $1.5 million in the form of a "Bridge Note" would be provided to the Company upon execution of a definitive agreement and would be due August 31, 2002 or would be exchanged for Convertible Notes. The Company would issue 600,000 warrants to the Bridge Note holders with an exercise price of $0.01 per share. Under the terms of the agreement, the conversion price for the Company's Series A Convertible Participating Preferred Shares would be reset from $12.00 per share to $6.00 per share and all other anti-dilution rights with respect to the agreement would be waived. The completion of the offer is subject to, among other things, shareholder approval which the Company expects to obtain before June 30, 2002. While we have had difficulty in recent months meeting operating needs and debt obligations, primarily as a result of economic conditions in the industry and related shortfall in revenues for the quarter ended December 31, 2001, we believe that the additional borrowing availability under the Credit Facility, the infusion of $1.5 million Bridge Note under the proposed offering of Convertible Notes in March and the completion of the Convertible Note offering upon shareholder approval will be sufficient to meet the Company's debt obligations and operating needs in the coming twelve months. While we believe we will obtain shareholder approval for the Convertible Notes, there can be no assurance, however, that the Company will obtain such approval. We will be investigating alternative sources of debt or equity in the interim period and expect that, if such shareholder approval is not obtained, other sources to meet our working capital needs will be identified and pursued. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange. Frontstep's revenues originating outside of North America were 28% and 20% of total revenue for the current and prior year fiscal quarters, respectively and 26% and 21% for the current and prior fiscal six month periods, respectively. By geographic region, revenues originating in Europe were 18% and 11% of total revenue for the current and prior year fiscal quarters, respectively and 16% and 11% for the current and prior fiscal six month periods, respectively. Revenues originating in Asia Pacific were 10% and 9% of total revenue for both the current and prior year fiscal quarters, respectively and 10% for the both the current and prior fiscal six month periods. International sales are made mostly from the Company's 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. 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. Foreign currency gains and losses will continue to result from fluctuations in the value of the currencies in which the Company conducts its operations as compared to the U.S. dollar and future operating results will be affected by gains and losses from foreign currency exposure. Page 17 The Company does not currently hedge against losses arising from its foreign currency exposure. The Company has considered the potential impact of a 10% adverse change in foreign exchange rates and it believes that such a change would not have a material impact on financial results or financial condition in the coming fiscal year. Interest Rates. The Company invests its surplus cash in financial instruments such as short-term marketable securities and interest-bearing time deposits. The Company also incurs interest at variable rates, dependent upon the prime rate or LIBOR rate that may be in effect from time to time. The Company has considered the potential impact of an adverse change in interest rates of one hundred basis points and it believes that such a change would not have a material impact on financial results or financial condition in the coming fiscal year. Page 18 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. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. (a) As of December 31, 2001, the Company was not in compliance with certain covenants under the Credit Facility, particularly covenants requiring the maintenance of minimum levels of net worth and cumulative EBITDA, as a result of its reported losses. The noncompliance does not relate to any payment due under the Credit Facility. The Company's bank has waived this noncompliance for the period ended December 31, 2001. Subsequent to that date the Company and its bank have amended the Credit Facility to waive the conditions of noncompliance as of December 31, 2001, to reset the related financial covenants and to adjust certain other provisions of the agreement to provide temporary additional borrowing availability. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The Company held its annual meeting of the shareholders on November 7, 2001 (the "Meeting"). (b) No response required. (c) The only matters voted on at the Meeting were (i) the uncontested election of directors, (ii) an amendment to the Company's Employee Stock Purchase Plan to increase the aggregate number of shares available for issuance under the plan to 400,000, and (iii) an amendment to the Company's 1999 Non-Qualified Stock Option Plan for Key Employees to increase the aggregate number of shares that may be issued upon exercise of options granted under the plan to 900,000. Of the 7,562,193 shares represented in person or by proxy at the meeting, the number of shares voted for and the number of shares as to which the authority to vote was withheld in the election of directors were as follows with respect to each director nominee: NAME VOTES "FOR" AUTHORITY TO VOTE WITHHELD Lawrence J. Fox 7,196,004 366,189 Stephen