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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 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
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FRONTSTEP, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1083175
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2800 CORPORATE EXCHANGE DRIVE 43231
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
(614) 523-7000
(Registrant's telephone number, including area code)
NOT APPLICABLE.
(Former name, former address and former fiscal year,
if changed since last report)
-------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of May 13, 2002, there were 7,568,218 of the registrant's common shares,
without par value, outstanding.
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FRONTSTEP, INC. AND SUBSIDIARIES
FISCAL YEAR 2001 FORM 10-K/A AND ANNUAL REPORT
This Quarterly Amendment No 1 to Form 10-Q/A ("Form 10-Q/A") amends Item 1, 2
and 3 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
including the consolidated financial statements therein, that was originally
filed on April 13, 2002.
As described in Note 2 to consolidated financial statements, a restatement has
been made to correct the previously reported financial results due to an
isolated error in third-party software used by the Company which affected the
timing of recognition of revenue from renewals of the Company's maintenance and
support contracts. This amendment does not otherwise update the other
information in the originally filed form 10-Q to reflect events after the
original filing date.
FRONTSTEP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and June 30, 2001...................3
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended
March 31, 2002 and 2001..........................................................................4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
March 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...........16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................23
Item 2. Changes in Securities and Use of Proceeds.......................................................23
Item 3. Defaults Upon Senior Securities.................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.............................................24
Item 5. Other Information...............................................................................24
Item 6. Exhibits and Reports on Form 8-K................................................................24
SIGNATURES....................................................................................................25
EXHIBIT INDEX................................................................................................ 27
Page 2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRONTSTEP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, JUNE 30,
2002 2001
----------------- ------------
RESTATED
(UNAUDITED) RESTATED
ASSETS
Current assets:
Cash and cash equivalents $ 3,942 $ 1,512
Trade accounts receivable, net 26,206 31,446
Prepaid expenses 5,639 3,756
Income taxes receivable 1,146 47
Deferred income taxes 2,807 2,026
Inventories 535 738
Other current assets 254 979
------------ ------------
40,529 40,504
Capitalized software, net 15,655 15,094
Goodwill, net 7,883 7,911
Property and equipment, net 5,543 7,646
Other assets 1,155 1,438
------------ ------------
Total assets $ 70,765 $ 72,593
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,231 $ 15,610
Deferred revenue 17,036 20,278
Income taxes payable -- -
Current portion of long-term obligations 7,039 1,967
------------ ------------
37,306 37,855
Noncurrent liabilities:
Long-term debt 10,867 8,337
Deferred income taxes 3,595 2,891
Other 97 405
------------ ------------
14,559 11,633
------------ ------------
Minority interest 105 2,102
Shareholders' equity:
Series A Convertible Participating Preferred Stock, no par value; 1,000,000
shares authorized; 566,933 shares issued and outstanding at March 31, 2002
and June 30, 2001; liquidation preference $13,606,392 10,865 10,865
Common stock; no par value; 20,000,000 shares authorized; 7,872,418 shares
issued at March 31, 2002 and June 30, 2001, respectively, at stated capital
amounts of $0.01 per share 79 79
Additional paid-in capital 39,341 37,470
Treasury stock, at cost; 304,200 shares (1,320) (1,320)
Retained earnings (deficit) (26,704) (22,773)
Accumulated other comprehensive loss (3,466) (3,318)
------------ ------------
18,795 21,003
------------ ------------
Total liabilities and shareholders' equity $ 70,765 $ 72,593
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
FRONTSTEP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
RESTATED RESTATED
(UNAUDITED) (UNAUDITED)
Revenue:
License fees $ 7,482 $10,724 $ 26,177 $39,790
Service 5,589 7,154 16,972 23,148
Maintenance and support 8,661 8,456 26,881 25,317
------------ ------------ ------------ ------------
Total revenue 21,732 26,334 70,030 88,255
Cost of revenue:
License fees 4,125 6,537 12,796 16,471
Service, maintenance and support 6,745 10,192 20,997 29,600
------------ ------------ ------------ ------------
Total cost of revenue 10,870 16,729 33,793 46,071
------------ ------------ ------------ ------------
Gross margin 10,862 9,605 36,237 42,184
Operating expenses:
Selling, general and administrative 10,050 20,388 32,868 48,642
Research and development 1,657 3,737 5,060 10,926
Amortization of acquired intangibles 433 828 1,343 2,496
Restructuring and other charges - 580 - 2,743
------------ ------------ ------------ ------------
Total operating expenses 12,140 25,533 39,271 64,807
------------ ------------ ------------ ------------
Operating income (loss) (1,278) (15,928) (3,034) (22,623)
Other expense, net (683) (258) (1,591) (307)
------------ ------------ ------------ ------------
Loss before income taxes (1,961) (16,186) (4,625) (22,930)
Benefit from income taxes (719) - (693) (2,063)
------------ ------------ ------------ ------------
Net loss $ (1,242) $ (16,186) $ (3,932) $ (20,867)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.16) $ (2.14) $ (0.52) $ (2.77)
============ ============ ============ ============
Diluted $ (0.16) $ (2.14) $ (0.52) $ (2.77)
============ ============ ============ ============
Shares used in computing per share amounts:
Basic 7,568 7,563 7,568 7,524
Diluted 7,568 7,563 7,568 7,524
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
FRONTSTEP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
------------ ------------
RESTATED
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(3,932) $(20,867)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 2,344 3,129
Amortization 4,694 5,500
Restructuring and other charges - 2,743
Deferred income taxes (1,105) (2,146)
Write-off of capitalized software - 1,913
Changes in operating assets and liabilities, net of restructuring and other
charges:
Accounts receivable 6,250 4,569
Prepaid expenses and other assets (1,929) (1,075)
Accounts payable and accrued expenses (1,100) (1,287)
Deferred revenue (3,243) (493)
Income taxes payable/receivable 570 2,215
------------ ------------
Net cash provided by (used in) operating activities 2,549 (5,799)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (316) (3,362)
Additions to capitalized software (5,178) (3,738)
Purchase of subsidiaries, net of acquired cash - -
------------ ------------
Net cash used in investing activities (5,494) (7,100)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - 253
Proceeds from long-term obligations 53,605 53,946
Payments on long-term obligations (48,002) (52,122)
------------ ------------
Net cash provided by financing activities 5,603 2,077
Effect of exchange rate changes on cash (228) 168
------------ ------------
Net decrease in cash and cash equivalents 2,430 (10,654)
Cash and cash equivalents at beginning of period 1,512 11,868
------------ ------------
Cash and cash equivalents at end of period $ 3,942 $ 1,214
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
FRONTSTEP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 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 nine months ended March 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 for the year ended June 30, 2001 ("Annual Report"). The
results of operations for the three and nine months ended March 31, 2002 are not
necessarily indicative of the results to be expected for a full year.
Comprehensive Income. The only item in addition to net income that is
included in comprehensive income is the foreign currency translation adjustment.
Comprehensive income (loss) for the three and six months ended March 31, 2002
and 2001 is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
RESTATED RESTATED
Net loss $(1,242) $(16,186) $(3,932) $(20,867)
Foreign currency translation adjustment, net of taxes (147) (725) (148) (1,121)
------------- ------------- ------------- --------------
Comprehensive loss, net of taxes $(1,389) $(16,911) $(4,080) $(21,988)
============= ============= ============= ==============
Minority Interest. In June 1998, Frontstep Computer Systems (Singapore)
Pte, Ltd, a wholly-owned subsidiary of the Company, sold previously un-issued
shares of common stock (representing a 13.3% interest in that subsidiary) for
$2,000,000 to an investor not affiliated with the Company. No gain or loss was
recognized on the sale of the subsidiary stock.
The Company and the minority interest investors also entered into a put
option agreement which provided that during a six month period commencing
September 1, 2001, the minority interest investors had the right to put their
shares in the subsidiary to the Company at a formula price as provided in the
put option agreement, not to be less than $2,000,000. The minority interest in
the subsidiary was adjusted to its expected redemption value each period as a
credit or charge to income until the put was exercised or the redemption period
expired.
As of March 31, 2002 the Company had re-classified $2,000,000 from minority
interest to current liabilities, current portion of long-term obligations,
because the minority interest investors exercised their put option rights. The
Company and minority interest investors are currently negotiating the final
terms of payment of the amount due. However, the Company anticipates the payment
will be due with accrued interest by September 1, 2002.
