-----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, EXEMO+nvDLUJjB0WQL7/ehhhWLinWhE4+wxT/gFsFpTawdGfsOBghTMnEhT2+lns Q40iCfOxxM8304eu7/HFwQ== 0000950152-02-007297.txt : 20020930 0000950152-02-007297.hdr.sgml : 20020930 20020930172553 ACCESSION NUMBER: 0000950152-02-007297 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20020930 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: 02777260 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 l96371ae10vqza.txt FRONTSTEP, INC. * FORM 10-Q/A FROM 09-30-2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q/A (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 7, 2001, 7,568,218 shares of the issuer's common stock, without par value, were outstanding. ================================================================================ FRONTSTEP, INC. AND SUBSIDIARIES FISCAL YEAR 2001 FORM 10-Q/A AND ANNUAL REPORT This Amendment No 1 to Form 10-Q/A ("Form 10-Q/A") amends Item 1, 2 and 3 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 including the consolidated financial statements therein, that was originally filed on November 14, 2001. As described in Note 2 to consolidated financial statements, a restatement has been made to correct the previously reported financial results due to an isolated error in third-party software used by the Company which affected the timing of recognition of revenue from renewals of the Company's maintenance and support contracts. This amendment does not otherwise update the other information in the originally filed Form 10-Q to reflect events after the original filing date. FRONTSTEP, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and June 30, 2001...............3 Consolidated Statements of Operations (unaudited) for the Three Months Ended September 30, 2001 and 2000......................................................................4 Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended September 30, 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...........15 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................19 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................................................21 Item 2. Changes in Securities and Use of Proceeds.......................................................21 Item 3. Defaults Upon Senior Securities.................................................................21 Item 4. Submission of Matters to a Vote of Security Holders.............................................21 Item 5. Other Information...............................................................................21 Item 6. Exhibits and Reports on Form 8-K................................................................21 SIGNATURES ...................................................................................................22 EXHIBIT INDEX ................................................................................................24
Page 2 PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FRONTSTEP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, JUNE 30, 2001 2001 -------- -------- RESTATED RESTATED (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 3,493 $ 1,512 Trade accounts receivable, net 30,845 31,446 Prepaid expenses 4,135 3,756 Income taxes receivable 10 47 Deferred income taxes 1,907 2,026 Inventories 740 738 Other current assets 310 979 -------- -------- 41,440 40,504 Capitalized software, net 15,233 15,094 Goodwill, net 7,911 7,911 Property and equipment, net 6,882 7,646 Other assets 1,244 1,438 -------- -------- Total assets $ 72,710 $ 72,593 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 11,420 $ 15,610 Deferred revenue 18,210 20,278 Current portion of long-term obligations 6,106 1,967 -------- -------- 35,736 37,855 Noncurrent liabilities: Long-term debt 9,208 8,337 Deferred income taxes 2,643 2,891 Other 381 405 -------- -------- 12,232 11,633 Minority interest 2,105 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 September 30, 2001 and June 30, 2001; liquidation preference $13,606 10,865 10,865 Common stock; no par value; 20,000,000 shares authorized; 7,872,418 shares issued at September 30, 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 (22,576) (22,773) Accumulated other comprehensive loss (3,157) (3,318) -------- -------- 22,637 21,003 -------- -------- Total liabilities and shareholders' equity $ 72,710 $ 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 SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- RESTATED RESTATED (UNAUDITED) Revenue: License fees $ 9,329 $ 11,881 Services 6,186 7,953 Maintenance and support 9,456 8,231 -------- -------- Total revenue 24,971 28,065 Cost of revenue: License fees 4,250 4,445 Service, maintenance and support 6,926 9,842 -------- -------- Total cost of revenue 11,176 14,287 -------- -------- Gross margin 13,795 13,778 Operating expenses: Selling, general and administrative 10,823 12,263 Research and development 1,691 3,718 Amortization of acquired intangibles 530 837 Restructuring and other charges - 2,163 -------- -------- Total operating expenses 13,044 18,981 -------- -------- Operating income (loss) 751 (5,203) Other income (expense), net (528) 73 -------- -------- Income (loss) before income taxes 223 (5,130) Provision for (benefit from) income taxes 26 (1,613) -------- -------- Net income (loss) $ 197 $ (3,517) ======== ======== Net income (loss) per common share: Basic $ 0.03 $ (0.47) ======== ======== Diluted $ 0.03 $ (0.47) ======== ======== Shares used in computing per share amounts: Basic 7,568 7,504 Diluted 7,661 7,504 The accompanying notes are an integral part of these consolidated financial statements. Page 4 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 -------- -------- RESTATED RESTATED (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 