U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998
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 0-23438
Effective Management Systems, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1292200
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12000 West Park Place, Milwaukee, WI 53224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 359-9800
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 _______
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 31, 1998
- ---------------------------------- ----------------------------------------
Common Stock, $.01 par value 4,102,486
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
August 31, 1998
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets at
August 31, 1998 and November 30, 1997 3
Consolidated Statements of Operations - Three and Nine
Months Ended August 31, 1998 and August 31, 1997 5
Consolidated Statements of Cash Flows - Nine 6
Months Ended August 31, 1998 and August 31, 1997
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 18
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Page 2
<PAGE>
PART I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1997 amounts)
- ------------------------------------------------------------------------------
ASSETS 31-Aug 30-Nov
1998 1997
==========================================================================
CURRENT ASSETS
Cash $8 $14
Accounts Receivable:
Trade, less allowance for
doubtful accounts 8,254 12,370
Related Parties 785 604
Inventories 334 280
Refundable Income Taxes 0 312
Deferred Income Taxes 0 0
Prepaid Expenses and Other
Current Assets 338 146
-------------------------------------
TOTAL CURRENT ASSETS 9,719 13,726
LONG TERM ASSETS
Computer Software, net 3,917 7,717
Investments in and Advances to
Unconsolidated Joint Ventures 182 182
Equipment and Leasehold
Improvements, net 3,312 3,917
Intangible Assets, net 2,269 2,444
Other Assets 284 811
-------------------------------------
TOTAL LONG TERM ASSETS 9,964 15,071
-------------------------------------
TOTAL ASSETS $19,683 $28,797
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
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EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited except for November 30, 1997 amounts)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 31-Aug 30-Nov
1998 1997
================================================================================
CURRENT LIABILITIES
Accounts Payable $2,301 $2,272
Accrued Liabilities 1,881 2,773
Deferred Revenues 5,810 5,887
Customer Deposits 290 63
Current portion of
Long-term Obligations 1,012 946
------------------------------
TOTAL CURRENT LIABILITIES 11,294 11,941
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 887 317
Long-term Obligations 3,961 3,966
Deferred Income Taxes 0 0
------------------------------
TOTAL LONG TERM LIABILITIES 4,848 4,283
Commitments and Contingencies 0 0
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value;
authorized 3,000,000 shares, of
which 7,000 shares are designated as
Series A 8% Convertible Redeemable
Preferred Stock ("Series A"); 1005
shares of Series A issued and
outstanding (liquidation
preference at $1,000 per share) 826 0
Common Stock, $.01 par value; authorized
20,000,000 shares; issued 4,102,486 and
4,067,408 shares; outstanding 4,089,861
and 4,054,783 shares 41 41
Common Stock Warrants 77 4
Additional Paid- in Capital 11,418 11,328
Retained Earnings (Deficit) (8,761) 1,260
Cost of Common Stock in Treasury(12,625
shares) (60) (60)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,541 12,573
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,683 $28,797
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
- --------------------------------------------------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
31-Aug 31-Aug 31-Aug 31-Aug
1998 1997 1998 1997
NET REVENUES:
<S> <C> <C> <C> <C>
Software license fees $3,866 $4,963 $13,573 $14,491
Services 3,977 4,095 12,748 12,361
Hardware 339 624 1,455 2,687
------------- ------------- ----------- -----------
Total net revenues 8,182 9,682 27,776 29,539
COST OF PRODUCTS AND SERVICES
Software license fees 1,059 1,321 4,163 3,983
Services 3,581 3,387 10,175 10,584
Hardware 232 468 1,112 2,074
-------------- ------------- ----------- -----------
Total cost of products and
services 4,872 5,176 15,450 16,641
Selling and marketing expenses 3,017 4,259 10,043 11,103
General and administrative expenses 624 631 2,837 2,993
Product development expenses 597 621 2,118 1,817
Restructuring and Other Charges 0 0 6,836 0
------------- ------------- ----------- -----------
Total costs and operating
expenses 9,110 10,687 37,284 32,554
------------- ------------- ----------- -----------
LOSS FROM OPERATIONS (928) (1,005) (9,508) (3,015)
Other (Income)/ Expense
Equity in (earnings)/loss
of unconsolidated joint
ventures 0 (55) (1) (57)
Interest (income) (19) (13) (39) (41)
Interest expense 184 107 521 274
------------- ------------- ----------- -----------
165 39 481 176
------------- ------------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,093) (1,044) (9,989) (3,191)
Income tax (benefit) expense 0 0 33 (883)
------------- ------------- ----------- -----------
NET LOSS ($1,093) ($1,044) ($10,022) ($2,308)
============= ============= =========== ===========
Loss per share - basic and diluted ($0.27) ($0.26) ($2.45) ($0.57)
============= ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
- -----------------------------------------------------------------------
NINE MONTHS ENDED
31-Aug 31-Aug
1998 1997
===============================================================================
OPERATING ACTIVITIES
Net Loss ($10,022) ($2,308)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,044 862
Amortization of capitalized
computer software development costs 2,277 2,077
Equity in earnings of joint ventures - -
Goodwill Amortization 176 170
Deferred income taxes - -
Restructuring and Other Charges 6,836
Changes in operating assets and
liabilities:
Accounts Receivable 3,054 1,226
Inventories and other current assets (25) (1,266)
Accounts payable and other liabilities (1,684) (921)
--------------------------
Total adjustments 11,678 2,148
--------------------------
Net cash provided by(used in) in
operating activities 1,656 (160)
INVESTING ACTIVITIES
Additions to equipment and
leasehold improvements (439) (1,101)
Proceeds from sale of securities - 504
Software development costs capitalized (2,800) (3,207)
Other 527 (97)
--------------------------
Net cash (used in) investing
activities (2,712) (3,901)
FINANCING ACTIVITIES
Proceeds on long-term debt and
other notes payable 61 3,466
Additional paid-in capital 90 -
Proceeds from sale of stock 899 136
--------------------------
Net cash provided by financing activities 1,050 3,602
--------------------------
Net decrease in cash ($6) ($459)
Cash-beginning of period $14 $866
==========================
Cash-end of period $8 $407
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998
(Unaudited) (In Thousands)
Note 1 - Basis of Presentation
The accompanying consolidated interim financial statements included
herein have been prepared by Effective Management Systems, Inc. (the "Company"),
without an audit, in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and 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, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
In the opinion of management, the information furnished for the three
and nine month periods ended August 31, 1998 and August 31, 1997 includes all
adjustments, consisting solely of normal recurring accruals, necessary for a
fair presentation of the financial position and results of operations for the
interim periods. The results of operations for the nine months ended August 31,
1998 are not necessarily indicative of the results of operations to be expected
for the entire fiscal year ending November 30, 1998. It is suggested that the
interim financial statements be read in conjunction with the audited
consolidated financial statements for the year ended November 30, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Note 2 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the following:
31-August-1998 30-Nov-1997
Gross $9,798 $9,359
Less: Accumulated
Depreciation ( 6,486 ) ( 5,442 )
-------- --------
Net $3,312 $3,917
Allowance for doubtful accounts consisted of the following:
31-August-1998 30-Nov-1997
Balance $ 547 $ 462
Provision for doubtful accounts consisted of the following:
31-August-1998 30-Nov-1997
$ 82 $ 17
Page 7
<PAGE>
Note 3 - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options and warrants.
Earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended
August 31,
1998 1997
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,098 4,054
Effect of dilutive securities - stock options
and warrants 0 0
Effect of dilutive securities - preferred stock 0 0
---------- ------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,098 4,054
========== ============
Nine Months Ended
August 31,
1998 1997
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,084 4,038
Effect of dilutive securities - stock options
and warrants 0 0
Effect of dilutive securities - preferred stock 0 0
---------- ------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,084 4,038
========== ============
Note 4 - Restructuring and Other Charges
The company recorded charges for a restructuring in the second quarter of fiscal
1998 totaling $6.8 million of which $6.6 million was paid or expensed as of
August 31, 1998. The company anticipates the remaining liability of $.2 million
to be paid in the fourth quarter of fiscal 1998, which will be financed through
working capital.
Page 8
<PAGE>
Note 5 - Preferred Stock
On August 28, 1998, the Company issued 1,005 shares of Series A 8% Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock"). Legal and
investment banking fees of $101,000 were deducted from the total proceeds.
The Series A Preferred Stock accrues cumulative dividends at a 8% rate per annum
(using a liquidation value of $1,000 per share), and all dividends in arrears
must be paid prior to any payment of dividends on common stock. Dividends, if
declared by the board of directors, generally must be paid in cash.
The Series A Preferred Stock is convertible into common stock at the preferred
shareholders' option at the initial conversion price of $3.50 per share, subject
to adjustment, with each share of Series A Preferred Stock valued at $1,000 for
purposes of conversion. An adjustment to the conversion rate may be made upon
any of the following circumstances: subdivision or reverse split of the
outstanding shares of common stock into a greater or lesser number of shares of
common stock, declaration of a dividend or other distribution by the Company
upon the common stock payable in common stock, capital reorganization or
reclassification of the common stock of the Company, and in certain other
instances. The Company may force conversion of the Series A Preferred Stock
under certain conditions.
The holders of the Series A Preferred Stock shall be entitled to vote and shall
receive the number of votes they would have assuming full conversion of the
Series A Preferred Stock into common stock.
There are 7,000 shares of Series A Preferred Stock authorized for issuance, with
1,005 shares being issued and outstanding. The Company has 3,000,000 shares of
Preferred Stock authorized for issuance. Such shares may be issued in separate
series. The Series A Preferred Stock is currently the only series of Preferred
Stock authorized, issued and outstanding.
Note 6 - Warrants
During August 1998 the Company's investment banker earned the right to receive a
warrant as consideration for the Preferred Stock issued. The investment banker
has the right through August 2003 to purchase up to 10% of the total number of
shares of common stock issuable upon exercise of the Series A Preferred Stock at
an exercise price of $4.20 per share.
As required by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company calculated the fair value of the warrants using the Black Scholes option
pricing model with a risk-free interest rate of 5.0%; dividend yield of 0%, and
an expected life of 5 years. The Company recorded $73,000 or $2.56 per warrant
as a reduction of proceeds on Series A Preferred Stock issued in August 1998.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company recorded a decrease of 15.5% in net revenues and a net loss of
$1,093,000 for the third quarter of fiscal 1998 compared with a net loss of
$1,044,000 for the third quarter of fiscal 1997. The third quarter of fiscal
1998 does not reflect a tax benefit relating to the loss since because the
Company is in a loss carryforward position for financial reporting purposes.
Software revenues were down 22.1% in the third quarter of fiscal 1998 compared
to the same period in the prior year. Management believes this decrease in
software revenues was mainly the result of the attention and efforts spent in
the transition to adding the new Baan product line, reduced revenues from
restructured operations (a reduction of $716,000 from the third quarter of 1997)
and reduced revenues due to lower levels of personnel caused by attrition. The
Company recorded a decrease in net revenues of 6.0% and a net loss of
$10,022,000 (including a $6,836,000 restructuring charge incurred in the second
quarter of 1998) for the first three quarters of fiscal 1998, compared with a
net loss of $2,308,000 for the first three quarters of fiscal 1997.
Although the goal of the Company is to return to profitability, no assurance can
be given that the various measures that the Company has taken will actually
result in the achievement of this goal. The Company's long term success is also
dependent on its ability to attract and retain a highly qualified sales,
development and service staff. The Company has recently experienced attrition at
rates higher than its historical experience. The Company has taken steps to
curtail the attrition, but no assurance can be given that these steps will be
successful or that further attrition will not materially impact the Company's
financial performance.
Results of Operations
Net Revenues
Net revenues were $8,182,000 for the three months ended August 31, 1998, which
was a decrease of 15.5% from the $9,682,000 for the same quarter in the previous
year. Net revenues were $27,776,000 for the nine months ended August 31, 1998,
which was a decrease of 6.0% from the $29,539,000 for the same period in the
previous year. The overall decrease in revenues for the three months ended
August 31, 1998 was attributable primarily to the attention and efforts spent
planning and executing the restructuring plan. The mix of revenues comparing
software, services and hardware revenues as a percentage of net revenues was
47.3%, 48.6%, and 4.1%, respectively, in the third quarter of fiscal 1998, as
compared with 51.3%, 42.3%, and 6.4%, respectively, in the third quarter of
fiscal 1997. The mix of revenues comparing software, services and hardware
10
<PAGE>
revenues as a percentage of net revenues was 48.9%, 45.9%, and 5.2%,
respectively, in the first three quarters of fiscal 1998, as compared with
49.1%, 41.9%, and 9.0%, respectively, in the first three quarters of fiscal
1997. International revenues represented less than 10% of net revenues for all
periods presented.
The Company's operating revenues can vary substantially from quarter to quarter
based on the size and timing of customer software orders and market acceptance
of new products. The Company has historically operated with little software
backlog because software orders are generally shipped as orders are received. As
a result, product revenue in any quarter is substantially dependent on software
orders booked and shipped during that quarter.
Software License Fees
Software license fees are customer charges for the right to use the Company's
software products. Software license fees decreased 22.1% to $3,866,000 in the
third quarter of fiscal 1998 from $4,963,000 in the third quarter of fiscal
1997. The decrease in software license fees was mainly attributable to the
attention and efforts spent in the transition to adding the new Baan product
lines, reduced revenues from restructured operations(a reduction of $664,000
from the third quarter of fiscal 1997), and reduced revenues due to lower levels
of sales personnel caused by attrition. As additional sales personnel continue
to train in the Baan products, sales productivity temporarily decreases. The
length of the sales cycle can range from two to twelve months depending on such
factors as the size of the prospect or complexity of the prospect need. The
Company is also in the process of building a sufficient level of prospect leads
to maintain and enhance necessary levels of sales activity. Management expects
that this decrease in productivity will mainly continue during the next fiscal
quarter, and, thereafter, productivity is expected to increase. Management is
also actively recruiting new sales talent through various methods. Software
license fees decreased 6.3% to $13,573,000 in the first three quarters of fiscal
1998 from $14,491,000 in the first three quarters of fiscal 1997. The decrease
was mainly attributable to the reasons mentioned above for the third quarter of
the 1998 fiscal year except that software revenues rose in the first quarter of
fiscal 1998 due to the introduction of new products.
Service Revenues
The Company offers a number of optional services to its customers, including
such services as a telephone support program, systems integration, custom
software development, implementation consulting, and formal classroom and
on-site training. Service revenues decreased to $3,977,000 for the three months
ended August 31, 1998, as compared with $4,095,000 for the same period of the
prior year. This decrease was mainly the result of a lower level of service
personnel though attrition. Service revenues increased to $12,748,000 for the
nine months ended August 31, 1998, as compared with
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<PAGE>
$12,361,000 for the same period of the prior year. Management expects the level
of service demand to grow as the Company transitions to the addition of the Baan
product line and recognizes the incremental revenues associated with that
transition. The Company has expanded its recruiting efforts and has begun to
hire additional service personnel.