A. Sasser 7,220,376 341,817 Duke W. Thomas 7,197,506 364,687 James A. Rutherford 7,223,340 338,853 Roger D. Blackwell 7,225,016 337,177 Guy de Chazal 7,217,116 345,077 Barry Goldsmith 7,218,566 343,627 The manner in which the votes were cast with respect to the proposed amendment to the Employee Stock Purchase Plan was as follows: SHARES VOTED SHARES VOTED ABSTENTIONS BROKER "FOR" "AGAINST" NON-VOTES 3,802,026 325,284 9,648 NONE Page 19 The manner in which the votes were cast with respect to the proposed amendment to the 1999 Non-Qualified Stock Option Plan was as follows: SHARES VOTED SHARES VOTED ABSTENTIONS BROKER "FOR" "AGAINST" NON-VOTES 3,395,396 729,932 12,157 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 January 10, 2001, to report under Item 5 (Other Events) that the registrant had issued a press release to announce preliminary results for the second quarter of fiscal 2002. The text of the press release is attached as an exhibit to the Form 8-K for further description of the event. Page 20 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: February 15, 2002 By: /s/ Daniel P. Buettin --------------------- ------------------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer and Secretary (on behalf of the Registrant and as Principal Financial Officer)
Page 21 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 Registrant'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 (File No. 0-19024) 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 Registrant'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 (File No. 0-19024) 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 Registrant's the Company (as filed with the Ohio Quarterly Report on Form 10-Q for the Secretary of State on May 10, 2000) fiscal quarter ended March 31, 2000 (File No. 0-19024) 3(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended of Exhibit 3(a)(4) to the Registrant's the Company (as filed with the Ohio Quarterly Report on Form 10-Q for the Secretary of State on November 8, 2000) fiscal quarter ended September 30, 2000 (File No. 0-19024) 3(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to amended of the Company (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 Company 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 the Incorporated herein by reference to Company (as filed with the Ohio Secretary Exhibit 3(a)(1) to the Registrant's Annual of State on February 8, 1991) Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 0-19024) 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 Registrant'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 (File No. 0-19024) 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 Registrant's the Company (as filed with the Ohio Quarterly Report on Form 10-Q for the Secretary of State on May 10, 2000) fiscal quarter ended March 31, 2000 (File No. 0-19024)
Page 22
EXHIBIT NO. DESCRIPTION PAGE 4(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to Articles of Incorporation, as amended of Exhibit 3(a)(4) to the Registrant's the Company (as filed with the Ohio Quarterly Report on Form 10-Q for the Secretary of State on November 8, 2000) fiscal quarter ended September 30, 2000 (File No. 0-19024) 4(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to amended of the Company (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 Company 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) Share Exchange Agreement, dated January Incorporated herein by reference to 9, 1997 Exhibit 99 to the Registrant's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 24, 1997 (File No. 0-19024) 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 Registrant's Quarterly Investors identified therein and Lawrence Report on Form 10-Q for the fiscal quarter J. Fox ended March 31, 2000 (File No. 0-19024) 4(e) Amendment to Investor Rights Agreement Incorporated herein by reference to Exhibit 4(c) to the Registrant's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on August 30, 2000 (File No. 0-19024) 4(f) Warrant for the Purchase of Shares of Incorporated herein by reference to Common Stock of the Registrant issued to Exhibit 4(e) to the Registrant's Annual 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 listed on Exhibit A, on the dates indicated 4(g) Assignment and Assumption Agreement, by Incorporated herein by reference to and between Morgan Stanley Dean Witter Exhibit 4(g) to the Registrant's Quarterly Equity Funding, Inc. and the Originators Report on Form 10-Q for the fiscal quarter Investment Plan, L.P., dated November 24, ended December 31, 2000 (File No. 0-19024) 2000 4(h) Common Share Purchase Warrant, dated July Incorporated herein by reference to 17, 2001, issued to Foothill Capital Exhibit 4(g) to the Registrant's Annual Corporation Report on Form 10-K for the fiscal year ended June 30, 2001 (File No. 0-19024)
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EXHIBIT NO. DESCRIPTION PAGE 4(i) Registration Rights Agreement, dated July Incorporated herein by reference to 17, 2001, by and between the Registrant Exhibit 4(h) to the Registrant's Annual and Foothill Capital Corporation Report on Form 10-K for the fiscal year ended June 30, 2001 (File No. 0-19024)
Page 24
EXHIBIT NO. DESCRIPTION PAGE 10(A)*** First Amendment to Loan and Security Filed herin Agreement, by and among the Registrant, Frontstep Solutions Group, Inc., brightwhite solutions, inc. and Frontstep Canada, Inc., as Borrowers, and the Lenders signatory thereto, as Lenders, and Foothill Capital Corporation, as Arranger and Administrative Agent.