Page 6
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements and related notes. Actual results could differ
from those estimates.
NOTE 2 - RESTATEMENT
The Company is restating its financial statements for the nine-months ended
March 31, 2002 (the "Restatement"). The Restatement is being made to correct the
previously reported financial results due to an isolated error in third-party
software used by the Company which affected the timing of recognition of revenue
from renewals of the Company's maintenance and support contracts during those
reported periods.
The Company uses certain third-party software to calculate and account for
revenues from renewals of its maintenance and support services contracts. The
error, which was isolated and occurred only in a certain specific process,
caused affected billing records to accelerate the timing of recognition of
revenue, and consequently understate the amount of deferred revenue to be
recognized in subsequent periods. Due to the limited number of records affected,
the error was difficult to detect. After detection by Company personnel in July
2002, the third-party software provider identified the nature of the error and
assisted the Company in determining which maintenance and support records had
been affected. The error was associated with a specific version of the software
and affected only the period from July 2000 to March 2002. The Company had
already installed a newer version of the software which properly accounts for
revenue recognition in the specific affected process.
For the nine months ended March 31, 2002, this restatement will reduce
revenue by $427,000 or 0.6% of the previously reported revenue of $70,457,000.
This decrease in revenue will increase the reported net loss for the nine-month
period by 427,000 or 12.2% of the previously reported net loss of $3,505,000.
The balance sheet account entitled Deferred revenue will increase as of March
31, 2002 by $1,637,000 or 10.6% from the previously reported balance of
$15,398,000.
For the year ended June 30, 2001, this restatement reduced revenue by
$1,210,000 or 1.0% of the previously reported revenue of $118,286,000. This
decrease in revenue will increase the reported net loss for the year by
$1,210,000 or 4.9% of the previously reported net loss of $24,854,000. The
balance sheet account entitled Deferred revenue will increase as of June 30,
2001 by $1,210,000 or 6.3% from the previously reported balance of $19,067,000.
The correction of the error by reporting period is presented in the table
and accompanying financial statements below (in thousands):
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
TOTAL REVENUE ADJUSTMENT TOTAL NET INCOME NET INCOME
AS PREVIOUSLY OF REVENUE REVENUE, AS (LOSS), AS (LOSS), AS
REPORTED ADJUSTED PREVIOUSLY ADJUSTED
REPORTED
REPORTING PERIOD
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended September 30, 2000 $28,033 $32 $28,065 $(3,549) $(3,517)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended December 31, 2000 $34,063 $(207) $33,856 $(957) $(1,164)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended March 31, 2001 $27,172 $(838) $26,334 $(15,348) $(16,186)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended June 30, 2001 $29,018 $(197) $28,821 $(5,000) $(5,197)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Year ended June 30, 2001 $118,286 $(1,210) $117,076 $(24,854) $(26,064)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended September 30, 2001 $24,918 $53 $24,971 $144 $197
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended December 31, 2001 $23,515 $(188) $23,327 $(2,699) $(2,887)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Quarter ended March 31, 2002 $22,024 $(292) $21,732 $(950) $(1,242)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Nine-months ended March 31, 2002 $70,457 $(427) $70,030 $(3,505) $(3,932)
- ------------------------------------------ ---------------- -------------- --------------- -------------- --------------
Page 7
FRONTSTEP, INC.
QUARTER ENDED MARCH 31, 2002
(all numbers in 000's except per share data)
Three Months Ended
March 31,
------------------ --------------
2002 2002
------------------ --------------
As Reported As Restated
------------------ --------------
Revenue:
License fees $ 7,482 7,482
Services 5,589 5,589
Maintenance and support 8,953 8,661
------------------ --------------
Total revenue 22,024 21,732
Cost of revenue:
License fees 4,125 4,125
Service, maintenance and support 6,745 6,745
------------------ --------------
Cost of revenue 10,870 10,870
------------------ --------------
Gross margin 11,154 10,862
Operating expenses:
Selling, general and administrative 10,050 10,050
Research and product development 1,657 1,657
Amortization of intangibles 433 433
Restructuring and other charges - -
------------------ --------------
Total operating expenses 12,140 12,140
------------------ --------------
Operating income (loss) (986) (1,278)
Other income (expense), net (683) (683)
------------------ --------------
Income (loss) before income taxes (1,669) (1,961)
Provision for income taxes (719) (719)
------------------ --------------
Net income (loss) $ (950) (1,242)
================== ==============
Shares outstanding 7,568 7,568
================== ==============
EPS $ (0.13) $ (0.16)
================== ==============
Nine Months Ended
March 31,
---------------- ---------------
2002 2002
---------------- ---------------
As Reported As Restated
---------------- ---------------
Revenue:
License fees $ 26,177 26,177
Services 16,972 16,972
Maintenance and support 27,308 26,881
---------------- ---------------
Total revenue 70,457 70,030
Cost of revenue:
License fees 12,796 12,796
Service, maintenance and support 20,997 20,997
---------------- ---------------
Cost of revenue 33,793 33,793
---------------- ---------------
Gross margin 36,664 36,237
Operating expenses:
Selling, general and administrative 32,868 32,868
Research and product development 5,060 5,060
Amortization of intangibles 1,343 1,343
Restructuring and other charges -- --
---------------- ---------------
Total operating expenses 39,271 39,271
---------------- ---------------
Operating income (loss) (2,607) (3,034)
Other income (expense), net (1,591) (1,591)
---------------- ---------------
Income (loss) before income taxes (4,198) (4,625)
Provision for income taxes (693) (693)
---------------- ---------------
Net income (loss) (3,505) (3,932)
================ ===============
Shares outstanding $ 7,568 7,568
================ ===============
EPS $ (0.46) $ (0.52)
================ ===============
Page 8
FRONTSTEP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
MARCH 31, MARCH 31,
2002 2002
------------------------------------------------
AS PREVIOUSLY
AS RESTATED REPORTED
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $3,942 $3,942
Trade accounts receivable, net 26,206 26,206
Prepaid expenses 5,639 5,639
Income tax receivable 1,146 1,146
Deferred income taxes 2,807 2,807
Inventories 535 535
Other current assets 254 254
-------------------- -------------------
40,529 40,529
Capitalized software, net 15,655 15,655
Intangibles, net 7,883 7,883
Equipment and improvements, net 5,543 5,543
Deposits and other assets 1,155 1,155
-------------------- -------------------
Total assets $70,765 $70,765
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $13,231 $13,231
Deferred revenue 17,036 15,398
Current portion of long-term obligations 7,039 7,039
-------------------- -------------------
37,306 35,668
Noncurrent liabilities:
Long-term obligations 10,867 10,867
Deferred income taxes 3,595 3,595
Other 97 97
-------------------- -------------------
14,559 14,559
Minority interest 105 105
Shareholders' equity:
Preferred stock 10,865 10,865
Common stock 79 79
Additional paid-in capital 39,341 39,341
Common stock in treasury, at cost (1,320) (1,320)
Retained earnings (deficit) (26,704) (25,066)
Accumulated other comprehensive loss (3,466) (3,466)
-------------------- -------------------
18,795 20,433
-------------------- -------------------
Total liabilities and shareholders' equity $70,765 $70,765
==================== ===================
Page 9
FRONTSTEP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- ----------------------------------
2002 2002 2001 2001
------------- ----------------- ------------------- -------------
As Previously As Previously
As Restated Reported As Restated Reported
------------- ------------- ----------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,932) $ (3,505) $ (20,867) $(19,854)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 2,344 2,344 3,129 3,129
Amortization 4,694 4,694 5,500 5,500
Restructuring and other charges -- -- 10,656 10,656
Deferred income taxes (1,105) (1,105) (2,146) (2,146)
Write-off of capitalized software -- --
Changes in operating assets and liabilities, net of
restructuring and other charges:
Accounts receivable 6,250 6,250 (1,431) (1,431)
Prepaid expenses and other assets (1,929) (1,929) (1,075) (1,075)
Accounts payable and accrued expenses (1,100) (1,100) (1,287) (1,287)
Deferred revenue (3,243) (3,670) (493) (1,506)
Income taxes payable/receivable 570 570 2,215 2,215
------------- ----------------- ------------------- ------------
Net cash used in operating activities 2,549 2,549 (5,799) (5,799)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (316) (316) (3,362) (3,362)
Additions to capitalized software (5,178) (5,178) (3,738) (3,738)
------------- ----------------- ------------------- ------------
Net cash used in investing activities (5,494) (5,494) (7,100) (7,100)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net -- -- 253 253
Proceeds from long-term obligations 53,605 53,605 53,946 53,946
Payments on long-term obligations (48,002) (48,002) (52,122) (52,122)
------------- ----------------- ------------------- ------------
Net cash provided by financing activities 5,603 5,603 2,077 2,077
Effect of exchange rate changes on cash (228) (228) 168 168
------------- ----------------- ------------------- ------------
Net increase (decrease) in cash and cash equivalents 2,430 2,430 (10,654) (10,654)
Cash and cash equivalents at beginning of period 1,512 1,512 11,868 11,868
------------- ----------------- ------------------- ------------
Cash and cash equivalents at end of period $ 3,942 $ 3,942 $ 1,214 $ 1,214
============= ================= =================== ============
Page 10
NOTE 3 - LONG-TERM DEBT
In July 2001, the Company executed a new credit facility (the "Credit
Facility") with Foothill Capital Corporation ("Foothill"). The Credit Facility
includes a $15,000,000, three-year term note and a $10,000,000 revolving credit
facility. Availability under the Credit Facility is based on and secured by
qualifying accounts receivable originating within the United States and Canada.
