-----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, KRvBmS6N/AeuEKWfaNpVJnF3HeviLVcOfBF3yHqSXGJZtPeYUTm3AhNdKGbBx8ej rASCe5SxK5oVByOVBlQgNA== 0000950152-03-001774.txt : 20030213 0000950152-03-001774.hdr.sgml : 20030213 20030213163448 ACCESSION NUMBER: 0000950152-03-001774 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030213 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19024 FILM NUMBER: 03560177 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 1 l98896ae10vq.txt FRONTSTEP, INC. FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ COMMISSION FILE NUMBER: 0-19024 ------------------- FRONTSTEP, INC. (Exact name of registrant as specified in its charter) OHIO 31-1083175 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2800 CORPORATE EXCHANGE DRIVE 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, 2003, 13,960,615 of the issuer's common stock, without par value, were outstanding. ================================================================================ FRONTSTEP, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2002 (unaudited) and June 30, 2002............... 3 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended December 31, 2002 and 2001...................................................................... 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended December 31, 2002 and 2001...................................................................... 5 Notes to Consolidated Financial Statements (unaudited).......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20 Item 4. Controls and Procedures......................................................................... 21 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................................................................. 22 Item 4. Submission of Matters to a Vote of Security Holders............................................. 22 Item 5. Other Information............................................................................... 22 Item 6. Exhibits and Reports on Form 8-K................................................................ 22 SIGNATURES ................................................................................................... 23 CERTIFICATIONS................................................................................................ 24 EXHIBIT INDEX ................................................................................................ 26
Page 2 PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FRONTSTEP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, JUNE 30, 2002 2002 ----------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 5,048 $ 3,389 Trade accounts receivable, net 25,962 29,049 Prepaid expenses 6,093 7,121 Income taxes receivable -- -- Deferred income taxes 3,386 3,386 Inventories 483 491 Other current assets 1,463 1,162 -------- -------- 42,435 44,598 Capitalized software, net 16,280 16,371 Goodwill, net 8,287 8,039 Property and equipment, net 4,160 5,030 Other assets 1,259 1,074 -------- -------- Total assets $ 72,421 $ 75,112 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 13,693 $ 13,271 Deferred revenue 20,545 21,407 Current portion of long-term obligations 15,143 15,895 Income tax payable 538 405 -------- -------- 49,919 50,978 Noncurrent liabilities: Long-term debt 4,062 1,031 Deferred income taxes 4,268 4,268 Other -- -- -------- -------- 8,330 5,299 Minority interest 123 118 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, 2002 and June 30, 2002; 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, 2002 and June 30, 2002, at stated capital amounts of $0.01 per share 79 79 Additional paid-in capital 40,045 39,341 Treasury stock, at cost; 304,200 shares (1,320) (1,320) Retained deficit (32,167) (27,118) Accumulated other comprehensive loss (3,453) (3,130) -------- -------- 14,049 18,717 -------- -------- Total liabilities and shareholders' equity $ 72,421 $ 75,112 ======== ========
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, ----------------------- ----------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Revenue: License fees $ 6,207 $ 7,616 $ 11,179 $ 15,287 Service 4,748 5,197 10,096 11,383 Maintenance and support 10,355 10,493 20,526 21,742 -------- -------- -------- -------- Total revenue 21,310 23,306 41,801 48,412 Cost of revenue: License fees 3,854 3,283 6,724 6,455 Service, maintenance and support 7,061 8,450 14,892 16,541 -------- -------- -------- -------- Total cost of revenue 10,915 11,733 21,616 22,996 -------- -------- -------- -------- Gross margin 10,395 11,573 20,185 25,416 Operating expenses: Selling, general and administrative 10,563 11,995 19,154 22,818 Research and development 1,428 1,712 3,038 3,403 Amortization of acquired intangibles 395 380 828 910 Restructuring and other charges -- -- -- -- -------- -------- -------- -------- Total operating expenses 12,387 14,087 23,021 27,131 -------- -------- -------- -------- Operating income (loss) (1,991) (2,514) (2,835) (1,715) Other income (expense), net (1,118) (380) (2,169) (908) -------- -------- -------- -------- Income (loss) before income taxes (3,109) (2,894) (5,004) (2,623) Provision for (benefit from) income taxes (50) -- 45 26 -------- -------- -------- -------- Net income (loss) $ (3,059) $ (2,894) $ (5,049) $ (2,649) ======== ======== ======== ======== Net income (loss) per common share: Basic $ (0.37) $ (0.38) $ (0.62) $ (0.35) ======== ======== ======== ======== Diluted $ (0.37) $ (0.38) $ (0.62) $ (0.35) ======== ======== ======== ======== Shares used in computing per share amounts: Basic 8,168 7,568 8,168 7,568 Diluted 8,168 7,568 8,168 7,568
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, ---------------------- 2002 2001 ------- -------- (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $(5,049) $ (2,649) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 1,340 1,648 Amortization 3,584 3,022 Amortization of Debt Discount 522 212 Deferred income taxes -- (154) Changes in operating assets and liabilities, net of restructuring and other charges: Accounts receivable 2,789 3,797 Prepaid expenses and other assets 1,338 48 Accounts payable and accrued expenses 224 (1,655) Deferred revenue (878) (1,247) Income taxes payable/receivable 13 1,064 ------- -------- Net cash provided by operating activities 3,883 4,086 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment (452) (212) Additions to capitalized software (3,630) (3,169) ------- -------- Net cash used in investing activities (4,082) (3,381) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from long-term obligations -- 38,231 Payments on long-term obligations (1,591) (33,477) Proceeds from Convertible Notes 3,500 -- ------- -------- Net cash provided by financing activities 1,909 4,754 Effect of exchange rate changes on cash (51) (360) ------- -------- Net increase (decrease) in cash and cash equivalents 1,659 5,099 Cash and cash equivalents at beginning of period 3,389 1,512 ------- -------- Cash and cash equivalents at end of period $ 5,048 $ 6,611 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 FRONTSTEP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 (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, 2002 and 2001, 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/A for the year ended June 30, 2002 ("Annual Report"). The results of operations for the three and six months ended December 31, 2002 are not necessarily indicative of the results to be expected for a full year. Comprehensive Income (Loss). The only item in addition to net income (loss) that is included in comprehensive income (loss) is the foreign currency translation adjustment. Comprehensive income (loss) for the three and six months ended December 31, 2002 and 2001 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------- --------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Net income (loss) $(3,059) $(2,894) $(5,049) $(2,649) Foreign currency translation adjustment (156) (162) (323) (1) ------- ------- ------- ------- Comprehensive income (loss) $(3,215) $(3,056) $(5,372) $(2,650) ======= ======= ======= =======
