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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
COMMISSION FILE NUMBER: 0-19024
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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
incorporation or organization) Identification Number)
2800 CORPORATE EXCHANGE DRIVE 43231
COLUMBUS, OHIO (Zip Code)
(Address of principal executive offices)
(614) 523-7000
(Registrant's telephone number, including area code)
NOT APPLICABLE.
(Former name, former address and former fiscal year,
if changed since last report)
-------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
As of February 13, 2003, 13,960,615 of the issuer's common stock, without
par value, were outstanding.
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FRONTSTEP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (unaudited) and June 30, 2002............... 3
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended
December 31, 2002 and 2001...................................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
December 31, 2002 and 2001...................................................................... 5
Notes to Consolidated Financial Statements (unaudited).......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20
Item 4. Controls and Procedures......................................................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 21
Item 2. Changes in Securities and Use of Proceeds....................................................... 21
Item 3. Defaults Upon Senior Securities................................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................................. 22
Item 5. Other Information............................................................................... 22
Item 6. Exhibits and Reports on Form 8-K................................................................ 22
SIGNATURES ................................................................................................... 23
CERTIFICATIONS................................................................................................ 24
EXHIBIT INDEX ................................................................................................ 26
Page 2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRONTSTEP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, JUNE 30,
2002 2002
----------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,048 $ 3,389
Trade accounts receivable, net 25,962 29,049
Prepaid expenses 6,093 7,121
Income taxes receivable -- --
Deferred income taxes 3,386 3,386
Inventories 483 491
Other current assets 1,463 1,162
-------- --------
42,435 44,598
Capitalized software, net 16,280 16,371
Goodwill, net 8,287 8,039
Property and equipment, net 4,160 5,030
Other assets 1,259 1,074
-------- --------
Total assets $ 72,421 $ 75,112
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,693 $ 13,271
Deferred revenue 20,545 21,407
Current portion of long-term obligations 15,143 15,895
Income tax payable 538 405
-------- --------
49,919 50,978
Noncurrent liabilities:
Long-term debt 4,062 1,031
Deferred income taxes 4,268 4,268
Other -- --
-------- --------
8,330 5,299
Minority interest 123 118
Shareholders' equity:
Series A Convertible Participating Preferred Stock, no par value; 1,000,000
shares authorized; 566,933 shares issued and outstanding at December 31, 2002
and June 30, 2002; liquidation preference $13,606,392 10,865 10,865
Common stock; no par value; 20,000,000 shares authorized; 7,872,418 shares
issued at December 31, 2002 and June 30, 2002, at stated capital amounts of
$0.01 per share 79 79
Additional paid-in capital 40,045 39,341
Treasury stock, at cost; 304,200 shares (1,320) (1,320)
Retained deficit (32,167) (27,118)
Accumulated other comprehensive loss (3,453) (3,130)
-------- --------
14,049 18,717
-------- --------
Total liabilities and shareholders' equity $ 72,421 $ 75,112
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
FRONTSTEP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenue:
License fees $ 6,207 $ 7,616 $ 11,179 $ 15,287
Service 4,748 5,197 10,096 11,383
Maintenance and support 10,355 10,493 20,526 21,742
-------- -------- -------- --------
Total revenue 21,310 23,306 41,801 48,412
Cost of revenue:
License fees 3,854 3,283 6,724 6,455
Service, maintenance and support 7,061 8,450 14,892 16,541
-------- -------- -------- --------
Total cost of revenue 10,915 11,733 21,616 22,996
-------- -------- -------- --------
Gross margin 10,395 11,573 20,185 25,416
Operating expenses:
Selling, general and administrative 10,563 11,995 19,154 22,818
Research and development 1,428 1,712 3,038 3,403
Amortization of acquired intangibles 395 380 828 910
Restructuring and other charges -- -- -- --
-------- -------- -------- --------
Total operating expenses 12,387 14,087 23,021 27,131
-------- -------- -------- --------
Operating income (loss) (1,991) (2,514) (2,835) (1,715)
Other income (expense), net (1,118) (380) (2,169) (908)
-------- -------- -------- --------
Income (loss) before income taxes (3,109) (2,894) (5,004) (2,623)
Provision for (benefit from) income taxes (50) -- 45 26
-------- -------- -------- --------
Net income (loss) $ (3,059) $ (2,894) $ (5,049) $ (2,649)
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.37) $ (0.38) $ (0.62) $ (0.35)
======== ======== ======== ========
Diluted $ (0.37) $ (0.38) $ (0.62) $ (0.35)
======== ======== ======== ========
Shares used in computing per share amounts:
Basic 8,168 7,568 8,168 7,568
Diluted 8,168 7,568 8,168 7,568
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
FRONTSTEP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
DECEMBER 31,
----------------------
2002 2001
------- --------
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(5,049) $ (2,649)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation 1,340 1,648
Amortization 3,584 3,022
Amortization of Debt Discount 522 212
Deferred income taxes -- (154)
Changes in operating assets and liabilities, net of restructuring and other
charges:
Accounts receivable 2,789 3,797
Prepaid expenses and other assets 1,338 48
Accounts payable and accrued expenses 224 (1,655)
Deferred revenue (878) (1,247)
Income taxes payable/receivable 13 1,064
------- --------
Net cash provided by operating activities 3,883 4,086
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (452) (212)
Additions to capitalized software (3,630) (3,169)
------- --------
Net cash used in investing activities (4,082) (3,381)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations -- 38,231
Payments on long-term obligations (1,591) (33,477)
Proceeds from Convertible Notes 3,500 --
------- --------
Net cash provided by financing activities 1,909 4,754
Effect of exchange rate changes on cash (51) (360)
------- --------
Net increase (decrease) in cash and cash equivalents 1,659 5,099
Cash and cash equivalents at beginning of period 3,389 1,512
------- --------
Cash and cash equivalents at end of period $ 5,048 $ 6,611
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
FRONTSTEP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Description of Business. Frontstep, Inc. and its
subsidiaries ("Frontstep" or the "Company"), is a leading global provider of
business software and services for mid-sized manufacturing, distribution and
other companies, including business units of larger companies. The Company
offers a comprehensive suite of integrated, collaborative network-centric
software and services that (1) support the traditional back office management
and resources of an enterprise ("ERP"), (2) support customer relationship
management ("CRM") and other front office business activities and (3) support an
enterprise's supply chain management activities.
Founded in 1979, Frontstep is headquartered in Columbus, Ohio. The Company
has more than 4,400 customers that it serves from 28 sales and service offices
in North America, Europe and the Pacific Rim, as well as through independent
software and support business partners worldwide.
The accompanying unaudited consolidated financial statements presented
herein have been prepared by the Company and reflect all adjustments of a normal
recurring nature that are, in the opinion of management, necessary for a fair
presentation of financial results for the three and six months ended December
31, 2002 and 2001, in accordance with generally accepted accounting principles
for interim financial reporting and pursuant to Article 10 of Regulation S-X.
Certain footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These interim consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K/A for the year ended June 30, 2002 ("Annual Report"). The
results of operations for the three and six months ended December 31, 2002 are
not necessarily indicative of the results to be expected for a full year.
Comprehensive Income (Loss). The only item in addition to net income
(loss) that is included in comprehensive income (loss) is the foreign currency
translation adjustment. Comprehensive income (loss) for the three and six months
ended December 31, 2002 and 2001 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income (loss) $(3,059) $(2,894) $(5,049) $(2,649)
Foreign currency translation adjustment (156) (162) (323) (1)
------- ------- ------- -------
Comprehensive income (loss) $(3,215) $(3,056) $(5,372) $(2,650)
======= ======= ======= =======
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2 -AGREEMENT TO MERGER WITH MAPICS, INC.