The revolving credit facility bears interest either at the Federal Funds rate
plus 1.5%, or at the Eurodollar market rate plus 3.0%. The term note bears
interest at the rate of 10.5% plus 1.5% per annum added to principal. The term
note is payable in monthly installments commencing October 1, 2001. The Credit
Facility is subject to customary terms and conditions and includes financial
covenants for maintenance of a minimum tangible net worth, a minimum level of
earnings before interest, taxes, depreciation and amortization and a maximum
ratio of debt to earnings before interest, taxes, depreciation and amortization.
The proceeds from the Credit Facility were used to repay, in full, the Company's
revolving credit facility with PNC Bank, National Association.
In connection with the Credit Facility, Foothill was granted a warrant to
purchase 550,000 of the Company's common shares priced at the current market
price at closing of the transaction ($3.36 per share), which expire in July
2006. The warrant is subject to certain anti-dilution provisions as defined in
the warrant agreement. The relative fair value of the warrant, $1,276,000, was
recorded as a debt discount and is being amortized as interest expense over the
three-year term of the Credit Facility. As of March 31, 2002, the unamortized
balance of the debt discount was $957,000.
In connection with the grant of the warrants to Foothill as discussed
above, and pursuant to the contractual terms of the warrant agreement associated
with the private placement of preferred shares by the Company in fiscal 2000,
the original exercise price of $15.00 per share for the existing warrants to
purchase 453,546 common shares of the Company issued in fiscal 2000 was adjusted
to $3.36 per share. Because this change in price was due to contractual
provisions already in place at the inception of the arrangement, there is no
impact on the Company's financial statements.
On November 9, 2001, the Company and Foothill amended the Credit Facility
to allow for temporary increased borrowing capacity through January 31, 2002.
Also as part of the amendment, all financial covenants were modified to give
account to the current economic conditions affecting the Company. The
modification of the financial covenants was effective starting as of September
29, 2001.
On February 14, 2002, the Company and Foothill amended the Credit Facility,
again due to economic conditions affecting the Company. The amendment provides
the Company with certain additional borrowing availability on a temporary basis
until July 15, 2002 and allows the Company to defer principal payments due under
the primary term note for a six-month period commencing in January 2002. Also,
the financial covenants were modified to reflect the current economic
environment. Fees associated with the amendment to the credit facility of
$900,000 have been recorded in current portion of long-term obligations, are
payable in nine installments commencing July 2002 and are being amortized as
interest expense over the remaining life of the credit facility.
As of March 31, 2002, the Company was not in compliance with certain
financial covenants under the Credit Facility as a result of its reported losses
for the three months ended March 31, 2002. The noncompliance does not relate to
any payment due under the Credit Facility. On May 13, 2002, effective as of
March 29, 2002, the Company and Foothill amended the Credit Facility to waive
the conditions of noncompliance and to reset the related financial covenants as
of March 31, 2002 and for the remainder of the Company's fiscal year.
NOTE 4 - RESTRUCTURING AND OTHER CHARGES
Fiscal 2001 Restructuring. In April 2001, the Company commenced a broad
restructuring plan to reduce operating costs by reducing its worldwide workforce
by approximately 20%, or 162 employees, all of which were direct employees
involved in all aspects of the Company's business, both domestic and
international; discontinuing certain product development and other non-essential
activities, including terminating activities related to its SyteCentre product
and exiting certain license agreements; and closing certain office facilities in
Arizona, California, Canada and Asia.
As a result of this restructuring plan, the Company recorded pre-tax
restructuring and other charges of $580,000 and $3,660,000 in the three months
ended March 31, 2001 and June 30, 2001, respectively.
Page 11
The following table displays a roll-forward of the accruals established for
the restructuring and other charges from the announcement of the plan to March
31, 2002 (in thousands):
(IN THOUSANDS) INITIAL AMOUNTS ACCRUAL AMOUNTS AMOUNTS ACCRUAL
CHARGE USED IN BALANCE RECLASSIFIED USED IN AT MARCH
FISCAL AT JUNE IN 2002 FISCAL 31, 2002
2001 30, 2001 2002
---------- ---------- ----------- ----------- ---------- ----------
Termination costs related to
employees $ 2,182 $ 1,770 $ 412 $ 723 $ 570 $ 565
Exit costs:
Facility closure costs 1,158 280 878 (248) 222 408
Contract termination
liabilities 900 120 780 (475) 215 90
---------- ---------- ----------- ----------- ---------- ----------
Total $ 4,240 $ 2,170 $ 2,070 $ 0 $ 1,007 $ 1,063
========== ========== =========== =========== ========== ==========
The amounts used of $1,007,000 and $2,170,000 in fiscal 2002 and 2001,
respectively, reflects cash payments of $3,097,000 and non-cash charges of
$80,000. During fiscal 2002, the Company reclassified estimated amounts
previously allocated in the restructuring reserve, as noted in the above chart,
to reflect the actual amounts needed for each category. The remaining accrual of
$1,063,000, which is included in accounts payable and accrued expenses,
represents cash payments to be made over the course of remaining contracts
through 2004.
In relation to this restructuring plan, the Company wrote-off certain
accounts receivable amounting to $6,840,000 in the quarter ended March 31, 2001,
which is presented in the Statement of Operations in Operating expenses:
Selling, general and administrative. Also, in relation to the restructuring
plan, the Company wrote-off other non-performing assets amounting to $1,913,000
in the quarter ended March 31, 2001, which is presented in the Statement of
Operations in Cost of revenue: License fees. The accounts receivable write-offs
were recorded to reflect accounts deemed to be uncollectible due to economic and
other situations that occurred subsequent to the recording of the sales related
to those receivables. The non-performing assets are no longer in use and were
completely written off.
Fiscal 2000 Restructuring. In July 2000, the Company commenced a
restructuring to discontinue certain business operations, write off
non-performing assets that were no longer in use and complete other cost
reductions to better focus on its core business strategy. The Company recorded a
non-recurring charge of $429,000, pre-tax, in the three months ended June 30,
2000 and an additional non-recurring charge of $2,163,000, pre-tax, in the three
months ended September 30, 2000. The aggregate pre-tax charges of $2,592,000
included non-cash charges of $429,000 primarily related to the sale of Visual
Applications Software, Inc. and $2,163,000 to reduce the Company's headcount.
All restructuring cash payments were paid during the year ended June 30, 2001
and no accruals remained for these costs as of June 30, 2001.
Page 12
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
RESTATED RESTATED
Numerator for basic and diluted loss per share -
net loss $(1,242) $(16,186) $(3,932) $(20,867)
============= ============= ============= ==============
Denominator for basic loss per share - weighted
average common shares outstanding 7,568 7,563 7,568 7,524
Effect of dilutive employee stock options and - - - -
warrants
------------- ------------- ------------- --------------
Denominator for diluted loss per share - adjusted
weighted average common shares and assumed
conversions 7,568 7,563 7,568 7,524
============= ============= ============= ==============
Basic net loss per share $ (0.16) $ (2.14) $ (0.52) $ (2.77)
============= ============= ============= ==============
Diluted net loss per share $ (0.16) $ (2.14) $ (0.52) $ (2.77)
============= ============= ============= ==============
During the three and nine months ended March 31, 2001 and March 31, 2002,
common share equivalents in stock options, warrants and convertible preferred
shares were outstanding. However, such common share equivalents were not
included in the computation of diluted net income per share because the Company
reported a net loss for the period and, therefore, the effect would be
anti-dilutive. As of March 31, 2002, 1,705,247 common share equivalents in stock
options and 3,631,278 common share equivalents in warrants, convertible and
preferred stock were outstanding.