Hardware Revenues
Hardware revenues decreased 45.7% to $339,000 in the third quarter of fiscal
1998 compared with $624,000 for the corresponding period of 1997. Hardware
revenues decreased 45.9% to $1,455,000 in the first three quarters of fiscal
1998 compared with $2,687,000 for the corresponding period of 1997. The decrease
was mainly due to increased sales of software on platforms for which the Company
does not supply hardware and the discontinuation of hardware sales to an
affiliate of the Company, EMS Solutions, Inc. (a decrease of $93,000 and
$334,000 from the third quarter and first three quarters of 1997,
respectively)(See General and Administrative Expense below). Management expects
the trend of declining hardware sales to continue due to the increasing sales of
software licenses operating on the Microsoft Windows NT platform. Hardware used
with the Microsoft Windows NT platform is either generally already in place at
the customer site or readily available from local suppliers who can also provide
local support.
Cost of Software License Fees
The cost of software license fees as a percentage of related revenue was 27.4%
for the third quarter of fiscal 1998, an increase from 26.6% for the
corresponding period of 1997. The cost of software license fees as a percentage
of related revenue was 30.7% for the first three quarters of fiscal 1998, an
increase from 27.5% for the corresponding period of 1997. Cost of software
license fees is composed of both amortization of past investment in software
development and the third party costs associated with the software revenues.
Software amortization is related to past investment in software development and
does not vary consistently with variations in software revenues. The Company
wrote off a substantial portion of its past investment in software development
in conjunction with its restructuring efforts in the quarter ended May 31, 1998.
(See the discussion under the caption "Restructuring and Other Charges" in the
section of the Company's Form 10-Q for the period ended May 31, 1998 titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Software amortization decreased $379,000 in the third quarter of
fiscal 1998 as compared to the same period of 1997 as a result of the amounts
written off of previously capitalized development costs in the restructuring.
The cost of software license fees is also dependent on the level of third party
costs associated with certain software revenues and includes such items as
purchased licenses and other components. The third party costs includes costs
associated with the new Baan product line revenues and vary directly with those
revenues. The remaining increases in the cost of software license fees as a
percentage of related revenue was due to these third party costs and to lower
levels of software revenue.
12
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Cost of Services
The cost of services as a percentage of related revenue increased to 90.0% for
the three months ended August 31, 1998 as compared with 82.7% for the same
quarter in the previous year. The increase was mainly due to additional
compensation for current personnel, higher costs of outside sourced labor, and
additional warranty work associated with new versions of the Company's software.
The cost of services as a percentage of related revenue decreased to 79.8% for
the nine months ended August 31, 1998 as compared with 85.6% for the same period
in the previous year. The decrease was mainly due to increased levels of
customer billing generated by existing personnel less the factors listed above
for performance during the third quarter of fiscal 1998. The Company has
experienced increased levels of service business from its customer base and a
reduction in employees through attrition. The current service backlog exceeds
current capacity and the Company continues efforts to hire additional service
personnel. Management expects the cost of services as a percentage of related
revenue to increase slightly with the additional training costs associated with
the hiring of new personnel. The Company also continues to take further steps to
reduce the level of customer warranty work by enhancing the quality of its
software through improved internal processes.
Cost of Hardware
The cost of hardware as a percentage of related revenue decreased to 68.4% in
the third quarter of fiscal 1998 from 75.0% in the third quarter of fiscal 1997.
The cost of hardware as a percentage of related revenue decreased to 76.4% in
the first three quarters of fiscal 1998 from 77.2% in the first three quarters
of fiscal 1997. The cost of hardware as a percentage of related revenue varies
with the size of the system, the margin mix of items comprising the system being
sold, and the competitive pressure of the customer sale. The cost of hardware as
a percentage of related revenue also varies with the amount of low margin
hardware sales to affiliates. Hardware sales to affiliates declined by $93,000
in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997
and declined by $334,000 in the first three quarters of fiscal 1998 compared to
the first three quarters of fiscal 1997.
Selling and Marketing Expenses
Selling and marketing expenses decreased $1,242,000, or 29.2%, from $4,259,000
in the third quarter of fiscal 1997 to $3,017,000 in the third quarter of fiscal
1998. Selling and marketing expenses decreased $1,060,000, or 9.6%, from
$11,103,000 in the first three quarters of fiscal 1997 to $10,043,000 in the
first three quarters of fiscal 1998. This
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decrease was mainly due to the restructuring resulting in reduced staffing and
closed locations, and reduced marketing expense. The Company also experienced
lower compensation expense related to employee attrition.
General and Administrative Expenses
General and administrative expenses decreased $7,000, or 1.1%, from $631,000 in
the third quarter of fiscal 1997 to $624,000 in the third quarter of fiscal
1998. General and administrative expenses decreased $156,000, or 5.2%, from
$2,993,000 in the first three quarters of fiscal 1997 to $2,837,000 in the first
three quarters of fiscal 1998. The decrease in general and administrative
expenses was mainly due to a reduction of expense related to the restructuring.
As a percentage of net revenues, general and administrative expenses were 7.6%
and 6.5% in the third quarter of fiscal 1998 and 1997, respectively. As a
percentage of net revenues, general and administrative expenses were 10.2% and
10.1% in the first three quarters of fiscal 1998 and 1997, respectively. The
increase in general and administrative expenses as a percentage of net revenues
was mainly attributable to the reduced level of revenues during the transition
to adding the Baan product line.
Product Development Expense
Product development expense decreased 3.9% from $621,000 in the third quarter of
fiscal 1997 to $597,000 in the third quarter of fiscal 1998. Product development
expense, exclusive of reductions for capitalized software, decreased by
$332,000, and capitalized software decreased by $308,000. Product development
expense increased 16.6% from $1,817,000 in the first three quarters of fiscal
1997 to $2,118,000 in the first three quarters of fiscal 1998. The Company
capitalizes costs in accordance with Statement of Financial Accounting Standard
(SFAS) No. 86. The Company capitalized $737,000 of product development costs in
the third quarter of fiscal 1998 compared to $1,045,000 in the third quarter of
fiscal 1997. The Company capitalized $2,800,000 of product development costs in
the first three quarters of fiscal 1998 compared to $3,207,000 in the first
three quarters of fiscal 1997. With the completion of two major development
projects and with the cessation of development of software products for large
customers which software is now supplied through the relationship with Baan, the
Company has reduced the level of investment in product development.
Restructuring and Other Charges
In the second quarter of fiscal 1998, the Company recorded a restructuring
charge of $6,836,000 related to entering into a new distributor arrangement for
manufacturing software, and a reduction of costs focused on improving the
Company's financial
14
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performance. Approximately $6,600,000 of the total charge has been paid or
expensed as of August 31, 1998. The Company anticipates the remaining liability
of approximately $200,000 to be paid in the fourth quarter of fiscal 1998, which
will be financed through working capital.
Other Income\Expense-Net
Other income\expense-net was $39,000 of expense for the third quarter of fiscal
1997 compared to $165,000 of expense for the third quarter of fiscal 1998. Other
income\expense-net was $176,000 of expense for the first three quarters of
fiscal 1997 compared to $481,000 of expense for the first three quarters of
fiscal 1998. The increase in the level of expense was mainly the result of an
increase in interest expense as a result of increased borrowings under the
Company's borrowing facility.
Income Tax
No income tax benefit was recorded for the third quarter of fiscal 1998 or the
third quarter of fiscal 1997. A small tax expense of $33,000 (for state and
local taxes) and no income tax benefit was recorded for the first three quarters
of fiscal 1998 compared to a benefit of $883,000 for the first three quarters of
fiscal 1997. At August 31, 1998, the Company, for financial reporting purposes,
is in a tax loss carryforward position. Generally accepted accounting principles
prohibit the Company from recording a tax benefit under these circumstances.
Liquidity and Capital Resources
At August 31, 1998, the Company had cash and marketable securities aggregating
$8,000. During the first three quarters of fiscal 1998, the Company's operating
activities provided $1,656,000 of cash compared to using $160,000 of cash for
the same period of the prior year. This decrease in the use of cash was mainly
attributable to the Company's restructuring of its operations and the reduction
in accounts receivable. On September 29, 1998, the Company received payment in
full of $307,000 on a note from EMS Solutions, Inc. which was previously to be
paid over a six year term beginning January 1, 1998.
Investing activities used cash of $2,712,000 in the first three quarters of
fiscal 1998 compared to using $3,901,000 of cash in the first three quarters of
fiscal 1997. The principal use of the cash in the first three quarters of fiscal
1998 was $2,800,000 for capitalized product development. The principal uses of
cash in the first three quarters of fiscal 1997 included $3,207,000 for
capitalized product development and $1,101,000 for purchases of equipment and
furniture.
15
<PAGE>
Financing activities provided $1,050,000 of cash in the first three quarters of
fiscal 1998 compared with providing $3,602,000 of cash in the first three
quarters of fiscal 1997. The cash provided in fiscal 1998 mainly reflected the
equity contribution from the Company's preferred stock offering. (See Note 5 to
the Consolidated Financial Statements) As of August 31, 1998, the Company, based
on the level of of eligible accounts receivables, had $1,828,000 of availability
under its then $6,000,000 line of credit. As of September 30, 1998, the Company
had $569,000 of availability under its line of credit.
The Company's credit agreement with Foothill Capital Corporation also contains
certain restrictive covenants relating to income (EBITDA), tangible net worth,
and level of capital expenditures. On October 6, 1998, the Company amended its
loan facility to reset the tangible net worth and EBITDA covenants to levels in
keeping with the Company's current financial position. The amendment also
restructured the loan facility to increase the term loan by $776,553 with an
amortization period of 36 months and to reduce the revolving line of credit to a
limit of $5,000,000. These changes will provide the Company with additional
short-term working capital. In order to meet financial covenants in the future,
the Company will need positive operational results in the short term. In the
event that the Company's performance does not improve in the short term, the
Company will need to secure additional waivers and/or alternative sources of
financing. The Company is continuing its review of alternative sources of
financing to deal with its current financial status. Although management
believes that waivers and/or additional financing can be obtained, if needed, no
assurance can be given that waivers or such additional financing will be
available to the Company on acceptable terms. In the event that the Company is
unable to secure necessary waivers or additional financing, it would likely have
a material adverse effect on the Company's liquidity, including its ability to
fund continuing operations at current levels.
Year 2000
The Company utilizes a combination of its own software and custom-written
systems for running its own operations. Based on its own evaluation, the Company
believes that it will incur no significant costs associated with ensuring year
2000 compliance of its internal systems. Since the release of version 5.1.2 of
the Company's software product, the Company's software product has been year
2000 compliant.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE
ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED
IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
16
<PAGE>
MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH
UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, PRODUCT DEMAND AND
MARKET ACCEPTANCE FOR THE COMPANY'S AND THIRD PARTY SUPPLIED PRODUCTS; THE
COMPANY'S ABILITY TO SUCCESSFULLY IMPLEMENT ITS RESTRUCTURING PLAN; THE
COMPANY'S ABILITY TO SUCCESSFULLY TRANSITION TO THE BAAN PRODUCT OFFERINGS; THE
IMPACT OF COMPETITIVE PRODUCTS; THE COMPANY'S ABILITY TO MAINTAIN EFFICIENT
MARKETING AND DISTRIBUTION OPERATIONS WITH RESPECT TO NEW PRODUCTS; FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS; THE COMPANY'S ABILITY TO RETAIN KEY
TECHNICAL AND MANAGEMENT PERSONNEL; THE COMPANY'S SUCCESS IN IMPROVING ITS
FINANCIAL PERFORMANCE; TO THE EXTENT NECESSARY, THE COMPANY'S ABILITY TO SECURE
AMENDMENTS, WAIVERS AND/OR REFINANCING OR EXTENSION OF ITS LINE OF CREDIT;
TIMING OF PRODUCT DEVELOPMENT; PRODUCT PRICING AND OTHER FACTORS DETAILED IN
THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER FILINGS MADE BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
17
<PAGE>
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
(a) None
(b) On August 28, 1998 the Company sold and issued 1,005 shares of its
Series A 8% Convertible Redeemable Preferred Stock (the "Series A
Preferred") at a price of $1,000 per share, for aggregate gross
proceeds of $1 million. Holders of Series A Preferred are entitled
to receive an 8% cumulative dividend ($80 per share) before any
dividends may be paid on the Common Stock. Also, in the event of
liquidation of the Company holders of Series A Preferred are
entitled to receive $1,000 per share, plus all accrued but unpaid
dividends, before any payment can be made on the Common Stock.
(c) On August 28, 1998, the Company sold and issued 1,005 shares of
its Series A 8% Convertible Redeemable Preferred Stock ("Series A
Preferred") at a price of $1,000 per share. Series A Preferred was
sold pursuant to a Preferred Stock Placement Agreement between the
Company and Taglich Brothers, D'Amadeo, Wagner & Company,
Incorporated ("Taglich") in which Taglich agreed to use its best
efforts to sell, on a private placement basis, up to $5,000,000 of
Series A Preferred. The 1,005 shares of Series A Preferred were
sold to investors qualifying as "accredited investors" under
Regulation D of the Securities Act of 1933, as amended (the
"Securities Act").
The aggregate offering price was $1 million. For its services, the
Company paid Taglich 8% of gross proceeds plus five (5) year
warrants to purchase shares of Common Stock equal to 10% of the
total number of shares of Common Stock issuable upon exercise of
the Series A Preferred Stock sold in the Private Placement.
Exemption from registration for the sale is claimed pursuant to
Section 4 (2) and Regulation D under the Securities Act. The
securities were sold is a private placement only to "accredited
investors" as defined in Regulation D.
The Series A Preferred is convertible into Common Stock at an
initial exercise price of $3.50 per share, with the value of the
Series A Preferred Stock pegged at $1,000 per share for conversion
purposes. The exercise price of $3.50 may be reduced in certain
circumstances to prevent dilution.
Page 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation
3.2 Articles of Amendment relating to Series A 8% Convertible
Redeemable Preferred Stock
4.1 Waiver and Second Amendment to Loan Agreement between
Foothill Capital Corporation and Effective Management Systems,
Inc., EMS-East, Inc., and Effective Management Systems of
Illinois, Inc., dated August , 1998.
4.2 Third Amendment to Loan Agreement between Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East,
Inc., and Effective Management Systems of Illinois, Inc.,
dated October 6, 1998.
10.1 Preferred Stock Placement Agreement, dated as of August
28, 1998 between Effective Management Systems, Inc. and
Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated
10.2 Loan Agreement by and between EMS Solutions, Inc. and
Effective Management Systems, Inc. dated January 1, 1998.