On November 25, 2002, Frontstep and MAPICS, Inc. ("MAPICS") announced that
they had entered into a definitive merger agreement (the "Merger Agreement")
pursuant to which MAPICS will acquire Frontstep. Pursuant to the terms of the
Merger Agreement, shareholders of Frontstep, including former holders of the
Company's Series A Convertible Participating Preferred Stock (the "Series A
Preferred Stock"), will receive, in the aggregate, 4.2 million shares of MAPICS
common stock in exchange for all of the outstanding Frontstep shares and the
assumption by MAPICS of the Company's debt and other liabilities. Frontstep
shareholders will receive approximately 0.300846 MAPICS shares for each share of
Frontstep common stock held as of the effective time of the merger. Closing,
which is expected to occur during the first calendar quarter of 2003, remains
subject to certain closing conditions including, but not limited to, approval of
the acquisition by Frontstep shareholders and approval of the issuance of MAPICS
shares in the merger by MAPICS shareholders. In connection with the Merger
Page 6
Agreement, Frontstep officers, directors and certain shareholders, including all
former holders of the Series A Preferred Stock, have entered into agreements to
vote Frontstep shares held by them in favor of the proposed transaction.
Pursuant to these voting agreements, shareholders expected to hold a majority of
the voting shares of Frontstep common stock as of the record date have committed
to vote their shares in favor of the transaction. Under Ohio law, the
transaction must be approved by the holders of at least two-thirds of the voting
power of Frontstep. The proposed merger is intended to qualify as a tax-free
reorganization pursuant to Section 368(a) of the Internal Revenue Code.
On November 24, 2002, in connection with the Merger Agreement, the Company
entered into a letter agreement with the holders of the Series A Preferred Stock
(the "Restructuring Agreement"). Each shareholder party to the Restructuring
Agreement agreed that, prior to the closing of the proposed merger, it shall
accept, in exchange for the Series A Preferred Stock owned by it, a number of
shares of MAPICS common stock equal to a 25% discount on the Series A Preferred
Stock liquidation preference, based on the average closing price of MAPICS
common stock during the period from November 7, 2002 through November 20, 2002.
At the request of the Company, and to induce MAPICS to enter into the Merger
Agreement, each holder of Series A Preferred Stock agreed to exercise warrants
issued by the Company on March 7, 2002 to acquire shares of Frontstep common
stock and to convert their shares of Series A Preferred Stock into Frontstep
common stock prior to the record date set for the special meeting of the
Company's shareholders to vote on the Merger Agreement. In addition, each of the
holders of Series A Preferred Stock agreed to certain other matters that would
become effective at the closing of the merger, including the cancellation of
warrants that had been issued in connection with the May 2000 Series A Preferred
Stock offering.
Also on November 24, 2002, the Company and Foothill Capital Corporation
("Foothill") reached certain understandings regarding the proposed merger and
the Company's Loan and Security Agreement, dated as of July 17, 2001 (as amended
to date, the "Credit Facility"). Foothill has agreed that the Company has
complied with certain conditions set forth in Section 6.20(a) of the Credit
Facility and Sections 13(a)(i) and 13(b)(i) of the Eighth Amendment to the Loan
Agreement, dated November 12, 2002. Additionally, Foothill consented to the
Company's execution of the Merger Agreement and to the consummation of the
proposed merger provided that upon the effectiveness of the proposed merger, all
outstanding obligations under the Credit Facility are paid in full. The consent
of Foothill is subject to certain conditions, including but not limited to,
closing of the merger no later than April 30, 2003.
Frontstep and MAPICS will each hold meetings of their shareholders on
February 18, 2003 to obtain approval for the completion of the proposed
transaction. The record date for the Frontstep shareholders meeting has been set
as January 14, 2003. A joint proxy statement-prospectus dated January 15, 2003
to solicit shareholder approval of the proposed transaction, as well as other
relevant documents concerning the proposed transaction were mailed to all
shareholders of record as of the record date.
On January 13, 2003, all of the holders of Series A Preferred Stock
converted their preferred shares for Frontstep common shares at a conversion
ratio of 10.2170745 common shares for each preferred share in accordance with
the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common
shares upon the conversion of the Series A Preferred Stock. In addition, also on
January 13, 2003, holders of certain common share warrants issued in March 2002
in connection with the convertible note offering by the Company, for the
purchase of 600,000 Frontstep common shares with an exercise price of $0.01 per
share, exercised their warrants in exchange for the issuance of 600,000
Frontstep common shares. As of the record date, 13,960,615 shares of Frontstep
common stock are issued and outstanding and entitled to vote at the February 18,
2003 Frontstep shareholders' meeting.
NOTE 3 - LONG-TERM OBLIGATIONS
In July 2001, the Company executed the Credit Facility with Foothill. This
agreement has been subject to certain amendments from its execution through
December 18, 2002. The Credit Facility includes a $15,000,000, three-year term
note and a $10,000,000 revolving credit facility. Availability under the Credit
Facility is based on and secured by qualifying accounts receivable originating
within the United States and Canada. The revolving credit facility bears
interest either at the Federal Funds rate plus 1.5%, or at the Eurodollar market
rate plus 3.0%. The term note bears interest at the rate of 10.5% plus 1.5% per
annum added to principal. The term note is payable in monthly installments
commencing October 1, 2001. Under certain of the Credit Facility amendments,
monthly payments were delayed from January 2002 to July 2002 and from October to
December 2002. The Credit Facility is subject to
Page 7
customary terms and conditions and includes financial covenants for maintenance
of a minimum tangible net worth, a minimum level of earnings before interest,
taxes, depreciation and amortization and a maximum ratio of debt to earnings
before interest, taxes, depreciation and amortization. As of December 31, 2002
the Company had outstanding term borrowings of $13.8 million and no borrowings
under the revolving credit portion of the Credit Facility.
In connection with the Credit Facility, the Company issued to Foothill a
warrant to purchase 550,000 common shares of the Company. The relative fair
value of the warrant ($1,276,000) was recorded as a debt discount at the time of
issuance and is being amortized as interest expense over the three-year term of
the Credit Facility. As of December 31, 2002, the unamortized balance of the
debt discount was $639,000.
On November 12, 2002, the Company and Foothill agreed to further amend the
Credit Facility to provide temporary additional borrowing availability under the
revolving credit portion of the Credit Facility. The amendment also modified the
financial covenants for the quarter ended September 30, 2002 and reset the
covenants for the balance of fiscal 2003 due to a restatement of the Company's
financial statements affecting prior periods. After giving effect to these
modifications, the Company was in compliance with the financial covenants under
the Credit Facility.
The amendment contains certain covenants relating to the strategic
business plans and objectives of the Company and which permit Foothill to
participate in the evaluation of such plans and objectives. Because of the
subjective nature of these covenants and the control they provide Foothill over
the management of the Company, indebtedness outstanding under the Credit
Agreement has been characterized as a current liability.
Pursuant to the terms of these covenants:
(a) The Company has delivered a contingency plan to Foothill reflecting
a plan to restructure the business operations of the Company to a
level at which the Company's revenues will provide sufficient cash
flow to support the business operations of the Company, including
its debt service obligations under the Credit Facility.
(b) The Company has engaged an investment banking firm to assist the
Company in reviewing its strategic and business options.
(c) The Company and Foothill have also established certain benchmarks
with respect to the evaluation and implementation of available
strategic and business options for the Company.
If the Company fails to comply with certain of the benchmarks referred to
in (c) above, the commitments of Foothill to make advances and issue letters of
credit for the account of the Company will terminate and any such advances
and/or issuances of letter of credit may be issued by Foothill in its sole and
absolute discretion. The non-compliance with the execution and implementation of
the strategic plan or option selected pursuant to the terms and conditions of
the Credit Facility will constitute an event of default under the Credit
Facility. Due to the uncertainty of the ultimate impact of these conditions and
milestones, the Company has classified the Foothill debt as a current portion of
long-term obligations in the accompanying December 31, 2002 balance sheet.