NOTE 6 - INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. The Company has adopted the provisions of SFAS No. 142 effective on
July 1, 2001.
As of March 31, 2002, the Company had unamortizable intangible assets
consisting only of goodwill of $7,883,000. The change in goodwill from June 30,
2001 results from fluctuations in foreign currency exchange rates. The Company's
amortizable intangible assets include only purchased software. The gross
carrying amount of purchased software as of March 31, 2002 was $2,696,000 and
accumulated amortization of purchased software was $2,098,000. In accordance
with the provisions of SFAS No. 142, the Company performed the appropriate
transitional impairment tests and determined that there is no transitional
impairment loss as of July 1, 2001. Also in accordance with the provisions of
SFAS No. 142, the Company reassessed the useful lives of all purchased software
and determined that no adjustments were necessary.
The following table illustrates what reported net income (loss) and net
income (loss) per share would have been in the periods presented exclusive of
amortization expense recognized in those periods related to goodwill (in
thousands, except per share data):
Page 13
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
RESTATED RESTATED
Numerator for basic and diluted loss per share -
net loss $ (1,242) $ (16,186) $ (3,932) $ (20,867)
Goodwill amortization - 289 - 866
------------- ------------- ------------- --------------
Adjusted net income /(loss) $ (1,242) $ (15,897) $ (3,932) $ (20,001)
============= ============= ============= ==============
Basic and diluted net income (loss) per share:
Net income (loss) $ (0.16) $ (2.14) $ (0.52) $ (2.77)
Goodwill amortization - $ 0.04 - $ 0.12
------------- ------------- ------------- --------------
Adjusted net income (loss) $ (0.16) $ (2.10) $ (0.52) $ (2.65)
============= ============= ============= ==============
NOTE 7 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, develops, markets and supports business software and
services for mid-sized manufacturing, distribution and other companies,
including business units of larger companies. The Company operates exclusively
in this market and, therefore, only reports on one primary segment.
Summarized financial information attributable to each of the Company's
geographic areas is shown in the following table (in thousands, except
percentage data):
NORTH AMERICA ASIA/PACIFIC EUROPE
------------------- ----------------- ---------------
THREE MONTHS ENDED MARCH 31, 2002 - RESTATED
Total revenue $15,065 $2,668 $3,999
Operating income (loss) before amortization
of intangibles (1,059) 9 205
Operating income (loss) (1,492) 9 205
THREE MONTHS ENDED MARCH 31, 2001 - RESTATED
Total revenue $20,182 $2,616 $3,536
Operating loss before amortization of
intangibles and special charges (11,654) (2,071) (795)
Operating loss (13,062) (2,071) (795)
NINE MONTHS ENDED MARCH 31, 2002 - RESTATED
Total revenue $50,554 $7,661 $11,815
Operating income (loss) before amortization
of intangibles (2,332) (71) 712
Operating income (loss) (3,632) (71) 669
NINE MONTHS ENDED MARCH 31, 2001 - RESTATED
Total revenue $69,017 $8,779 $10,459
Operating income (loss) before amortization
of intangibles and special charges (14,168) (2,704) (512)
Operating loss (19,140) (2,737) (746)
Page 14
NOTE 8 - VOLUNTARY STOCK OPTION EXCHANGE PROGRAM
On October 30, 2001, the Company offered the participants of its
Non-Qualified Stock Option Plan for Key Employees and its 1999 Non-Qualified
Stock Option Plan for Key Employees (collectively, "the Plans") the opportunity
to participate in a voluntary stock option exchange program. The program
generally allowed a participant to return options held at that time to the
Company in exchange for new options to be granted at a future date at least six
months and one day after the date of cancellation of the old options by the
Company. As of the date of the offer, options to purchase 1,586,054 shares of
the Company were outstanding pursuant to the Plans. The offer expired on
December 7, 2001 and options to purchase 366,111 common shares were returned to
the Company and cancelled. Subject to the terms and conditions of the offer, the
Company expects to grant options to purchase 341,111 common shares on or about
June 11, 2002 with an exercise price per share equal to the market price per
share of the Company's common shares on the date of grant. The new options will
have other terms and conditions substantially the same as the old options. The
exchange program is not expected to result in any additional compensation
charges or variable plan accounting.
NOTE 9 - CONVERTIBLE NOTES OFFERING
On March 7, 2002, the Company executed an agreement pursuant to which
certain holders of its Series A Convertible Participating Preferred Stock and
certain members of the Company's Board, including the Company's founder, agreed
to provide $5.0 million to the Company for working capital needs in exchange for
convertible notes (the "Convertible Notes") with a term expiring May 2004. The
Convertible Notes will be entitled, upon issuance, to convert into the Company's
common stock based on a conversion price equal to 80% of the market value of the
Company's common stock for a specified period prior to closing. The Convertible
Notes will be subordinated to Foothill and will bear interest at 10%. Also under
the terms of the agreement, $1.5 million of the offering in the form of "Initial
Notes" was provided to the Company on March 7, 2002. These Initial Notes are due
May 2004 or, at the option of the holders August 31, 2002 if the convertible
note offering is not completed. The Company issued 600,000 warrants to the
holders of the Initial Notes with an exercise price of $0.01 per share. Of these
warrants, 240,000 warrants issued to directors are not exercisable Also relating
to the execution of the agreement, the Company and the holders of Series A
Preferred Stock agreed that the conversion price for the Series A Preferred
Stock would be immediately reset from $12.00 per share to $6.00 per share and,
in exchange, all other anti-dilution rights with respect to the convertible note
offering would be waived. The completion of the offer is subject to, among other
things, shareholder approval that the Company expects to obtain at a special
meeting of shareholders scheduled for June 20, 2002.
The Company recorded the relative fair value of the 600,000 warrants issued
in connection with the Initial Notes ($593,153) as a debt discount and is
amortizing the debt discount over the three-year expected life of the Initial
Notes. The Company also expects to record a non-recurring, non-cash charge in
the June quarter when the Convertible Notes are issued to reflect the difference
between the market price of the Company's common stock and the price of these
equity instruments at the date of issuance.
NOTE 10 - PROVISION FOR INCOME TAXES
In the current fiscal quarter, the Company booked a benefit of $1.1 million
as a result of a tax law change contained in the Economic Stimulus package
passed by the United States Congress in March 2002. This benefit is shown on the
income statement net of the provision for income taxes incurred in certain
foreign countries where taxable income was recorded and net of the adjustments
to the valuation allowance.
Page 15
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
include, but are not limited to, improvement in demand for the Company's
products, the ability of the Company to return to profitability, the ability of
the Company to obtain additional financing when needed, and other factors set
forth herein and in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2001 (the "Annual Report"). Unless required by law, the Company
undertakes no obligation to update any forward-looking statements. However,
readers should carefully review the risk factors set forth in each of the
Company's reports or documents filed 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, 2000, as contained in the Annual Report.
OVERVIEW
Frontstep, Inc. is a leading provider of integrated ERP software and
services for mid-market manufacturing and distribution companies and business
units of larger companies. Frontstep, Inc. and its subsidiaries are referred
herein as the "Company" or "Frontstep".
RESTATEMENT. The Company is restating its financial statements for the
nine-months ended March 31, 2002 (the "Restatement"). The Restatement is being
made to correct the previously reported financial results due to an isolated
error in third-party software used by the Company which affected the timing of
recognition of revenue from renewals of the Company's maintenance and support
contracts during those reported periods. The financial results reported in this
Form 10-Q have been restated to reflect the correction of this error. See Note 2
to the Financial Statements included herein. The following discussion reflects
effects of reclassifications and restatements.