*** Indicates that the Registrant has omitted from Exhibit 10(a) certain confidential information that it has separately filed with the Securities and Exchange Commission ("SEC"), pursuant to a request for confidential treatment of such information. Page 25 EX-10.A 3 l92741bex10-a.txt EXHIBIT 10(A) Exhibit 10(a) ***The Registrant has omitted from this Exhibit 10(a) certain confidential information that it has separately filed with the Securities and Exchange Commission ("SEC"), pursuant to a request for confidential treatment of such information. The portions of the Exhibit which have been omitted are contained in Section 10 of the following First Amendment to Loan and Security Agreement and are designated with the following mark: "***". FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT FIRST AMENDMENT dated as of November 16, 2001 (this "AMENDMENT") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 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 January 15, 2002 and (ii) a new term loan in the principal amount of $2,500,000 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) The term and the definition of "Base Rate Term Loan Margin" is hereby deleted in its entirety. (b) A definition of the term "Base Rate Term Loan A Margin" is hereby inserted, in appropriate alphabetical order, to read as follows: "'BASE RATE TERM LOAN A MARGIN' means 5.0 percentage points." (c) A definition of the term "Base Rate Term Loan B Margin" is hereby inserted, in appropriate alphabetical order, to read as follows: "'BASE RATE TERM LOAN B MARGIN' means 4.0 percentage points." (d) The definition of the term "Commitment" is hereby amended in its entirety to read as follows: "'COMMITMENT' means, with respect to each Lender, its Revolver Commitment, its Term Loan A Commitment, its Term Loan B Commitment, or its Total Commitment, as the context requires, and, with respect to all Lenders, their Revolver Commitments, their Term Loan A Commitments, their Page 26 Term Loan B Commitments, or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on SCHEDULE C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of SECTION 14.1." (e) A definition of the term "First Amendment Effective Date" is hereby inserted, in appropriate alphabetical order, to read as follows: "'FIRST AMENDMENT EFFECTIVE DATE' means the date on which all of the conditions precedent to the effectiveness of First Amendment to Loan Agreement dated as of November __, 2001, by and among the Borrowers, the Agent and the Lenders have been fulfilled or waived." (f) The definition of the term "Maximum Revolver Amount" is hereby amended in its entirety to read as follows: "'MAXIMUM REVOLVER AMOUNT' means $25,000,000 minus the Term Loan A Amount." (g) A definition of the term "Overadvance Amount" is hereby inserted, in appropriate alphabetical order, to read as follows: "'OVERADVANCE AMOUNT' means (i) $280,000, from the First Amendment Effective Date through and including January 15, 2002 and (iv) $0.00, after January 15, 2002; PROVIDED, HOWEVER, that the Overadvance Amount shall be $0.00 at any time Advances are outstanding (except Advances attributable to the charging to the Loan Account of the amendment fee payable by Borrowers to Agent on the First Amendment Effective Date)." (h) The definition of the term "Pro Rata Share" is hereby amended by (i) deleting clauses (c) and (d) thereof and (ii) inserting new clauses (c), (d) and (e) therein to read as follows: "(c) with respect to a Lender's obligation to make the Term Loan A and receive payments of interest, fees, and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Term Loan A Commitment, by (ii) the aggregate amount of all Lenders' Term Loan A Commitments, (d) with respect to a Lender's obligation to make the Term Loan B and receive payments of interest, fees, and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Term Loan B Commitment, by (ii) the aggregate amount of all Lenders' Term Loan B Commitments, and (e) with respect to all other matters (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's Total Commitment, by (ii) the aggregate amount of Total Commitments of all Lenders; PROVIDED, HOWEVER, that, in each case, in the event all Commitments have been terminated, Pro Rata Share shall be determined according to the Commitments in effect immediately prior to such termination." (i) The definition of the term "Term Loan" is hereby amended in its entirety to read as follows: "'TERM LOAN' means, collectively, the Term Loan A and the Term Loan B." (j) The definition of the term "Term Loan Amount" is hereby deleted its entirety. (k) A definition of the term "Term Loan A" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN A' has the meaning set forth in SECTION 2.2(A)." (l) The