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 -AGREEMENT TO MERGER WITH MAPICS, INC. On November 25, 2002, Frontstep and MAPICS, Inc. ("MAPICS") announced that they had entered into a definitive merger agreement (the "Merger Agreement") pursuant to which MAPICS will acquire Frontstep. Pursuant to the terms of the Merger Agreement, shareholders of Frontstep, including former holders of the Company's Series A Convertible Participating Preferred Stock (the "Series A Preferred Stock"), will receive, in the aggregate, 4.2 million shares of MAPICS common stock in exchange for all of the outstanding Frontstep shares and the assumption by MAPICS of the Company's debt and other liabilities. Frontstep shareholders will receive approximately 0.300846 MAPICS shares for each share of Frontstep common stock held as of the effective time of the merger. Closing, which is expected to occur during the first calendar quarter of 2003, remains subject to certain closing conditions including, but not limited to, approval of the acquisition by Frontstep shareholders and approval of the issuance of MAPICS shares in the merger by MAPICS shareholders. In connection with the Merger Page 6 Agreement, Frontstep officers, directors and certain shareholders, including all former holders of the Series A Preferred Stock, have entered into agreements to vote Frontstep shares held by them in favor of the proposed transaction. Pursuant to these voting agreements, shareholders expected to hold a majority of the voting shares of Frontstep common stock as of the record date have committed to vote their shares in favor of the transaction. Under Ohio law, the transaction must be approved by the holders of at least two-thirds of the voting power of Frontstep. The proposed merger is intended to qualify as a tax-free reorganization pursuant to Section 368(a) of the Internal Revenue Code. On November 24, 2002, in connection with the Merger Agreement, the Company entered into a letter agreement with the holders of the Series A Preferred Stock (the "Restructuring Agreement"). Each shareholder party to the Restructuring Agreement agreed that, prior to the closing of the proposed merger, it shall accept, in exchange for the Series A Preferred Stock owned by it, a number of shares of MAPICS common stock equal to a 25% discount on the Series A Preferred Stock liquidation preference, based on the average closing price of MAPICS common stock during the period from November 7, 2002 through November 20, 2002. At the request of the Company, and to induce MAPICS to enter into the Merger Agreement, each holder of Series A Preferred Stock agreed to exercise warrants issued by the Company on March 7, 2002 to acquire shares of Frontstep common stock and to convert their shares of Series A Preferred Stock into Frontstep common stock prior to the record date set for the special meeting of the Company's shareholders to vote on the Merger Agreement. In addition, each of the holders of Series A Preferred Stock agreed to certain other matters that would become effective at the closing of the merger, including the cancellation of warrants that had been issued in connection with the May 2000 Series A Preferred Stock offering. Also on November 24, 2002, the Company and Foothill Capital Corporation ("Foothill") reached certain understandings regarding the proposed merger and the Company's Loan and Security Agreement, dated as of July 17, 2001 (as amended to date, the "Credit Facility"). Foothill has agreed that the Company has complied with certain conditions set forth in Section 6.20(a) of the Credit Facility and Sections 13(a)(i) and 13(b)(i) of the Eighth Amendment to the Loan Agreement, dated November 12, 2002. Additionally, Foothill consented to the Company's execution of the Merger Agreement and to the consummation of the proposed merger provided that upon the effectiveness of the proposed merger, all outstanding obligations under the Credit Facility are paid in full. The consent of Foothill is subject to certain conditions, including but not limited to, closing of the merger no later than April 30, 2003. Frontstep and MAPICS will each hold meetings of their shareholders on February 18, 2003 to obtain approval for the completion of the proposed transaction. The record date for the Frontstep shareholders meeting has been set as January 14, 2003. A joint proxy statement-prospectus dated January 15, 2003 to solicit shareholder approval of the proposed transaction, as well as other relevant documents concerning the proposed transaction were mailed to all shareholders of record as of the record date. On January 13, 2003, all of the holders of Series A Preferred Stock converted their preferred shares for Frontstep common shares at a conversion ratio of 10.2170745 common shares for each preferred share in accordance with the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common shares upon the conversion of the Series A Preferred Stock. In addition, also on January 13, 2003, holders of certain common share warrants issued in March 2002 in connection with the convertible note offering by the Company, for the purchase of 600,000 Frontstep common shares with an exercise price of $0.01 per share, exercised their warrants in exchange for the issuance of 600,000 Frontstep common shares. As of the record date, 13,960,615 shares of Frontstep common stock are issued and outstanding and entitled to vote at the February 18, 2003 Frontstep shareholders' meeting. NOTE 3 - LONG-TERM OBLIGATIONS In July 2001, the Company executed the Credit Facility with Foothill. This agreement has been subject to certain amendments from its execution through December 18, 2002. 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. Under certain of the Credit Facility amendments, monthly payments were delayed from January 2002 to July 2002 and from October to December 2002. The Credit Facility is subject to Page 7 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. As of December 31, 2002 the Company had outstanding term borrowings of $13.8 million and no borrowings under the revolving credit portion of the Credit Facility. In connection with the Credit Facility, the Company issued to Foothill a warrant to purchase 550,000 common shares of the Company. The relative fair value of the warrant ($1,276,000) was recorded as a debt discount at the time of issuance and is being amortized as interest expense over the three-year term of the Credit Facility. As of December 31, 2002, the unamortized balance of the debt discount was $639,000. On November 12, 2002, the Company and Foothill agreed to further amend the Credit Facility to provide temporary additional borrowing availability under the revolving credit portion of the Credit Facility. The amendment also modified the financial covenants for the quarter ended September 30, 2002 and reset the covenants for the balance of fiscal 2003 due to a restatement of the Company's financial statements affecting prior periods. After giving effect to these modifications, the Company was in compliance with the financial covenants under the Credit Facility. The amendment contains certain covenants relating to the strategic business plans and objectives of the Company and which permit Foothill to participate in the evaluation of such plans and objectives. Because of the subjective nature of these covenants and the control they provide Foothill over the management of the Company, indebtedness outstanding under the Credit Agreement has been characterized as a current liability. Pursuant to the terms of these covenants: (a) The Company has delivered a contingency plan to Foothill reflecting a plan to restructure the business operations of the Company to a level at which the Company's revenues will provide sufficient cash flow to support the business operations of the Company, including its debt service obligations under the Credit Facility. (b) The Company has engaged an investment banking firm to assist the Company in reviewing its strategic and business options. (c) The Company and Foothill have also established certain benchmarks with respect to the evaluation and implementation of available strategic and business options for the Company. If the Company fails to comply with certain of the benchmarks referred to in (c) above, the commitments of Foothill to make advances and issue letters of credit for the account of the Company will terminate and any such advances and/or issuances of letter of credit may be issued by Foothill in its sole and absolute discretion. The non-compliance with the execution and implementation of the strategic plan or option selected pursuant to the terms and conditions of the Credit Facility will constitute an event of default under the Credit Facility. Due to the uncertainty of the ultimate impact of these conditions and milestones, the Company has classified the Foothill debt as a current portion of long-term obligations in the accompanying December 31, 2002 balance sheet. As a condition of the November 12, 2002 amendment the Company agreed to reduce the purchase price of Foothill's warrants to purchase 550,000 common shares of the Company to $2.85 per share from $3.36 per share. In relation to this amendment the Company also agreed to reduce the price at which shares of the Company's Series A Preferred stock convert into common shares of the Company to $2.85 per share from $6.00 per share. On January 13, 2003, in connection with the Merger Agreement discussed in Note 2 above, the purchase price of Foothill's warrants were again reduced from $2.85 to $2.349009. At that time, the price at which the shares of the Series A Preferred stock convert into common shares of the Company was also reduced to $2.349009 per share. On March 7, 2002, the Company executed an agreement pursuant to which certain holders of its Series A Convertible Participating Preferred Shares and certain members of the Company's Board, including the Company's founder (collectively, the "Investors"), agreed to provide up to $5 million to the Company for working capital needs in exchange for convertible notes (the "Convertible Notes") with a term expiring on May 10, 2004. Under terms of the