CURRENT FINANCIAL RESULTS AND EVENTS. After nearly two years of difficult
economic and market conditions, during which the Company undertook significant
efforts to enhance its product capabilities, the Company reported positive
financial results for the quarter ended September 30, 2001. The Company reported
operating income of $0.8 million and net income of $0.2 million for the
September 2001 quarter. In spite of the negative impact of the tragic events of
September 11, 2001, the Company believes it was able to achieve these positive
results primarily due to the cost reductions initiated in April 2001 and the
careful management of the Company's costs since that time.
Throughout the quarter ended December 31, 2001, the Company believed that
it was on track to continue to be profitable and to maintain a positive cash
flow, both as a result of the cost savings achieved and a belief that our
customers and potential customers would not continue to defer their buying
decisions as they did in the September 2001 quarter. The Company had previously
indicated that further economic slowdown and lessening of demand or a
continuation of the uncertainty created by the war against terrorism could have
a negative impact on the Company. In fact, these factors did impact the
Company's operating results for the December quarter and the Company did not
achieve its revenue expectations, primarily due to continued delays by customers
and potential customers, particularly those in North America, in making critical
buying decisions. As a result, Frontstep reported an operating loss of $2.5
million and a net loss of $2.9 million.
Early in the quarter ended March 31, 2002 (the "current fiscal quarter" or
"fiscal 2002 quarter") the Company announced that it would further reduce its
operating costs by $8.0 million through reductions in personnel, facilities and
Page 16
other related costs. During the current fiscal quarter Frontstep completed
nearly all of these actions and believe cost savings equal to $6.8 million of
annualized savings have already taken effect.
Our results for the current fiscal quarter continue to reflect the effects
of delays by customers and potential customers, particularly in North America,
in making critical buying decisions. For the current fiscal quarter, the Company
reported revenue of $21.7 million, an operating loss of $1.3 million and a net
loss of $1.2 million. The Company believes that the levels of its revenue
throughout its business have stabilized and, with the exception of sales to new
customers and prospects, have modestly improved during the current fiscal
quarter. As a result of more stable revenue levels and the impact of its cost
reduction actions, The Company expects to return to operating profitability and
positive cash flows in the June 2002 quarter. Our expectations are for revenue
of $22.5 to $23.5 million in the June and September quarters with operating
income in the range of 2% to 5%. For the December 2002 quarter, Frontstep
expects revenue of $24.0 to $26.0 million with operating income in the range of
5% to 10%.
However, the country and the manufacturing industries that Frontstep serves
have been in a recession since early in calendar 2001. While economic indicators
have generally been more positive lately, it remains unclear when demand for
Frontstep products and services will begin to increase. Differing conditions
will alter the Company's beliefs about its financial results in the coming
quarters and there can be no assurance that the Company will return to
profitability and positive cash flows.
PRIOR FINANCIAL RESULTS AND EVENTS. Since the second quarter of fiscal
2000, the Company has experienced changing market conditions resulting from a
recession in many manufacturing industries. Well before these market changes
began to affect results of operations, the Company began to enhance its product
offerings beyond traditional ERP systems to participate in higher growth market
segments. These enhancements included a comprehensive suite of integrated
software and services that (1) support the management and resources of an
enterprise, (2) support customer relationship management and other front office
business activities and (3) support an enterprise's supply chain management
activities. We have invested more than $55 million over the last few years to
continue to invest in these enhancements and new product offerings.
In the March 2001 quarter, customers and potential customers appeared to
react to the slowing economy by electing to defer their buying decisions. As a
result, the Company, the information technology industry in general and many
other enterprise software providers began to experience significant reductions
in revenues and incurred net losses for the March and June 2001 quarters as
compared to an expectation of continued improvements in financial results from
increased demand for their products.
Consequently, in April 2001, the Company initiated a broad restructuring
program in order to reduce operating costs. The Company's worldwide workforce
was reduced by approximately 20%, certain product development and other
non-essential activities were discontinued and certain Company offices around
the world were closed. In the March and June 2001 quarters, the Company recorded
an aggregate of approximately $4.2 million, pre-tax, in related restructuring
charges. In the March quarter, the Company also wrote-off $6.8 million of
accounts receivable and $1.9 million of related product assets in relation to
our restructuring strategy.
Earlier, in July 2000, the Company had previously conducted cost reduction
activities and had made structural changes to discontinue certain business
operations and to write off non-performing assets to better focus on its core
business strategy. In connection with these changes, the Company recorded a
$429,000, pre-tax, non-recurring charge in the June 2000 quarter and an
additional $2.2 million, pre-tax, non-recurring charge in the September 2000
quarter.
GENERAL
The Company's total revenue is derived primarily from licensing software,
providing related services, including installation, implementation, training,
consulting and systems integration and providing maintenance and support on an
annual basis. Revenue is accounted for in accordance with Statement of Position
97-2, Software Revenue Recognition, as amended and interpreted from time to
time.
Revenue is derived principally from the sale of internally produced
software products and maintenance and support agreements from software sales.
The Company licenses software generally under non-cancelable license agreements
and provides product support services 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
Page 17
collection is considered probable. For customer license agreements which meet
these recognition criteria, the portion of the fees related to software
licenses, which is determined using the residual method, will generally be
recognized in the current period, while the portion of the fees related to
services is recognized as the services are performed. The amount allocated to
services revenues is based on the Company's standard rate per hour. Revenue from
maintenance and support agreements, which is determined based on renewal rates,
is billed periodically, deferred and recognized ratably over the life of the
agreements. In the event revenue is contingent upon customer acceptance
criteria, the Company defers that revenue until the contingencies are resolved.
Cost of license fees revenue includes royalties, amortization of
capitalized software development costs and software delivery expenses. Cost of
service, maintenance and support revenue includes the personnel and related
overhead costs for implementation, training and customer support services,
together with fees paid to third parties for subcontracted services.
Selling, general and administrative expenses consist of personnel,
facilities and related overhead costs, together with other operating costs of
the Company, including advertising and marketing costs.
Research and development expenses include personnel and related overhead
costs for product development, enhancement, upgrades, quality assurance and
testing. The amount of such expenses is dependent on the nature and status of
the development process for the Company's products. Development costs
capitalized in a given period are dependent upon the nature and status of the
development process. Upon general release of a product, related capitalized
costs are amortized over three to five years and recorded as license fees cost
of revenue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
Revenue. Total revenue decreased $4.6 million, or 17.5%, to $21.7 million
in the current fiscal quarter from $26.3 million in the three months ended March
31, 2001 (the "prior year fiscal quarter" or "fiscal 2001 quarter"). The total
revenue mix is shown in the table below (in thousands, except percentage data):
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
License fees revenue $7,482 34.4% $10,724 40.7%
Service revenue 5,589 25.7% 7,154 27.2%
Maintenance and support revenue 8,661 39.9% 8,456 32.1%
--------------------- ---------------------
Total revenue $21,732 100.0% $26,334 100.0%
===================== =====================
License fees revenue decreased 30.2% in the fiscal 2002 quarter from the
fiscal 2001 quarter. The Company believes that the decrease in license fees
revenue in the fiscal 2002 quarter is industry wide and due to the current
economic climate that is causing the Company's customers and potential customers
to defer their buying decisions related to large capital investments,
particularly information technology investments. The Company's license fees
revenue in Europe and Asia Pacific each increased in the fiscal 2002 quarter
over the fiscal 2001 quarter, so the Company believes the current economic
situation has affected buyers in North America more significantly than in other
countries. The Company expects that total license fees revenue will remain
stable for the remainder of the fiscal year and will not begin to significantly
grow again until the current economic climate improves and demand for our
product improves as a result.
Service revenue decreased 21.9% in the fiscal 2002 quarter from the fiscal
2001 quarter. The decrease is primarily the result of several straight quarters
of continuing sluggish license fees revenue experienced by the Company. Service
revenues in particular are directly dependent on new license purchases by new
and existing customers. The Company expects that service revenues will continue
to be adversely affected in the short-term and will improve in the quarters that
follow increased license fee revenues.
Maintenance and support revenue increased 2.4% in the fiscal 2002 quarter
from the fiscal 2001 quarter. Maintenance and support contracts and the related
revenue from these contracts have remained steady during the last
Page 18
year despite the fact that the base of customers under such programs has grown
slowly. The Company expects such revenues to remain stable in the short-term and
to grow as license fees revenue grows.
Cost of Revenue. Total cost of revenue as a percentage of total revenue
decreased to 50.0% for the fiscal 2002 quarter from 63.5% for the fiscal 2001
quarter.