10.3 Special Compensation and Separation Agreement by and
between Jeffrey J. Fossum and Effective Management Systems,
Inc. effective January 1, 1998.
10.4 Special Compensation and Separation Agreement by and
between Wayne T. Wedell and Effective Management Systems, Inc.
effective January 1, 1998.
27 Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
None
Page 19
<PAGE>
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.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
October 15, 1998 By: /s/ MICHAEL D. DUNHAM
Michael D. Dunham
President (principal executive officer)
By: /s/JEFFREY J. FOSSUM
Jeffrey J. Fossum
Chief Financial Officer and Assistant
Treasurer (principal financial and
accounting officer)
Page 20
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Restated Articles of Incorporation
3.2 Articles of Amendment relating to Series A 8% Convertible Redeemable
Preferred Stock
4.1 Waiver and Second Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc., and Effective Management Systems of Illinois, Inc.,
dated August , 1998.
4.2 Third Amendment to Loan Agreement between Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.,
and Effective Management Systems of Illinois, Inc., dated October 6,
1998.
10.1 Preferred Stock Placement Agreement, dated as of August 28, 1998
between Effective Management Systems, Inc. and Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated
10.2 Loan Agreement by and between EMS Solutions, Inc. and Effective
Management Systems, Inc. dated January 1, 1998.
10.3 Special Compensation and Separation Agreement by and between Jeffrey
J. Fossum and Effective Management Systems, Inc. effective January
1, 1998.
10.4 Special Compensation and Separation Agreement by and between Wayne
T. Wedell and Effective Management Systems, Inc. effective January
1, 1998.
27 Financial Data Schedule [EDGAR version only]
RESTATED
ARTICLES OF INCORPORATION
OF
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Pursuant to Section 180.1007 of the Wisconsin Business Corporation Law,
these Restated Articles of Incorporation shall supersede and take the place of
the corporation's heretofore existing Articles of Incorporation and all
amendments thereto.
ARTICLE 1
The name of the corporation is Effective Management Systems, Inc.
ARTICLE 2
The period of existence of the corporation shall be perpetual.
ARTICLE 3
The purpose of the corporation is to engage in any lawful business or
purpose whatever for which corporations may be organized under the Wisconsin
Business Corporation Law.
ARTICLE 4
The aggregate number of shares which the corporation shall have the
authority to issue shall be 23,000,000 shares, consisting of: (i) 20,000,000
shares of a class designated as "Common Stock," with a par value of $.01 per
share; and (ii) 3,000,000 shares of a class designated as "Preferred Stock,"
with a par value of $.01 per share. Upon the effectiveness of these Restated
Articles of Incorporation, each issued and outstanding share of Common Stock,
$.20 par value per share, of the corporation held of record by each shareholder
of the corporation immediately prior to such effectiveness and each share held
in the corporation's treasury shall automatically and without need of any
further action on the part of any shareholder be reclassified into thirty-five
(35) shares of Common Stock, with a par value of $.01 per share.
The designation, relative rights, preferences and limitations of the shares
of each class and the authority of the Board of Directors of the corporation to
establish and to designate series of Preferred Stock and to fix variations in
the relative rights, preferences and limitations as between such series, shall
be as set forth herein.
A. Preferred Stock.
(1) Series and Variations Between Series. The Board of Directors of the
corporation is authorized, to the full extent permitted under the Wisconsin
Business Corporation Law and the provisions of this Section A, to provide for
the issuance of
<PAGE>
the Preferred Stock in series, each of such series to be distinctively
designated, and to have such redemption rights, dividend rights, rights on
dissolution or distribution of assets, conversion or exchange rights, voting
powers, designations, preferences and relative participating, optional or other
special rights, if any, and such qualifications, limitations or restrictions
thereof as shall be provided by the Board of Directors of the corporation
consistent with the provisions of this Article 4.
(2) Dividends. Before any dividends shall be paid or set apart for payment
upon shares of Common Stock, the holders of each series of Preferred Stock shall
be entitled to receive dividends at the rate (which may be fixed or variable)
and at such times as specified in the particular series. The holders of shares
of Preferred Stock shall have no rights to participate with the holders of
shares of Common Stock in any distribution of dividends in excess of the
preferential dividends, if any, fixed for such Preferred Stock.
(3) Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the holders of shares
of each series of Preferred Stock shall be entitled to receive out of the assets
of the corporation in money or money's worth the preferential amount, if any,
specified in the particular series for each share at the time outstanding
together with all accrued but unpaid dividends thereon, before any of such
assets shall be paid or distributed to holders of Common Stock. The holders of
Preferred Stock shall have no rights to participate with the holders of Common
Stock in the assets of the corporation available for distribution to
shareholders in excess of the preferential amount, if any, fixed for such
Preferred Stock.
(4) Voting Rights. The holders of Preferred Stock shall have only such
voting rights as are fixed for shares of each series by the Board of Directors
pursuant to this Section A or are provided, to the extent applicable, by the
Wisconsin Business Corporation Law.
(5) Series A 8% Convertible Redeemable Preferred Stock
(i) Designation and Amount. There is hereby created a series of
Preferred Stock which shall be designated as the "Series A 8% Convertible
Redeemable Preferred Stock" (hereinafter referred to as the "Series A"); the
number of shares constituting such series shall be 7,000. Such number of shares
may be increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series A to a
number less than the number of shares then outstanding.
(ii) Dividends.
(a) Cumulative Dividends. From and after the date of issuance of
any shares of Series A, the holders of the Series A shall be entitled to receive
in cash, cumulative preferential dividends at the rate of eight (8%) percent per
annum, payable quarterly on January 2, April 1, July 1, and October 1 of each
year to holders of record of Series A as of the fifteenth (15th) day of the
month immediately preceding the month in which a quarterly dividend is due (each
a "Dividend Record Date"). Notwithstanding the foregoing,
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<PAGE>
the first dividend payment date with respect to the Series A shall be January 2,
1999, which dividend shall be paid on a pro rata basis for the period such
shares of Series A are outstanding. In the event that the corporation cannot, as
determined by the corporation's Board of Directors in its sole discretion, pay
dividends in cash on any dividend payment date, the corporation shall pay
dividends in shares of Series A valued at eighty (80%) percent of the lesser of:
(i) $1,000 and (ii) the Market Price (as defined below) of the Common Stock (as
defined below) on the relevant Dividend Record Date multiplied by the quotient
of (a) $1,000 and (b) the Conversion Price (as defined below). Commencing with
the quarterly period beginning January 2, 2002, the annual dividend rate will
increase each quarterly period by 2% up to a maximum annual dividend rate of 18%
(e.g., the annual dividend rate for the quarterly period commencing January 2,
2002 will be 10% and the annual dividend rate for the quarterly period
commencing April 1, 2002 will be 12%).
(b) Preference of Dividends. In the event that dividends shall
not have been fully paid, or declared and set apart for payment on all shares of
Series A, the amount of the deficiency (without interest) shall be fully paid
before any dividends shall be declared or paid on any shares of the
corporation's Common Stock, $.01 par value per share (the "Common Stock"), or
any other equity security which is junior to the Series A. If any dividends are
paid on any of the Series A at any time in an aggregate amount less than the
total dividends then accumulated and payable on all shares of Series A entitled
to dividends then outstanding, the amount to be distributed shall be paid on
each share of Series A entitled to dividends in the proportion that the
dividends then accumulated and payable on each such share bears to the total
dividends accumulated and payable on all outstanding shares of Series A entitled
to dividends.
(c) Date of Payment. In any case where the due date for the
payment of dividends on the Series A shall be on a day on which banking
institutions in the United States are authorized or obligated by law to close,
the payment of dividends need not be made on such date, but may be made on the
next succeeding day which is not a day on which banking institutions are
authorized or obligated by law to close, with the same force and effect as if
made on the date of such payment, and dividends shall accrue and be paid for the
period through and including the date of payment.
(iii) Priority. All shares of the Series A shall rank on a parity with
each other and shall be preferred to the Common Stock and, except as expressly
provided below in this Section (iii), any other class of stock of the
corporation, as to the payment of dividends and the distribution of assets upon
the liquidation, dissolution or winding up of the corporation. The corporation
shall have the right to create other classes of Preferred Stock which shall rank
below the Series A without the consent of the holders of the Series A. The
holders of the Series A shall be entitled to vote as a separate class on the
issuance of any class of equity securities which ranks equal to or senior to the
Series A; provided, however, that should the corporation issue and sell prior to
September 30, 1998 at least 1,000 shares of Series A and, at any time thereafter
through September 30, 1998, subject to the right of the corporation and its
placement agent to extend such date by up to an additional thirty (30) days, the
corporation and its placement agent agree in writing to sell equity securities
for an aggregate sale price equal to or less than the difference between $5
million
-3-
<PAGE>
and the aggregate purchase price for the number of shares of Series A
sold, with different terms than the Series A (the "Other Securities"), the
corporation shall have the right, without the approval of the holders of the
Series A, to sell the Other Securities and to have such Other Securities rank
equal in priority to the Series A.
(iv) Voluntary Conversion Rights.
(a) Voluntary Conversion. Each holder of Series A shall have the
right, at any time and from time to time, at the holder's option, to convert all
or any portion of such holder's shares of Series A into fully paid and
non-assessable (except as otherwise provided by the Wisconsin Business
Corporation Law) shares of Common Stock at the Conversion Price in effect at the
time of conversion, each share of the Series A being taken at $1,000 per share
for the purposes of such conversion. The initial Conversion Price is $3.50 per
share of Common Stock ("Initial Conversion Price"). The Initial Conversion Price
shall be adjusted as provided for below in Section (vi) (the Initial Conversion
Price and the Initial Conversion Price as thereafter then adjusted shall be
referred to as the "Conversion Price"). Upon each adjustment of the Conversion
Price, the holders of the Series A shall thereafter be entitled to receive upon
conversion, at the Conversion Price, the number of shares of Common Stock
obtained by multiplying $1,000 times the number of shares of Series A being
converted and dividing such product by the Conversion Price.
(b) Method of Conversion. In order to convert shares of the
Series A into Common Stock, the holder thereof shall surrender the certificates
representing the Series A to be converted, duly endorsed in blank, at the
principal office of the corporation or its transfer agent, if any, or at such
other office or offices, located in the United States as the Board of Directors
may designate by written notice to all holders of Series A shares, and give
written notice to the corporation at said office that the holder elects to
convert said shares of Series A. Shares of the Series A shall be deemed to have
been converted as of the date (hereinafter called the "Conversion Date") of
receipt by the corporation of the surrendered shares of Series A for conversion
as provided above, and the person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such Common Stock on such date. As soon as
practicable on or after the Conversion Date but in no event more than five (5)
business days thereafter, the corporation will deliver by Federal Express or
other nationally recognized overnight delivery service to the address of the
holder who submitted the Series A for conversion, a certificate or certificates
for the number of full shares of Common Stock issuable upon such conversion,
together with cash in lieu of any fraction of a share, as hereinafter provided,
to the person or persons entitled to receive the same and a check representing
all accrued and unpaid dividends on the Series A so converted through the
Conversion Date.
(v) Forced Conversion. The corporation shall have the right to force
conversion of all, but not less than all, of the Series A into shares of Common
Stock; provided, however, that on the day that notice of forced conversion is
given (the "Forced Conversion Notice Date") and on the Forced Conversion Date
(as defined below) the following conditions are satisfied: (a) the Common Stock
issued and/or issuable upon conversion of the Series A has been registered for
resale pursuant to the Securities Act of
-4-
<PAGE>
1933, as amended (the "Act"), and such registration is then currently effective;
and (b) the average of the closing bid price of the Common Stock as listed on
the National Association of Securities Dealers Automated Quotation System, the
New York Stock Exchange, the American Stock Exchange or wherever the Common
Stock then trades (hereinafter, the "Market"), is at least 175% of the
Conversion Price for twenty (20) trading days within any thirty (30) consecutive
trading day period ending no more than ten (10) days prior to the Forced
Conversion Notice Date. Any notice of forced conversion must be given to all
holders no less than thirty (30) days nor more than forty-five (45) days prior
to the date set forth for conversion (the "Forced Conversion Date"). On the
Forced Conversion Date, the corporation shall pay to all registered holders of
the Series A all accrued and unpaid dividends through and including the Forced
Conversion Date. In the event that the Board of Directors of the corporation
approves a transaction whereby the holders of the Common Stock would be paid a
per share price equal to or in excess of 175% of the Conversion Price (the "Sale
Event") and the Forced Conversion Notice Date and on the Forced Conversion Date
the condition set forth in Section (v)(a) above has been satisfied, the
corporation can require all holders of the Series A to convert their shares of
Series A into shares of Common Stock immediately prior to the closing of the
Sale Event. Notwithstanding anything to the contrary, holders of Series A shall
not have the right to vote together with the holders of Common Stock, or as a
separate class, on whether to approve the Sale Event (although a holder of
Series A that voluntarily converts shares of Series A into Common Stock prior to
the record date for the shareholders' meeting to vote on the Sale Event would be
entitled to vote such shares of Common Stock) during the 150-day period
following the Forced Conversion Notice Date because it shall be deemed for all
purposes relating to the approval of the Sale Event, including for purposes of
the Wisconsin Business Corporation Law, that the Series A is no longer
outstanding during such period and that the only rights of the Series A shall be
to receive shares of Common Stock upon consummation of the forced conversion. In
the event that the foregoing sentence is determined not to eliminate the voting
rights of the Series A (either class voting rights or the right to vote with the
Common Stock) with respect to a Sale Event, the holders of the Series A shall be
deemed to have granted the President and the Secretary of the corporation (and
each of them individually) an irrevocable proxy for such 150-day period to vote
the Series A held by each such holder for the approval of the Sale Event. In the
event that the Sale Event would result in the holders of the Series A receiving
securities, it is a condition to the corporation's right to force conversion
resulting from a Sale Event that the securities to be received by the holders of
the Series A are registered under the Act and are freely transferable.
(vi) Adjustments to Conversion Price. The Conversion Price shall be
adjusted as follows:
(a) Amendment to the Restated Articles of Incorporation. In the
case of any amendment to the Restated Articles of Incorporation of the
corporation to change the designation of the Common Stock or the rights,
privileges, restrictions or conditions in respect to the Common Stock or to
provide for a division of the Common Stock, the Series A shall be adjusted so as
to provide that upon conversion thereof the holder shall receive, in lieu of
shares of Common Stock theretofore issuable upon such conversion, the kind and
amount of shares, other securities, money and property receivable upon such
designation, change or division by such holder issuable upon such conversion had
the
-5-
<PAGE>
conversion occurred immediately prior to such designation, change or division.
The Series A shall be deemed thereafter to provide for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Section (vi). The provisions of this Section (vi)(a) shall apply in the
same manner to successive reclassifications, changes, consolidations and
mergers.