agreement, the Company issued an aggregate principal amount of $1.5 million of initial notes and warrants to purchase 600,000 common shares of the Company at $0.01 to the Investors on March 7, 2002. The relative fair Page 8 value of the warrants, $595,000 was recorded as a debt discount at the time of issuance and is being amortized as interest expense over the two-year expected term of the notes. As of December 31, 2002, the unamortized balance of the debt discount was $374,000. On August 12, 2002 and August 28, 2002, the Company issued its remaining Convertible Notes in the aggregate principal amounts of $2.5 million and $1.0 million, respectively, to the Investors in accordance with the terms of a private placement transaction. The Convertible Notes, which total $5.0 million, are each due on May 10, 2004 and are convertible into common shares of the Company at a conversion rate of $2.4876 per share. The initial notes in the aggregate principal amount of $1.5 million became convertible on July 9, 2002. At that date, due to a difference between the conversion price and market price of Frontstep's common stock and due to the reduced carrying amount of the debt due to the debt discount, the notes carried a beneficial conversion feature of $652,000. The Company has recorded this beneficial conversion feature as a debt discount and is amortizing it over the term of the notes through May 10, 2004. As of December 31, 2002, the unamortized balance of the debt discount was $563,000. In 2001, certain minority interest investors, including Mitsui & Co., Asia Investment Ltd. and its affiliates (collectively, "Mitsui") exercised their put option agreements which gave them the right to sell their shares in a Company subsidiary to another subsidiary of the Company at a formula price as provided in the put options, to be not less than an aggregate of $2,000,000. At that time the Company reclassified $2,000,000 from minority interest equity to current portion of long-term obligations. The Company and Mitsui entered into convertible note agreements in May 2002 and July 2002 for the payment of $2,000,000 to Mitsui in connection with the exercise of the put options. In October 2002, the Company and Mitsui amended the terms of these convertible note agreements with respect to $1.3 million of notes originally due September 1, 2002. Under the modified terms, 50% of the principal amount of the Mitsui convertible notes that were due September 1, 2002, plus the accrued interest on such amount, is payable in common shares of the Company based upon a conversion price of $2.85 per share. The Company was required to register the shares for resale and had the right to issue the common shares to Mitsui at any time prior to January 1, 2003. However, interest continues to accrue on these notes at 4.4% until the common shares are issued and the notes are exchanged. The remaining 50% of the principal amount of the Mitsui convertible notes due September 1, 2002, plus accrued interest at 4.4%, was due and payable no later than January 1, 2003. In December 2002, in connection with the Merger Agreement discussed in Note 2 above, Mitsui agreed to extend the payment date for these notes to February 18, 2003 to allow MAPICS and Mitsui time to negotiate revised payment terms suitable to each party. The amended convertible note agreements will provide that, in the event of non-payment, Mitsui has the right to require late payment interest on the unpaid principal and accrue interest at 16% per annum or to convert all of the unpaid principal and accrued interest into common shares of the Company. The price per share for such conversion is the lower of (a) $2.85 or (b) the average of the daily closing price of the Company's common shares for the 30 consecutive trading days preceding January 1, 2003. The Company may repay the Mitsui convertible notes at any time, including the portion exchangeable for common shares of the Company, prior to the issuance of such common shares. For the remaining $700,000 of the Mitsui convertible notes, the principal and accrued interest at 4.4% shall be due and payable in one lump sum payment not later than March 5, 2003. The note is convertible into common shares of the Company at the rate of $12 per share, at the option of Mitsui. In connection with the closing of the proposed merger with MAPICS, the Company anticipates that the Convertible Notes and the Mitsui Convertible Notes will be renegotiated or paid off. Page 9 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, --------------------------- ------------------------ 2002 2001 2002 2001 ---------- ---------- ---------- ------- Numerator for basic and diluted income (loss) per share - net income (loss) $ (3,059) $ (2,894) $ (5,049) $(2,649) ========== ========== ========== ======= Denominator for basic income (loss) per share - weighted average common shares outstanding, including warrants issuable at $0.01 per share in 2002 8,168 7,568 8,168 7,568 Effect of dilutive warrants -- -- -- -- ---------- ---------- ---------- ------- Denominator for diluted income (loss) per share - adjusted weighted average common shares and assumed conversions 8,168 7,568 8,168 7,568 ========== ========== ========== ======= Basic net income (loss) per share $ (0.37) $ (0.38) $ (0.62) $ (0.35) ========== ========== ========== ======= Diluted net income (loss) per share $ (0.37) $ (0.38) $ (0.62) $ (0.35) ========== ========== ========== =======
During the three and six months ended December 31, 2002, 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. Warrants for the purchase of 600,000 shares of the Company's common stock are included in the earnings (loss) per share calculation due to the nominal exercise price of $0.01 per share. During the three and six months ended December 31, 2001, 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 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, 2002, the Company had unamortized intangible assets consisting only of goodwill of $8,287,000. The change in goodwill during the period is due solely to foreign currency adjustment. The Company's amortizable intangible assets include only purchased software. The gross carrying amount of purchased software as of December 31, 2002 was $2,697,000 and accumulated amortization of purchased software was $2,556,000. 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, 2002. 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. Page 10 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, 2002 Total revenue $ 15,139 $ 4,129 $ 2,042 Operating income (loss) before amortization of intangibles (373) (756) (467) Operating income (loss) (768) (756) (467) THREE MONTHS ENDED DECEMBER 31, 2001 Total revenue $ 16,675 $ 4,263 $ 2,368 Operating income (loss) before amortization of intangibles (2,276) 312 (170) Operating income (loss) (2,709) 365 (170) SIX MONTHS ENDED DECEMBER 31, 2002 Total revenue $ 29,391 $ 7,966 $ 4,444 Operating income (loss) before amortization of intangibles (683) (617) (707) Operating income (loss) (1,511) (617) (707) SIX MONTHS ENDED DECEMBER 31, 2001 Total revenue $ 35,603 $ 7,816 $ 4,993 Operating income (loss) before amortization of intangibles (1,232) 507 (80) Operating income (loss) (2,142) 507 (80)
NOTE 7 - SUBSEQUENT EVENTS On January 13, 2003, in connection with the Merger Agreement discussed in Note 2 above, the Company reduced the purchase price of Foothill's warrant to purchase 550,000 shares of the Company's common stock to $2.349009 from $2.85 per share. As a result, the Company also reduced the price at which the Company's Series A Preferred shares convert into common stock to $2.349009 from $2.85 per share. On January 13, 2003, also in connection with the Merger Agreement, all of the holders of Series A Preferred Stock converted their preferred shares for Frontstep common shares at a conversion ratio of 10.2170745 common shares for each preferred share in accordance with the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common shares upon the conversion of the Series A Preferred Stock. In addition, also on January 13, 2003, holders of certain common share warrants issued in connection with the Company's convertible note offering, for the purchase of 600,000 Frontstep common shares with an exercise price of $0.01 per share, exercised their warrants in exchange for the issuance of 600,000 Frontstep common shares. As of the record date, 13,960,615 shares of Frontstep common stock are issued and outstanding and entitled to vote at the February 18, 2003 Frontstep shareholders' meeting. Page 11 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/A for the fiscal year ended June 30, 2002. 