Cost of license fees revenue decreased $2.4 million, or 36.9%, to $4.1
million in the fiscal 2002 quarter from $6.5 million in the fiscal 2001 quarter
and as a percentage of license fees revenue, decreased to 55.1% in the fiscal
2002 quarter from 61.0% in the fiscal 2001 quarter. The percentage decrease is
primarily attributable to a one-time charge in the prior year fiscal quarter to
write-off certain non-producing assets as part of a broader restructuring effort
by the Company at that time. In the current fiscal quarter, the effects of
product mix relative to third party royalty arrangements, discounting as a
result of weakened demand and lower license fees revenue in general had the
effect of increasing this percentage as compared to the prior year fiscal
quarter. Cost of license fees includes certain fixed components including
amortization of capitalized software.
Cost of service, maintenance and support revenue decreased $3.4 million, or
33.8%, to $6.7 million in the fiscal 2002 quarter from $10.2 million in the
fiscal 2001 quarter. As a percentage of service and maintenance and support
revenue, such costs decreased to 47.3% in the fiscal 2002 quarter from 65.3% in
the fiscal 2001 quarter. The decrease is attributable to the higher percentage
of maintenance and support revenues relative to services revenues in the current
fiscal quarter. Maintenance and support revenues have higher margins than
services revenues. This is offset by lower margins on services revenues in the
current fiscal quarter than in the fiscal 2001 quarter due to the cost of
personnel and certain fixed costs of service revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $10.3 million, or 50.7%, to $10.1 million in
the fiscal 2002 quarter from $20.3 million in the fiscal 2001 quarter. Such
expenses as a percentage of total revenue decreased to 46.2% in the fiscal 2002
quarter from 77.4% in the fiscal 2001 quarter. The decrease in costs is
attributable primarily to the one-time charge in the prior year fiscal quarter
to write-off $6.8 million of accounts receivable as part of a broader
restructuring effort by the Company at that time. Also, the decrease in costs
was a result of the cost reductions that have occurred, in part from these
restructuring efforts undertaken over the last twelve months. The Company
expects that these costs will continue to decrease in the June quarter and will
also continue to decrease as a percentage of total revenue, particularly when
total revenue increases, since many of these costs are fixed in nature.
Research and Development. Total research and development costs, including
amounts capitalized, decreased $1.2 million or 24.5% to $3.7 million for the
fiscal 2002 quarter from $4.9 million for the fiscal 2001 quarter but decreased
only modestly as a percentage of total revenue to 16.9% in the fiscal 2002
quarter from 18.5% in the fiscal 2001 quarter. The decrease was primarily
attributable to spending in the prior fiscal year on products and other
development efforts that were discontinued as part of the Company's
restructuring efforts in April 2001. Although total research and development
spending decreased from the fiscal 2001 quarter, the Company is continuing to
spend a substantial amount 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 $2.0 million
during the fiscal 2002 quarter and $1.1 million during the fiscal 2001 quarter.
Restructuring and Other Charges. The restructuring programs undertaken by
the Company in July 2000 and March 2001 and their related costs are discussed
above (see Note 3 to the Financial Statements).
Provision for (Benefit from) Income Taxes. The provision for (benefit from)
income taxes for the fiscal 2002 and 2001 quarters reflects an effective tax
benefit rate of 43% and 0%, respectively. In the current fiscal quarter, the
Company booked a benefit of $1.1 million as a result of a tax law change
contained in the Economic Stimulus package passed by the United States Congress
in March 2002. This benefit is shown on the income statement net of the
provision for income taxes incurred in certain foreign countries where taxable
income was recorded and net of the adjustments to the valuation allowance.
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31,
2001
Page 19
Revenue. Total revenue decreased $18.2 million, or 20.7%, to $70.0 million
in the nine months ended March 31, 2002 (the "current fiscal nine month period")
from $88.3 million in the nine months ended March 31, 2001 (the "prior fiscal
nine month period"). The total revenue mix is shown in the table below (in
thousands, except percentage data):
NINE MONTHS ENDED MARCH 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
License fees revenue $26,177 37.4% $39,790 45.1%
Service revenue 16,972 24.2% 23,148 26.2%
Maintenance and support revenue 26,881 38.4% 25,317 28.7%
--------------------- ---------------------
Total revenue $70,030 100.0% $88,255 100.0%
===================== =====================
License fees revenue decreased 34.2% in the current fiscal nine month
period from the prior fiscal nine month period. The Company believes that the
decrease in license fees revenue in fiscal 2002 is industry wide and due to the
same economic and other issues discussed above for the current fiscal quarter.
Service revenue decreased 26.7% in the current fiscal nine month period
from the prior fiscal nine month period. The decrease is primarily the result of
continued sluggish license fees revenue experienced by the Company and the
factors discussed above for the current fiscal quarter.
Maintenance and support revenue increased 6.2% in the current fiscal nine
month period from the prior fiscal nine month period. Maintenance and support
contracts and the related revenue from these contracts have been stable in
fiscal 2002, after significant growth in the several years preceding the last
year, despite the sluggish license fees revenue during this period.
Cost of Revenue. Total cost of revenue as a percentage of total revenue
decreased to 48.3% for the current fiscal nine month period from 52.2% for the
prior fiscal nine month period.
Cost of license fees revenue decreased $3.7 million, or 22.3%, to $12.8
million in the current fiscal nine month period from $16.5 million in the prior
fiscal nine month period and as a percentage of license fees revenue, increased
to 48.9% in the current fiscal nine month period from 41.4% in the prior fiscal
nine month period. The percentage increase is primarily attributable to the same
factors as discussed above for the current fiscal quarter.
Cost of service, maintenance and support revenue decreased $8.6 million, or
29.1%, to $21.0 million in the current fiscal nine month period from $29.6
million in the prior fiscal nine month period and as a percentage of service,
maintenance and support revenue, decreased to 47.9% in the current fiscal nine
month period from 61.1% in the prior fiscal nine month period. The decrease is
attributable to the higher percentage of maintenance and support revenues
relative to services revenues in the current fiscal nine month period and the
other factors discussed above for the current fiscal quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $15.8 million, or 32.4%, to $32.9 million in
the current fiscal nine month period from $42.6 million in the prior fiscal nine
month period. Such expenses as a percentage of total revenue decreased to 46.9%
in the current fiscal nine month period from 55.1% in the prior fiscal nine
month period. The decrease in costs is attributable to the Company's
restructuring efforts undertaken over the last twelve months.
Research and Development. Total research and development expenses,
including amounts capitalized, decreased $4.4 million or 30.2%, to $10.2 million
for the current fiscal nine month period from $14.7 million for the prior fiscal
nine month period and decreased as a percentage of total revenues to 14.6% in
the current fiscal nine month period from 16.6% in the prior fiscal nine month
period. The decrease was primarily attributable to spending in the prior fiscal
year on products and other development efforts that were discontinued as part of
the Company's restructuring efforts in April 2001 and, to a lesser extent, to a
reduction in headcount from the Company's restructuring efforts. Although total
spending on research and development has declined in the current fiscal year,
the Company is continuing to spend a substantial amount on the development of
its expanded product offerings and product capabilities
Page 20
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 $5.2 million
during the current fiscal nine month period and $3.7 million during the prior
fiscal nine month period.
Restructuring and Other Charges. The restructuring programs undertaken by
the Company in July 2000 and March 2001 and their related costs are discussed
above (see Note 3).
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes for the current and prior fiscal nine month periods reflects an effective
tax benefit rate of 17% and 9%, respectively. The effective tax rate in the
current fiscal nine month period differs from the expected corporate tax rate
primarily due to valuation allowances recorded against the deferred tax assets
related to net operating losses incurred domestically and foreign losses
incurred in countries where no tax benefits will be received for the losses. The
Company booked a benefit of $1.1 million in the current fiscal quarter as a
result of a tax law change contained in the Economic Stimulus package passed by
the United States Congress in March 2002. This benefit is shown on the income
statement net of the provision for income taxes incurred in foreign countries
where taxable income was recorded and net of the adjustments to the valuation
allowance.
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 March 31, 2002, the Company had cash and cash equivalents of $3.9
million and working capital of $3.2 million. During the current fiscal year, the
Company had net cash provided by operating activities of $2.5 million, including
cash expenditures for restructuring as described in Note 3 to Consolidated
Financial Statements in Item 1 above. The Company purchased $0.3 million of
property and equipment and used $5.2 million in relation to capitalized
software. Net cash provided by financing activities for the current fiscal year
was $5.6 million. Gross borrowings on Term Note A (see below) were $13.9 million
at March 31, 2002. Gross borrowings on the revolving credit facility were $0.8
million as of March 31, 2002.