As a condition of the November 12, 2002 amendment the Company agreed to
reduce the purchase price of Foothill's warrants to purchase 550,000 common
shares of the Company to $2.85 per share from $3.36 per share. In relation to
this amendment the Company also agreed to reduce the price at which shares of
the Company's Series A Preferred stock convert into common shares of the Company
to $2.85 per share from $6.00 per share. On January 13, 2003, in connection with
the Merger Agreement discussed in Note 2 above, the purchase price of Foothill's
warrants were again reduced from $2.85 to $2.349009. At that time, the price at
which the shares of the Series A Preferred stock convert into common shares of
the Company was also reduced to $2.349009 per share.
On March 7, 2002, the Company executed an agreement pursuant to which
certain holders of its Series A Convertible Participating Preferred Shares and
certain members of the Company's Board, including the Company's founder
(collectively, the "Investors"), agreed to provide up to $5 million to the
Company for working capital needs in exchange for convertible notes (the
"Convertible Notes") with a term expiring on May 10, 2004. Under terms of the
agreement, the Company issued an aggregate principal amount of $1.5 million of
initial notes and warrants to purchase 600,000 common shares of the Company at
$0.01 to the Investors on March 7, 2002. The relative fair
Page 8
value of the warrants, $595,000 was recorded as a debt discount at the time of
issuance and is being amortized as interest expense over the two-year expected
term of the notes. As of December 31, 2002, the unamortized balance of the debt
discount was $374,000. On August 12, 2002 and August 28, 2002, the Company
issued its remaining Convertible Notes in the aggregate principal amounts of
$2.5 million and $1.0 million, respectively, to the Investors in accordance with
the terms of a private placement transaction. The Convertible Notes, which total
$5.0 million, are each due on May 10, 2004 and are convertible into common
shares of the Company at a conversion rate of $2.4876 per share.
The initial notes in the aggregate principal amount of $1.5 million became
convertible on July 9, 2002. At that date, due to a difference between the
conversion price and market price of Frontstep's common stock and due to the
reduced carrying amount of the debt due to the debt discount, the notes carried
a beneficial conversion feature of $652,000. The Company has recorded this
beneficial conversion feature as a debt discount and is amortizing it over the
term of the notes through May 10, 2004. As of December 31, 2002, the unamortized
balance of the debt discount was $563,000.
In 2001, certain minority interest investors, including Mitsui & Co., Asia
Investment Ltd. and its affiliates (collectively, "Mitsui") exercised their put
option agreements which gave them the right to sell their shares in a Company
subsidiary to another subsidiary of the Company at a formula price as provided
in the put options, to be not less than an aggregate of $2,000,000. At that time
the Company reclassified $2,000,000 from minority interest equity to current
portion of long-term obligations. The Company and Mitsui entered into
convertible note agreements in May 2002 and July 2002 for the payment of
$2,000,000 to Mitsui in connection with the exercise of the put options.
In October 2002, the Company and Mitsui amended the terms of these
convertible note agreements with respect to $1.3 million of notes originally due
September 1, 2002. Under the modified terms, 50% of the principal amount of the
Mitsui convertible notes that were due September 1, 2002, plus the accrued
interest on such amount, is payable in common shares of the Company based upon a
conversion price of $2.85 per share. The Company was required to register the
shares for resale and had the right to issue the common shares to Mitsui at any
time prior to January 1, 2003. However, interest continues to accrue on these
notes at 4.4% until the common shares are issued and the notes are exchanged.
The remaining 50% of the principal amount of the Mitsui convertible notes due
September 1, 2002, plus accrued interest at 4.4%, was due and payable no later
than January 1, 2003. In December 2002, in connection with the Merger Agreement
discussed in Note 2 above, Mitsui agreed to extend the payment date for these
notes to February 18, 2003 to allow MAPICS and Mitsui time to negotiate revised
payment terms suitable to each party. The amended convertible note agreements
will provide that, in the event of non-payment, Mitsui has the right to require
late payment interest on the unpaid principal and accrue interest at 16% per
annum or to convert all of the unpaid principal and accrued interest into common
shares of the Company. The price per share for such conversion is the lower of
(a) $2.85 or (b) the average of the daily closing price of the Company's common
shares for the 30 consecutive trading days preceding January 1, 2003. The
Company may repay the Mitsui convertible notes at any time, including the
portion exchangeable for common shares of the Company, prior to the issuance of
such common shares.
For the remaining $700,000 of the Mitsui convertible notes, the principal
and accrued interest at 4.4% shall be due and payable in one lump sum payment
not later than March 5, 2003. The note is convertible into common shares of the
Company at the rate of $12 per share, at the option of Mitsui.
In connection with the closing of the proposed merger with MAPICS, the
Company anticipates that the Convertible Notes and the Mitsui Convertible Notes
will be renegotiated or paid off.
Page 9
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- -------
Numerator for basic and diluted income (loss)
per share - net income (loss) $ (3,059) $ (2,894) $ (5,049) $(2,649)
========== ========== ========== =======
Denominator for basic income (loss) per share -
weighted average common shares outstanding,
including warrants issuable at $0.01 per share
in 2002 8,168 7,568 8,168 7,568
Effect of dilutive warrants -- -- -- --
---------- ---------- ---------- -------
Denominator for diluted income (loss) per share
- adjusted weighted average common shares and
assumed conversions 8,168 7,568 8,168 7,568
========== ========== ========== =======
Basic net income (loss) per share $ (0.37) $ (0.38) $ (0.62) $ (0.35)
========== ========== ========== =======
Diluted net income (loss) per share $ (0.37) $ (0.38) $ (0.62) $ (0.35)
========== ========== ========== =======
During the three and six months ended December 31, 2002, share equivalents
related to warrants and employee stock options were outstanding, but were not
included in the computation of diluted net income per share because the Company
reported a net loss for the period and, therefore, the effect would be
antidilutive. Warrants for the purchase of 600,000 shares of the Company's
common stock are included in the earnings (loss) per share calculation due to
the nominal exercise price of $0.01 per share.
During the three and six months ended December 31, 2001, common equivalent
shares in stock options and warrants were outstanding. However, such options
were not included in the computation of diluted net income per share because the
Company reported a net loss for the period and, therefore, the effect would be
antidilutive.
NOTE 5 - INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. The Company has adopted the provisions of SFAS No. 142 effective on
July 1, 2001.
As of December 31, 2002, the Company had unamortized intangible assets
consisting only of goodwill of $8,287,000. The change in goodwill during the
period is due solely to foreign currency adjustment. The Company's amortizable
intangible assets include only purchased software. The gross carrying amount of
purchased software as of December 31, 2002 was $2,697,000 and accumulated
amortization of purchased software was $2,556,000. In accordance with the
provisions of SFAS No. 142, the Company performed the appropriate transitional
impairment tests related to its stated goodwill and determined that there is no
transitional impairment loss as of July 1, 2002. Also in accordance with the
provisions of SFAS No. 142, the Company reassessed the useful lives of all
purchased software and determined that no adjustments were necessary.
Page 10
NOTE 6 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, develops, markets and supports business software and
services for mid-sized manufacturing, distribution and other companies,
including business units of larger companies. The Company operates exclusively
in this market and, therefore, only reports on one primary segment.
Summarized financial information attributable to each of the Company's
geographic areas is shown in the following table (in thousands):
NORTH ASIA/
AMERICA EUROPE PACIFIC
-------- ------- -------
THREE MONTHS ENDED DECEMBER 31, 2002
Total revenue $ 15,139 $ 4,129 $ 2,042
Operating income (loss) before amortization of intangibles (373) (756) (467)
Operating income (loss) (768) (756) (467)
THREE MONTHS ENDED DECEMBER 31, 2001
Total revenue $ 16,675 $ 4,263 $ 2,368
Operating income (loss) before amortization of intangibles (2,276) 312 (170)
Operating income (loss) (2,709) 365 (170)
SIX MONTHS ENDED DECEMBER 31, 2002
Total revenue $ 29,391 $ 7,966 $ 4,444
Operating income (loss) before amortization of intangibles (683) (617) (707)
Operating income (loss) (1,511) (617) (707)
SIX MONTHS ENDED DECEMBER 31, 2001
Total revenue $ 35,603 $ 7,816 $ 4,993
Operating income (loss) before amortization of intangibles (1,232) 507 (80)
Operating income (loss) (2,142) 507 (80)
NOTE 7 - SUBSEQUENT EVENTS
On January 13, 2003, in connection with the Merger Agreement discussed in
Note 2 above, the Company reduced the purchase price of Foothill's warrant to
purchase 550,000 shares of the Company's common stock to $2.349009 from $2.85
per share. As a result, the Company also reduced the price at which the
Company's Series A Preferred shares convert into common stock to $2.349009 from
$2.85 per share.