197 $ (3,517) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 854 1,081 Amortization 1,608 1,925 Restructuring and other charges - 2,163 Deferred income taxes (154) (716) Changes in operating assets and liabilities, net of restructuring and other charges: Accounts receivable 670 (1,647) Prepaid expenses and other assets 294 (1,744) Accounts payable and accrued expenses (4,207) (2,864) Deferred revenue (2,138) (1,143) Income taxes payable/receivable 269 (14) -------- -------- Net cash used in operating activities (2,607) (6,476) CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment (73) (1,095) Additions to capitalized software (1,575) (1,395) -------- -------- Net cash used in investing activities (1,648) (2,490) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net - 8 Proceeds from long-term obligations 21,548 3,814 Payments on long-term obligations (15,617) (2,660) -------- -------- Net cash provided by financing activities 5,931 1,162 Effect of exchange rate changes on cash 305 99 -------- -------- Net increase (decrease) in cash and cash equivalents 1,981 (7,705) Cash and cash equivalents at beginning of period 1,512 11,868 -------- -------- Cash and cash equivalents at end of period $ 3,493 $ 4,163 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 months ended September 30, 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 months ended September 30, 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 months ended September 30, 2001 and 2000 is as follows (in thousands): THREE MONTHS ENDED SEPTEMBER 30, -------------------- 2001 2000 ------- ------- RESTATED RESTATED Net income (loss) $ 197 $(3,517) Foreign currency translation adjustment 161 (368) ------- ------- Comprehensive income (loss) $ 358 $(3,885) ======= ======= 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 - RESTATEMENT The Company has restated its financial statements for the year ended June 30, 2001 (the "Restatement") and the three months ended September 30, 2001. The Restatement has been made to correct the previously reported financial results due to an isolated error in third-party software used by the Company which affected the timing of recognition of revenue from renewals of the Company's maintenance and support contracts during those reported periods. The Company uses certain third-party software to calculate and account for revenues from renewals of its maintenance and support services contracts. The error, which was isolated and occurred only in a certain specific process, caused affected billing records to accelerate the timing of recognition of revenue, and consequently understate the amount of deferred revenue to be recognized in subsequent periods. Due to the limited number of records affected, the error was difficult to detect. After detection by Company personnel in July 2002, the third- Page 6 party software provider identified the nature of the error and assisted the Company in determining which maintenance and support records had been affected. The error was associated with a specific version of the software and affected only the period from July 2000 to March 2002. The Company had already installed a newer version of the software which properly accounts for revenue recognition in the specific affected process. For the quarter ended September 30, 2001, this restatement increased revenue by $53,000 or 0.2% of the previously reported revenue of $24,918,000. This increase in revenue increased the reported net income for the quarter by $53,000 or 36.8% of the previously reported net income of $144,000. The balance sheet account entitled deferred revenue increased $1,158,000 or 6.8% from the previously reported balance of $17,052,000. The financial statements included herein reflect the restatement. For the year ended June 30, 2001, this restatement reduced revenue by $1,210,000 or 1.0% of the previously reported revenue of $118,286,000. This decrease in revenue increased the reported net loss for the year by $1,210,000 or 4.9% of the previously reported net loss of $24,854,000. The balance sheet account entitled Deferred revenue increased as of June 30, 2001 by $1,210,000 or 6.3% from the previously reported balance of $19,067,000. The correction of the error by reporting period is presented in the table and accompanying financial statements below (in thousands):
- ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- TOTAL REVENUE ADJUSTMENT TOTAL NET INCOME NET INCOME AS PREVIOUSLY OF REVENUE REVENUE, AS (LOSS), AS (LOSS), AS REPORTED ADJUSTED PREVIOUSLY ADJUSTED REPORTED REPORTING PERIOD - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Quarter ended September 30, 2000 $28,033 $32 $28,065 $(3,549) $(3,517) - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Quarter ended December 31, 2000 $34,063 $(207) $33,856 $(957) $(1,164) - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Quarter ended March 31, 2001 $27,172 $(838) $26,334 $(15,348) $(16,186) - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Quarter ended June 30, 2001 $29,018 $(197) $28,821 $(5,000) $(5,197) - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Year ended June 30, 2001 $118,286 $(1,210) $117,076 $(24,854) $(26,064) ------------------------ - ------------------------------------------ ---------------- -------------- --------------- -------------- -------------- Quarter ended September 30, 2001 $24,918 $53 $24,971 $144 $197 - ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Page 7 Frontstep, Inc. Quarter ended September 30, 2001 (all numbers in 000's except per share data)