(b) Stock Splits; Stock Dividends. If the corporation shall at
any time subdivide its outstanding shares of Common Stock into a greater number
of shares of Common Stock, or declare a dividend or make any other distribution
upon the Common Stock payable in shares of Common Stock, the Conversion Price in
effect immediately prior to such subdivision or dividend or other distribution
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
(c) Issuance of Additional Securities. In case the corporation
shall, through either a private placement or a public offering (but other than
pursuant to options granted under the corporation's directors' and employee
stock option and stock purchase plans or shares or options issued in an
acquisition or shares issuable pursuant to the exercise of warrants outstanding
on August 19, 1998), issues shares of Common Stock, or options to purchase
Common Stock or rights to subscribe for Common Stock or securities convertible
into or exchangeable for Common Stock at a price (such consideration, if other
than cash, as determined by the Board of Directors) less than the then Market
Price (as defined below) on the date of sale, the Conversion Price then in
effect shall automatically be reduced by multiplying the then Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issuance, sale or distribution plus
the number of shares of Common Stock which the aggregate consideration received
or to be received by the corporation for such issuance, sale or distribution
would purchase at the Market Price per share, and the denominator of which shall
be the number of shares of Common Stock outstanding immediately after giving
effect to such issuance, sale or distribution. The term "Market Price" shall
mean the average closing bid price on the Market for the ten (10) consecutive
trading days immediately prior to the date in question. Notwithstanding the
foregoing, in no event shall the Conversion Price ever be increased as a result
of this Section (vi)(c).
(d) Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the corporation, or
any consolidation or merger of the corporation with another corporation or other
entity, or the sale of all or substantially all of the corporation's assets to
another corporation or other entity shall be effected in such a way that holders
of shares of Common Stock shall be entitled to receive stock, securities, other
evidence of equity ownership or assets with respect to or in exchange for shares
of Common Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale (except as otherwise provided below in this
Section (vi)(d)), lawful and adequate provisions shall be made whereby the
holders of Series A shall thereafter have the right to receive upon the basis
and upon the terms and conditions specified herein, such shares of stock,
securities, other evidence of equity ownership or assets as may be issued
-6-
<PAGE>
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of Common Stock immediately
theretofore purchasable and receivable upon the conversion of Series A had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provisions shall be made with respect to the
rights and interests of the holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Conversion
Price and the number of shares of Common Stock receivable upon the conversion of
Series A) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities, other evidence of equity ownership or assets
thereafter deliverable upon the exercise hereof (including an immediate
adjustment, by reason of such consolidation or merger, of the Conversion Price
to the value for the Common Stock reflected by the terms of such consolidation
or merger if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation or merger; provided, however, that the
Conversion Price shall not be reduced under this Section (vi)(d) by more than
thirty (30%) percent). Subject to the terms of the Series A, in the event of a
merger or consolidation of the corporation with or into another corporation or
other entity as a result of which the number of shares of common stock of the
surviving corporation or other entity issuable to holders of Common Stock is
greater or lesser than the number of shares of Common Stock of the corporation
outstanding immediately prior to such merger or consolidation, then the
Conversion Price in effect immediately prior to such merger or consolidation
shall be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock. The corporation shall not
effect any such consolidation, merger or sale, unless prior to the consummation
thereof, the successor corporation or other entity (if other than the
corporation) resulting from such consolidation or merger or the corporation or
other entity purchasing such assets shall assume by written instrument executed
and mailed or delivered to the holders, the obligation to deliver to such
holders such shares of stock, securities, other evidence of equity ownership or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to receive or otherwise acquire. If a purchase tender or exchange offer
is made to and accepted by the holders of more than fifty (50%) percent of the
outstanding shares of Common Stock, the corporation shall not effect any
consolidation, merger or sale with the person having made such offer or with any
affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holders of Series A shall have been given a
reasonable opportunity to then elect to receive upon the conversion of Series A,
the amount of stock, securities, other evidence of equity ownership or assets
then issuable with respect to the number of shares of Common Stock of the
corporation in accordance with such offer.
(e) Change of Control. In case the corporation shall, at any time
prior to conversion of the shares of Series A, consolidate or merge with any
other corporation or other entity (where the corporation is not the surviving
entity) or transfer all or substantially all of its assets to any other
corporation or other entity, then the corporation shall, as a condition
precedent to such transaction, cause effective provision to be made so that the
holders of the Series A upon the conversion of the Series A after the effective
date of such transaction shall be entitled to receive the kind and amount of
shares, evidences of indebtedness and/or other securities or property receivable
on such transaction by a holder of the number of shares of Common Stock as to
which each share of Series A was convertible
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<PAGE>
immediately prior to such transaction (without giving effect to any restriction
upon such conversion); and, in any such case, appropriate provision shall be
made with respect to the rights and interest of the holders of Series A to the
end that the provisions of the Series A shall thereafter be applicable (as
nearly as may be practicable) with respect to any shares, evidences of
indebtedness or other securities or assets thereafter deliverable upon
conversion of the Series A. Upon the occurrence of any event described in this
Section (vi)(e), the holders of the Series A shall have the right to (i) convert
into shares of Common Stock immediately prior to such event at a Conversion
Price equal to the lesser of (1) the then Conversion Price or (2) the price per
share of Common Stock paid in such event; provided, however, that the Conversion
Price shall not be reduced under this Section (vi)(e)(2) by more than thirty
(30%) percent, or (ii) retain ownership of the shares of Series A, in which
event, appropriate provisions shall be made so that the shares of Series A shall
be convertible at the holder's option into shares of stock, securities or other
equity ownership of the surviving or acquiring entity.
(f) Record of Conversion Price. Whenever the shares of Common
Stock or other types of securities or assets receivable upon conversion of the
Series A shall be adjusted as provided in this Section (vi), the corporation
shall forthwith obtain and file with its corporate records a certificate or
letter from a firm of independent public accountants of recognized standing
setting forth the computation and the adjusted number of shares of Common Stock
or other securities or assets resulting from such adjustments, and a copy of
such certificate or letter shall be mailed to the holders of the Series A. Any
such certificate or letter shall be conclusive evidence as to the correctness of
the adjustment or adjustments referred to therein and shall be available for
inspection by any holders of the Series A on any day during normal business
hours.
(g) Notice. In case:
i. the corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in Common
Stock; or
ii. the corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in cash; or
iii. any reclassification of Common Stock or any
consolidation, merger, conveyance of the property of the
corporation as an entirety, or substantially as an
entirety, dissolution, liquidation or winding up shall
be effected by the corporation;
then the corporation shall mail, or cause to be mailed by the corporation's
transfer agent, if any, for the Series A to the holders of record of the
outstanding shares of the Series A, at least thirty (30) days, but not more than
sixty (60) days, prior to the applicable record date hereinafter specified, a
notice stating (A) the date on which a record is to be taken
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for the purpose of such dividend, distribution or rights, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or right are to be determined, or (B)
the date on which such reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange the certificates representing their shares of Common Stock
for securities or other property deliverable upon such reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(vii) Reservation of Shares of Common Stock.
(a) Reservation of Shares. The corporation shall at all times
reserve and keep available out of its authorized but unissued Common Stock, for
the purpose of effecting the conversion of the shares of the Series A, the full
number of shares of Common Stock then deliverable upon the conversion of all
shares of the Series A then outstanding. If shares of the Common Stock of the
corporation are listed on any securities exchange, the corporation shall make
application for the listing thereon, on notice of issuance, of the shares of
Common Stock deliverable upon the conversion of the outstanding shares of the
Series A and shall use its best efforts to effect such listing.
(b) Fractional Shares. No fractional shares of Common Stock are
to be issued upon conversion. The corporation shall pay a cash adjustment in
respect to any fraction of a share which would otherwise be issuable, in an
amount equal to the fair market value of the Common Stock which shall be the
same fraction of the closing bid price per share at which the Common Stock was
sold on the Market prior to the opening of business on the Conversion Date, or
if no sale of such stock takes place on such day on the Market, the average of
the closing bid and asked prices on such day as officially quoted on the Market.
If the Common Stock is not then publicly traded, fair market value shall be
determined in good faith by the corporation's Board of Directors.
(c) Transfer Taxes. The corporation will pay any and all transfer
taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of shares of the Series A pursuant hereto. The
corporation shall not, however, be required to pay any tax which may be payable
in respect of transfer involved in the issue and delivery of shares of Common
Stock in a name other than that in which the shares of the Series A so converted
were registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the corporation the amount of any
such tax, or has established, to the satisfaction of the corporation, that such
tax has been paid.
(d) Common Stock. For the purpose of this Section (vii), the term
"Common Stock" shall include any stock of any class of the corporation which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and which is not subject to redemption by the corporation. Shares
of Common Stock shall be only such shares which have no preference in respect of
dividends or of amounts payable in the event of any voluntary
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<PAGE>
or involuntary liquidation, dissolution, or winding up of the corporation and
which are not subject to redemption by the corporation.
(e) Status of Common Stock. All Common Stock that may be issued
upon conversion of the Series A will, upon issuance, be duly issued, fully paid
and non-assessable (except as otherwise provided by the Wisconsin Business
Corporation Law) and free from all taxes, liens and charges with respect to the
issuance thereof (except to the extent resulting from the holder's own
circumstances, actions or omissions).
(viii) Voting.
(a) Voting. The holders of the Series A shall be entitled to
vote, on all matters in which holders of Common Stock are entitled to vote,
voting together with the Common Stock and the Other Securities, if any, without
regard to class. The holders of the Series A shall have the number of votes that
they would have had assuming conversion of the Series A into Common Stock as of
the record date for the meeting of the holders of Common Stock with fractional
shares being disregarded. The holders of the Series A shall be entitled to
receive all communications sent by the corporation to the holders of Common
Stock. Except as provided in Section (viii)(c) below or by the Wisconsin
Business Corporation Law, holders of shares of the Series A shall not be
entitled to vote as a separate class.
(b) No Cumulative Voting. The holders of shares of the Series A
shall not have the right of cumulative voting in an election of directors.
(c) Voting as a Separate Class. The corporation shall not,
without the consent (given by vote at a meeting called for that purpose or by
written consent) of the holders of a majority of the shares of the Series A and
the Other Securities, if any, then outstanding, voting together as a separate
class:
i. create, authorize or issue any stock or other
equity security ranking equal to or senior to the
Series A and the Other Securities as to dividends
or distributions, or any obligation or security
convertible into shares of any such senior stock,
except as set forth in Section (ii) above; or
ii. amend, alter, change, or repeal any of the express
terms of the Series A or the Other Securities.
(ix) Redemption.
(a) Redemption. Commencing three (3) years following the last
issuance of the shares of Series A, the corporation may redeem the Series A in
whole at any time at the option of the corporation by resolution of its Board of
Directors, at a redemption price of $1,000 per share, plus accrued and unpaid
dividends, if any, to the date fixed for redemption.
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<PAGE>
(b) Notice of Redemption. Notice of redemption of the shares of
the Series A shall be given by certified mail, return receipt requested, postage
prepaid, not less than thirty (30) nor more than forty-five (45) days prior to
the date fixed for redemption, to each holder of the Series A, at each holder's
last address appearing on the books of the corporation; but no failure to
receive such a notice by any holder, so long as mailed in accordance with the
provisions herein, shall affect the validity of the proceedings for the
redemption of any shares of the Series A so to be redeemed. Each notice of
redemption of shares of the Series A shall state:
i. the redemption date,
ii. the redemption price,
iii. the Conversion Price on the date of the
notice,
iv. that on the redemption date the
redemption price will become due and
payable upon each share of the Series A
to be redeemed and the right to convert
each such share shall cease as of the
close of business on the redemption
date, unless default shall be made in
the payment of the redemption price, and
v. the place or places where certificates
for such shares of the Series A to be
redeemed are to be surrendered for
conversion or for payment of the
redemption price.
(c) Conversion Prior to the Redemption. At any time prior to the
redemption date, each holder of the Series A shall be entitled to convert all or
any portion of such holder's Series A into Common Stock based on the Conversion
Price.
(d) Rights Following Redemption. If notice of redemption shall
have been duly given as provided in Section (ix)(b), and if, on the redemption
date, funds necessary for such redemption have been deposited in trust with a
bank or trust company, or have been set aside, in trust, by the corporation, for
the purpose of redeeming shares of the Series A, the shares of the Series A
called for redemption shall, as of the close of business on the redemption date,
no longer be transferable on the books of the corporation and shall no longer be
deemed to be outstanding, the right to receive dividends thereon shall cease to
accrue, and all rights with respect to such shares so called for redemption
shall terminate, except only the right of the holders thereof to receive the
redemption price, without interest thereon, upon surrender of the certificates
for such shares.
(e) Cancellation of Shares. Shares of the Series A redeemed
pursuant to this Section (ix) or otherwise reacquired by the corporation shall
be deemed cancelled and thereafter shall constitute authorized and unissued
shares of Preferred Stock,
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undesignated as to series, subject to reissuance by the corporation as shares of
any series of Preferred Stock.
(x) Liquidation.
(a) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the corporation
(hereinafter collectively called "liquidation"), before any amount shall be paid
to or set aside for, or any assets shall be distributed among, the holders of
shares of Common Stock or of any other equity security of the corporation other
than the Other Securities, each holder of a share of the Series A shall be
entitled to receive out of the assets of the corporation or the proceeds
thereof, a preferential payment in an amount equal to $1,000 per share, plus the
amount of accrued and unpaid dividends on such share, if any, and no more.
(b) Proportional Rights. In the event the amount available for
distribution as liquidation preference payments to holders of the Series A and
any other stock ranking on a parity therewith (including the Other Securities,
if any) is insufficient to pay the full amount of their respective preferences,
such amount shall be divided among and paid to such holders ratably in
proportion to the respective amounts which would be payable to such holders if
their respective liquidation preferences were to be paid in full.
(c) Insufficient Funds. In the event any liquidation preference
payment to be made on the shares of the Series A shall amount in the aggregate
to less than $1,000 per share plus accrued and unpaid dividends, the corporation
in its discretion may require the surrender of certificates for shares of the
Series A and issue a replacement certificate or certificates, or it may require
the certificates evidencing the shares in respect of which such payments are to
be made to be presented to the corporation, or its agent, for notation thereon
of the amounts of the liquidation preference payments made in respect of such
shares. In the event a certificate for shares of the Series A on which payment
of one or more partial liquidation preferences has been made is presented for
exchange or transfer, such new certificate shall bear an appropriate notation as
to the aggregate amount of liquidation preference payments theretofore made in
respect thereof.
(d) Merger or Sale. Neither the consolidation or merger of the
corporation with or into any other corporation or other entity, nor the sale or
transfer by the corporation of all or any part of its assets, shall be deemed to
be a liquidation of the corporation for the purposes of this Section (x).
(xi) Replacement Certificates.