On January 13, 2003, also in connection with the Merger Agreement, all of
the holders of Series A Preferred Stock converted their preferred shares for
Frontstep common shares at a conversion ratio of 10.2170745 common shares for
each preferred share in accordance with the Restructuring Agreement. As a
result, Frontstep issued 5,792,397 common shares upon the conversion of the
Series A Preferred Stock. In addition, also on January 13, 2003, holders of
certain common share warrants issued in connection with the Company's
convertible note offering, for the purchase of 600,000 Frontstep common shares
with an exercise price of $0.01 per share, exercised their warrants in exchange
for the issuance of 600,000 Frontstep common shares. As of the record date,
13,960,615 shares of Frontstep common stock are issued and outstanding and
entitled to vote at the February 18, 2003 Frontstep shareholders' meeting.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current beliefs, plans,
objectives and expectations of the Company's management. The words "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "would" and similar
expressions identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Such risks and uncertainties are
set forth herein and in the Company's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 2002. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or update or publicly release the results of any revision or update to
these forward-looking statements. Readers should carefully review the risk
factors set forth in each of the Company's reports or documents filed from time
to time with the Securities and Exchange Commission.
The following information should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes included elsewhere in this
Form 10-Q. The following information should also be read in conjunction with the
Company's audited Consolidated Financial Statements and related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended June 30, 2002, as contained in the Annual Report.
OVERVIEW
Frontstep, Inc. is a leading global provider of software and services for
midsize discrete, to-order manufacturers and business units of larger companies.
For more than 23 years, Frontstep has helped manufacturers create and implement
business solutions -- including extended ERP, customer relationship management,
and supply chain management -- that simplify and streamline business processes
and operations. Through these innovative and practical solutions, manufacturers
can respond better and faster to customers' demands for quality products and
services.
For the last several years, since the second quarter of fiscal 2000, our
industry, and specifically, our Company have experienced (1) dramatic changes in
worldwide economic conditions, (2) dramatic changes in our market conditions
resulting from a recession in many manufacturing industries and (3) a lessening
of information technology spending that is a result of these economic and market
conditions. Prior to fiscal 2000, and well before these economic and market
changes began to affect our results of operations, we began to enhance our
product offerings beyond traditional ERP systems to participate in higher growth
market segments. These enhancements included a comprehensive suite of integrated
software and services that support (1) the management and resources of an
enterprise, (2) customer relationship management and other front office business
activities and (3) an enterprise's supply chain management activities. In
November 2000, the shareholders of the Company approved a change in the
Company's name to Frontstep, Inc. to reflect this transformation in our
corporate identity. In July 2002, we achieved the culmination of these efforts
with the announcement of SyteLine 7, a new version of our flagship ERP product
that fully integrates the Company's efforts in traditional ERP, customer
relationship management and supply chain management. Additionally, the release
of SyteLine 7 offers our customers a product based on Microsoft SQL Server
technology which supports Microsoft's .NET strategy. We believe our strategic
efforts to develop this total business system on an industry-standard technology
platform greatly expand our market opportunities, increase our potential for a
stronger business partner network and will provide better gross margins in the
years ahead.
However, over the last few years, it has been difficult to manage and
predict our revenues due to ever more difficult economic conditions and a lack
of demand from manufacturers who have significantly limited their capital
spending budgets, especially for information technology investments. This
situation has been most severe in North America which has been mired in a
recession for nearly two years. We have reacted to these difficult economic and
market conditions in several ways. We have accomplished significant reductions
in the Company's operating costs and we have completed several financing
transactions; each with the intentions of balancing our costs with expected
revenues and of ensuring adequate cash to meet our operating needs. In the
quarter ended June 30, 2002, we had operating income in excess of $1.0 million,
and net income of $457,000 or $0.04 per share.
Page 12
In the quarter ended September 30, 2002, we announced the availability of
SyteLine 7, our newest release of our flagship ERP package, the first based on
Microsoft SQL technology. Although SyteLine 7 has been very well received in the
marketplace, we believe that it did have a negative impact on revenue in the
September quarter, as we believe customers delayed their buying decision in
anticipation of our new product release. As a result of general economic
conditions and the impact of our new product release, revenue and operating
income fell $1.9 million from the prior quarter ended June 30, 2002. We reported
an operating loss of $0.8 million and a net loss of $2.0 million, or $0.24 per
share in the September quarter.
In the current quarter ended December 31, 2002 (the "current fiscal
quarter") we expected revenues would be higher than the revenues reported for
the quarter ended September 30, 2002 as a result of seasonal fluctuations and
our SyteLine 7 product transition. However, continued severe economic conditions
resulted in more limited spending by our customers and potential customers. In
addition, our planned merger with MAPICS was announced during the quarter which
we believe resulted in numerous decisions by potential customers to wait until
the merger is completed before finalizing their spending decisions. As a result,
we reported lower revenues in the current fiscal quarter than we had expected
and only slightly higher than revenues reported for the September 30, 2002
quarter. We also reported a net loss of $3.1 million or $0.37 per share. Our
expectation is for continued difficulty in the economy and a lack of information
technology spending in our target manufacturing market. While the economy has,
at times, shown signs of improvement over the last several months, we continue
to be concerned about our ability to predict revenues in the near term, due to
current economic and market conditions. As a result we may not achieve positive
operating results in the near future or until economic and technology spending
conditions improve.
AGREEMENT TO MERGER WITH MAPICS, INC.
On November 25, 2002, Frontstep and MAPICS announced that they had entered
into a definitive merger agreement pursuant to which MAPICS will acquire
Frontstep by merging a wholly owned subsidiary of MAPICS into Frontstep, after
which MAPICS will be the sole shareholder of Frontstep. In the merger, each
Frontstep shareholder, other than those perfecting dissenters' rights, will
receive for each Frontstep common share that the shareholder owns, approximately
0.300846 of a share of MAPICS common stock. Collectively, the Frontstep
shareholders will receive in the merger 4,200,000 shares of MAPICS common stock
and MAPICS will assume the Company's debt and other liabilities. The merger is
intended to qualify as a tax-free reorganization, in which Frontstep
shareholders generally would not recognize gain or loss for U.S. federal income
tax purposes as a result of the exchange in the merger of Frontstep common
shares for MAPICS common stock. The merger is currently expected to close during
the first calendar quarter of 2003; however, it remains subject to certain
closing conditions, including, but not limited to, the approval of the merger by
Frontstep shareholders and the approval of the issuance of shares of MAPICS
common stock by the MAPICS shareholders.
The MAPICS board of directors has unanimously approved and adopted the
merger agreement and determined that the merger agreement and the merger are
advisable, fair to, and in the best interests of, MAPICS and its shareholders
and has unanimously recommended that MAPICS shareholders vote to approve the
issuance of MAPICS common stock in the merger.
The Frontstep board of directors has unanimously approved and adopted the
merger agreement and determined that the merger agreement and the merger are
advisable, fair to, and in the best interests of, Frontstep and its shareholders
and has unanimously recommended that Frontstep shareholders vote to adopt the
merger agreement and approve the merger.
In connection with the merger agreement, Frontstep directors, executive
officers and certain shareholders holding approximately 60.90% of the voting
power of Frontstep have entered into agreements to vote Frontstep shares held by
them in favor of the proposed transaction. Under Ohio law, the transaction must
be approved by the holders of at least two-thirds of the voting power of
Frontstep.