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, 2002, as contained in the Annual Report. OVERVIEW Frontstep, Inc. is a leading global provider of software and services for midsize discrete, to-order manufacturers and business units of larger companies. For more than 23 years, Frontstep has helped manufacturers create and implement business solutions -- including extended ERP, customer relationship management, and supply chain management -- that simplify and streamline business processes and operations. Through these innovative and practical solutions, manufacturers can respond better and faster to customers' demands for quality products and services. For the last several years, since the second quarter of fiscal 2000, our industry, and specifically, our Company have experienced (1) dramatic changes in worldwide economic conditions, (2) dramatic changes in our market conditions resulting from a recession in many manufacturing industries and (3) a lessening of information technology spending that is a result of these economic and market conditions. Prior to fiscal 2000, and well before these economic and market changes began to affect our results of operations, we began to enhance our product offerings beyond traditional ERP systems to participate in higher growth market segments. These enhancements included a comprehensive suite of integrated software and services that support (1) the management and resources of an enterprise, (2) customer relationship management and other front office business activities and (3) an enterprise's supply chain management activities. In November 2000, the shareholders of the Company approved a change in the Company's name to Frontstep, Inc. to reflect this transformation in our corporate identity. In July 2002, we achieved the culmination of these efforts with the announcement of SyteLine 7, a new version of our flagship ERP product that fully integrates the Company's efforts in traditional ERP, customer relationship management and supply chain management. Additionally, the release of SyteLine 7 offers our customers a product based on Microsoft SQL Server technology which supports Microsoft's .NET strategy. We believe our strategic efforts to develop this total business system on an industry-standard technology platform greatly expand our market opportunities, increase our potential for a stronger business partner network and will provide better gross margins in the years ahead. However, over the last few years, it has been difficult to manage and predict our revenues due to ever more difficult economic conditions and a lack of demand from manufacturers who have significantly limited their capital spending budgets, especially for information technology investments. This situation has been most severe in North America which has been mired in a recession for nearly two years. We have reacted to these difficult economic and market conditions in several ways. We have accomplished significant reductions in the Company's operating costs and we have completed several financing transactions; each with the intentions of balancing our costs with expected revenues and of ensuring adequate cash to meet our operating needs. In the quarter ended June 30, 2002, we had operating income in excess of $1.0 million, and net income of $457,000 or $0.04 per share. Page 12 In the quarter ended September 30, 2002, we announced the availability of SyteLine 7, our newest release of our flagship ERP package, the first based on Microsoft SQL technology. Although SyteLine 7 has been very well received in the marketplace, we believe that it did have a negative impact on revenue in the September quarter, as we believe customers delayed their buying decision in anticipation of our new product release. As a result of general economic conditions and the impact of our new product release, revenue and operating income fell $1.9 million from the prior quarter ended June 30, 2002. We reported an operating loss of $0.8 million and a net loss of $2.0 million, or $0.24 per share in the September quarter. In the current quarter ended December 31, 2002 (the "current fiscal quarter") we expected revenues would be higher than the revenues reported for the quarter ended September 30, 2002 as a result of seasonal fluctuations and our SyteLine 7 product transition. However, continued severe economic conditions resulted in more limited spending by our customers and potential customers. In addition, our planned merger with MAPICS was announced during the quarter which we believe resulted in numerous decisions by potential customers to wait until the merger is completed before finalizing their spending decisions. As a result, we reported lower revenues in the current fiscal quarter than we had expected and only slightly higher than revenues reported for the September 30, 2002 quarter. We also reported a net loss of $3.1 million or $0.37 per share. Our expectation is for continued difficulty in the economy and a lack of information technology spending in our target manufacturing market. While the economy has, at times, shown signs of improvement over the last several months, we continue to be concerned about our ability to predict revenues in the near term, due to current economic and market conditions. As a result we may not achieve positive operating results in the near future or until economic and technology spending conditions improve. AGREEMENT TO MERGER WITH MAPICS, INC. On November 25, 2002, Frontstep and MAPICS announced that they had entered into a definitive merger agreement pursuant to which MAPICS will acquire Frontstep by merging a wholly owned subsidiary of MAPICS into Frontstep, after which MAPICS will be the sole shareholder of Frontstep. In the merger, each Frontstep shareholder, other than those perfecting dissenters' rights, will receive for each Frontstep common share that the shareholder owns, approximately 0.300846 of a share of MAPICS common stock. Collectively, the Frontstep shareholders will receive in the merger 4,200,000 shares of MAPICS common stock and MAPICS will assume the Company's debt and other liabilities. The merger is intended to qualify as a tax-free reorganization, in which Frontstep shareholders generally would not recognize gain or loss for U.S. federal income tax purposes as a result of the exchange in the merger of Frontstep common shares for MAPICS common stock. The merger is currently expected to close during the first calendar quarter of 2003; however, it remains subject to certain closing conditions, including, but not limited to, the approval of the merger by Frontstep shareholders and the approval of the issuance of shares of MAPICS common stock by the MAPICS shareholders. The MAPICS board of directors has unanimously approved and adopted the merger agreement and determined that the merger agreement and the merger are advisable, fair to, and in the best interests of, MAPICS and its shareholders and has unanimously recommended that MAPICS shareholders vote to approve the issuance of MAPICS common stock in the merger. The Frontstep board of directors has unanimously approved and adopted the merger agreement and determined that the merger agreement and the merger are advisable, fair to, and in the best interests of, Frontstep and its shareholders and has unanimously recommended that Frontstep shareholders vote to adopt the merger agreement and approve the merger. In connection with the merger agreement, Frontstep directors, executive officers and certain shareholders holding approximately 60.90% of the voting power of Frontstep have entered into agreements to vote Frontstep shares held by them in favor of the proposed transaction. Under Ohio law, the transaction must be approved by the holders of at least two-thirds of the voting power of Frontstep. On November 24, 2002, in connection with the proposed merger transaction with MAPICS, Frontstep entered into a letter agreement with Fallen Angel Equity Fund, L.P. and certain entities affiliated with Morgan Stanley. At the time the letter agreement was executed, these entities held all of the outstanding Frontstep Series A Preferred Stock. Page 13 Under the terms of the letter agreement, the holders of the Series A Preferred Stock agreed to accept, at the effective time of the merger and in exchange for their Frontstep shares, a number of shares of MAPICS common stock equal to 25% discount on the Series A Preferred Stock's liquidation preference, based on the average closing price of MAPICS common stock during the period from November 7, 2002 through November 20, 2002. Additionally, under the letter agreement, each holder of the Series A Preferred Stock agreed to: (a) convert its Series A Preferred Stock into Frontstep common shares prior to the record date set for the special meeting of Frontstep's shareholders to vote on the merger agreement, which is a condition to MAPICS' obligation to complete the merger; (b) exercise warrants issued by Frontstep on March 7, 2002 to acquire Frontstep common shares; and (c)cancel, at the closing of the proposed merger, warrants to acquire 453,546 Frontstep common shares issued by Frontstep to the holders of the Series A Preferred Stock on May 10, 2000. Also on November 24, 2002, the Company and Foothill reached certain understandings regarding the proposed merger and the Company's Credit Facility. .. Foothill has agreed that the Company has complied with certain conditions set forth in Section 6.20(a) of the Credit Facility and Sections 13(a)(i) and 13(b)(i) of the Eighth Amendment to the Loan Agreement, dated November 12, 2002. Additionally, Foothill has consented to the