(a) Mutilated Certificate. If any mutilated certificate of Series
A is surrendered to the corporation, the corporation shall execute and deliver
in exchange therefor a new certificate for Series A of like tenor and principal
amount, bearing a number not contemporaneously outstanding.
(b) Destroyed, Lost or Stolen Certificate. If there is delivered
to the corporation (i) evidence to its reasonable satisfaction of the
destruction, loss or
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<PAGE>
theft of any certificate of Series A and (ii) such reasonable security or
indemnity as may be required by it to save it harmless, then, in the absence of
notice to the corporation that such certificate of Series A has been acquired by
a bona fide purchaser, the corporation shall execute and deliver in lieu of any
such destroyed, lost or stolen certificate of Series A, a new certificate of
Series A of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
(c) Status of New Certificate. Upon the issuance of any new
certificate of Series A under this Section (xi), the corporation may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses connected therewith.
Every new certificate of Series A issued pursuant to this Section (xi), in lieu
of any destroyed, lost or stolen certificate of Series A, shall constitute an
original additional contractual obligation of the corporation, whether or not
the destroyed, lost or stolen certificate of Series A shall be at any time
enforceable by anyone. Any new certificate for Series A delivered pursuant to
this Section (xi), shall be so dated that neither gain nor loss in interest
shall result from such exchange. The provisions of this Section (xi) are
exclusive and shall preclude (to the extent lawful) all other rights and
remedies with respect to the replacement or payment of mutilated, destroyed,
lost or stolen certificates of Series A.
B. Common Stock.
(1) Dividends. Subject to the provisions of this Article 4, the Board
of Directors of the corporation may, in its sole discretion, out of funds
legally available for the payment of dividends and at such times and in such
manner as determined by the Board of Directors, declare and pay dividends on the
Common Stock.
(2) Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, after there shall
have been paid to or set aside for the holders of Preferred Stock the full
preferential amounts, if any, to which they are entitled, the holders of
outstanding shares of Common Stock shall be entitled to receive pro rata,
according to the number of shares held by each, the remaining assets of the
corporation available for distribution.
(3) Voting Rights. Except as otherwise provided by the Wisconsin
Business Corporation Law, and except as may be determined by the Board of
Directors with respect to Preferred Stock pursuant to Section A of this Article
4, only the holders of Common Stock shall be entitled to vote for the election
of directors of the corporation and for all other corporate purposes. Upon any
such vote the holders of Common Stock shall, except as otherwise provided by
law, be entitled to one vote for each share of Common Stock held by them
respectively.
ARTICLE 5
A. General Powers, Number, Classification and Tenure of Directors. The
general powers, number, classification and tenure of the directors of the
corporation shall be as set forth in Section 3.01 of Article III of the By-laws
of the corporation (and as such
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<PAGE>
Section shall exist from time to time). Such Section 3.01 of the By-laws, or any
provision thereof, may only be amended, altered, changed or repealed by the
affirmative vote of shareholders holding at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of the then outstanding shares of all
classes of capital stock of the corporation generally possessing voting rights
in the election of directors, considered for this purpose as a single class;
provided, however, that the Board of Directors, by resolution adopted by the
Requisite Vote (as hereinafter defined), may amend, alter, change or repeal
Section 3.01 of the By-laws, or any provision thereof, without a vote of the
shareholders. As used herein, the term "Requisite Vote" shall mean the
affirmative vote of at least two-thirds of the directors then in office plus one
director.
B. Removal of Directors. Any director may be removed from office with
or without cause, but only by the affirmative vote of holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of the then
outstanding shares of stock of the voting group of shareholders that elected the
director to be removed; provided, however, that if the Board of Directors by
resolution adopted by the Requisite Vote shall have recommended removal of a
director, then the shareholders may remove such director from office with or
without cause by a majority vote of such outstanding shares.
C. Vacancies. Any vacancy occurring in the Board of Directors,
including a vacancy created by the removal of a director or an increase in the
number of directors, shall be filled by the affirmative vote of a majority of
the directors then in office, although less than a quorum of the Board of
Directors; provided, however, that if the vacant office was held by a director
elected by a voting group of shareholders, only the remaining directors elected
by that voting group shall fill the vacancy. For purposes of this Article 5, a
director elected by directors to fill a vacant office pursuant to this Section C
shall be deemed to be a director elected by the same voting group of
shareholders that elected the director(s) who voted to fill the vacancy. Any
director elected pursuant to this Section C shall serve until the next election
of the class for which such director shall have been chosen and until his
successor shall be elected and qualified.
D. Amendments.
(1) Notwithstanding any other provision of these Restated
Articles of Incorporation, the provisions of this Article 5 may be amended,
altered, changed or repealed only by the affirmative vote of shareholders
holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power
of the then outstanding shares of all classes of capital stock of the
corporation generally possessing voting rights in the election of directors,
considered for this purpose as a single class.
(2) Notwithstanding the foregoing and any provisions in the
By-laws of the corporation, whenever the holders of any one or more series of
Preferred Stock issued by the corporation pursuant to Article 4 hereof shall
have the right, voting separately as a class or by series, to elect directors at
an annual or special meeting of shareholders, the election, term of office,
filing of vacancies and other features of such directorships shall be governed
by
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<PAGE>
the terms of the series of Preferred Stock applicable thereto, and such
directors so elected shall not be divided into classes unless expressly provided
by the terms of the applicable series.
ARTICLE 6
The address of the registered office of the corporation shall be 12000
West Park Place, Milwaukee, Wisconsin 53224.
ARTICLE 7
The name of the registered agent of the corporation at such address
shall be Michael D. Dunham.
ARTICLE 8
No holder of shares of any class of capital stock of the corporation
shall have a preemptive right to acquire unissued shares or securities
convertible into unissued shares or conveying a right to subscribe for or
acquire shares, unless otherwise determined by the Board of Directors.
ARTICLE 9
These Restated Articles of Incorporation may be amended solely as
authorized herein and by law at the time of amendment.
ARTICLES OF AMENDMENT
Relating to
SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
of
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Pursuant to Sections 180.0602 and
180.1002 of the Wisconsin Business Corporation Law
I, Michael D. Dunham, President of Effective Management Systems, Inc., a
corporation organized and existing under the Wisconsin Business Corporation Law
(the "Corporation"), in accordance with the provisions of Sections 180.0602 and
180.1002 thereof, DO HEREBY CERTIFY:
1. That, pursuant to the authority conferred upon the Board of
Directors by the Restated Articles of Incorporation of the Corporation and
in accordance with Sections 180.0602 and 180.1002 of the Wisconsin Business
Corporation Law, the Board of Directors of the Corporation adopted a
resolution creating a series of shares of preferred stock, $.01 par value,
of the Corporation, designated as Series A 8% Convertible Redeemable
Preferred Stock.
2. That said resolution of the Board of Directors of the Corporation
creating the series designated as Series A 8% Convertible Redeemable
Preferred Stock, provides that said series shall have such designation and
number of shares and such relative rights, preferences and limitations as
are set forth below, which shall constitute Paragraph (5) of Section A of
Article 4 of the Corporation's Restated Articles of Incorporation:
(5) Series A 8% Convertible Redeemable Preferred Stock
--------------------------------------------------
(i) Designation and Amount. There is hereby created a series of Preferred
Stock which shall be designated as the "Series A 8% Convertible
Redeemable Preferred Stock" (hereinafter referred to as the "Series
A"); the number of shares constituting such series shall be 7,000.
Such number of shares may be increased or decreased by resolution of
the Board of Directors; provided, however, that no decrease shall
reduce the number of shares of Series A to a number less than the
number of shares then outstanding.
(ii) Dividends.
(a) Cumulative Dividends. From and after the date of issuance of any
shares of Series A, the holders of the Series A shall be entitled
to receive in cash, cumulative preferential dividends at the rate
of eight (8%) percent per annum, payable quarterly on January 2,
April 1, July
<PAGE>
1, and October 1 of each year to holders of record of Series A as
of the fifteenth (15th) day of the month immediately preceding
the month in which a quarterly dividend is due (each a "Dividend
Record Date"). Notwithstanding the foregoing, the first dividend
payment date with respect to the Series A shall be January 2,
1999, which dividend shall be paid on a pro rata basis for the
period such shares of Series A are outstanding. In the event that
the corporation cannot, as determined by the corporation's Board
of Directors in its sole discretion, pay dividends in cash on any
dividend payment date, the corporation shall pay dividends in
shares of Series A valued at eighty (80%) percent of the lesser
of: (i) $1,000 and (ii) the Market Price (as defined below) of
the Common Stock (as defined below) on the relevant Dividend
Record Date multiplied by the quotient of (a) $1,000 and (b) the
Conversion Price (as defined below). Commencing with the
quarterly period beginning January 2, 2002, the annual dividend
rate will increase each quarterly period by 2% up to a maximum
annual dividend rate of 18% (e.g., the annual dividend rate for
the quarterly period commencing January 2, 2002 will be 10% and
the annual dividend rate for the quarterly period commencing
April 1, 2002 will be 12%).
(b) Preference of Dividends. In the event that dividends shall not
have been fully paid, or declared and set apart for payment on
all shares of Series A, the amount of the deficiency (without
interest) shall be fully paid before any dividends shall be
declared or paid on any shares of the corporation's Common Stock,
$.01 par value per share (the "Common Stock"), or any other
equity security which is junior to the Series A. If any dividends
are paid on any of the Series A at any time in an aggregate
amount less than the total dividends then accumulated and payable
on all shares of Series A entitled to dividends then outstanding,
the amount to be distributed shall be paid on each share of
Series A entitled to dividends in the proportion that the
dividends then accumulated and payable on each such share bears
to the total dividends accumulated and payable on all outstanding
shares of Series A entitled to dividends.
(c) Date of Payment. In any case where the due date for the payment
of dividends on the Series A shall be on a day on which banking
institutions in the United States are authorized or obligated by
law to close, the payment of dividends need not be made on such
date, but may be made on the next succeeding day which is not a
day on which banking institutions are authorized or obligated by
law to close, with the same force and effect as if made on the
date of such payment, and dividends shall accrue and be paid for
the period through and including the date of payment.
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(iii)Priority. All shares of the Series A shall rank on a parity with each
other and shall be preferred to the Common Stock and, except as
expressly provided below in this Section (iii), any other class of
stock of the corporation, as to the payment of dividends and the
distribution of assets upon the liquidation, dissolution or winding up
of the corporation. The corporation shall have the right to create
other classes of Preferred Stock which shall rank below the Series A
without the consent of the holders of the Series A. The holders of the
Series A shall be entitled to vote as a separate class on the issuance
of any class of equity securities which ranks equal to or senior to
the Series A; provided, however, that should the corporation issue and
sell prior to September 30, 1998 at least 1,000 shares of Series A
and, at any time thereafter through September 30, 1998, subject to the
right of the corporation and its placement agent to extend such date
by up to an additional thirty (30) days, the corporation and its
placement agent agree in writing to sell equity securities for an
aggregate sale price equal to or less than the difference between $5
million and the aggregate purchase price for the number of shares of
Series A sold, with different terms than the Series A (the "Other
Securities"), the corporation shall have the right, without the
approval of the holders of the Series A, to sell the Other Securities
and to have such Other Securities rank equal in priority to the Series
A.
(iv) Voluntary Conversion Rights.
(a) Voluntary Conversion. Each holder of Series A shall have the
right, at any time and from time to time, at the holder's option,
to convert all or any portion of such holder's shares of Series A
into fully paid and non-assessable (except as otherwise provided
by the Wisconsin Business Corporation Law) shares of Common Stock
at the Conversion Price in effect at the time of conversion, each
share of the Series A being taken at $1,000 per share for the
purposes of such conversion. The initial Conversion Price is
$3.50 per share of Common Stock ("Initial Conversion Price"). The
Initial Conversion Price shall be adjusted as provided for below
in Section (vi) (the Initial Conversion Price and the Initial
Conversion Price as thereafter then adjusted shall be referred to
as the "Conversion Price"). Upon each adjustment of the
Conversion Price, the holders of the Series A shall thereafter be
entitled to receive upon conversion, at the Conversion Price, the
number of shares of Common Stock obtained by multiplying $1,000
times the number of shares of Series A being converted and
dividing such product by the Conversion Price.
(b) Method of Conversion. In order to convert shares of the Series A
into Common Stock, the holder thereof shall surrender the
certificates representing the Series A to be converted, duly
endorsed in blank, at the principal office of the corporation or
its transfer agent, if any, or at such other office or offices,
located in the United States as the Board of Directors may
designate by written notice to all holders of Series A
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shares, and give written notice to the corporation at said office
that the holder elects to convert said shares of Series A. Shares
of the Series A shall be deemed to have been converted as of the
date (hereinafter called the "Conversion Date") of receipt by the
corporation of the surrendered shares of Series A for conversion
as provided above, and the person or persons entitled to receive
the Common Stock issuable upon such conversion shall be treated
for all purposes as the record holder or holders of such Common
Stock on such date. As soon as practicable on or after the
Conversion Date but in no event more than five (5) business days
thereafter, the corporation will deliver by Federal Express or
other nationally recognized overnight delivery service to the
address of the holder who submitted the Series A for conversion,
a certificate or certificates for the number of full shares of
Common Stock issuable upon such conversion, together with cash in
lieu of any fraction of a share, as hereinafter provided, to the
person or persons entitled to receive the same and a check
representing all accrued and unpaid dividends on the Series A so
converted through the Conversion Date.