Three Months Ended September 30, 2001 2001 As Reported As Restated ---------------- --------------- Revenue: License fees $ 9,329 9,329 Services 6,186 6,186 Maintenance and support 9,403 9,456 ---------------- --------------- Total revenue 24,918 24,971 Cost of revenue: License fees 4,250 4,250 Service, maintenance and support 6,926 6,926 ---------------- --------------- Cost of revenue 11,176 11,176 ---------------- --------------- Gross margin 13,742 13,795 Operating expenses: Selling, general and administrative 10,823 10,823 Research and product development 1,691 1,691 Amortization of intangibles 530 530 Restructuring and other charges - - ---------------- --------------- Total operating expenses 13,044 13,044 ---------------- --------------- Operating income (loss) 698 751 Other income (expense), net (528) (528) ---------------- --------------- Income (loss) before income taxes 170 223 Provision for income taxes 26 26 ---------------- --------------- Net income (loss) $ 144 197 ================ =============== Shares outstanding 7,661 7,661 ================ =============== EPS $ 0.02 0.03 ================ ===============
Page 8 FRONTSTEP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30, 2001 2001 --------------------------------- AS PREVIOUSLY AS RESTATED REPORTED ------------- --------------- ASSETS Current assets: Cash and cash equivalents $3,493 $3,493 Trade accounts receivable, net 30,845 30,845 Prepaid expenses 4,135 4,135 Income tax receivable 10 10 Deferred income taxes 1,907 1,907 Inventories 740 740 Other current assets 310 310 ------------- --------------- 41,440 41,440 Capitalized software, net 15,233 15,233 Intangibles, net 7,911 7,911 Equipment and improvements, net 6,882 6,882 Deposits and other assets 1,244 1,244 ------------- --------------- Total assets $72,710 $72,710 ============= =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $11,420 $11,420 Deferred revenue 18,210 17,052 Current portion of long-term obligations 6,106 6,106 ------------- --------------- 35,736 34,578 Noncurrent liabilities: Long-term obligations 9,208 9,208 Deferred income taxes 2,643 2,643 Other 381 381 ------------- --------------- 12,232 12,232 Minority interest 2,105 2,105 Shareholders' equity: Preferred stock 10,865 10,865 Common stock 79 79 Additional paid-in capital 38,746 38,746 Common stock in treasury, at cost (1,320) (1,320) Retained earnings (deficit) (22,576) (21,418) Accumulated other comprehensive loss (3,157) (3,157) ------------- --------------- 22,637 23,795 ------------- --------------- Total liabilities and shareholders' equity $72,710 $72,710 ============= ===============
Page 9 FRONTSTEP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2001 2000 2000 ------------- -------------- ------------- ------------ As Previously As Previously As Restated Reported As Restated Reported ------------- ----------- ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 197 $ 144 $ (3,517) $(3,549) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 854 854 1,081 1,081 Amortization 1,608 1,608 1,925 1,925 Restructuring and other charges -- -- 2,163 2,163 Deferred income taxes (154) (154) (716) (716) Write-off of capitalized software -- -- -- -- Changes in operating assets and liabilities, net of restructuring and other charges: Accounts receivable 670 670 (1,647) (1,647) Prepaid expenses and other assets 294 294 (1,744) (1,744) Accounts payable and accrued expenses (4,207) (4,207) (2,864) (2,864) Deferred revenue (2,138) (2,085) (1,143) (1,111) Income taxes payable/receivable 269 269 (14) (14) ------------- ----------- ------------ ------------ Net cash used in operating activities (2,607) (2,607) (6,476) (6,476) CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment (73) (73) (1,095) (1,095) Additions to capitalized software (1,575) (1,575) (1,395) (1,395) ------------- ----------- ------------ ------------ Net cash used in investing activities (1,648) (1,648) (2,490) (2,490) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net -- -- 8 8 Proceeds from long-term obligations 21,548 21,548 3,814 3,814 Payments on long-term obligations (15,617) (15,617) (2,660) (2,660) ------------- ----------- ------------ ------------ Net cash provided by financing activities 5,931 5,931 1,162 1,162 Effect of exchange rate changes on cash 305 305 99 99 ------------- ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,981 1,981 (7,705) (7,705) Cash and cash equivalents at beginning of period 1,512 1,512 11,868 11,868 ------------- ----------- ------------ ------------ Cash and cash equivalents at end of period $ 3,493 $ 3,493 $ 4,163 $ 4,163 ============= =========== ============ ============
Page 10 NOTE 3 - LONG-TERM DEBT In July 2001, the Company executed a new credit facility with Foothill Capital Corporation (the "Credit Facility"). 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 ("EBITDA") and a maximum ratio of debt to EBITDA. The proceeds from the Credit Facility were used to repay, in full, the Company's revolving credit facility with PNC Bank, National Association. As of September 30, 2001, current and long-term debt included $13,830,000 outstanding on the term note and $378,000 drawn on the revolving credit facility. On November 9, 2001, the Company and Foothill Capital Corporation amended the Credit Facility to modify all financial covenants to give account to current global economic conditions. The modification of the financial covenants was effective commencing September 29, 2001. The amendment also modified the term note structure through January 15, 2002 to allow for increased borrowing capacity during that period. In connection with the Credit Facility, the Company issued to Foothill Capital Corporation a warrant to purchase 550,000 common shares of the Company with an exercise price per share based on the current market price per share of the Company's common shares as of the closing date for the transaction (which was $3.36 per share). The warrant expires in July 2006 and is subject to certain anti-dilution provisions