Company's execution of the Merger Agreement and to the consummation of the proposed merger provided that upon the effectiveness of the proposed merger, all outstanding obligations under the Credit Facility are paid in full. The consent of Foothill is subject to certain conditions, including but not limited to, closing of the merger no later than April 30, 2003. Frontstep and MAPICS will each hold meetings of their shareholders on February 18, 2003 to obtain approval for the completion of the proposed transaction. The record date for the Frontstep meeting has been set as January 14, 2003. A joint proxy statement-prospectus dated January 16, 2003 to solicit shareholder approval of the proposed transaction, as well as other relevant documents concerning the proposed transaction were mailed to all shareholders of record as of the record date. On January 13, 2003, all of the holders of Series A Preferred Stock converted their preferred shares for Frontstep common shares at a conversion ratio of 10.2170745 common shares for each preferred share in accordance with the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common shares upon the conversion of the Series A Preferred Stock. In addition, also on January 13, 2003, holders of certain common share warrants issued in connection with the Company's convertible note offering, for the purchase of 600,000 Frontstep common shares with an exercise price of $0.01 per share, exercised their warrants in exchange for the issuance of 600,000 Frontstep common shares. As of the record date, 13,960,615 shares of Frontstep common stock are issued and outstanding and entitled to vote at the February 18, 2003 Frontstep shareholders' meeting. Shareholders of MAPICS and Frontstep are urged to read the joint proxy statement-prospectus regarding the proposed transaction and all other relevant documents sent to them with the joint proxy statement-prospectus because they contain important information. Shareholders and interested parties may obtain a free copy of the joint proxy statement-prospectus, as well as other filings containing information about MAPICS and Frontstep, at the SEC's Internet site (HTTP://WWW.SEC.GOV). CRITICAL ACCOUNTING POLICIES The Company's total revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on an annual basis. Revenue is accounted for in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended and interpreted from time to time. License fees revenue is generally recognized when the software product is shipped. Services revenues are recognized as the services are performed. Revenues from maintenance agreements are billed periodically, deferred and recognized straight-line over the term of the agreements. Cost of license fees revenue includes royalties, amortization of capitalized software development costs and software delivery expenses. Cost of service, maintenance and support revenue includes the personnel and related Page 14 overhead costs for implementation, training and customer support services, together with fees paid to third parties for subcontracted services. Selling, general and administrative expenses consist of personnel, facilities and related overhead costs, together with other operating costs of the Company, including advertising and marketing costs. Research and development expenses include personnel and related overhead costs for product development, enhancement, upgrades, quality assurance and testing. The amount of such expenses is dependent on the nature and status of the development process for the Company's products. Development costs capitalized in a given period are dependent upon the nature and status of the development process. Upon general release of a product, related capitalized costs are amortized over three to five years and recorded as license fees cost of revenue. Frontstep's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, capitalized software, intangible assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue recognition. The Company's total revenue is derived primarily from licensing software, providing related services, including installation, implementation, training, consulting and systems integration and providing maintenance and support on an annual basis. Revenue is accounted for in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended and interpreted from time to time. Revenue is derived principally from the sale of internally produced software products and maintenance and support agreements from software sales. Generally, the Company licenses software 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. Bad Debts. A considerable amount of judgment is required when determining the allowance for bad debt, including assessing the probability of collection as well as the credit-worthiness of each customer. The Company has recorded bad debt reserves in recent periods due to recent economic conditions especially as they affect the Company's customer base. The Company may determine in future periods that additional charges must be recorded. Capitalized Software. The Company capitalizes the cost of developing its software products in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalized software is stated at the lower of amortized cost or net realizable value. The Company's judgment is required when determining the net realizable value of its software and any impairment loss could have a material adverse impact on our financial condition and results of operations. Impairment of Intangible Assets. The Company periodically evaluates acquired intangibles for potential Page 15 impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. Contingencies and Litigation. The Company is subject to proceedings, lawsuits and other claims related to ongoing business and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. If an adverse judgment or outcome can be predicted, an accrual in the determined amount is recorded on the Company's general ledger. An accrual may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. The Company is not involved in any actions that currently require an accrual to be recorded. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2001 Revenue. Total revenue decreased $2.0 million, or 8.6%, to $21.3 million in the current fiscal quarter from $23.3 million in the three months ended December 31, 2001 (the "prior year fiscal quarter" or "fiscal 2002 quarter"). The total revenue mix is shown in the table below (in thousands, except percentage data):
THREE MONTHS ENDED DECEMBER 31, ----------------------------------------------- 2002 2001 -------------------- -------------------- License fees revenue $ 6,207 29.1% $ 7,616 32.7% Service revenue 4,748 22.3% 5,197 22.3% Maintenance and support revenue 10,355 48.6% 10,493 45.0% ------- ----- ------- ----- Total revenue $21,310 100.0% $23,306 100.0% ======= ===== ======= =====
License fees revenue decreased 18.5% in the fiscal 2003 quarter from the fiscal 2002 quarter. The Company believes that the decrease in license fees revenue in the fiscal 2003 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. Additionally, the Company believes that its pending merger with MAPICS also caused customers to delay purchasing decisions. 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 8.6% in the fiscal 2003 quarter from the fiscal 2002 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 decreased 1.3% in the fiscal 2003 quarter from the fiscal 2002 quarter. Maintenance and support contracts and the related revenue from these contracts have been steady over the last year as the base of customers under such programs has remained consistent. 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 51.2% for the fiscal 2003 quarter from 50.3% for the fiscal 2002 quarter. Cost of license fees revenue increased $0.6 million, or 17.4%, to $3.9 million in the fiscal 2003 quarter from $3.3 million in the fiscal 2002 quarter and as a percentage of license fees revenue, increased to 62.1% in the fiscal 2003 quarter from 43.1% in the fiscal 2002 quarter. The percentage increase is primarily attributable to lower Page 16 license fees revenue affecting certain fixed and related costs, including the amortization of capitalized software, which has grown in the last year as we completed our development of SyteLine 7. Cost of service, maintenance and support revenue decreased $1.4 million, or 16.4%, to $7.1 million in the fiscal 2003 quarter from $8.5 million in the fiscal 2002 quarter and as a percentage of service and maintenance and support revenue, decreased to 46.8% in the fiscal 2003 quarter from 53.9% in the fiscal 2002 quarter. The decrease is attributable to efforts during the last two years to reduce costs, particularly relating to our services. The percentage decrease is the result of a larger percentage of maintenance revenue, which has a higher margin than services revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $1.4 million, or 11.9%, to $10.6 million in the fiscal 2003 quarter from $12.0 million in the fiscal 2002 quarter. Such expenses as a percentage of total revenue decreased to 49.6% in the fiscal 2003 quarter from 51.5% in the fiscal 2002 