(v) Forced Conversion. The corporation shall have the right to force
conversion of all, but not less than all, of the Series A into shares
of Common Stock; provided, however, that on the day that notice of
forced conversion is given (the "Forced Conversion Notice Date") and
on the Forced Conversion Date (as defined below) the following
conditions are satisfied: (a) the Common Stock issued and/or issuable
upon conversion of the Series A has been registered for resale
pursuant to the Securities Act of 1933, as amended (the "Act"), and
such registration is then currently effective; and (b) the average of
the closing bid price of the Common Stock as listed on the National
Association of Securities Dealers Automated Quotation System, the New
York Stock Exchange, the American Stock Exchange or wherever the
Common Stock then trades (hereinafter, the "Market"), is at least 175%
of the Conversion Price for twenty (20) trading days within any thirty
(30) consecutive trading day period ending no more than ten (10) days
prior to the Forced Conversion Notice Date. Any notice of forced
conversion must be given to all holders no less than thirty (30) days
nor more than forty-five (45) days prior to the date set forth for
conversion (the "Forced Conversion Date"). On the Forced Conversion
Date, the corporation shall pay to all registered holders of the
Series A all accrued and unpaid dividends through and including the
Forced Conversion Date. In the event that the Board of Directors of
the corporation approves a transaction whereby the holders of the
Common Stock would be paid a per share price equal to or in excess of
175% of the Conversion Price (the "Sale Event") and the Forced
Conversion Notice Date and on the Forced Conversion Date the condition
set forth in Section (v)(a) above has been satisfied, the corporation
can require all holders of the Series A to convert their shares of
Series A into shares of Common Stock immediately prior to the closing
of the Sale Event. Notwithstanding anything to the contrary, holders
of Series A shall not have the right to vote together with the holders
of Common Stock, or as a separate class, on whether to approve the
Sale Event (although a holder of Series A that voluntarily converts
shares of Series A into Common Stock prior to the record date for the
shareholders' meeting to vote on the Sale Event would be entitled to
vote such shares of Common Stock) during the 150-day period following
the Forced Conversion Notice Date because it shall be deemed for all
purposes relating to the approval of the Sale Event, including for
purposes of the Wisconsin Business Corporation Law, that the Series A
is no longer outstanding during such period and that the only rights
of the Series A shall be to receive shares of Common Stock upon
consummation of the forced conversion. In the event that the foregoing
sentence is determined not to eliminate the voting rights of the
Series A (either class voting rights or the right to vote with the
Common Stock) with respect to a Sale Event, the holders of the Series
A shall be deemed to have granted the President and the Secretary of
the corporation (and each of them individually) an irrevocable proxy
for such 150-day period to vote the Series A held by each such holder
for the approval of the Sale Event. In the event that the Sale Event
would result in the holders of the Series A receiving securities, it
is a condition to the corporation's right to force conversion
resulting from a Sale Event that the securities to be received by the
holders of the Series A are registered under the Act and are freely
transferable.
(vi) Adjustments to Conversion Price. The Conversion Price shall be
adjusted as follows:
(a) Amendment to the Restated Articles of Incorporation. In the case
of any amendment to the Restated Articles of Incorporation of the
corporation to change the designation of the Common Stock or the
rights, privileges, restrictions or conditions in respect to the
Common Stock or to provide for a division of the Common Stock,
the Series A shall be adjusted so as to provide that upon
conversion thereof the holder shall receive, in lieu of shares of
Common Stock theretofore issuable upon such conversion, the kind
and amount of shares, other securities, money and property
receivable upon such designation, change or division by such
holder issuable upon such conversion had the conversion occurred
immediately prior to such designation, change or division. The
Series A shall be deemed thereafter to provide for adjustments
which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section (vi). The provisions of
this Section (vi)(a) shall apply in the same manner to successive
reclassifications, changes, consolidations and mergers.
(b) Stock Splits; Stock Dividends. If the corporation shall at any
time subdivide its outstanding shares of Common Stock into a
greater number of shares of Common Stock, or declare a dividend
or make any other distribution upon the Common Stock payable in
shares of Common Stock, the Conversion Price in effect
immediately prior to such subdivision or dividend or other
distribution shall be proportionately
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reduced, and conversely, in case the outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
(c) Issuance of Additional Securities. In case the corporation shall,
through either a private placement or a public offering (but
other than pursuant to options granted under the corporation's
directors' and employee stock option and stock purchase plans or
shares or options issued in an acquisition or shares issuable
pursuant to the exercise of warrants outstanding on August 19,
1998), issues shares of Common Stock, or options to purchase
Common Stock or rights to subscribe for Common Stock or
securities convertible into or exchangeable for Common Stock at a
price (such consideration, if other than cash, as determined by
the Board of Directors) less than the then Market Price (as
defined below) on the date of sale, the Conversion Price then in
effect shall automatically be reduced by multiplying the then
Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately
prior to such issuance, sale or distribution plus the number of
shares of Common Stock which the aggregate consideration received
or to be received by the corporation for such issuance, sale or
distribution would purchase at the Market Price per share, and
the denominator of which shall be the number of shares of Common
Stock outstanding immediately after giving effect to such
issuance, sale or distribution. The term "Market Price" shall
mean the average closing bid price on the Market for the ten (10)
consecutive trading days immediately prior to the date in
question. Notwithstanding the foregoing, in no event shall the
Conversion Price ever be increased as a result of this Section
(vi)(c).
(d) Reorganization or Reclassification. If any capital reorganization
or reclassification of the capital stock of the corporation, or
any consolidation or merger of the corporation with another
corporation or other entity, or the sale of all or substantially
all of the corporation's assets to another corporation or other
entity shall be effected in such a way that holders of shares of
Common Stock shall be entitled to receive stock, securities,
other evidence of equity ownership or assets with respect to or
in exchange for shares of Common Stock, then, as a condition of
such reorganization, reclassification, consolidation, merger or
sale (except as otherwise provided below in this Section
(vi)(d)), lawful and adequate provisions shall be made whereby
the holders of Series A shall thereafter have the right to
receive upon the basis and upon the terms and conditions
specified herein, such shares of stock, securities, other
evidence of equity ownership or assets as may be issued or
payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of
shares of Common
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Stock immediately theretofore purchasable and receivable upon the
conversion of Series A had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such
case appropriate provisions shall be made with respect to the
rights and interests of the holders to the end that the
provisions hereof (including, without limitation, provisions for
adjustments of the Conversion Price and the number of shares of
Common Stock receivable upon the conversion of Series A) shall
thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities, other evidence of equity ownership
or assets thereafter deliverable upon the exercise hereof
(including an immediate adjustment, by reason of such
consolidation or merger, of the Conversion Price to the value for
the Common Stock reflected by the terms of such consolidation or
merger if the value so reflected is less than the Conversion
Price in effect immediately prior to such consolidation or
merger; provided, however, that the Conversion Price shall not be
reduced under this Section (vi)(d) by more than thirty (30%)
percent). Subject to the terms of the Series A, in the event of a
merger or consolidation of the corporation with or into another
corporation or other entity as a result of which the number of
shares of common stock of the surviving corporation or other
entity issuable to holders of Common Stock is greater or lesser
than the number of shares of Common Stock of the corporation
outstanding immediately prior to such merger or consolidation,
then the Conversion Price in effect immediately prior to such
merger or consolidation shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding
shares of Common Stock. The corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof, the successor corporation or other entity (if other than
the corporation) resulting from such consolidation or merger or
the corporation or other entity purchasing such assets shall
assume by written instrument executed and mailed or delivered to
the holders, the obligation to deliver to such holders such
shares of stock, securities, other evidence of equity ownership
or assets as, in accordance with the foregoing provisions, such
holders may be entitled to receive or otherwise acquire. If a
purchase tender or exchange offer is made to and accepted by the
holders of more than fifty (50%) percent of the outstanding
shares of Common Stock, the corporation shall not effect any
consolidation, merger or sale with the person having made such
offer or with any affiliate of such person, unless prior to the
consummation of such consolidation, merger or sale the holders of
Series A shall have been given a reasonable opportunity to then
elect to receive upon the conversion of Series A, the amount of
stock, securities, other evidence of equity ownership or assets
then issuable with respect to the number of shares of Common
Stock of the corporation in accordance with such offer.
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(e) Change of Control. In case the corporation shall, at any time
prior to conversion of the shares of Series A, consolidate or
merge with any other corporation or other entity (where the
corporation is not the surviving entity) or transfer all or
substantially all of its assets to any other corporation or other
entity, then the corporation shall, as a condition precedent to
such transaction, cause effective provision to be made so that
the holders of the Series A upon the conversion of the Series A
after the effective date of such transaction shall be entitled to
receive the kind and amount of shares, evidences of indebtedness
and/or other securities or property receivable on such
transaction by a holder of the number of shares of Common Stock
as to which each share of Series A was convertible immediately
prior to such transaction (without giving effect to any
restriction upon such conversion); and, in any such case,
appropriate provision shall be made with respect to the rights
and interest of the holders of Series A to the end that the
provisions of the Series A shall thereafter be applicable (as
nearly as may be practicable) with respect to any shares,
evidences of indebtedness or other securities or assets
thereafter deliverable upon conversion of the Series A. Upon the
occurrence of any event described in this Section (vi)(e), the
holders of the Series A shall have the right to (i) convert into
shares of Common Stock immediately prior to such event at a
Conversion Price equal to the lesser of (1) the then Conversion
Price or (2) the price per share of Common Stock paid in such
event; provided, however, that the Conversion Price shall not be
reduced under this Section (vi)(e)(2) by more than thirty (30%)
percent, or (ii) retain ownership of the shares of Series A, in
which event, appropriate provisions shall be made so that the
shares of Series A shall be convertible at the holder's option
into shares of stock, securities or other equity ownership of the
surviving or acquiring entity.
(f) Record of Conversion Price. Whenever the shares of Common Stock
or other types of securities or assets receivable upon conversion
of the Series A shall be adjusted as provided in this Section
(vi), the corporation shall forthwith obtain and file with its
corporate records a certificate or letter from a firm of
independent public accountants of recognized standing setting
forth the computation and the adjusted number of shares of Common
Stock or other securities or assets resulting from such
adjustments, and a copy of such certificate or letter shall be
mailed to the holders of the Series A. Any such certificate or
letter shall be conclusive evidence as to the correctness of the
adjustment or adjustments referred to therein and shall be
available for inspection by any holders of the Series A on any
day during normal business hours.
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<PAGE>
(g) Notice. In case:
i. the corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in Common Stock;
or
ii. the corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in cash; or
iii. any reclassification of Common Stock or any consolidation,
merger, conveyance of the property of the corporation as an
entirety, or substantially as an entirety, dissolution,
liquidation or winding up shall be effected by the
corporation;
then the corporation shall mail, or cause to be mailed by the corporation's
transfer agent, if any, for the Series A to the holders of record of the
outstanding shares of the Series A, at least thirty (30) days, but not more than
sixty (60) days, prior to the applicable record date hereinafter specified, a
notice stating (A) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to such
dividend, distribution or right are to be determined, or (B) the date on which
such reclassification, consolidation, merger, conveyance, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange the certificates representing their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(vii) Reservation of Shares of Common Stock.
(a) Reservation of Shares. The corporation shall at all times reserve
and keep available out of its authorized but unissued Common
Stock, for the purpose of effecting the conversion of the shares
of the Series A, the full number of shares of Common Stock then
deliverable upon the conversion of all shares of the Series A
then outstanding. If shares of the Common Stock of the
corporation are listed on any securities exchange, the
corporation shall make application for the listing thereon, on
notice of issuance, of the shares of Common Stock deliverable
upon the conversion of the outstanding shares of the Series A and
shall use its best efforts to effect such listing.
(b) Fractional Shares. No fractional shares of Common Stock are to be
issued upon conversion. The corporation shall pay a cash
adjustment in respect to any fraction of a share which would
otherwise be issuable, in an amount equal to the fair market
value of the Common Stock which shall be the same fraction of the
closing bid price per share at which the Common Stock was sold on
the Market prior to the opening of business on the Conversion
Date, or if no sale of such stock takes place on such day on the
Market, the average of the closing bid and asked prices on
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such day as officially quoted on the Market. If the Common Stock
is not then publicly traded, fair market value shall be
determined in good faith by the corporation's Board of Directors.
(c) Transfer Taxes. The corporation will pay any and all transfer
taxes that may be payable in respect of the issue or delivery of
shares of Common Stock on conversion of shares of the Series A
pursuant hereto. The corporation shall not, however, be required
to pay any tax which may be payable in respect of transfer
involved in the issue and delivery of shares of Common Stock in a
name other than that in which the shares of the Series A so
converted were registered, and no such issue or delivery shall be
made unless and until the person requesting such issue has paid
to the corporation the amount of any such tax, or has
established, to the satisfaction of the corporation, that such
tax has been paid.
(d) Common Stock. For the purpose of this Section (vii), the term
"Common Stock" shall include any stock of any class of the
corporation which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, and
which is not subject to redemption by the corporation. Shares of
Common Stock shall be only such shares which have no preference
in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution, or winding up
of the corporation and which are not subject to redemption by the
corporation.
(e) Status of Common Stock. All Common Stock that may be issued upon
conversion of the Series A will, upon issuance, be duly issued,
fully paid and non-assessable (except as otherwise provided by
the Wisconsin Business Corporation Law) and free from all taxes,
liens and charges with respect to the issuance thereof (except to
the extent resulting from the holder's own circumstances, actions
or omissions).
(viii) Voting.
(a) Voting. The holders of the Series A shall be entitled to vote, on
all matters in which holders of Common Stock are entitled to
vote, voting together with the Common Stock and the Other
Securities, if any, without regard to class. The holders of the
Series A shall have the number of votes that they would have had
assuming conversion of the Series A into Common Stock as of the
record date for the meeting of the holders of Common Stock with
fractional shares being disregarded. The holders of the Series A
shall be entitled to receive all communications sent by the
corporation to the holders of Common Stock. Except as provided in
Section (viii)(c) below or by the Wisconsin Business
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Corporation Law, holders of shares of the Series A shall not be
entitled to vote as a separate class.
(b) No Cumulative Voting. The holders of shares of the Series A shall
not have the right of cumulative voting in an election of
directors.
(c) Voting as a Separate Class. The corporation shall not, without
the consent (given by vote at a meeting called for that purpose
or by written consent) of the holders of a majority of the shares
of the Series A and the Other Securities, if any, then
outstanding, voting together as a separate class:
i. create, authorize or issue any stock or other equity
security ranking equal to or senior to the Series A and the
Other Securities as to dividends or distributions, or any
obligation or security convertible into shares of any such
senior stock, except as set forth in Section (ii) above; or
ii. amend, alter, change, or repeal any of the express terms of
the Series A or the Other Securities.
(ix) Redemption.
(a) Redemption. Commencing three (3) years following the last
issuance of the shares of Series A, the corporation may redeem
the Series A in whole at any time at the option of the
corporation by resolution of its Board of Directors, at a
redemption price of $1,000 per share, plus accrued and unpaid
dividends, if any, to the date fixed for redemption.
(b) Notice of Redemption. Notice of redemption of the shares of the
Series A shall be given by certified mail, return receipt
requested, postage prepaid, not less than thirty (30) nor more
than forty-five (45) days prior to the date fixed for redemption,
to each holder of the Series A, at each holder's last address
appearing on the books of the corporation; but no failure to
receive such a notice by any holder, so long as mailed in
accordance with the provisions herein, shall affect the validity
of the proceedings for the redemption of any shares of the Series
A so to be redeemed. Each notice of redemption of shares of the
Series A shall state:
i. the redemption date,
ii. the redemption price,
iii. the Conversion Price on the date of the notice,
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iv. that on the redemption date the redemption price will become
due and payable upon each share of the Series A to be
redeemed and the right to convert each such share shall
cease as of the close of business on the redemption date,
unless default shall be made in the payment of the
redemption price, and
v. the place or places where certificates for such shares of
the Series A to be redeemed are to be surrendered for
conversion or for payment of the redemption price.
(c) Conversion Prior to the Redemption. At any time prior to the
redemption date, each holder of the Series A shall be entitled to
convert all or any portion of such holder's Series A into Common
Stock based on the Conversion Price.