as described in the warrant. The relative fair value of the warrant ($1,276,000) has been recorded as a debt discount and is being amortized as interest expense over the three-year term of the Credit Facility. As of September 30, 2001, the unamortized balance of the debt discount was $1,170,000. In connection with the issuance of the warrant to Foothill Capital Corporation in July, 2001 as discussed above, the exercise price of the outstanding warrants to purchase 453,546 common shares of the Company related to the private placement of preferred shares of the Company in fiscal 2000 was reduced from $15.00 per share to $3.36 per share pursuant to the terms of the warrants. No amount was recorded in the Company's financial statements as a result of this transaction since the original contractual terms of the warrant remain unchanged. NOTE 4 - 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. As a result of this restructuring plan, the Company recorded pre-tax restructuring charges of $580,000 and $3,660,000 in the three months ended March 31, 2001 and June 30, 2001, respectively. These restructuring charges are recorded as a separate line in the consolidated statements of operations. The Company's restructuring plan consisted of the following significant items: - - Employee separation costs of $2,182,000 - The Company reduced its workforce by approximately 20%, or 162 employees. These costs consist primarily of severance for these employees. - - Contract termination liabilities - $900,000- The Company elected to discontinue its SyteCentre ERP product to focus resources on the Company's primary ERP product, SyteLine. The Company also discontinued its ASP hosting solution and its internet procurement software due to sluggish demand and unprofitable operations. As a result, the Company provided $900,000 to cover anticipated liabilities to customers currently using the discontinued products and services. Page 11 - - Facility closure costs - $1,158,000 - The Company recorded $1,158,000 of costs associated with closing certain offices in Arizona, California, Canada and Asia. For those leases with non-cancelable lease terms, the Company assumed that subleases would be obtained after a one-year period. The following table displays a rollforward of the accruals established for the restructuring and other charges from June 30, 2001 to September 30, 2001 (in thousands):
(IN THOUSANDS) INITIAL AMOUNTS ACCRUAL AMOUNTS ACCRUAL CHARGE USED IN BALANCE USED IN AT FISCAL AT JUNE FISCAL MARCH 2001 30, 2001 2002 31, 2002 --------- ------ --------- ------ ------ Termination costs related to employees $ 2,182 $1,770 $ 412 $ 400 $ 12 Exit costs: Facility closure costs 1,158 280 878 144 734 Contract termination liabilities 900 120 780 215 565 --------- ------ --------- ------ ------ Total $ 4,240 $2,170 $ 2,070 $ 759 $1,311 ========= ====== ========= ====== ======
The amounts used of $759,000 and $2,170,000 in fiscal 2002 and 2001, respectively, reflects cash payments of $2,849,000 and non-cash charges of $80,000. The remaining accrual of $1,311,000, which is included in accounts payable and accrued expenses in the Consolidated Balance Sheets, represents cash payments expected to be made over the course of the remaining contracts through 2004. In relation to this restructuring plan, the Company wrote-off certain accounts receivable amounting to $6,840,000 in the quarter ended March 31, 2001, which is presented in the Statement of Operations in Operating expenses: Selling, general and administrative. Also, in relation to the restructuring plan, the Company wrote-off other non-performing assets amounting to $1,913,000 in the quarter ended March 31, 2001, which is presented in the Statement of Operations in Cost of revenue: License fees. The accounts receivable write-offs were recorded to reflect accounts deemed to be uncollectible due to economic and other situations that occurred subsequent to the recording of the sales related to those receivables. The non-performing assets are no longer in use and were completely written off. Fiscal 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. These changes included divesting the Company's FieldPro subsidiary, terminating the operations of its e-Mongoose, Inc. subsidiary, consolidating the Company's product development organizations and restructuring the Company's sales channels. In connection with this announcement, the Company recorded a non-recurring charge of $429,000, pre-tax, in the three months ended June 30, 2000 and an additional non-recurring charge of $2,163,000, pre-tax, in the three months ended September 30, 2000. The aggregate pre-tax charge of $2,592,000 included non-cash charges of $429,000 related primarily to the sale of Visual Applications Software, Inc. and $2,163,000 to reduce the Company's headcount. The headcount reduction included approximately 90 employees associated with the operations discussed above and others terminated as part of the restructuring. All severance payments were paid during the year ended June 30, 2001 and no accruals remained for these costs as of June 30, 2001. NOTE 5 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
THREE MONTHS ENDED SEPTEMBER 30, -------------------- 2001 2000 ------- ------- Numerator for basic and diluted income (loss) per share - net income (loss) $ 197 $(3,517) ======= =======
Page 12 Denominator for basic income (loss) per share - weighted average common shares outstanding 7,568 7,504 Effect of dilutive warrants 93 - ------- ------- Denominator for diluted income (loss) per share - adjusted weighted average common shares and assumed conversions 7,661 7,504 ======= ======= Basic net income (loss) per share $ 0.03 $ (0.47) ======= ======= Diluted net income (loss) per share $ 0.03 $ (0.47) ======= =======