quarter. The decrease in costs is attributable to the continued cost saving measures that the Company has been implementing over the past two fiscal years. The Company expects that these costs will further 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 $0.4 million or 12.1% to $2.9 million for the fiscal 2003 quarter from $3.3 million for the fiscal 2002 quarter and decreased as a percentage of total revenue to 13.5% in the fiscal 2003 quarter from 14.2% in the fiscal 2002 quarter. Although total research and development spending decreased from the fiscal 2002 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 $1.4 million during the fiscal 2003 quarter and $1.6 million during the fiscal 2002 quarter. Provision for (Benefit from) Income Taxes. The provision for (benefit from) income taxes for the fiscal 2003 and 2002 quarters reflects an effective tax rate of 1.6% and 0%, 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 assets related to net operating losses incurred domestically, foreign losses incurred in countries where no tax benefits will be received for the losses and the non-deductibility of the amortization of certain intangibles. SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2001 Revenue. Total revenue decreased $6.6 million, or 13.7%, to $41.8 million in the six months ended December 31, 2002 (the "current fiscal six month period") from $48.4 million in the six months ended December 31, 2001 (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, ----------------------------------------------- 2002 2001 -------------------- -------------------- License fees revenue $11,179 26.7% $15,287 31.6% Service revenue 10,096 24.2% 11,383 23.5% Maintenance and support revenue 20,526 49.1% 21,742 44.9% ------- ----- ------- ----- Total revenue $41,801 100.0% $48,412 100.0% ======= ===== ======= =====
License fees revenue decreased 26.9% in the current fiscal six month period from the prior fiscal six month period. The Company believes this reduction in revenue is due primarily to the current economic conditions as discussed above for the three month period. The Company also believes customers' delayed buying decisions are, in some instances, related to our pending merger with MAPICS. 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. Page 17 Service revenue decreased 11.3% 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 in the short-term and will improve in the quarters that follow increased license fee revenues. Maintenance and support revenue decreased 5.6% 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 steady over the last few years as the base of customers under such programs has remained consistent. 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 51.7% for the current fiscal six month period from 47.5% for the prior fiscal six month period. Cost of license fees revenue increased $0.8 million, or 11.7%, to $7.2 million in the current fiscal six month period from $6.5 million in the prior fiscal six month period and as a percentage of license fees revenue, increased to 64.5% in the current fiscal six month period from 42.2% in the prior fiscal six month period. The increase is primarily attributable to increased amortization of capitalized software as a result of the completion of SyteLine 7. The percentage increase is primarily attributable to lower license fees revenue affecting certain fixed and related costs, including the amortization of capitalized software which has grown in the last year as we completed our development of SyteLine 7. Cost of service, maintenance and support revenue decreased $2.1 million, or 12.9%, to $14.4 million in the current fiscal six month period from $16.5 million in the prior fiscal six month period and as a percentage of service, maintenance and support revenue, decreased to 47.0% in the current fiscal six month period from 49.9% in the prior fiscal six month period. The decrease is attributable to our efforts over the last two years to reduce costs, particularly relating to our services. The percentage decrease is due to a higher percentage of maintenance and support revenues which has higher margins than services revenue. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $3.7 million, or 16.1%, to $19.2 million in the current fiscal six month period from $22.8 million in the prior fiscal six month period. Such expenses as a percentage of total revenue decreased to 45.8% in the current fiscal six month period from 47.1% in the prior fiscal six month period. This reduction is due to the continued cost reduction and cost savings efforts undertaken over the past two years. Research and Development. Total research and development expenses, including amounts capitalized, increased $0.1 million or 1.5%, to $6.7 million for the current fiscal six-month period from $6.6 million for the prior fiscal six month period and increased as a percentage of total revenues to 16.0% in the current fiscal six month period from 13.6% in the prior fiscal six month period. 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 $3.6 million during the current fiscal six month period and $3.2 million during the prior fiscal six month period. 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 0.9% and 1.0%, 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, foreign losses incurred in countries where no tax benefits will be received for the losses and the non-deductibility of the amortization of certain intangibles. Page 18 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, 2002, the Company had cash and cash equivalents of $5.0 million and working capital deficit of $7.5 million. During the six months ended December 31, 2002, the Company was $3.9 million cash positive from operating activities. The Company purchased $0.5 million of property and equipment and used $3.6 million in cash for investments in capitalized software. The balance outstanding on the Foothill term note as of December 31, 2002 was $13.8 million. As of December 31, 2002 there were no borrowings under the revolving Credit Facility. As we discussed in "Overview" above, it has been difficult in the last several quarters to manage and predict our revenues for any quarterly period. While customer activity has not diminished recently, economic conditions and industry-wide lack of demand for new investments may cause us to generate less revenue than we expect. If we do not generate sufficient revenue to meet our forecast in any quarter in the current fiscal year, the Company may not be in compliance with one or more of the financial covenants under the Credit Facility. In August 2002, we completed the funding of $3.5 million from the issuance of Convertible Notes. However, we continue to experience difficulties in meeting all of our cash operating needs, due to unpredictability in our revenues and the impact of economic conditions on our customers. If we do not meet our revenue expectations in any quarters in the current fiscal year, we may have further difficulty in meeting our operating cash needs. On November 12, 2002, the Company and Foothill further amended the Credit Facility to provide for, among other things, temporary additional borrowing availability under the revolving credit portion of the Credit Facility and the deferral of certain payments owing under the term loan portion of the Credit Facility. In addition, the amendment further amends the financial covenants. The amendment contains certain covenants relating to the strategic and business plans and objectives of the Company and which permit Foothill to participate in the evaluation of such plans and objectives. Because of the subjective nature of these covenants and the control they provide Foothill over the management of the Company, indebtedness outstanding under the Credit Facility has been characterized as a current liability. Pursuant to the terms of these covenants: (b) The Company has delivered a contingency plan to Foothill reflecting a plan to restructure the business operations of the Company to a level at which the Company's revenues will provide sufficient cash flow to support the business operations of the Company, including its debt service obligations under the Credit Facility. (c) The Company has engaged an investment banking firm to assist the Company in reviewing its strategic and business options. (d) The Company and Foothill have also established certain benchmarks with respect to the evaluation and implementation of available strategic and business options for the Company. If the Company fails to comply with certain of the benchmarks referred to in (c) above, the commitments of Foothill to make advances and issue letters of credit for the account of the Company will terminate and any such advances and/or issuances of letter of credit may be issued by Foothill in its sole and absolute discretion. The non-compliance with the execution and implementation of the strategic plan or option selected pursuant to the terms and conditions of the Credit Facility will constitute an event of default under the Credit Facility. There can be no assurance that we can achieve levels of quarterly revenue sufficient