term and the definition of "Term Loan A Amount" is hereby inserted therein, in appropriate alphabetical order, to read as follows: Page 27 "'TERM LOAN A AMOUNT' means, as of the date of determination, the outstanding principal amount of the Term Loan A, plus the then extant Term Loan A PIK Amount." (m) A definition of the term "Term Loan B" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN B' has the meaning set forth in SECTION 2.2(B)." (n) A definition of the term "Term Loan B Amount" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN B AMOUNT' means, as of the date of determination, the outstanding principal amount of the Term Loan B." (o) The term and the definition of "Term Loan Commitment" is hereby deleted in its entirety, and the term and the definition of "Term Loan A Commitment" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN A COMMITMENT' means, with respect to each Lender, its Term Loan A Commitment, and, with respect to all Lenders, their Term Loan A Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on SCHEDULE C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of SECTION 14.1." (p) A definition of the term "Term Loan B Commitment" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN B COMMITMENT' means, with respect to each Lender, its Term Loan B Commitment, and, with respect to all Lenders, their Term Loan B Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on SCHEDULE C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of SECTION 14.1." (q) The term "Term Loan PIK Amount" is hereby deleted in its entirety, and the term and the definition of "Term Loan A PIK Amount" is hereby inserted, in appropriate alphabetical order, to read as follows: "'TERM LOAN A PIK AMOUNT' means, as of any date of determination, the amount of all interest accrued with respect to the Term Loan A Amount that has been paid in kind by being added to the balance thereof in accordance with SECTION 2.6(A)(II)." 3. 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. 4. BORROWING BASE. (a) Clause (x) of Section 2.1(a) of the Loan Agreement is hereby amended in its entirety to read as follows: "(x) the sum of (I) the lesser of (i) 85% of the amount of Eligible Non-Maintenance Accounts, less the amount, if any, of the Dilution Reserve, and (ii) an amount equal to 33% of Borrowers' Domestic Collections with respect to Accounts for the immediately preceding 90 day period, and (II) the applicable Overadvance Amount, minus" (b) Section 2.1(c) of the Loan Agreement is hereby amended by deleting the term "Term Loan Amount" therein and inserting the term "Term Loan A Amount" in lieu thereof. 5. TERM LOANS. Section 2.2 of the Loan Agreement is hereby amended in its entirety to read as follows: Page 28 "(a) (i) Subject to the terms and conditions of this Agreement, on the Closing Date each Lender with a Term Loan A Commitment agrees (severally, not jointly or jointly and severally) to make a term loan (collectively, the "Term Loan A") to Borrowers in an amount equal to such Lender's Pro Rata Share of $15,000,000. (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 October 1, 2001. Borrowers may, at any time, prepay all or a portion of the Term Loan A without penalty or premium. The outstanding unpaid principal balance and all accrued and unpaid interest under the Term Loan A shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. All amounts outstanding under the Term Loan A shall constitute Obligations. (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 $2,500,000. The Term Loan B shall be repaid on the following dates and in the following amounts: (A) $1,500,000 on December 31, 2001; (B) $500,000 on January 7, 2002; and (C) $500,000 on January 15, 2002. (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 earliest of (A) January 15, 2002 or (B) 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." 6. PAYMENTS. Clause K of Section 2.4(b)(i) of the Loan Agreement is hereby amended in its entirety to read as follows: "K. ELEVENTH, if an Event of Default has occurred and is continuing, to pay the outstanding principal balance of the Term Loan (in the inverse order of the maturity of the installments due thereunder), including the Term Loan A PIK Amount, until the Term Loan is paid in full," 7. INTEREST RATES AND LETTER OF CREDIT FEE: RATES, PAYMENTS, AND CALCULATIONS. Section 2.6(a) of the Loan Agreement is hereby amended in its entirety to read as follows: "(a) INTEREST RATES. Except as provided in clause (c) below, (i) all Obligations (except for undrawn Letters of Credit and the Term Loan Amount) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to (A) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, or (B) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin; (ii) the