On November 24, 2002, in connection with the proposed merger transaction
with MAPICS, Frontstep entered into a letter agreement with Fallen Angel Equity
Fund, L.P. and certain entities affiliated with Morgan Stanley. At the time the
letter agreement was executed, these entities held all of the outstanding
Frontstep Series A Preferred Stock.
Page 13
Under the terms of the letter agreement, the holders of the Series A
Preferred Stock agreed to accept, at the effective time of the merger and in
exchange for their Frontstep shares, a number of shares of MAPICS common stock
equal to 25% discount on the Series A Preferred Stock's liquidation preference,
based on the average closing price of MAPICS common stock during the period from
November 7, 2002 through November 20, 2002. Additionally, under the letter
agreement, each holder of the Series A Preferred Stock agreed to:
(a) convert its Series A Preferred Stock into Frontstep common
shares prior to the record date set for the special meeting of Frontstep's
shareholders to vote on the merger agreement, which is a condition to
MAPICS' obligation to complete the merger;
(b) exercise warrants issued by Frontstep on March 7, 2002 to
acquire Frontstep common shares; and
(c)cancel, at the closing of the proposed merger, warrants to
acquire 453,546 Frontstep common shares issued by Frontstep to the holders
of the Series A Preferred Stock on May 10, 2000.
Also on November 24, 2002, the Company and Foothill reached certain
understandings regarding the proposed merger and the Company's Credit Facility.
.. Foothill has agreed that the Company has complied with certain conditions set
forth in Section 6.20(a) of the Credit Facility and Sections 13(a)(i) and
13(b)(i) of the Eighth Amendment to the Loan Agreement, dated November 12, 2002.
Additionally, Foothill has consented to the Company's execution of the Merger
Agreement and to the consummation of the proposed merger provided that upon the
effectiveness of the proposed merger, all outstanding obligations under the
Credit Facility are paid in full. The consent of Foothill is subject to certain
conditions, including but not limited to, closing of the merger no later than
April 30, 2003.
Frontstep and MAPICS will each hold meetings of their shareholders on
February 18, 2003 to obtain approval for the completion of the proposed
transaction. The record date for the Frontstep meeting has been set as January
14, 2003. A joint proxy statement-prospectus dated January 16, 2003 to solicit
shareholder approval of the proposed transaction, as well as other relevant
documents concerning the proposed transaction were mailed to all shareholders of
record as of the record date.
On January 13, 2003, all of the holders of Series A Preferred Stock
converted their preferred shares for Frontstep common shares at a conversion
ratio of 10.2170745 common shares for each preferred share in accordance with
the Restructuring Agreement. As a result, Frontstep issued 5,792,397 common
shares upon the conversion of the Series A Preferred Stock. In addition, also on
January 13, 2003, holders of certain common share warrants issued in connection
with the Company's convertible note offering, for the purchase of 600,000
Frontstep common shares with an exercise price of $0.01 per share, exercised
their warrants in exchange for the issuance of 600,000 Frontstep common shares.
As of the record date, 13,960,615 shares of Frontstep common stock are issued
and outstanding and entitled to vote at the February 18, 2003 Frontstep
shareholders' meeting.
Shareholders of MAPICS and Frontstep are urged to read the joint proxy
statement-prospectus regarding the proposed transaction and all other relevant
documents sent to them with the joint proxy statement-prospectus because they
contain important information. Shareholders and interested parties may obtain a
free copy of the joint proxy statement-prospectus, as well as other filings
containing information about MAPICS and Frontstep, at the SEC's Internet site
(HTTP://WWW.SEC.GOV).
CRITICAL ACCOUNTING POLICIES
The Company's total revenue is derived primarily from licensing software,
providing related services, including installation, implementation, training,
consulting and systems integration and providing maintenance and support on an
annual basis. Revenue is accounted for in accordance with Statement of Position
97-2, Software Revenue Recognition, as amended and interpreted from time to
time. License fees revenue is generally recognized when the software product is
shipped. Services revenues are recognized as the services are performed.
Revenues from maintenance agreements are billed periodically, deferred and
recognized straight-line over the term of the agreements.
Cost of license fees revenue includes royalties, amortization of
capitalized software development costs and software delivery expenses. Cost of
service, maintenance and support revenue includes the personnel and related
Page 14
overhead costs for implementation, training and customer support services,
together with fees paid to third parties for subcontracted services.
Selling, general and administrative expenses consist of personnel,
facilities and related overhead costs, together with other operating costs of
the Company, including advertising and marketing costs.
Research and development expenses include personnel and related overhead
costs for product development, enhancement, upgrades, quality assurance and
testing. The amount of such expenses is dependent on the nature and status of
the development process for the Company's products. Development costs
capitalized in a given period are dependent upon the nature and status of the
development process. Upon general release of a product, related capitalized
costs are amortized over three to five years and recorded as license fees cost
of revenue.
Frontstep's discussion and analysis of its financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our critical accounting policies
and estimates, including those related to revenue recognition, bad debts,
capitalized software, intangible assets, contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue recognition. The Company's total revenue is derived
primarily from licensing software, providing related services, including
installation, implementation, training, consulting and systems integration
and providing maintenance and support on an annual basis. Revenue is
accounted for in accordance with Statement of Position 97-2, Software
Revenue Recognition, as amended and interpreted from time to time.
Revenue is derived principally from the sale of internally produced
software products and maintenance and support agreements from software
sales. Generally, the Company licenses software under non- cancelable
license agreements and provides product support services and periodic
updates including training, installation, consulting and maintenance.
License fees revenue is generally recognized when a non- cancelable
license agreement has been signed, the software product has been shipped,
there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable and collection is considered probable. For customer
license agreements, which meet these recognition criteria, the portion of
the fees related to software licenses, which is determined using the
residual method, will generally be recognized in the current period, while
the portion of the fees related to services is recognized as the services
are performed. The amount allocated to services revenues is based on the
Company's standard rate per hour. Revenue from maintenance and support
agreements, which is determined based on renewal rates, is billed
periodically, deferred and recognized ratably over the life of the
agreements. In the event revenue is contingent upon customer acceptance
criteria, the Company defers that revenue until the contingencies are
resolved.
Bad Debts. A considerable amount of judgment is required when
determining the allowance for bad debt, including assessing the
probability of collection as well as the credit-worthiness of each
customer. The Company has recorded bad debt reserves in recent periods due
to recent economic conditions especially as they affect the Company's
customer base. The Company may determine in future periods that additional
charges must be recorded.
Capitalized Software. The Company capitalizes the cost of developing
its software products in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Capitalized software is stated at the lower of amortized cost or net
realizable value. The Company's judgment is required when determining the
net realizable value of its software and any impairment loss could have a
material adverse impact on our financial condition and results of
operations.
Impairment of Intangible Assets. The Company periodically evaluates
acquired intangibles for potential
Page 15
impairment indicators. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events could cause us to
conclude that impairment indicators exist and that goodwill and other
intangible assets associated with our acquired businesses are impaired.
Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations.
Contingencies and Litigation. The Company is subject to proceedings,
lawsuits and other claims related to ongoing business and other matters.
We are required to assess the likelihood of any adverse judgments or
outcomes to these matters as well as potential ranges of probable losses.
If an adverse judgment or outcome can be predicted, an accrual in the
determined amount is recorded on the Company's general ledger. An accrual
may change in the future due to new developments in each matter or changes
in approach such as a change in settlement strategy in dealing with these
matters. The Company is not involved in any actions that currently require
an accrual to be recorded.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2001
Revenue. Total revenue decreased $2.0 million, or 8.6%, to $21.3 million
in the current fiscal quarter from $23.3 million in the three months ended
December 31, 2001 (the "prior year fiscal quarter" or "fiscal 2002 quarter").