to satisfy our cash flow needs or to meet the financial covenants of the Credit Facility in future periods or that the bank will continue to provide special financing arrangements to support us in meeting our operating cash needs. Additionally, we may not Page 19 be able to obtain other debt or equity financing from other sources. On November 25, 2002, Frontstep and MAPICS announced that they had entered into the Merger Agreement pursuant to which MAPICS will acquire Frontstep. Pursuant to the terms of the Merger Agreement, shareholders of Frontstep, including former holders of the Company's Series A Preferred Stock, will receive, in the aggregate, 4.2 million shares of MAPICS common stock in exchange for all of the outstanding shares and the assumption by MAPICS of the Company's debt and other liabilities. Frontstep shareholders will receive approximately 0.300846 MAPICS shares for each share of Frontstep common stock held as of the effective time of the merger. Closing, which is expected to occur during the first calendar quarter of 2003, remains subject to certain closing conditions including, but not limited to, approval of the acquisition by MAPICS and Frontstep shareholders. In connection with the Merger Agreement, Frontstep officers, directors and certain shareholders, including all former holders of the Series A Preferred Stock, have entered into agreements to vote shares held by them in favor of the proposed transaction. Pursuant to these voting agreements, shareholders expected to hold a majority of the voting shares of Frontstep common stock as of the record date have committed to vote their shares in favor of the transaction. Under Ohio law, the transaction must be approved by the holders of at least two-thirds of the voting power of Frontstep. The proposed merger is intended to qualify as a tax-free reorganization pursuant to Section 368(a) of the Internal Revenue Code On November 24, 2002, the Company and Foothill reached certain understandings regarding the proposed merger and the Company's Credit Facility. Foothill has agreed that the Company has complied with certain conditions set forth in Section 6.20(a) of the Credit Facility and Sections 13(a)(i) and 13(b)(i) of the Eighth Amendment to the Credit Facility, dated November 12, 2002. Additionally, Foothill consented to the Company's execution of the Merger Agreement and to the consummation of the proposed merger provided that upon the effectiveness of the proposed merger, all outstanding obligations under the Credit Facility are paid in full. The consent of Foothill is subject to certain conditions, including but not limited to, closing of the merger no later than April 30, 2003. Frontstep and MAPICS will each hold meetings of their shareholders on February 18, 2003 to obtain approval for the completion of the proposed transaction. The record date for the Frontstep shareholders meeting has been set as January 14, 2003. A joint proxy statement-prospectus dated January 15, 2003 to solicit shareholder approval of the proposed transaction, as well as other relevant documents concerning the proposed transaction were mailed to all Frontstep shareholders of record as of the record date. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange. Frontstep's revenues originating outside of North America were 29% and 28% of total revenue for the current and prior year fiscal quarters, respectively and 30% and 26% for the current and prior fiscal six month periods, respectively. By geographic region, revenues originating in Europe were 19% and 18% of total revenue for the current and prior year fiscal quarters, respectively and 19% and 16% for the current and prior fiscal six month periods, respectively. Revenues originating in Asia Pacific were 10% of total revenue for both the current and prior year fiscal quarters, respectively and 11% and 10% for the current and prior fiscal six month periods, respectively. 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. Page 20 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. ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. (b) Changes in internal controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 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. On November 12, 2002, in connection with an amendment of the Credit Facility with Foothill, the Company agreed to reduce the purchase price of Foothill's warrants to purchase 550,000 common shares of the Company to $2.85 per share from $3.36 per share. In relation to this amendment the Company also agreed to reduce the price at which shares of the Company's Series A Preferred Stock convert into common shares of the Company to $2.85 per share from $6.00 per share. On January 13, 2003, in connection with the Merger Agreement discussed in Note 2 above, the Company reduced the purchase price of Foothill's warrant to purchase 550,000 common shares of the Company to $2.349009 from $2.85 per share. As a result, the Company also reduced the price at which the Company's Series A Preferred Stock convert into common stock to $2.349009 from $2.85 per share. On January 13, 2003, also in connection with the Merger Agreement, all of the holders of Series A Preferred Stock converted their preferred shares for Frontstep common shares at a conversion ratio of 10.2170745 common shares for each preferred share in accordance with the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common shares upon the conversion of the Series A Preferred Stock. In addition, also on January 13, 2003, holders of certain common share warrants issued in connection with the Company's convertible note offering, for the purchase of 600,000 Frontstep common shares with an exercise price of $0.01 per share, exercised their warrants in exchange for the issuance of 600,000 Frontstep common shares. The 600,000 shares of Frontstep common stock issued upon exercise of the warrants are not registered shares and will be subject to certain trading restrictions. The 600,00 shares of unregistered Frontstep common stock were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, and Rule 506 promulgated under the Act. Page 21 As of the record date, 13,960,615 shares of Frontstep common stock are issued and outstanding and entitled to vote at the February 18, 2003 Frontstep shareholders' meeting. 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. The Company filed a current report on Form 8-K on November 6, 2002 indicating under Item 5 (Other Events) that the Company was restating its Statements of Operations and its Balance Sheets for the years ended June 30, 2001 and 2002 to reflect a change in accounting for a specific portion of its annual revenues for each of its fiscal years ended June 30, through June 30, 2002. This restatement did not have a material effect on our reported results for any of our recent fiscal years. The Company filed an amended Form 10-K with the Securities and Exchange Commission in December 2002 for the year ended June 30, 2002 to fully restate the financial statements presented therein. On November 26, 2002, the Company filed a Current Report on Form 8-K indicating under Item 5. (Other Events) that the Company and MAPICS, Inc. had entered into a definitive merger agreement pursuant to which MAPICS will acquire Frontstep. The Company also included as exhibits to this Current Report on Form 8-K certain of the documents executed by the parties, including the Merger Agreement. Page 22 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 13, 2003 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 23 CERTIFICATIONS I, Stephen A. Sasser, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Frontstep, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 13, 2003 By: /s/ STEPHEN A. SASSER ---------------------------------------- Stephen A. Sasser President and Chief Executive Officer Page 24 I, Daniel P. Buettin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Frontstep, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 13, 2003 By: /s/ DANIEL P. BUETTIN ------------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer and Secretary, Principal Financial and Accounting Officer Page 25 INDEX TO EXHIBITS