Term Loan A Amount (inclusive of any Term Loan A PIK Amount) shall bear interest on the amount thereof outstanding from time to time at a per annum rate equal to the greater of (A) the Base Rate plus the Base Rate Term Loan A Margin and (B) 12.00% (to the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate); provided, however, that, so long as no Event of Default has occurred and is continuing, that portion of such interest equal to 1.50 percentage points per annum ( the "Term Loan A PIK Amount") shall, in the absence of an election by Borrowers to pay such interest in cash, be paid-in-kind by being added to the principal balance of the Term Loan A Page 29 Amount (inclusive of any Term Loan A PIK Amount theretofore so added); provided, further, however, that Borrower may, on or prior to the date that is 5 Business Days prior to the due date thereof, elect to pay all accrued and unpaid interest under this Section 2.6(a)(ii) in cash; and (iii) the Term Loan B Amount shall bear interest on the amount thereof outstanding from time to time at a per annum rate equal to the greater of (A) the Base Rate plus the Base Rate Term Loan B Margin and (B) 9.50% (to the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate)." 8. PAYMENT REMITTANCE. Section 2.8(b) of the Loan Agreement is hereby amended in its entirety to read as follows: "(b) So long as on any date: (i) no Advances (other than Advances that are LIBOR Rate Loans) are outstanding and no Obligations are due and payable on such date; (ii) the difference between (A) the aggregate amount of the Accounts Reserve, the Softech Reserves and any other reserves established by Lender under SECTION 2.1(B) minus (B) the amount of the Borrowing Base (exclusive of the Accounts Reserve, the Softech Reserves and any other reserves established by Lender under SECTION 2.1(B)) shall not exceed $500,000 (the amount by which the difference between clause (ii)(A) above minus clause (ii)(B) above exceeds $500,000 is hereafter referred to as the "RESERVE EXCESS"); and (iii) no Event of Default has occurred and is continuing on such date, then all payment items received by Agent and constituting payments on account on such day in accordance with SECTION 2.8(A) shall be remitted by Agent to Borrowers' Designated Account subject to the terms of SECTION 7.13; PROVIDED, HOWEVER, that (1) if any Reserve Excess exists, all payment items received by Agent in excess of the Reserve Excess and constituting payments on account on such day in accordance with SECTION 2.8(A) shall be remitted by Agent to Borrowers' Designated Account subject to the terms of SECTION 7.13 and clauses (i) and (iii) of this SECTION 2.8(B), (2) if on any day the amount of clause (ii)(A) above is greater than the amount of clause (ii)(B) above (the amount by which clause (ii)(A) above exceeds clause (ii)(B) above is hereafter referred to as an "OVERAGE"), then (x) the provisions of the immediately preceding sub-clause (1) shall no longer be effective and (y) so long as an Overage exists for six consecutive days prior to the occurrence of such Overage, all payment items received by Agent and constituting payments on account on such day in accordance with SECTION 2.8(A) may, in Agent's sole and absolute discretion, be remitted by Agent to Borrowers' Designated Account, and (3) if no Overage exists, then any payments on account not previously remitted by Agent to Borrowers' Designated Account as a result of this proviso shall be remitted to Borrowers' Designated Account subject to the terms of SECTION 7.13 and clauses (i) and (iii) of this SECTION 2.8(B). Notwithstanding anything to the contrary contained in this Agreement, the condition set forth in clause (ii) of, and the terms of the proviso to, this SECTION 2.8(B) shall only be applicable until and including January 15, 2002." 9. COLLATERAL REPORTING. Section 6.2 of the Loan Agreement is hereby amended by deleting the collateral reporting table set forth therein and inserting a new collateral reporting table therein to read as follows:
============================= ======================================================================================== Daily A SALES JOURNAL, COLLECTION JOURNAL, AND CREDIT REGISTER SINCE THE LAST SUCH SCHEDULE AND A CALCULATION OF THE BORROWING BASE AS OF SUCH DATE, AND (d) notice of all returns, disputes, or claims. - ----------------------------- ---------------------------------------------------------------------------------------- Weekly (not later than (e) a detailed calculation of the Borrowing Base (including detail regarding those - ----------------------------- ----------------------------------------------------------------------------------------