(d) Rights Following Redemption. If notice of redemption shall have
been duly given as provided in Section (ix)(b), and if, on the
redemption date, funds necessary for such redemption have been
deposited in trust with a bank or trust company, or have been set
aside, in trust, by the corporation, for the purpose of redeeming
shares of the Series A, the shares of the Series A called for
redemption shall, as of the close of business on the redemption
date, no longer be transferable on the books of the corporation
and shall no longer be deemed to be outstanding, the right to
receive dividends thereon shall cease to accrue, and all rights
with respect to such shares so called for redemption shall
terminate, except only the right of the holders thereof to
receive the redemption price, without interest thereon, upon
surrender of the certificates for such shares.
(e) Cancellation of Shares. Shares of the Series A redeemed pursuant
to this Section (ix) or otherwise reacquired by the corporation
shall be deemed cancelled and thereafter shall constitute
authorized and unissued shares of Preferred Stock, undesignated
as to series, subject to reissuance by the corporation as shares
of any series of Preferred Stock.
(x) Liquidation.
(a) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
corporation (hereinafter collectively called "liquidation"),
before any amount shall be paid to or set aside for, or any
assets shall be distributed among, the holders of shares of
Common Stock or of any other equity security of the corporation
other than the Other Securities, each holder of a share of the
Series A shall be entitled to receive out of the assets of the
corporation or the proceeds thereof, a preferential payment in an
amount equal to
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$1,000 per share, plus the amount of accrued and unpaid dividends
on such share, if any, and no more.
(b) Proportional Rights. In the event the amount available for
distribution as liquidation preference payments to holders of the
Series A and any other stock ranking on a parity therewith
(including the Other Securities, if any) is insufficient to pay
the full amount of their respective preferences, such amount
shall be divided among and paid to such holders ratably in
proportion to the respective amounts which would be payable to
such holders if their respective liquidation preferences were to
be paid in full.
(c) Insufficient Funds. In the event any liquidation preference
payment to be made on the shares of the Series A shall amount in
the aggregate to less than $1,000 per share plus accrued and
unpaid dividends, the corporation in its discretion may require
the surrender of certificates for shares of the Series A and
issue a replacement certificate or certificates, or it may
require the certificates evidencing the shares in respect of
which such payments are to be made to be presented to the
corporation, or its agent, for notation thereon of the amounts of
the liquidation preference payments made in respect of such
shares. In the event a certificate for shares of the Series A on
which payment of one or more partial liquidation preferences has
been made is presented for exchange or transfer, such new
certificate shall bear an appropriate notation as to the
aggregate amount of liquidation preference payments theretofore
made in respect thereof.
(d) Merger or Sale. Neither the consolidation or merger of the
corporation with or into any other corporation or other entity,
nor the sale or transfer by the corporation of all or any part of
its assets, shall be deemed to be a liquidation of the
corporation for the purposes of this Section (x).
(xi) Replacement Certificates.
(a) Mutilated Certificate. If any mutilated certificate of Series A
is surrendered to the corporation, the corporation shall execute
and deliver in exchange therefor a new certificate for Series A
of like tenor and principal amount, bearing a number not
contemporaneously outstanding.
(b) Destroyed, Lost or Stolen Certificate. If there is delivered to
the corporation (i) evidence to its reasonable satisfaction of
the destruction, loss or theft of any certificate of Series A and
(ii) such reasonable security or indemnity as may be required by
it to save it harmless, then, in the absence of notice to the
corporation that such certificate of Series A has been acquired
by a bona fide purchaser, the corporation shall execute and
deliver in lieu of any such destroyed, lost or stolen
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certificate of Series A, a new certificate of Series A of like
tenor and principal amount and bearing a number not
contemporaneously outstanding.
(c) Status of New Certificate. Upon the issuance of any new
certificate of Series A under this Section (xi), the corporation
may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto
and any other expenses connected therewith. Every new certificate
of Series A issued pursuant to this Section (xi), in lieu of any
destroyed, lost or stolen certificate of Series A, shall
constitute an original additional contractual obligation of the
corporation, whether or not the destroyed, lost or stolen
certificate of Series A shall be at any time enforceable by
anyone. Any new certificate for Series A delivered pursuant to
this Section (xi), shall be so dated that neither gain nor loss
in interest shall result from such exchange. The provisions of
this Section (xi) are exclusive and shall preclude (to the extent
lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen
certificates of Series A.
* * *
3. That none of the shares of Series A 8% Convertible Redeemable
Preferred Stock have been issued.
4. That the amendment creating the Series A 8% Convertible Redeemable
Preferred Stock was adopted by the Board of Directors of the Corporation in
accordance with Section 180.1002 of the Wisconsin Business Corporation Law,
and shareholder action was not required.
IN WITNESS WHEREOF, I have executed and subscribed these Articles of
Amendment on behalf of the Corporation and do affirm the foregoing as true this
24th day of August, 1998.
By: /s/ Michael D. Dunham
Michael D. Dunham
President and Chief Executive Officer
This instrument was drafted by, and should be returned to, Jay O.
Rothman of the firm of Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202.
CONSENT AND SECOND AMENDMENT TO
LOAN AGREEMENT
THIS CONSENT AND SECOND AMENDMENT (this "Amendment") is entered into as of
August __, 1998, among Effective Management Systems, Inc. ("EMS"), a Wisconsin
corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective
Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation
(EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and
collectively "Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement
dated as of December 30, 1997 (the "Loan Agreement");
WHEREAS, Borrowers have requested that Lender consent to the issuance by
EMS of up to $5,000,000 of convertible preferred equity securities and the
issuance of warrants, each in accordance with terms of the engagement letter
dated as of August 14, 1998 (the "Engagement Letter") issued by Taglich
Brothers, D'Amadeo, Wagner & Company, Incorporated; and
WHEREAS, Borrowers have requested that Lender amend the Loan Agreement,
and Lender has agreed to do so subject to the terms and conditions contained
herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed to such terms in the Loan Agreement.
2. Consent. Subject to the satisfaction of the conditions set forth in
Section 5 hereof, Lender hereby consents to the issuance by EMS of up to
$5,000,000 of convertible preferred equity securities and the issuance of
warrants, each in accordance with the terms of the Engagement Letter; provided
that EMS acknowledges and agrees that it will not repurchase or redeem any of
the preferred equity securities or warrants without the prior written consent of
Lender.
3. Amendments to Loan Agreement. Subject to the satisfaction of the
conditions set forth in Section 5 hereof, the Loan Agreement is amended as
follows:
(a) Section 1.1 of the Loan Agreement is hereby amended to add the
following definitions in appropriate alphabetical order:
"Excess Availability" means, as of any date of determination, the
amount by which the lesser of (a) the Maximum Revolving Amount and (b) the
Borrowing Base, exceeds the sum of the Obligations (excluding the
<PAGE>
principal balance of the Term Loan) and the amount of deterioration in the
payables over 60 days past due since the date of Foothill's last audit of
Borrowers.
"Permitted Preferred Equity Securities Offering" means the issuance
by EMS of convertible preferred equity securities of up to $5,000,000 and
the issuance by EMS of warrants, each in accordance with the terms of the
Engagement Letter attached hereto as Schedule P-2.
(b) Section 7.3 of the Loan Agreement is hereby amended and restated in
its entirety, as follows:
7.3 Restrictions on Fundamental Changes.
Enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up,
or dissolve itself (or suffer any liquidation or dissolution), or convey,
sell, assign, lease, transfer, or otherwise dispose of, in one transaction
or a series of transactions, all or any substantial part of its property
or assets; provided, that EMS may issue preferred equity securities and
warrants pursuant to the Permitted Preferred Equity Securities Offering.
(c) Section 7.9 of the Loan Agreement is hereby amended and restated in
its entirety, as follows:
7.9 Change of Control.
Cause, permit, or suffer, directly or indirectly, any Change of
Control; provided, that EMS may consummate the Permitted Preferred Equity
Securities Offering, and issue common stock upon conversion and upon
exercise of the warrants provided therein.
(d) Section 7.11 of the Loan Agreement is hereby amended and restated in
its entirety, as follows:
7.11 Distributions.
Make any distribution or declare or pay any dividends (in cash or
other property, other than capital stock) on, or purchase, acquire,
redeem, or retire any of any Borrower's capital stock, of any class,
whether now or hereafter outstanding, except that (a) each of EMS-East and
EMS-Illinois may pay dividends to EMS, and (b) so long as no Event of
Default exists or would be caused thereby and Excess Availability exceeds
$200,000 after giving effect to the payment thereof, EMS may pay regularly
scheduled quarterly dividends at a per annum rate of 8% in respect of its
convertible preferred equity securities issued upon consummation of the
Permitted Preferred Equity Securities Offering.
2
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(e) The Loan Agreement is amended to add Exhibit A hereto as Schedule P-2
to the Loan Agreement.
4. Ratification. This Amendment, subject to satisfaction of the conditions
provided below, shall constitute amendments to the Loan Agreement and all of the
Loan Documents as appropriate to express the agreements contained herein. In all
other respects, the Loan Agreement and the Loan Documents shall remain unchanged
and in full force and effect in accordance with their original terms.
5. Conditions to Effectiveness. Subject to Section 6 below, the amendments
to the Loan Agreement set forth in this Amendment shall become effective as of
the date of this Amendment and upon the satisfaction of the following conditions
precedent in form and substance satisfactory to Lender:
(a) Consummation of Permitted Preferred Equity Securities Offering. EMS
shall have consummated the Permitted Preferred Equity Securities Offering.
(b) No Default. No Event of Default or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, shall
have occurred and be continuing, and, after giving effect to the amendments
contained herein, no Event of Default or event which, with the giving of notice
or the passage of time, or both, would become an Event of Default, shall have
occurred and be continuing.
6. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to enter
into this Amendment, each Borrower hereby warrants to Lender, as of the date
hereof, that:
(i) The warranties of such Borrower contained in the Loan Agreement,
as herein amended, are true and correct as of the date hereof as if made
on the date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by such Borrower in connection with this Amendment,
the Loan Agreement and the other Loan Documents are accurate and correct
in all material respects and complete insofar as may be necessary to give
Lender true and accurate knowledge of the subject matter thereof. Such
Borrower has disclosed to Lender every fact of which it is aware which
would reasonably be expected to materially and adversely affect the
business, operations or financial condition of such Borrower or the
ability of such Borrower to perform its obligations under this Amendment,
the Loan Agreement or under any of the other Loan Documents. None of the
information furnished to Lender by or on behalf of such Borrower contained
any material misstatement of fact or omitted to state a material fact or
any fact necessary to make the statements contained herein or therein not
materially misleading.
3
<PAGE>
(iii) No Event of Default or event which, with giving of notice or
the passage of time, or both would become an Event of Default, exists as
of the date hereof.
(b) Expenses. Borrowers agree to pay on demand all costs and expenses of
Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrowers agree to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment or the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this Section 6 (b) shall survive any termination of
this Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of California.
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) Reference to Loan Agreement. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any Loan Documents, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) Successors. This Amendment shall be binding upon Borrowers, Lender and
their respective successors and assigns, and shall inure to the benefit of
Borrowers, Lender and their respective successors and assigns.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and delivered as
of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By /S/
Title
EMS-EAST, INC., a Massachusetts corporation
By /S/
Title
EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS,
INC., an Illinois corporation
By /S/
Title
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /S/
Title
THIRD AMENDMENT TO
LOAN AGREEMENT
THIS THIRD AMENDMENT (this "Amendment") is entered into as of October 6,
1998, among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation,
EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management
Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS,
EMS-East and EMS-Illinois are each individually a "Borrower", and collectively
"Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement
dated as of December 30, 1997 (the "Loan Agreement");
WHEREAS, Borrowers have requested that Lender amend the Loan Agreement, and
Lender has agreed to do so subject to the terms and conditions contained herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed to such terms in the Loan Agreement.
2. Amendments to Loan Agreement. Subject to the satisfaction of the
conditions set forth in Section 4 hereof, the Loan Agreement is amended as
follows:
(a) The definition of "Maximum Revolving Amount" is hereby amended and
restated in its entirety as follows:
"Maximum Revolving Amount" means $5,000,000.
(b) Section 2.3 of the Loan Agreement is hereby amended and restated in its
entirety, as follows:
2.3 Term Loan.
Foothill made a term loan (the "Term Loan") to Borrowers in the
original principal amount of $3,112,500, consisting of an advance of
$3,000,000 and the closing fee of $112,500 described in Section 2.11(b). As
of October 6, 1998, the outstanding principal amount of the Term Loan is
$2,723,447. Foothill has agreed to make an additional advance (which shall
be added to and become part of the Term Loan) in the amount of $776,553 to
increase the Term Loan to $3,500,000. The Term Loan, as so increased, shall
be repaid in 35 installments of principal each in the amount of $100,000
<PAGE>
(except for the last such installment which shall be in the amount of the
unpaid principal balance of the Term Loan). Each such installment shall be
due and payable on the tenth day of each month commencing on the tenth day
of November, 1998 and continuing on the tenth day of each succeeding month,
and the final payment shall be on the third anniversary of the Closing
Date. In addition to the foregoing, Borrowers shall make prepayments of
principal of the Term Loan such that at all times the outstanding principal
balance of the Term Loan is less than the Applicable Maintenance Revenue
Amount. The outstanding principal balance and all accrued and unpaid
interest under the Term Loan shall be due and payable upon the termination
of this Agreement, whether by its terms, by prepayment, by acceleration, or
otherwise. The unpaid principal balance of the Term Loan may be prepaid in
whole or in part without penalty or premium at any time during the term of
this Agreement upon 30 days prior written notice by Borrowers to Foothill.
All prepayments of principal of the Term Loan shall be applied to the
installments due on the Term Loan in the inverse order of their maturity.
All amounts outstanding under the Term Loan shall constitute Obligations.
(c) The first sentence of Section 3.4 of the Loan Agreement is hereby
amended and restated in its entirety, as follows:
This Agreement shall become effective upon the execution and delivery
hereof by Borrowers and Foothill and shall continue in full force and
effect for a term ending on October 31, 2001 (the "Renewal Date") and
automatically shall be renewed for successive one year periods thereafter,
unless sooner terminated pursuant to the terms hereof.