During the three months ended September 30, 2001, 1,983,404 shares related to employee stock options were outstanding, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be antidilutive. During the three months ended September 30, 2000, common share equivalents related to warrants and employee stock options were outstanding, but 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 6 - INTANGIBLE ASSETS 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 September 30, 2001, the Company had unamortized intangible assets consisting only of goodwill of $7,911,000. The Company's amortizable intangible assets include only purchased software. The gross carrying amount of purchased software as of September 30, 2001 was $2,696,000 and accumulated amortization of purchased software was $1,851,000. In accordance with the provisions of SFAS No. 142, the Company performed the appropriate transitional impairment tests related to its stated goodwill 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 SEPTEMBER 30, ----------------------- 2001 2000 --------- --------- RESTATED Net income (loss) $ 197 $ (3,517) Goodwill amortization, net of tax - 198 --------- --------- Adjusted net income (loss) $ 197 $ (3,319) ========= ========= Basic and diluted net income (loss) per share: Net income (loss) $ 0.03 $ (0.47) Goodwill amortization, net of tax - 0.03 --------- --------- Adjusted net income (loss) $ 0.03 $ (0.44) ========= =========
NOTE 7 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION Page 13 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 SEPTEMBER 30, 2001 - RESTATED Total revenue $18,793 $3,553 $2,625 Operating income before amortization of intangibles 996 195 90 Operating income 562 99 90 THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenue $21,638 $3,308 $3,119 Operating income (loss) before amortization of intangibles and special charges (2,295) 125 (33) Operating income (loss) (5,158) 5 (50)
NOTE 8 - SUBSEQUENT EVENTS 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 allows a participant to return options currently held to the Company in exchange for new options to be granted at a future date which is 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 is expected to expire on November 30, 2001, subject to extension by the Company. New options are expected to be issued for exchanged options on or about June 2, 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. Page 14 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 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. RESTATEMENT. The Company is restating its Statements of Operations and its Balance Sheets for the three-months ended September 30, 2001 (the "Restatement"). The Restatement is being made to correct the previously reported financial results due to an isolated error in third-party software used by the Company which affected the timing of recognition of revenue from renewals of the Company's maintenance and support contracts during those reported periods. The financial results reported in this Form 10-Q have been restated to reflect the correction of this error. See Note 2 to the Financial Statements included herein. The following discussion reflects effects of reclassifications and restatements. Current Financial Results and Events. After nearly two years of difficult economic and market conditions, during which the Company undertook to significantly enhance its product capabilities, the Company reported positive financial results for the quarter ended September 30, 2001 (the "current fiscal quarter" or "fiscal 2002 quarter"). Throughout the quarter, the Company believed that it was on track to become profitable and to maintain a positive cash flow primarily as a result of the cost savings achieved from the restructuring program initiated in April 2001 as discussed below. The Company reported operating income of $0.8 million and net income of $0.2 million for the current fiscal quarter. On September 11, 2001, the United States was violently attacked by terrorists. The widespread uncertainty related to the events of September 11, 2001 and the ensuing war against terrorism waged by the United States and its allies appears to have caused our customers and potential customers to elect to defer their buying decisions, particularly near the end of the current fiscal quarter. In spite of these tragic events, the Company believes it was able to achieve positive results in the current fiscal quarter primarily due to the cost reductions initiated and the careful management of the Company's costs since that time. In the months that have followed since this event, there have been significant indications of a broad and possibly lasting impact of this event on our economy and the economy of other countries around the world. Although there are many indications that the country has already entered into a recession, it is not yet clear whether a recession or further slowdown of the economy will occur. 