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============================= ======================================================================================== Monday of each week for Accounts that are not Eligible Accounts), the one week period ending on Friday of the (f) a detailed aging, by total, of the Accounts, together with a reconciliation immediately preceding week) to the detailed calculation of the Borrowing Base previously provided to Agent, and (g) a summary aging, by vendor, of Borrowers' accounts payable and any book overdraft. - ----------------------------- ---------------------------------------------------------------------------------------- Monthly (h) a calculation of Dilution for the prior month, and (i) a list of any software license agreements, Maintenance Contracts or other agreements giving rise to Accounts of a Borrower which contain proscriptions of, or limitations on, a Borrower's right to assign such agreements. - ----------------------------- ---------------------------------------------------------------------------------------- Quarterly (j) a detailed list of each Borrower's customers, (k) a report regarding each Borrower's accrued, but unpaid, ad valorem taxes, - ----------------------------- ---------------------------------------------------------------------------------------- Upon request by Agent (l) copies of invoices in connection with the Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (m) such other reports as to the Collateral, or the financial condition of Borrowers as Agent may request. ============================= ========================================================================================
10. PROJECTIONS; ***. (a) Section 6.3(c) of the Loan Agreement is hereby amended by deleting the number "30" therein and inserting the number "60" in lieu thereof. (b) Section 6.3 of the Loan Agreement is hereby amended by (i) deleting the word "and" at the end of clause (h) thereof, (ii) deleting the period at the end of clause (i) thereof and inserting the word ", and" at the end thereof and (iii) inserting a new clause (j) therein to read as follows: "(j) on the 1st and 15th days (or, if any such day is not a Business Day, the immediately succeeding Business Day) of each week, a report setting forth ***. 11. INDEBTEDNESS. Section 7.1 of the Loan Agreement is hereby amended by (a) deleting the word "and" at the end of clause (f) thereof, (b) deleting the period at the end of clause (g) thereof and inserting the word "; and" at the end thereof and (c) inserting a new clause (h) therein to read as follows: "(h) subordinated Indebtedness owing to Mitsui & Co. Ltd., 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." 12. FINANCIAL COVENANTS. Section 7.20 of the Loan Agreement is hereby amended as follows: - -------- *** Reflects the omission of confidential information from this Exhibit 10(a). The omitted information has been separately filed with the SEC, pursuant to a request for confidential treatment of such information. *** Reflects the omission of confidential information from this Exhibit 10(a). The omitted information has been separately filed with the SEC, pursuant to a request for confidential treatment of such information. Page 31 (a) MINIMUM EBITDA. Clause (i) of Section 7.20(a) is hereby amended in its entirety to read as follows: "(i) MINIMUM EBITDA. 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 ---------------------------------------------- ------------------------------------------------------ $3,100,000 For the 6 month period ending December 31, 2001 ---------------------------------------------- ------------------------------------------------------ $3,700,000 For the 9 month period ending March 31, 2002 ---------------------------------------------- ------------------------------------------------------ $5,300,000 For the 12 month period ending June 30, 2002 ---------------------------------------------- ------------------------------------------------------
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 not be less than $12,000,000." (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. 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 ---------------------------------------------- ------------------------------------------------------ $11,500,000 December 31, 2001 ---------------------------------------------- ------------------------------------------------------ $11,500,000 March 31, 2002 ---------------------------------------------- ------------------------------------------------------ $11,700,000 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 not be less than $17,000,000." (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: Page 32