Exhibit No. Description Page - ----------- ----------- ---- 2(a) Agreement and Plan of Merger dated Incorporated herein by reference to November 24, 2002 by and among Exhibit 2(a) to Registrant's MAPICS, Inc., Frontstep, Inc. and Current Report on From 8-K filed on FP Acquisition Sub, Inc. November 26, 2002 (File No. 0-19024) 10(a) Amendment to Convertible Incorporated herein by reference to Subordinated Note Agreement, dated Exhibit 10(a) to Registrant's as of September 16, 2002, by and Quarterly Report on From 10-Q for between Frontstep Solutions Group, the fiscal quarter ended September Inc. and MVC Corporation 30, 2002 (File No. 0-19024) 10(b) Amendment to Convertible Incorporated herein by reference to Subordinated Note Agreement, dated Exhibit 10(b) to Registrant's as of September 16, 2002, by and Quarterly Report on From 10-Q for between Frontstep Solutions Group, the fiscal quarter ended September Inc. and Mitsui & Co., Asia 30, 2002 (File No. 0-19024) Investment Ltd. 10(c) Seventh Amendment to Loan and Incorporated herein by reference to Security Agreement dated as of Exhibit 10(c) to Registrant's September 30, 2002 with Foothill Quarterly Report on From 10-Q for Capital Corporation, as the the fiscal quarter ended September arranger and administrative agent 30, 2002 (File No. 0-19024) for the Lenders 10(d) Eighth Amendment to Loan and Incorporated herein by reference to Security Agreement dated as of Exhibit 10(d) to Registrant's November 12, 2002 with Foothill Quarterly Report on From 10-Q for Capital Corporation, as the the fiscal quarter ended September arranger and administrative agent 30, 2002 (File No. 0-19024) for the Lenders 10(e) Amendment No. 1 dated November 12, Incorporated herein by reference to 2002 to Amended and Restated Common Exhibit 10(e) to Registrant's Share Purchase Warrant, dated Quarterly Report on From 10-Q for November 15, 2001, issued to the fiscal quarter ended September Foothill Capital Corporation 30, 2002 (File No. 0-19024) 10(f) Ninth Amendment to Loan and Filed herein Security Agreement dated as of December 18, 2002 with Foothill Capital Corporation, as the arranger and administrative agent for the Lenders 10(g) Agreement and Plan of Merger dated Incorporated herein by reference to November 24, 2002 by and among Exhibit 2(a) to Registrant's MAPICS, Inc., Frontstep, Inc. and Current Report on From 8-K filed on FP Acquisition Sub, Inc. November 26, 2002 (File No. 0-19024)
Page 26
Exhibit No. Description Page - ----------- ----------- ---- 10(h) Form of Shareholder Agreement dated Incorporated herein by reference to November 24, 2002 by and among Exhibit 2(b) to Registrant's MAPICS, Inc., Frontstep Inc. and Current Report on From 8-K filed on certain Frontstep shareholders and November 26, 2002 (File No. affiliates 0-19024) 10(i) List of Shareholders executing the Incorporated herein by reference to Shareholders Agreement Exhibit 2(c) to Registrant's Current Report on From 8-K filed on November 26, 2002 (File No. 0-19024) 10(j) Letter agreement dated November 24, Incorporated herein by reference to 2002 between Frontstep, Inc. and Exhibit 2(d) to Registrant's the holders of the Series A Current Report on From 8-K filed on Preferred Stock November 26, 2002 (File No. 0-19024) 99(a) Certificates of Chief Executive Filed herein Officer and Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 27 EX-10.F 3 l98896aexv10wf.txt EX-10(F) Exhibit 10(f) NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT NINTH AMENDMENT dated as of December 18, 2002 (this "Amendment") to the LOAN AND SECURITY AGREEMENT dated as of July 17, 2001, as amended by the First Amendment dated as of November 15, 2001, the Second Amendment dated as of February 14, 2002, the Third Amendment dated as of May 13, 2002, the Fourth Amendment dated as of July 9, 2002, the Fifth Amendment dated as of July 31, 2002, the Sixth Amendment, dated as of September 10, 2002, the Seventh Amendment, dated as of September 30, 2002 and the Eighth Amendment, dated as of November 24, 2002 (as so amended, the "Loan Agreement"), 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 and the Agent, on behalf of the Lenders, wish to amend the Loan Agreement to correct certain inconsistencies. 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. Letter of Credit Usage Limit. Section 2.12(a)(ii) of the Loan Agreement is hereby amended by deleting the dollar figure "$2,000,000" set forth therein and substituting therefor the dollar figure "$1,500,000". 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. Conditions. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions have been satisfied being herein called the "Amendment Effective Date"): (a) Representations and Warranties; No Event of Default. The representations and warranties contained herein, in Section 5 of the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Agent and the Lenders pursuant hereto on or prior to the Amendment Effective Date shall be correct in all material respects on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date), and no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms, unless any such Event of Default has previously been waived in accordance with Section 15 of the Loan Agreement. (b) Delivery of Documents. The Agent shall have received on or before the Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Agent and, unless indicated otherwise, dated the Amendment Effective Date: (i) counterparts of this Amendment, duly executed by the Borrowers and the Agent; and (ii) such other agreements, instruments, approvals, opinions and other documents as the Agent may reasonably request. 5. Representations and Warranties. Each of the Borrowers represent and warrant as follows: (a) Except as previously disclosed in writing to the Agent: (i) the representations and warranties made by such Borrower herein, in the Loan Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders on or prior to the Amendment Effective Date shall be correct and accurate on and as of the Amendment Effective Date as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date in which case such representations and warranties shall be true and correct on and as of such date); and (ii) no Default or Event of Default shall have occurred and be continuing on the Amendment Effective Date or would result from this Amendment becoming effective in accordance with its terms. (b) Each of the Borrowers (i) is a corporation, duly organized, validly existing and in good standing under the laws of its state of organization, (ii) has all requisite power and authority to execute, deliver and perform this Amendment, and to perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction where the failure to be so qualified and in good standing reasonably could be expected to have a Material Adverse Change. (c) The execution, delivery and performance by each Borrower of this Amendment, and the performance by each such Borrower of the Loan Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene such Borrower's charter or by-laws, any applicable law or any contractual restriction binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any lien or other encumbrance (other than pursuant to any Loan Documents) upon or with respect to any of its properties, and (iv) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. 2 (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. 6. 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 or if Borrowers fail to perform any covenant contained in this Amendment. 7. 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. 8. 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. 3 (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. 9. 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] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. FRONTSTEP, INC. an Ohio corporation By: /s/ DANIEL P. BUETTIN -------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP SOLUTIONS GROUP, INC. an Ohio corporation By: /s/ DANIEL P. BUETTIN -------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FRONTSTEP CANADA, INC. an Ontario corporation By: /s/ DANIEL P. BUETTIN -------------------------------------- Name: Daniel P. Buettin Title: Vice President and Chief Financial Officer FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ TRENT A. SMART -------------------------------------- Name: Trent A. Smart Title: Vice President 5 ANNEX I SCHEDULE C-1 COMMITMENTS
=================================================================================================== REVOLVER TERM LOAN A TERM LOAN B TERM LOAN C TOTAL LENDER COMMITMENT COMMITMENT COMMITMENT COMMITMENT COMMITMENT - --------------------------------------------------------------------------------------------------- Foothill Capital $1,500,000 $15,000,000 $900,000 $650,000 $18,050,000 Corporation - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- All Lenders $1,500,000 $15,000,000 $900,000 $650,000 $18,050,000 ===================================================================================================
6 EX-99.A 4 l98896aexv99wa.txt EX-99(A) EXHIBIT 99(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF FRONTSTEP, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report of Frontstep, Inc. (the "Company") on Form 10-Q for the year ended December 31, 2002, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ STEPHEN A. SASSER ------------------------------------- Stephen A. Sasser President and Chief Executive Officer Date: February 13, 2003 ---------------------------------------------------- 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 for the year ended December 31, 2002, as filed with the Securities and Exchange Commission (the "Report"). The undersigned, in the capacities and on the date indicated below, hereby certifies that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. By: /s/ DANIEL P. BUETTIN ------------------------------------------ Daniel P. Buettin Vice President, Finance, Chief Financial Officer And Secretary, Principal Financial and Accounting Officer Date: February 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----