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. Page 15 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 include 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. While the enterprise applications software industry has generally been experiencing weak demand and fluctuating economic conditions for software spending since early in 1999, the Company did experience significantly improved license fees revenues and heightened demand for its products in the December 2000 quarter. This increase in revenues and heightened overall demand led the Company to believe that its strategy would lead it to more successful financial results, with improvements each quarter over comparable periods in the prior year. However, in the latter portion of 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 experienced significant shortfalls in revenue levels and incurred net losses for the March and June 2001 quarters as compared to an expectation of continued improvements as were demonstrated in the December 2000 quarter. Consequently, in April 2001, we initiated a broad restructuring program in order to reduce the Company's workforce, reduce expenses associated with non-essential activities and to improve the Company's ability to be profitable at lower levels of revenue. We reduced our worldwide workforce by approximately 20%, discontinued certain product development and other non-essential activities, closed certain offices and acted to reduce operating costs. As this effort is fully realized in the September 2001 quarter, we believe that overall operating costs, including payroll related employee costs, facility costs, costs of outside services and software providers and other costs, will be reduced by $28 million on an annual basis, or approximately 25%. Commencing in the September 2001 quarter the Company expects to fully realize savings of approximately $7.0 million per quarter. These savings are expected to occur through reductions in payroll costs of $4.5 million; facility costs, $0.2 million; and discontinuance of certain capitalized assets and programs, $0.4 million. Additional reductions are expected through the cost management of other selling, general and administrative expenses including marketing, contractors, travel, meetings and outside services, $1.6 million; and other assets write-offs of $0.3 million. In the quarters ended March 31, 2001 and June 30, 2001 (the "current fiscal quarter"), we recorded an aggregate of approximately $4.2 million, pre-tax, in related restructuring charges including termination costs relating to employees, facility closure costs and contract termination costs. Additionally we recorded a charge of $6.8 million in bad debt expense to write off accounts receivable and a $1.9 million charge to license fee cost of sales to write-off capitalized product costs. We do not believe that the restructuring has had or will have a significant negative impact to our business operations because our personnel and facilities were in excess of needed levels. In July 2000, the Company made several structural changes to discontinue certain business operations, write off non-performing assets and to restructure the Company to better focus on its core business strategy. In connection with these changes, the Company recorded a $0.4 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. Because this restructuring was completed in the quarter ended September 30, 2000, there were minimal effects to our ongoing operations. The charge taken in the June 2000 quarter was entirely a non-cash charge. However, the charge taken in the September 2000 quarter represented cash outlays for employee termination costs and facility closures. All of these cash payments were made during the first half of fiscal year 2001. 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. License fees revenue is generally recognized when the software product is shipped. Services revenue is recognized as the services are performed and revenues from Page 16 maintenance agreements are billed periodically, deferred and recognized straight-line over the term of the agreements. Cost of license fees revenue includes royalties, amortization of capitalized software development costs and software delivery expenses. Cost of service, maintenance and support revenue includes the personnel and related overhead costs for implementation, training and customer support services, together with fees paid to third parties for subcontracted services. Selling, general and administrative expenses consist of personnel, facilities and related overhead costs, together with other operating costs of the Company, including advertising and marketing costs. Research and development expenses include personnel and related overhead costs for product development, enhancement, upgrades, quality assurance and testing. The amount of such expenses is dependent on the nature and status of the development process for the Company's products. Development costs capitalized in a given period are dependent upon the nature and status of the development process. Upon general release of a product, related capitalized costs are amortized over three to five years and recorded as license fees cost of revenue. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Revenue. Total revenue decreased $3.1 million, or 11.0%, to $25.0 million in the current fiscal quarter from $28.1 million in the three months ended September 30, 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 SEPTEMBER 30, --------------------------------------------- 2001 2000 --------------------- --------------------- RESTATED License fees revenue $9,329 37.4% $11,881 42.4% Services 6,186 24.8% 7,953 28.3% Maintenance and support revenue 9,456 37.9% 8,231 29.3% --------------------- --------------------- Total revenue $24,971 100.0% $28,065 100.0% ===================== =====================