The total revenue mix is shown in the table below (in thousands, except
percentage data):
THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001
-------------------- --------------------
License fees revenue $ 6,207 29.1% $ 7,616 32.7%
Service revenue 4,748 22.3% 5,197 22.3%
Maintenance and support revenue 10,355 48.6% 10,493 45.0%
------- ----- ------- -----
Total revenue $21,310 100.0% $23,306 100.0%
======= ===== ======= =====
License fees revenue decreased 18.5% in the fiscal 2003 quarter from the
fiscal 2002 quarter. The Company believes that the decrease in license fees
revenue in the fiscal 2003 quarter is due to the current economic climate that
is causing the Company's customers and potential customers to defer their buying
decisions related to large capital investments, particularly information
technology investments. Additionally, the Company believes that its pending
merger with MAPICS also caused customers to delay purchasing decisions. The
Company expects that license fees revenues will remain stable in the short-term
but will not begin to significantly grow again until the current economic
climate improves and demand for our product improves as a result.
Service revenue decreased 8.6% in the fiscal 2003 quarter from the fiscal
2002 quarter. The decrease is primarily the result of sluggish license fees
revenue experienced by the Company in the last year. Service revenues in
particular are directly dependent on new license purchases by new and existing
customers. The Company expects that service revenues will remain stable in the
short-term and will improve in the quarters that follow increased license fee
revenues.
Maintenance and support revenue decreased 1.3% in the fiscal 2003 quarter
from the fiscal 2002 quarter. Maintenance and support contracts and the related
revenue from these contracts have been steady over the last year as the base of
customers under such programs has remained consistent. The Company expects such
revenues to remain stable in the short-term.
Cost of Revenue. Total cost of revenue as a percentage of total revenue
increased to 51.2% for the fiscal 2003 quarter from 50.3% for the fiscal 2002
quarter.
Cost of license fees revenue increased $0.6 million, or 17.4%, to $3.9
million in the fiscal 2003 quarter from $3.3 million in the fiscal 2002 quarter
and as a percentage of license fees revenue, increased to 62.1% in the fiscal
2003 quarter from 43.1% in the fiscal 2002 quarter. The percentage increase is
primarily attributable to lower
Page 16
license fees revenue affecting certain fixed and related costs, including the
amortization of capitalized software, which has grown in the last year as we
completed our development of SyteLine 7.
Cost of service, maintenance and support revenue decreased $1.4 million,
or 16.4%, to $7.1 million in the fiscal 2003 quarter from $8.5 million in the
fiscal 2002 quarter and as a percentage of service and maintenance and support
revenue, decreased to 46.8% in the fiscal 2003 quarter from 53.9% in the fiscal
2002 quarter. The decrease is attributable to efforts during the last two years
to reduce costs, particularly relating to our services. The percentage decrease
is the result of a larger percentage of maintenance revenue, which has a higher
margin than services revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $1.4 million, or 11.9%, to $10.6 million in
the fiscal 2003 quarter from $12.0 million in the fiscal 2002 quarter. Such
expenses as a percentage of total revenue decreased to 49.6% in the fiscal 2003
quarter from 51.5% in the fiscal 2002 quarter. The decrease in costs is
attributable to the continued cost saving measures that the Company has been
implementing over the past two fiscal years. The Company expects that these
costs will further decrease as a percentage of total revenue when total revenue
increases since many of these costs are fixed in nature.
Research and Development. Total research and development costs, including
amounts capitalized, decreased $0.4 million or 12.1% to $2.9 million for the
fiscal 2003 quarter from $3.3 million for the fiscal 2002 quarter and decreased
as a percentage of total revenue to 13.5% in the fiscal 2003 quarter from 14.2%
in the fiscal 2002 quarter. Although total research and development spending
decreased from the fiscal 2002 quarter, the Company is continuing to spend a
substantial portion of total revenue on the development of its expanded product
offerings and product capabilities and development of future releases of the
Company's ERP software. The Company believes that these investments are critical
to the success and market acceptance of its new product offerings and total
suite of integrated collaborative business systems.
The Company capitalized research and development costs of $1.4 million
during the fiscal 2003 quarter and $1.6 million during the fiscal 2002 quarter.
Provision for (Benefit from) Income Taxes. The provision for (benefit
from) income taxes for the fiscal 2003 and 2002 quarters reflects an effective
tax rate of 1.6% and 0%, respectively. The effective tax rate in both periods
differs from the expected corporate tax rate primarily due to valuation
allowances recorded against the deferred tax assets related to net operating
losses incurred domestically, foreign losses incurred in countries where no tax
benefits will be received for the losses and the non-deductibility of the
amortization of certain intangibles.
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER
31, 2001
Revenue. Total revenue decreased $6.6 million, or 13.7%, to $41.8 million
in the six months ended December 31, 2002 (the "current fiscal six month
period") from $48.4 million in the six months ended December 31, 2001 (the
"prior fiscal six month period"). The total revenue mix is shown in the table
below (in thousands, except percentage data):
SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001
-------------------- --------------------
License fees revenue $11,179 26.7% $15,287 31.6%
Service revenue 10,096 24.2% 11,383 23.5%
Maintenance and support revenue 20,526 49.1% 21,742 44.9%
------- ----- ------- -----
Total revenue $41,801 100.0% $48,412 100.0%
======= ===== ======= =====
License fees revenue decreased 26.9% in the current fiscal six month
period from the prior fiscal six month period. The Company believes this
reduction in revenue is due primarily to the current economic conditions as
discussed above for the three month period. The Company also believes customers'
delayed buying decisions are, in some instances, related to our pending merger
with MAPICS. The Company expects that license fees revenues will remain stable
in the short-term but will not begin to significantly grow again until the
current economic climate improves and demand for our product improves as a
result.
Page 17
Service revenue decreased 11.3% in the current fiscal six month period
from the prior fiscal six month period. The decrease is primarily the result of
sluggish license fees revenue experienced by the Company in the last year.
Service revenues in particular are directly dependent on new license purchases
by new and existing customers. The Company expects that service revenues will
remain stable in the short-term and will improve in the quarters that follow
increased license fee revenues.
Maintenance and support revenue decreased 5.6% in the current fiscal six
month period from the prior fiscal six month period. Maintenance and support
contracts and the related revenue from these contracts have been steady over the
last few years as the base of customers under such programs has remained
consistent. The Company expects such revenues to remain stable in the
short-term.
Cost of Revenue. Total cost of revenue as a percentage of total revenue
increased to 51.7% for the current fiscal six month period from 47.5% for the
prior fiscal six month period.
Cost of license fees revenue increased $0.8 million, or 11.7%, to $7.2
million in the current fiscal six month period from $6.5 million in the prior
fiscal six month period and as a percentage of license fees revenue, increased
to 64.5% in the current fiscal six month period from 42.2% in the prior fiscal
six month period. The increase is primarily attributable to increased
amortization of capitalized software as a result of the completion of SyteLine
7. The percentage increase is primarily attributable to lower license fees
revenue affecting certain fixed and related costs, including the amortization of
capitalized software which has grown in the last year as we completed our
development of SyteLine 7.
Cost of service, maintenance and support revenue decreased $2.1 million,
or 12.9%, to $14.4 million in the current fiscal six month period from $16.5
million in the prior fiscal six month period and as a percentage of service,
maintenance and support revenue, decreased to 47.0% in the current fiscal six
month period from 49.9% in the prior fiscal six month period. The decrease is
attributable to our efforts over the last two years to reduce costs,
particularly relating to our services. The percentage decrease is due to a
higher percentage of maintenance and support revenues which has higher margins
than services revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $3.7 million, or 16.1%, to $19.2 million in
the current fiscal six month period from $22.8 million in the prior fiscal six
month period. Such expenses as a percentage of total revenue decreased to 45.8%
in the current fiscal six month period from 47.1% in the prior fiscal six month
period. This reduction is due to the continued cost reduction and cost savings
efforts undertaken over the past two years.
Research and Development. Total research and development expenses,
including amounts capitalized, increased $0.1 million or 1.5%, to $6.7 million
for the current fiscal six-month period from $6.6 million for the prior fiscal
six month period and increased as a percentage of total revenues to 16.0% in the
current fiscal six month period from 13.6% in the prior fiscal six month period.