---------------------------------------------- ------------------------------------------------------ LEVERAGE RATIO APPLICABLE PERIOD ---------------------------------------------- ------------------------------------------------------ 5.00:1 For the 6 month period ending December 31, 2001 ---------------------------------------------- ------------------------------------------------------ 3.70:1 For the 9 month period ending March 31, 2002 ---------------------------------------------- ------------------------------------------------------ 2.35:1 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 not be less than 0.85:1." 13. AMENDMENTS AND WAIVERS. Clause (j) of Section 15.1 of the Loan Agreement is hereby amended in its entirety to read as follows: "(j) change the definition of Borrowing Base or the definitions of Eligible Accounts, Maximum Revolver Amount, Term Loan A Amount, Term Loan B Amount, or change SECTION 2.1(B); or" 14. 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) the amended and restated Warrants, in form and substance satisfactory to Agent, duly executed by the Parent; (iii) a copy of the resolutions of each Borrower, certified as of the Amendment Effective Date by an authorized officer thereof, authorizing (A) the borrowings contemplated by this Amendment by each Borrower and the transactions contemplated by the Loan Documents to which such Person is or will be a party, and (B) the execution, delivery and performance by each such Person of this Amendment and the other Loan Documents to be executed and delivered pursuant hereto, and the performance of the Loan Agreement, as amended; and Page 33 (iv) 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 $280,000, 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. 15. 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 13 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. (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. 16. 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: Page 34 (i) the Borrowers and their Subsidiaries having a Minimum EBITDA of less than $3,000,000 as of September 30, 2001; PROVIDED that the actual Minimum EBITDA of the Borrowers and their Subsidiaries for the three month period ending September 30, 2001 was not less than $1,300,000; (ii) the Borrowers and their Subsidiaries having a Tangible Net Worth of less than $12,500,000 as of September 30, 2001; PROVIDED that the actual Tangible Net Worth of the Borrowers and their Subsidiaries as of September 30, 2001 was not less than $11,500,000; and (iii) the Borrowers and their Subsidiaries having a Leverage Ratio of less than 5.40:1 as of September 30, 2001; PROVIDED that the actual Leverage Ratio of the Borrowers and their Subsidiaries for the three month period ending September 30, 2001 was not less than 11.75:1. (b) The Lenders' waiver and consent provided for in this Amendment (i) shall be deemed effective as of September 29, 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. 17. 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. 18. 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. 19. 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. 20. 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] Page 35 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 ---------------------------------------------- Daniel P. Buettin Vice President and Chief Financial Officer: FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ Daniel P. Buettin ---------------------------------------------- Daniel P. Buettin Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ Daniel P. Buettin ------------------------------------------------------- Daniel P. Buettin Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Tent A. Smart ---------------------------------------------- Trent A. Smart: Vice President
Page 36 ANNEX I SCHEDULE C-1 COMMITMENTS
========================= ===================== ========================= ======================== =================== TERM LOAN A REVOLVER SUB-FACILITY TERM LOAN B TOTAL LENDER COMMITMENT COMMITMENT* COMMITMENT COMMITMENT - ------------------------- --------------------- ------------------------- ------------------------ ------------------- Foothill Capital $25,000,000 $15,000,000 $2,500,000 $27,500,000 Corporation - ------------------------- --------------------- ------------------------- ------------------------ ------------------- - ------------------------- --------------------- ------------------------- ------------------------ ------------------- All Lenders $25,000,000 $15,000,000 $2,500,000 $27,500,000 ========================= ===================== ========================= ======================== ===================
*The Term Loan A Commitment is a sub-facility of the Revolver Commitment. Page 37 -----END PRIVACY-ENHANCED MESSAGE-----