License fees revenue decreased 21.5% 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 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 in the short-term but 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 22.2% 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 few quarters. Service revenues in particular are directly dependent on new license purchases by new and existing customers. Maintenance and support revenue has increased 14.9% due primarily to the steadily improving number of contracts over the last few years as the base of customers under such programs has continued to grow. Cost of Revenue. Total cost of revenue as a percentage of total revenue decreased to 44.8% for the fiscal 2002 quarter from 51.0% for the fiscal 2001 quarter. Cost of license fees revenue decreased $0.2 million, or 4.4%, to $4.3 million in the fiscal 2002 quarter from $4.4 million in the fiscal 2001 quarter and as a percentage of license fees revenue, increased to 45.6% in the fiscal 2002 quarter from 37.4% in the fiscal 2001 quarter. The percentage increase is primarily attributable to lower license fees revenue affecting certain fixed and related costs, an increase in the number of third party product vendors included in the Company's expanded product offerings and discounting as a result of weakened demand. Page 17 Cost of service, maintenance and support revenue decreased $2.9 million, or 29.6%, to $6.9 million in the fiscal 2002 quarter from $9.8 million in the fiscal 2001 quarter and as a percentage of service, maintenance and support revenue, decreased to 44.3% in the fiscal 2002 quarter from 60.8% in the fiscal 2001 quarter. The decrease in cost is attributable to a decline in service revenue as compared to the year earlier period. The percentage decrease is primarily due to improvements in gross margin for maintenance and support and services as a result of the cost management efforts of the Company since the April 2001 restructuring and continued growth of maintenance and support revenues which have higher margins than services revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.4 million, or 11.7%, to $10.8 million in the fiscal 2002 quarter from $12.3 million in the fiscal 2001 quarter. Such expenses as a percentage of total revenue remained relatively constant: 43.4% in the fiscal 2002 quarter and 43.7% 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 $1.8 million or 36.1%, to $3.3 million for the fiscal 2002 quarter from $5.1 million for the fiscal 2001 quarter and decreased as a percentage of total revenue to 13.1% in the fiscal 2002 quarter from 18.2% 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 development of future releases of the Company's ERP software and development of its expanded product offerings and product capabilities. 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 $1.4 million during the fiscal 2001 quarter. Restructuring and Other Charges. The restructuring program undertaken by the Company in July 2000 and its related costs recorded are discussed above. 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 15% and (31)%, respectively. The effective tax rate in both periods differs from the expected corporate tax rate primarily due to valuation allowances recorded against deferred tax assets related to net operating losses incurred domestically, foreign losses incurred in countries where no tax benefits will be received for the losses, the non-deductibility of the amortization of certain intangibles and the application of prior net operating losses carried forward to offset current pre-tax income. 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 September 30, 2001, the Company had cash and cash equivalents of $3.5 million and working capital of $6.9 million. During the current fiscal quarter, the Company used $2.6 million of cash for operating activities, including the restructuring and other charges described above. The Company purchased $0.1 million of property and equipment and used $1.6 million in relation to capitalized software. Cash was also used for the payment of $0.6 million on certain debt payments relating to previous acquisitions. Net borrowings on the term note and revolving credit facility under the Credit Facility as of September 30, 2001 were $13.8 million and $0.4 million, respectively In July 2001, the Company executed a new credit facility with Foothill Capital Corporation (the "Credit Facility"). The Credit Facility includes a $15.0 million, three-year term note 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 Page 18 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 Capital Corporation amended the Credit Facility to modify all financial covenants to give account to current global economic conditions. The modification of the financial covenants was effective commencing September 29, 2001. The amendment also modified the term note structure through January 15, 2002 to allow for increased borrowing capacity during that period. In connection with the Credit Facility, the Company issued to Foothill Capital Corporation a warrant to purchase 550,000 common shares of the Company with an exercise price per share based on the current market price per share of the Company's common shares as of the closing date for the transaction (which was $3.36 per share). The warrant expires in July 2006 and is subject to certain anti-dilution provisions as described in the warrant. The Company anticipates that cash on hand, cash flow from operations and available borrowings from the Credit Facility, as amended, will be sufficient to satisfy expected cash needs for the next 12 months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange. Frontstep's revenues originating outside of North America were 25% and 23% of total revenue for the current and prior year fiscal quarters, respectively. By geographic region, revenues originating in Europe were 14% and 12% of total revenue for the current and prior year fiscal quarters, respectively. Revenues originating in Asia Pacific were 11% of total revenue for both the current and prior year fiscal quarters. 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. 