In July 2001, the Company obtained a Credit Facility with Foothill Capital
Corporation (the "Credit Facility"). The Credit Facility includes a $15.0
million, three-year term note ("Term Note A") and a $10.0 million revolving
credit facility. Availability under the Credit Facility is based on and secured
by qualifying accounts receivable originating within the United States and
Canada. The revolving credit facility bears interest either at the Federal Funds
rate plus 1.5%, or at the Eurodollar market rate plus 3.0%. Term Note A bears
interest at the rate of 10.5% plus 1.5% per annum added to principal. Term Note
A is payable in monthly installments which commenced October 1, 2001. The Credit
Facility is subject to customary terms and conditions and includes financial
covenants for maintenance of a minimum tangible net worth, a minimum level of
earnings before interest, taxes, depreciation and amortization and a maximum
ratio of debt to earnings before interest, taxes, depreciation and amortization.
The proceeds from the Credit Facility were used to repay, in full, the Company's
revolving credit facility with PNC Bank, National Association.
On February 14, 2002, the Company and Foothill amended the Credit Facility.
The amendment provides the Company with certain additional borrowing
availability on a temporary basis until July 15, 2002 and allows the Company to
defer principal payments due under Term Note A for a six-month period commencing
in January 2002. Also, the financial covenants relating to the Credit Facility
were modified to reflect the current economic environment.
As of March 31, 2002, the Company was not in compliance with certain
financial covenants under the Credit Facility as a result of its reported losses
for the three months ended March 31, 2002. The noncompliance does not relate to
any payment due under the Credit Facility. On May 13, 2002, effective as of
March 31, the Company and Foothill amended the Credit Facility to waive the
conditions of noncompliance and to reset the related financial covenants as of
March 31, 2002 and for the remainder of the Company's fiscal year.
Page 21
\
On March 7, 2002, the Company executed an agreement pursuant to which
holders of its Series A Convertible Participating Preferred Stock and certain
members of the Company's Board, including the Company's founder, agreed to
provide $5.0 million to the Company for working capital needs in exchange for
convertible notes (the "Convertible Notes") with a term expiring May 2004. The
Convertible Notes, upon issuance, will be entitled to convert into the Company's
common stock based on a conversion price equal to 80% of the market value of the
Company's common stock at the time of closing. The Convertible Notes will be
subordinated to Foothill and will bear interest at 10%. Also under the terms of
the agreement, $1.5 million in the form of "Initial Notes" was provided to the
Company on March 7, 2002. These Initial Notes are due May 2004 or, at the option
of the holders August 31, 2002 if the convertible note offering is not
completed. The Company issued 600,000 warrants to the holders of the Initial
Notes with an exercise price of $0.01 per share. Also relating to the execution
of the agreement, the Company and the holders of Series A Preferred Stock agreed
that the conversion price for the Series A Preferred Stock would be immediately
reset from $12.00 per share to $6.00 per share and, in exchange, all other
anti-dilution rights with respect to the agreement would be waived. The
completion of the offer is subject to, among other things, shareholder approval
that the Company expects to obtain at a special meeting of shareholders
scheduled for June 20, 2002.
While the Company has had difficulty over the last twelve months meeting
operating needs and debt obligations, primarily as a result of economic
conditions in the industry and related shortfall in revenues, the Company
believes that the additional borrowing availability under the Credit Facility,
the infusion of the $1.5 million from the Initial Notes and the completion of
the Convertible Note offering upon shareholder approval will be sufficient to
meet the Company's debt obligations and operating needs in the coming twelve
months. While the Company believes it will obtain shareholder approval for the
Convertible Notes, there can be no assurance, however, that the Company will
obtain such approval. The Company will be investigating alternative sources of
debt or equity in the interim period and expect that, if such shareholder
approval is not obtained, other sources to meet its working capital needs will
be identified and pursued.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange. Frontstep's revenues originating outside of North America
were 30.7% and 23.4% of total revenue for the current and prior year fiscal
quarters, respectively, and 27.8% and 21.8% for the current and prior fiscal
nine month periods, respectively. By geographic region, revenues originating in
Europe were 18.4% and 13.4% of total revenue for the current and prior year
fiscal quarters, respectively, and 16.9% and 11.9% for the current and prior
fiscal nine month periods, respectively. Revenues originating in Asia Pacific
were 12.3% and 9.9% of total revenue for both the current and prior year fiscal
quarters, respectively, and 10.9% and 9.9% for the current and prior fiscal nine
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 also is 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 the Company's financial results or its
financial condition in the coming fiscal year.
Interest Rates. The Company invests its surplus cash in financial
instruments such as short-term marketable securities and interest-bearing time
deposits. The Company also incurs interest at variable rates, dependent upon the
prime rate, LIBOR rate or Eurodollar 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 the Company's financial results or its
financial condition in the coming fiscal year.
Page 22
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.
(a) None.
(b) None.
(c) Sale of Unregistered Securities
On March 7, 2002, the Company issued and sold its 10%
subordinated notes due May 10, 2004 or, at the option of the holders,
due August 31, 2002, in the aggregate principal amount of $1.5 million
(the "Initial Notes") and warrants to purchase 600,000 common shares
(the "Warrants") for an aggregate of $1.5 million in cash pursuant to
a Securities Purchase Agreement between the Company and the investors
named therein, including, among others, two directors of the Company
(the "Agreement"). The Initial Notes and the Warrants were not
registered under the Securities Act of 1933, as amended (the "Act"),
in reliance upon an exemption from registration under Section 4(2) of
the Act and Rule 506 promulgated under the Act by the Securities and
Exchange Commission (the "Commission").
Under the Agreement, the Company also has agreed to issue and
sell to the investors named therein, subject to certain conditions,
including approval of Frontstep shareholders, additional 10%
subordinated notes due May 10, 2004 in the aggregate principal amount
of $3.5 million for $3.5 million in cash (the "Convertible Notes").
The terms of the Convertible Notes would be substantially the same as
the terms of the Initial Notes.
The Initial Notes are unsecured and bear interest, commencing on
March 7, 2002, at a rate of 10% per annum, payable in arrears on March
31, June 30, September 30 and December 31 of each year in which the
Initial Notes are outstanding. After issuance of the Convertible
Notes, and subject to the prior approval of shareholders of the
Company of the issuance of common shares upon conversion of the
Initial Notes, the Initial Notes will become convertible at any time
and from time to time, in whole or in part, at the option of the
holder into common shares of the Company at an initial conversion
price equal to 80% of the daily price per common share (e.g., the last
reported sale price per share on such day on the Nasdaq National
Market System) for the ten (10) consecutive trading days immediately
preceding the two (2) consecutive trading days immediately prior to
the shareholders meeting at which such issuance of common shares is
approved. The conversion price of the Initial Notes will be subject to
adjustment from time to time on a weighted average basis in case of
certain events which would have a dilutive affect on the conversion
price of the Initial Notes.
The Warrants expire on March 7, 2012 and are exercisable by the
holders, in whole or in part, at any time, or from time to time, at an
exercise price of $0.01 per share, subject to adjustments, except that
the Warrants issued to Lawrence J. Fox and James A. Rutherford, each a
director of the Company, are not exercisable until the issuance of the
Warrants to them is approved by Frontstep shareholders.
Page 23
A special meeting of Frontstep shareholders to consider and vote
upon, among other things, a proposal to approve the issuance of the
Convertible Notes, the issuance of common shares upon conversion of
the Initial Notes and the issuance of that portion of the Warrants
issued to Messrs. Fox and Rutherford pursuant to the Agreement is
scheduled to be held on June 20, 2002. The Company filed proxy
materials relating to the special meeting with the Commission on May
8, 2002.
The sale of the Initial Notes and the Warrants was reported
previously in a Current Report on Form 8-K dated March 7, 2002 filed
by the Company with the Commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(a) As of March 31, 2002, the Company was not in compliance with certain
covenants under the Credit Facility, particularly covenants requiring
the maintenance of minimum levels of net worth and cumulative EBITDA,
as a result of its reported losses. The noncompliance does not relate
to any payment due under the Credit Facility. Foothill has waived this
noncompliance for the period ended March 31, 2002.