The Company is continuing to spend a substantial portion of total revenues on
the development of its e-business software products and capabilities,
development of future releases of the Company's ERP software and development of
interfaces with third-party software products. The Company believes that these
investments are critical to the success and market acceptance of its new
e-business offerings and the total suite of integrated collaborative business
systems.
The Company capitalized research and development costs of $3.6 million
during the current fiscal six month period and $3.2 million during the prior
fiscal six month period.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes for the current and prior fiscal six month periods reflects an effective
tax rate of 0.9% and 1.0%, respectively. The effective tax rate in the current
fiscal six month period differs from the expected corporate tax rate primarily
due to valuation allowances recorded against the deferred tax assets related to
net operating losses incurred domestically, foreign losses incurred in countries
where no tax benefits will be received for the losses and the non-deductibility
of the amortization of certain intangibles.
Page 18
QUARTERLY RESULTS
The Company's results of operations have fluctuated on a quarterly basis.
The Company's expenses, with the principal exception of sales commissions and
certain components of cost of revenue, are generally fixed and do not vary with
revenue. As a result, any shortfall of actual revenue in a given quarter would
adversely affect net earnings for that quarter.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash and cash equivalents of
$5.0 million and working capital deficit of $7.5 million. During the six months
ended December 31, 2002, the Company was $3.9 million cash positive from
operating activities. The Company purchased $0.5 million of property and
equipment and used $3.6 million in cash for investments in capitalized software.
The balance outstanding on the Foothill term note as of December 31, 2002 was
$13.8 million. As of December 31, 2002 there were no borrowings under the
revolving Credit Facility.
As we discussed in "Overview" above, it has been difficult in the last
several quarters to manage and predict our revenues for any quarterly period.
While customer activity has not diminished recently, economic conditions and
industry-wide lack of demand for new investments may cause us to generate less
revenue than we expect. If we do not generate sufficient revenue to meet our
forecast in any quarter in the current fiscal year, the Company may not be in
compliance with one or more of the financial covenants under the Credit
Facility.
In August 2002, we completed the funding of $3.5 million from the issuance
of Convertible Notes. However, we continue to experience difficulties in meeting
all of our cash operating needs, due to unpredictability in our revenues and the
impact of economic conditions on our customers. If we do not meet our revenue
expectations in any quarters in the current fiscal year, we may have further
difficulty in meeting our operating cash needs.
On November 12, 2002, the Company and Foothill further amended the Credit
Facility to provide for, among other things, temporary additional borrowing
availability under the revolving credit portion of the Credit Facility and the
deferral of certain payments owing under the term loan portion of the Credit
Facility. In addition, the amendment further amends the financial covenants.
The amendment contains certain covenants relating to the strategic and
business plans and objectives of the Company and which permit Foothill to
participate in the evaluation of such plans and objectives. Because of the
subjective nature of these covenants and the control they provide Foothill over
the management of the Company, indebtedness outstanding under the Credit
Facility has been characterized as a current liability.
Pursuant to the terms of these covenants:
(b) The Company has delivered a contingency plan to Foothill reflecting
a plan to restructure the business operations of the Company to a
level at which the Company's revenues will provide sufficient cash
flow to support the business operations of the Company, including
its debt service obligations under the Credit Facility.
(c) The Company has engaged an investment banking firm to assist the
Company in reviewing its strategic and business options.
(d) The Company and Foothill have also established certain benchmarks
with respect to the evaluation and implementation of available
strategic and business options for the Company.
If the Company fails to comply with certain of the benchmarks referred to
in (c) above, the commitments of Foothill to make advances and issue letters of
credit for the account of the Company will terminate and any such advances
and/or issuances of letter of credit may be issued by Foothill in its sole and
absolute discretion. The non-compliance with the execution and implementation of
the strategic plan or option selected pursuant to the terms and conditions of
the Credit Facility will constitute an event of default under the Credit
Facility.
There can be no assurance that we can achieve levels of quarterly revenue
sufficient to satisfy our cash flow needs or to meet the financial covenants of
the Credit Facility in future periods or that the bank will continue to provide
special financing arrangements to support us in meeting our operating cash
needs. Additionally, we may not
Page 19
be able to obtain other debt or equity financing from other sources.
On November 25, 2002, Frontstep and MAPICS announced that they had entered
into the Merger Agreement pursuant to which MAPICS will acquire Frontstep.
Pursuant to the terms of the Merger Agreement, shareholders of Frontstep,
including former holders of the Company's Series A Preferred Stock, will
receive, in the aggregate, 4.2 million shares of MAPICS common stock in exchange
for all of the outstanding shares and the assumption by MAPICS of the Company's
debt and other liabilities. Frontstep shareholders will receive approximately
0.300846 MAPICS shares for each share of Frontstep common stock held as of the
effective time of the merger. Closing, which is expected to occur during the
first calendar quarter of 2003, remains subject to certain closing conditions
including, but not limited to, approval of the acquisition by MAPICS and
Frontstep shareholders. In connection with the Merger Agreement, Frontstep
officers, directors and certain shareholders, including all former holders of
the Series A Preferred Stock, have entered into agreements to vote shares held
by them in favor of the proposed transaction. Pursuant to these voting
agreements, shareholders expected to hold a majority of the voting shares of
Frontstep common stock as of the record date have committed to vote their shares
in favor of the transaction. Under Ohio law, the transaction must be approved by
the holders of at least two-thirds of the voting power of Frontstep. The
proposed merger is intended to qualify as a tax-free reorganization pursuant to
Section 368(a) of the Internal Revenue Code
On November 24, 2002, the Company and Foothill reached certain
understandings regarding the proposed merger and the Company's Credit Facility.
Foothill has agreed that the Company has complied with certain conditions set
forth in Section 6.20(a) of the Credit Facility and Sections 13(a)(i) and
13(b)(i) of the Eighth Amendment to the Credit Facility, dated November 12,
2002. Additionally, Foothill consented to the Company's execution of the Merger
Agreement and to the consummation of the proposed merger provided that upon the
effectiveness of the proposed merger, all outstanding obligations under the
Credit Facility are paid in full. The consent of Foothill is subject to certain
conditions, including but not limited to, closing of the merger no later than
April 30, 2003.
Frontstep and MAPICS will each hold meetings of their shareholders on
February 18, 2003 to obtain approval for the completion of the proposed
transaction. The record date for the Frontstep shareholders meeting has been set
as January 14, 2003. A joint proxy statement-prospectus dated January 15, 2003
to solicit shareholder approval of the proposed transaction, as well as other
relevant documents concerning the proposed transaction were mailed to all
Frontstep shareholders of record as of the record date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange. Frontstep's revenues originating outside of North
America were 29% and 28% of total revenue for the current and prior year fiscal
quarters, respectively and 30% and 26% for the current and prior fiscal six
month periods, respectively. By geographic region, revenues originating in
Europe were 19% and 18% of total revenue for the current and prior year fiscal
quarters, respectively and 19% and 16% for the current and prior fiscal six
month periods, respectively. Revenues originating in Asia Pacific were 10% of
total revenue for both the current and prior year fiscal quarters, respectively
and 11% and 10% for the current and prior fiscal six month periods,
respectively. International sales are made mostly from the Company's foreign
sales subsidiaries in the local countries and are typically denominated in the
local currency of each country. These subsidiaries also incur most of their
expenses in the local currency. Accordingly, all foreign subsidiaries use the
local currency as their functional currency.
The Company's exposure to foreign exchange rate fluctuations arises in
part from intercompany accounts in which costs of software, including certain
development costs, incurred in the United States are charged to the Company's
foreign sales subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. Foreign currency gains and losses will continue to result from
fluctuations in the value of the currencies in which the Company conducts its
operations as compared to the U.S. dollar and future operating results will be
affected by gains and losses from foreign currency exposure. The Company does
not currently hedge against losses arising from its foreign currency exposure.