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 19 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. In July 2001, the Company entered into a new credit facility arrangement with Foothill Capital Corporation. In connection with the new credit facility arrangement, the Company issued to Foothill Capital Corporation a warrant to purchase 550,000 common shares at an initial exercise price of $3.36 per share, which was the average of the closing bid price for common shares of the Company for the 10 trading days immediately preceding the closing date for the new credit facility. The exercise price of the warrant and the number of common shares issuable upon exercise of the warrant are subject to adjustments from time to time under the anti-dilution provisions contained in the warrant. The warrant expires in July 2006 and is exercisable at any time prior to its expiration. The warrant was issued in reliance upon an exemption from registration under Section 4(2) of the Securities Act of 1933 (the "Act") and Rule 506 promulgated under the Act. As required by the Company's agreement with Foothill Capital Corporation, the Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 to register 687,500 common shares of the Company for possible issuance upon exercise of the warrant. The registration statement has not been declared effective by the Commission as of the date hereof. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits filed with this Quarterly Report on Form 10-Q following the Signature Page. (b) Reports on Form 8-K. None 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: September 28, 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 CERTIFICATIONS I, Stephen A. Sasser, certify that: 1. I have reviewed this report on Form 10Q-A of Frontstep, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 28, 2002 By: /s/ STEPHEN A. SASSER ------------------------------------ Stephen A. Sasser President and Chief Executive Officer I, Daniel P. Buettin, certify that: 1. I have reviewed this report on Form 10Q-A of Frontstep, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 28, 2002 By: /s/ DANIEL P. BUETTIN ------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer And Secretary, Principal Financial and Accounting Officer 22 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 23
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) 10(a) Loan and Security Agreement, by and among Incorporated herein by reference to the Registrant, Frontstep Solutions Exhibit 10(u) to the Registrant's Annual Group, Inc., brightwhite solutions, inc. Report on Form 10-K for the fiscal year and Frontstep Canada, Inc., as Borrowers, ended June 30, 2001 (File No. 0-19024) and the Lenders signatory thereto, as Lenders, and Foothill Capital Corporation, as Arranger and Administrative Agent 10(b) Common Share Purchase Warrant, dated July Incorporated herein by reference to 17, 2001, issued to Foothill Capital Exhibit 10(v) to the Registrant's Annual Corporation Report on Form 10-K for the fiscal year ended June 30, 2001 (File No. 0-19024) 10(c) Registration Rights Agreement, dated July Incorporated herein by reference to 17, 2001, by and between the Registrant Exhibit 10(w) 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) 10(d) Pledge and Security Agreement (Foreign), Incorporated herein by reference to dated July 17, 2001, made by the Exhibit 10(x) to the Registrant's Annual Registrant and Frontstep Solutions Group, Report on Form 10-K for the fiscal year Inc., in favor of Foothill Capital ended June 30, 2001 (File No. 0-19024) Corporation, as agent for certain Lenders 10(e) Pledge and Security Agreement (Domestic), Incorporated herein by reference to dated July 17, 2001, made by the Exhibit 10(y) to the Registrant's Annual Registrant and Frontstep Solutions Group, Report on Form 10-K for the fiscal year Inc., in favor of Foothill Capital ended June 30, 2001 (File No. 0-19024) Corporation, as agent for certain Lenders 10(f) Copyright Security Agreement, dated July Incorporated herein by reference to 17, 2001, made by the Registrant, Exhibit 10(z) to the Registrant's Annual Frontstep Solutions Group, Inc. and Report on Form 10-K for the fiscal year brightwhite solutions, inc., in favor of ended June 30, 2001 (File No. 0-19024) Foothill Capital Corporation, as agent for certain Lenders 10(g) Trademark Security Agreement, dated July Incorporated herein by reference to 17, 2001, made by the Registrant, Exhibit 10(a)(a) to the Registrant's Frontstep Solutions Group, Inc. and Annual Report on Form 10-K for the fiscal brightwhite solutions, inc., in favor of year ended June 30, 2001 (File No. 0-19024) Foothill Capital Corporation, as agent for certain Lenders 10(h) Intercompany Subordination Agreement, Incorporated herein by reference to dated July 17, 2001, made among the Exhibit 10(a)(b) to the Registrant's Registrant, Frontstep Solutions Group, Annual Report on Form 10-K for the fiscal Inc., brightwhite solutions, inc., year ended June 30, 2001 (File No. 0-19024) Frontstep Canada, Inc., and other future obligors, and Foothill Capital Corporation, as agent for certain Lenders 99(a) Certification of Chief Executive Officer and Filed herein Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 25 EX-99.A 3 l96371aexv99wa.txt EX-99(A) CERTIFICATIONS Exhibit 99(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF FRONTSTEP, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report of Frontstep, Inc. (the "Company") on Form 10-Q/A for the quarter period ended September 30, 2001, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ STEPHEN A. SASSER ------------------------------------- Stephen A. Sasser President and Chief Executive Officer Date: September 28, 2002 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF FRONTSTEP, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report of Frontstep, Inc. (the "Company") on Form 10-Q/A for the quarter period ended September 30, 2001, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ DANIEL P. BUETTIN ------------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer And Secretary, Principal Financial and Accounting Officer Date: September 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----