On May 13, 2002, the Company and Foothill have amended the Credit
Facility to waive the conditions of noncompliance as of March 31,
2002, to reset the related financial covenants and to adjust certain
other provisions of the agreement.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits filed with this Quarterly Report on Form 10-Q
following the Signature Page.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on January 10, 2002
indicating under Item 5 (Other Events) that a press release had been
issued on January 9, 2002 to announce the registrant's preliminary
results for the second quarter of fiscal 2002 ended December 31, 2001.
The release was attached thereto as an exhibit for further description
of the event.
The Company filed a current report on Form 8-K, dated March 11, 2002,
to report under Item 5 (Other Events) that, on March 7, 2002, the
registrant had issued its warrants for an aggregate of 600,000 common
shares, with an exercise price of $0.01 per share, and unsecured
subordinated notes in the aggregate principal amount of $1.5 million
in a private placement to certain of its preferred shareholders,
including entities affiliated with Morgan Stanley Dean Witter & Co.
and Fallen Angel Equity Fund, and two directors of the Company,
Lawrence J. Fox and James A. Rutherford. The transaction is part of an
agreement by such investors to provide a total of $5 million of
funding to the Company, provided certain closing conditions are met
with regard to the remaining $3.5 million investment. The transaction
was publicly announced on February 14, 2002 in a press release issued
by the Company, a copy of which was included as an exhibit to this
filing.
Page 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTSTEP, INC.
Dated: September 28, 2002 By: /s/ Daniel P. Buettin
------------------ ----------------------------------
Daniel P. Buettin
Vice President, Chief Financial
Officer and Secretary
(on behalf of the Registrant and
as Principal Financial Officer)
Page 25
CERTIFICATIONS
I, Stephen A. Sasser, certify that:
1. I have reviewed this report on Form 10-Q/A of Frontstep, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
Date: September 28, 2002
By: /s/ STEPHEN A. SASSER
------------------------------------
Stephen A. Sasser
President and Chief Executive
Officer
I, Daniel P. Buettin, certify that:
1. I have reviewed this report on Form 10-Q/A of Frontstep, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
Date: September 28, 2002
By: /s/ DANIEL P. BUETTIN
------------------------------------
Daniel P. Buettin
Vice President, Finance, Chief
Financial Officer And Secretary,
Principal Financial and Accounting
Officer
Page 26
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
3(a)(1) Amended Articles of Incorporation of Incorporated herein by reference to
Frontstep, Inc. (f/k/a "Symix Systems, Exhibit 3(a)(1) to the Company's Annual
Inc.") (the "Company") (as filed with the Report on Form 10-K for the fiscal year
Ohio Secretary of State on February 8, ended June 30, 1997 (File No. 0-19024)
1991)
3(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation of the Company Exhibit 3(a)(2) to the Company's Annual
(as filed with the Ohio Secretary of Report on Form 10-K for the fiscal year
State on July 16, 1996) ended June 30, 1997 (File No. 0-19024)
3(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation, as amended of Exhibit 3(a)(3) to the Company's Quarterly
the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter
Secretary of State on May 10, 2000) ended March 31, 2000 (File No. 0-19024)
3(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation, as amended of Exhibit 3(a)(4) to the Company's Quarterly
the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter
Secretary of State on November 8, 2000) ended September 30, 2000 (File No.
0-19024)
3(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to
amended of the Company (reflecting Exhibit 3(a)(5) to the Company's Quarterly
amendments through November 8, 2000 for Report on Form 10-Q for the fiscal quarter
purposes of Securities and Exchange ended September 30, 2000 (File No. 0-19024)
Commission reporting compliance only)
3(b) Amended Regulations of the Company Incorporated herein by reference to
Exhibit 3(b) to the Company's Registration
Statement on Form S-1, as filed with the
Securities and Exchange Commission on
February 12, 1991 (Registration No.
33-38878)
4(a)(1) Amended Articles of Incorporation of the Incorporated herein by reference to
Company (as filed with the Ohio Secretary Exhibit 3(a)(1) to the Company's Annual
of State on February 8, 1991) Report on Form 10-K for the fiscal year
ended June 30, 1997
4(a)(2) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation of the Company Exhibit 3(a)(2) to the Company's Annual
(as filed with the Ohio Secretary of Report on Form 10-K for the fiscal year
State on July 16, 1996) ended June 30, 1997 (File No. 0-19024)
4(a)(3) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation, as amended of Exhibit 3(a)(3) to the Company's Quarterly
the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter
Secretary of State on May 10, 2000) ended March 31, 2000 (File No. 0-19024)
Page 27
Exhibit No. Description Page
- ----------- ----------- ----
4(a)(4) Certificate of Amendment to the Amended Incorporated herein by reference to
Articles of Incorporation, as amended of Exhibit 3(a)(4) to the Company's Quarterly
the Company (as filed with the Ohio Report on Form 10-Q for the fiscal quarter
Secretary of State on November 8, 2000) ended September 30, 2000 (File No. 0-19024)
4(a)(5) Amended Articles of Incorporation, as Incorporated herein by reference to
amended of the Company (reflecting Exhibit 3(a)(5) to the Company's Quarterly
amendments through November 8, 2000 for Report on Form 10-Q for the fiscal quarter
purposes of Securities and Exchange ended September 30, 2000 (File No. 0-19024)
Commission reporting compliance only)
4(b) Amended Regulations of the Company Incorporated herein by reference to
Exhibit 3(b) to the Company's Registration
Statement on Form S-1, as filed with the
Securities and Exchange Commission on
February 12, 1991 (Registration No.
33-38878)
4(c) Share Exchange Agreement, dated January Incorporated herein by reference to
9, 1997 Exhibit 99 to the Company's Current Report
on Form 8-K, as filed with the Securities
and Exchange Commission on January 24,
1997 (File No. 0-19024)
4(d) Amended and Restated Investor Rights Incorporated herein by reference to
Agreement, dated as of March 7, 2002, Exhibit 4(c) to the Company's Quarterly
among the Company and the Investors Report on Form 10-Q for the fiscal quarter
identified therein ended March 31, 2000 (File No. 0-19024)
4(e) Warrant for the Purchase of Shares of Incorporated herein by reference to
Common Stock of the Company issued to Exhibit 4(f) to the Company's Quarterly
Morgan Stanley Dean Witter Venture Report on Form 10-Q for the fiscal quarter
Partners IV, L.P. on May 10, 2000, and ended December 31, 2000 (File No. 0-19024)
Exhibit A, identifying other identical
warrants issued to the investors
identified on Exhibit A on the dates
indicated, for the number of common
shares listed on Exhibit A
4(f) Assignment and Assumption Agreement, by Incorporated herein by reference to
and between Morgan Stanley Dean Witter Exhibit 4(g) to the Company's Quarterly
Equity Funding, Inc. and the Originators Report on Form 10-Q for the fiscal quarter
Investment Plan, L.P., dated November 24, ended December 31, 2000 (File No. 0-19024)
2000
4(g) Common Share Purchase Warrant, dated July Incorporated herein by reference to
17, 2001, issued to Foothill Capital Exhibit 4(g) to the Registrant's Annual
Corporation Report on Form 10-K for the fiscal year
ended June 30, 2001 (File No. 0-19024)
4(h) Registration Rights Agreement, dated July Incorporated herein by reference to
17, 2001, by and between the Registrant Exhibit 4(g) to the Registrant's Annual
and Foothill Capital Corporation Report on Form 10-K for the fiscal year
ended June 30, 2001 (File No. 0-19024)
Page 28
Exhibit No. Description Page
- ----------- ----------- ----
4(i) Form of Warrant for the purchase of Incorporated herein by reference to
Common Shares of the Registrant dated Exhibit 4(b) to the Registrant's Current
March 7, 2002 Report on Form 8-K dated March 7, 2002
4(j) Form of Initial Note issued by Registrant Incorporated herein by reference to
Exhibit 4(c) to the Registrant's Current
Report on Form 8-K dated March 7, 2002
10 Securities Purchase Agreement dated March Incorporated herein by reference to
7, 2002 Exhibit 10 to the Registrant's Current
Report on Form 8-K dated March 7, 2002
99(a) Certifications of Chief Executive Officer Filed herein
and Chief Financial Officer pursuant to
Title 18, United States Code, Section
1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Page 29