The Company has considered the potential impact of a 10% adverse change in
foreign exchange rates and it believes that such a change would not have a
material impact on financial results or financial condition in the coming fiscal
year.
Page 20
Interest Rates. The Company invests its surplus cash in financial
instruments such as short-term marketable securities and interest-bearing time
deposits. The Company also incurs interest at variable rates, dependent upon the
prime rate or LIBOR rate that may be in effect from time to time. The Company
has considered the potential impact of an adverse change in interest rates of
one hundred basis points and it believes that such a change would not have a
material impact on financial results or financial condition in the coming fiscal
year.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
(b) Changes in internal controls
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their last evaluation.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to legal proceedings and claims which arise in the
normal course of business. While the outcome of these matters cannot be
predicted with certainty, management does not believe the outcome of any of
these legal matters will have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 12, 2002, in connection with an amendment of the Credit
Facility with Foothill, the Company agreed to reduce the purchase price of
Foothill's warrants to purchase 550,000 common shares of the Company to $2.85
per share from $3.36 per share. In relation to this amendment the Company also
agreed to reduce the price at which shares of the Company's Series A Preferred
Stock convert into common shares of the Company to $2.85 per share from $6.00
per share.
On January 13, 2003, in connection with the Merger Agreement discussed in
Note 2 above, the Company reduced the purchase price of Foothill's warrant to
purchase 550,000 common shares of the Company to $2.349009 from $2.85 per share.
As a result, the Company also reduced the price at which the Company's Series A
Preferred Stock convert into common stock to $2.349009 from $2.85 per share.
On January 13, 2003, also in connection with the Merger Agreement, all of
the holders of Series A Preferred Stock converted their preferred shares for
Frontstep common shares at a conversion ratio of 10.2170745 common shares for
each preferred share in accordance with the Restructuring Agreement. As a
result, Frontstep issued 5,792,397 common shares upon the conversion of the
Series A Preferred Stock. In addition, also on January 13, 2003, holders of
certain common share warrants issued in connection with the Company's
convertible note offering, for the purchase of 600,000 Frontstep common shares
with an exercise price of $0.01 per share, exercised their warrants in exchange
for the issuance of 600,000 Frontstep common shares. The 600,000 shares of
Frontstep common stock issued upon exercise of the warrants are not registered
shares and will be subject to certain trading restrictions. The 600,00 shares of
unregistered Frontstep common stock were issued in reliance upon an exemption
from registration pursuant to Section 4(2) of the Securities Act of 1933, and
Rule 506 promulgated under the Act.
Page 21
As of the record date, 13,960,615 shares of Frontstep common stock are issued
and outstanding and entitled to vote at the February 18, 2003 Frontstep
shareholders' meeting.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits filed with this Quarterly Report on Form 10-Q
following the Signature Page.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on November 6, 2002
indicating under Item 5 (Other Events) that the Company was restating its
Statements of Operations and its Balance Sheets for the years ended June 30,
2001 and 2002 to reflect a change in accounting for a specific portion of its
annual revenues for each of its fiscal years ended June 30, through June 30,
2002. This restatement did not have a material effect on our reported results
for any of our recent fiscal years.
The Company filed an amended Form 10-K with the Securities and Exchange
Commission in December 2002 for the year ended June 30, 2002 to fully restate
the financial statements presented therein.
On November 26, 2002, the Company filed a Current Report on Form 8-K
indicating under Item 5. (Other Events) that the Company and MAPICS, Inc. had
entered into a definitive merger agreement pursuant to which MAPICS will acquire
Frontstep. The Company also included as exhibits to this Current Report on Form
8-K certain of the documents executed by the parties, including the Merger
Agreement.
Page 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTSTEP, INC.
Dated: February 13, 2003 By: /s/ Daniel P. Buettin
----------------- -------------------------------------
Daniel P. Buettin
Vice President, Finance,
Chief Financial Officer and Secretary
(on behalf of the Registrant and as
Principal Financial Officer)
Page 23
CERTIFICATIONS
I, Stephen A. Sasser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontstep, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
By: /s/ STEPHEN A. SASSER
----------------------------------------
Stephen A. Sasser
President and Chief Executive Officer
Page 24
I, Daniel P. Buettin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontstep, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
By: /s/ DANIEL P. BUETTIN
------------------------------------------
Daniel P. Buettin
Vice President, Finance,
Chief Financial Officer and Secretary,
Principal Financial and Accounting Officer
Page 25
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
2(a) Agreement and Plan of Merger dated Incorporated herein by reference to
November 24, 2002 by and among Exhibit 2(a) to Registrant's
MAPICS, Inc., Frontstep, Inc. and Current Report on From 8-K filed on
FP Acquisition Sub, Inc. November 26, 2002 (File No.
0-19024)
10(a) Amendment to Convertible Incorporated herein by reference to
Subordinated Note Agreement, dated Exhibit 10(a) to Registrant's
as of September 16, 2002, by and Quarterly Report on From 10-Q for
between Frontstep Solutions Group, the fiscal quarter ended September
Inc. and MVC Corporation 30, 2002 (File No. 0-19024)
10(b) Amendment to Convertible Incorporated herein by reference to
Subordinated Note Agreement, dated Exhibit 10(b) to Registrant's
as of September 16, 2002, by and Quarterly Report on From 10-Q for
between Frontstep Solutions Group, the fiscal quarter ended September
Inc. and Mitsui & Co., Asia 30, 2002 (File No. 0-19024)
Investment Ltd.
10(c) Seventh Amendment to Loan and Incorporated herein by reference to
Security Agreement dated as of Exhibit 10(c) to Registrant's
September 30, 2002 with Foothill Quarterly Report on From 10-Q for
Capital Corporation, as the the fiscal quarter ended September
arranger and administrative agent 30, 2002 (File No. 0-19024)
for the Lenders
10(d) Eighth Amendment to Loan and Incorporated herein by reference to
Security Agreement dated as of Exhibit 10(d) to Registrant's
November 12, 2002 with Foothill Quarterly Report on From 10-Q for
Capital Corporation, as the the fiscal quarter ended September
arranger and administrative agent 30, 2002 (File No. 0-19024)
for the Lenders
10(e) Amendment No. 1 dated November 12, Incorporated herein by reference to
2002 to Amended and Restated Common Exhibit 10(e) to Registrant's
Share Purchase Warrant, dated Quarterly Report on From 10-Q for
November 15, 2001, issued to the fiscal quarter ended September
Foothill Capital Corporation 30, 2002 (File No. 0-19024)
10(f) Ninth Amendment to Loan and Filed herein
Security Agreement dated as of
December 18, 2002 with Foothill
Capital Corporation, as the
arranger and administrative agent
for the Lenders
10(g) Agreement and Plan of Merger dated Incorporated herein by reference to
November 24, 2002 by and among Exhibit 2(a) to Registrant's
MAPICS, Inc., Frontstep, Inc. and Current Report on From 8-K filed on
FP Acquisition Sub, Inc. November 26, 2002 (File No.
0-19024)
Page 26
Exhibit No. Description Page
- ----------- ----------- ----
10(h) Form of Shareholder Agreement dated Incorporated herein by reference to
November 24, 2002 by and among Exhibit 2(b) to Registrant's
MAPICS, Inc., Frontstep Inc. and Current Report on From 8-K filed on
certain Frontstep shareholders and November 26, 2002 (File No.
affiliates 0-19024)
10(i) List of Shareholders executing the Incorporated herein by reference to
Shareholders Agreement Exhibit 2(c) to Registrant's
Current Report on From 8-K filed on
November 26, 2002 (File No.
0-19024)
10(j) Letter agreement dated November 24, Incorporated herein by reference to
2002 between Frontstep, Inc. and Exhibit 2(d) to Registrant's
the holders of the Series A Current Report on From 8-K filed on
Preferred Stock November 26, 2002 (File No.
0-19024)
99(a) Certificates of Chief Executive Filed herein
Officer and Chief Financial Officer
pursuant to Title 18, United States
Code, Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Page 27