(d) Section 3.6 of the Loan Agreement is hereby amended and restated
in its entirety, as follows:
3.6 Early Termination by Borrower.
The provisions of Section 3.4 that allow termination of this Agreement
by Borrowers only on the Renewal Date and certain anniversaries thereof
notwithstanding, Borrowers have the option, at any time upon 90 days prior
written notice to Foothill, to terminate this Agreement by paying to
Foothill, in cash, the Obligations (including an amount equal to 102% of
the undrawn amount of the Letters of Credit), in full, together with a
premium (the "Early Termination Premium") equal to (a) 3% of the Maximum
Amount if such termination occurs on or before October 31, 1999, (b) 2% of
the Maximum Amount if such termination occurs after October 31, 1999 but on
or before October 31, 2000, and (c) 1% of the Maximum Amount if such
termination occurs after October 31, 2000 but before October 31, 2001;
provided, that if Borrowers refinance the facility provided for under this
Agreement after
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<PAGE>
the eighteen month anniversary of the date hereof with Norwest Bank, N.A.
or any of its subsidiaries, the Early Termination Premium will be waived by
Foothill.
(e) Section 7.20 of the Loan Agreement is hereby amended and restated in
its entirety as follows:
7.20 Financial Covenants.
Fail to maintain:
(a) Tangible Net Worth. Tangible Net Worth as of the last day of any
fiscal quarter set forth below of at least the amount set forth below
opposite such fiscal quarter:
Fiscal Quarter Amount
August 31, 1998 ($5,000,000)
plus the Equity Infusion Amount
November 30, 1998 ($3,750,000)
plus the Equity Infusion Amount
February 28, 1999 ($4,000,000)
plus the Equity Infusion Amount
May 31, 1999 ($3,500,000)
plus the Equity Infusion Amount
August 31, 1999 ($2,750,000)
plus the Equity Infusion Amount
November 30, 1999 and the last day of ($2,500,000)
each fiscal quarter thereafter plus the Equity Infusion Amount
"Equity Infusion Amount" means the amount, if any, by which the equity
contributed to Borrowers at any time after October 6, 1998 exceeds
$1,000,000.
(b) EBITDA. EBITDA for any period set forth below of at least the
amount set forth below opposite such period:
Period Amount
------ ------
3 month period ending August 31, 1998 ($1,500,000)
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<PAGE>
Period Amount
------ ------
3 month period ending November 30, 1998 0
3 month period ending February 28, 1999 ($500,000)
3 month period ending May 31, 1999 and 3 month $500,000
period ending on the last day of each fiscal
quarter thereafter
(f) Section 7.21 of the Loan Agreement is hereby amended and restated in
its entirety as follows:
7.21 Capital Expenditures.
Make capital expenditures in any fiscal year set forth below in excess
of the amount set forth opposite such fiscal year:
Period Amount
Fiscal year ending November 30, 1998 $1,750,000
Fiscal year ending November 30, 1999 and each $1,750,000
fiscal year thereafter
3. Ratification. This Amendment, subject to satisfaction of the conditions
provided below, shall constitute amendments to the Loan Agreement and all of the
Loan Documents as appropriate to express the agreements contained herein. In all
other respects, the Loan Agreement and the Loan Documents shall remain unchanged
and in full force and effect in accordance with their original terms.
4. Conditions to Effectiveness. Subject to Section 5 below, the amendments
to the Loan Agreement set forth in this Amendment shall become effective as of
the date of this Amendment and upon the satisfaction of the following conditions
precedent in form and substance satisfactory to Lender:
(a) Modification Fee. Borrowers shall have paid Lender a modification fee
in the amount of $20,000.
(b) Other Documents. Borrower shall have executed and delivered to Lender
such other documents, agreements and instruments as Lender shall have requested.
(c) No Default. No Event of Default or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, Shall
have
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<PAGE>
occurred and be continuing, and, after giving effect to the amendments contained
herein, no Event of Default or event which, with the giving of notice or the
passage of time, or both, would become an Event of Default, shall have occurred
and be continuing.
5. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to enter
into this Amendment, each Borrower hereby warrants to Lender, as of the date
hereof, that:
(i) The warranties of such Borrower contained in the Loan Agreement,
as herein amended, are true and correct as of the date hereof as if made on
the date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by such Borrower in connection with this Amendment, the
Loan Agreement and the other Loan Documents are accurate and correct in all
material respects and complete insofar as may be necessary to give Lender
true and accurate knowledge of the subject matter thereof. Such Borrower
has disclosed to Lender every fact of which it is aware which would
reasonably be expected to materially and adversely affect the business,
operations or financial condition of such Borrower or the ability of such
Borrower to perform its obligations under this Amendment, the Loan
Agreement or under any of the other Loan Documents. None of the information
furnished to Lender by or on behalf of such Borrower contained any material
misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained herein or therein not materially
misleading.
(iii) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the
date hereof.
(b) Expenses. Borrowers agree to pay on demand all costs and expenses of
Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrowers agree to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment or the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this Section 5(b) shall survive any termination of
this Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of California.
-5-
<PAGE>
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) Reference to Loan Agreement. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any Loan Documents, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) Successors. This Amendment shall be binding upon Borrowers, Lender and
their respective successors and assigns, and shall inure to the benefit of
Borrowers, Lender and their respective successors and assigns.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
BY /S/
Title
EMS-EAST, INC., a Massachusetts
corporation
By /S/
Title
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, INC., an Illinois
corporation
By /S/
Title
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /S/
Title
PREFERRED STOCK PLACEMENT AGREEMENT
PREFERRED STOCK PLACEMENT AGREEMENT ("Agreement") dated as of the 28th day
of August, 1998, by and between EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin
corporation (the "Company") and TAGLICH BROTHERS, D'AMADEO, WAGNER & COMPANY,
INCORPORATED ("Placement Agent").
W I T N E S S E T H :
WHEREAS, in reliance upon the representations, warranties, terms and
conditions hereinafter set forth, Placement Agent will use its best efforts to
privately place a minimum of 1,000 and a maximum of 5,000 shares of Series A 8%
convertible redeemable preferred stock (the "Preferred Stock") at $1000 per
share of Preferred Stock (the "Purchase Price") for an aggregate minimum
purchase price of $1 million ("Minimum Amount") and an aggregate maximum
purchase price of $5 million ("Maximum Amount"), with each share of the
Preferred Stock being convertible into shares of common stock, $.01 par value
per share (the "Common Stock"), of the Company at a price, subject to
adjustment, of $3.50 per share, and the persons and entities so purchasing the
Preferred Stock from time to time and the number of shares of Preferred Stock
being so purchased being as listed on Exhibit A to this Agreement (such persons
and entities being referred to individually as "Purchaser" and collectively, as
"Purchasers"); and
WHEREAS, the shares of Preferred Stock are being issued pursuant to the
Company's Confidential Private Placement Memorandum and Exhibits thereto dated
August 19, 1998, as the same may be amended and/or supplemented from time to
time (collectively, the "Memorandum"); and
WHEREAS, the shares of Preferred Stock are being issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "1933 Act").
NOW, THEREFORE, in consideration of the premises and the respective
promises hereinafter set forth, the Company and the Placement Agent hereby agree
as follows:
1. Sale and Purchase of Preferred Stock.
(a) Subject to the terms and conditions of this Agreement, the Company
shall sell to the Purchasers a minimum of 1,000 and a maximum of 5,000 shares of
Preferred Stock at the Purchase Price per share for an aggregate purchase price
of not less than the Minimum Amount nor greater than the Maximum Amount,
respectively. The form of the Preferred Stock is included in the Memorandum.
-1-
<PAGE>
(b) The initial sale and purchase described in Paragraph 1(a) of this
Agreement shall take place at a closing (the "Closing") at the offices of
ROBINSON SILVERMAN PEARCE ARONSOHN & BERMAN, LLP, 1290 Avenue of the Americas,
New York, New York 10104 or such other place as shall be acceptable to the
Company and Placement Agent on such date or dates as Placement Agent shall
advise the Company on two (2) business days notice or such shorter notice as
shall be reasonably acceptable to the Company. In no event shall the Initial
Closing (as defined below) occur unless the Minimum Amount is sold. Subsequent
sale and purchase of Preferred Stock up to the Maximum Amount shall take place
at one or more Closings held on such dates as the Company and Placement Agent
shall mutually determine. All Closings pursuant to this Agreement shall occur
not later than September 30, 1998 unless such date is extended by the Company
and the Placement Agent to a date no later than October 30, 1998. The initial
Closing hereunder shall be referred to as "Initial Closing", the final Closing
hereunder shall be referred to as "Final Closing" and the date of the Final
Closing shall be referred to as the "Final Closing Date".
(c) All defined terms used in this Agreement which are not otherwise
defined shall have the meanings ascribed to them in the Memorandum.
2. Payment. At each Closing, the Company shall deliver to Placement
Agent, on behalf of the Purchasers, the original executed Preferred Stock
certificates being purchased by the Purchasers, against its receipt of payment
therefor by certified or bank check drawn on a bank located in the United
States, or by Federal wire transfer, in the amount of the aggregate purchase
price for such Preferred Stock being sold, less the amount of fees payable to
Placement Agent pursuant to Paragraph 10(a) of this Agreement. All Preferred
Stock being purchased by the Purchasers shall be issued in the respective names
of the Purchasers in accordance with instructions provided by Placement Agent
not later than the day of Closing.
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to and covenants and agrees with the Placement Agent, as
of the date hereof and as of the date of each Closing, as follows:
(a) The Company is a corporation duly organized and validly existing
under the laws of the State of Wisconsin and is qualified and in good standing
as a foreign corporation in each jurisdiction in which the nature of the
business conducted by the Company or the property owned or leased by the Company
requires such qualification, except where the failure to be so qualified has not
had or will not have a material adverse effect on the business, financial
condition or results of operations of the Company or its subsidiaries, taken as
a whole ("Material Adverse Effect"). The Company has no subsidiaries and does
not own any equity interest and has not made any loans or advances to or
guarantees of indebtedness to any person, corporation, partnership or other
entity, except for EMS-East, Inc., Effective Management Systems of Illinois,
Inc. and EMS-China, Ltd, which are wholly-owned subsidiaries, Total Management
Systems, Inc., a 50% owned subsidiary (collectively, the "Subsidiaries") and
EMS-Asia Pacific, Ltd., a 20% owned corporation. Each Subsidiary is, to the
extent applicable, a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and, to the
extent applicable, each
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<PAGE>
Subsidiary is qualified and in good standing as a foreign corporation in each
jurisdiction in which the nature of its business or the property owned or leased
by the Subsidiary requires such qualification, except where the failure to be so
qualified has not had or will not have a Material Adverse Effect. Except as
disclosed in the Memorandum, no Subsidiary has any subsidiary and no Subsidiary
owns any equity interest in any other entity and no Subsidiary has made any
loans or advances to or guarantees of indebtedness to any person, corporation,
partnership or other entity. Except as indicated in this Section 3(b), the
Company owns all of the issued and outstanding shares of common stock of each of
the Subsidiaries free and clear of any lien, claim, encumbrance, pre-emptive
rights or contractual rights of first refusal.
(b) The authorized capital of the Company consists of 20,000,000
shares of Common Stock and 3,000,000 shares of preferred stock, of which, as of
the date of this Agreement, (i) 4,102,486 shares of Common Stock are issued and
outstanding, (ii) 12,625 shares of Common Stock are held in treasury, (iii) no
shares of preferred stock are issued and outstanding (other than as may be
issued at any prior Closing pursuant to the Memorandum), and (iv)1,205,606
shares of Common Stock have been reserved for issuance upon exercise of
outstanding debentures, options, warrants and other rights to acquire Common
Stock and upon the exercise of options granted pursuant to the Company's stock
option plans and pursuant to other agreements, excluding the shares of Common
Stock (the "Conversion Shares") issuable upon conversion of the Preferred Stock
and the shares of Common Stock (the "PAW Exercise Shares") issuable upon
exercise of the Placement Agent Warrants (as defined below). Except as set forth
in the Memorandum, the Company is not a party to any agreement to issue, nor has
it issued, any warrants, options or rights or preferred stock, notes or other
evidence of indebtedness or other securities, instruments or agreements upon the
exercise or conversion of which or pursuant to the terms of which additional
shares of capital stock of the Company may become issuable. No holder of any of
the Company's securities has preemptive rights or contractual rights of first
refusal.
(c) The Company has the full right, power and authority to execute,
deliver and perform under this Agreement, the Preferred Stock and the Placement
Agent Warrants. This Agreement has been duly executed by the Company and, at
each Closing, the Preferred Stock and the Placement Agent Warrants being issued
will have been duly executed by the Company, and this Agreement, the Preferred
Stock and the Placement Agent Warrants and the transactions contemplated by this
Agreement, the Preferred Stock and Placement Agent Warrants have been duly
authorized by all necessary corporate action and each constitute, the legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms.
(d) All of the issued and outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
nonassessable (except as otherwise provided by Section 180.0622 (2)(b) of the
Wisconsin Business Corporation Law), with no personal liability attaching to the
holders thereof (except as otherwise provided in Section 180.0622 (2)(b) of the
Wisconsin Business Corporation Law), and such shares of Common Stock have not
been issued in violation of the preemptive rights or rights of first refusal of
any holder of securities of the Company. All of the issued and outstanding
shares of Common Stock of the
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<PAGE>
Company have been issued pursuant to either a current effective registration
statement under the 1933 Act or an exemption from the registration requirements
of the 1933 Act and were issued in accordance with all applicable Federal and
state securities laws. All of the issued and outstanding shares of common stock
of each Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable (except as otherwise provided by Section 180.0622
(2)(b) of the Wisconsin Business Corporation Law), with no personal liability
attaching to the Company (except as otherwise provided by Section 180.0622
(2)(b) of the Wisconsin Business Corporation Law).
(e) The shares of Common Stock included in the Conversion Shares and
the PAW Exercise Shares have been validly authorized for issuance and, when
issued pursuant to this Agreement and the terms of the Preferred Stock and the
Placement Agent Warrants, as the case may be, will be duly and validly
authorized and issued, fully paid and nonassessable (except as otherwise
provided by Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law)
and free from preemptive rights or rights of first refusal held by any person.
(f) The following financial statements of the Company (hereinafter
collectively, the "Financial Statements") are included in the Memorandum (i)
consolidated balance sheets as at November 30, 1997 and 1996, and consolidated
statements of operations, shareholders' equity and cash flows for the fiscal
years ended November 30, 1997 and 1996, and the related notes thereto, which
have been audited by Ernst & Young LLP, independent certified public
accountants, (ii) unaudited balance sheets as at February 28 and May 31, 1998,
and (iii) unaudited statements of operations and cash flows for the fiscal
quarters ended February 28 and May 31, 1998, and the related notes thereto,
which have been prepared by the Company. The Financial Statements, which are
included in the Company's Annual Report on Form 10-K for the year ended November
30, 1997 ("Form 10-K"), were prepared in accordance with generally accepted
accounting principles consistently applied and present and reflect fairly the
financial position of the Company at the respective balance sheet dates and the
results of its operations, changes in stockholders' equity and cash flows for
the periods then ended. During the period of Ernst & Young LLP's engagement as
the Company's independent certified public accountants, there has been no
material disagreements between the accounting firm and the Company on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure and no reportable events relating to the
relationship between the Company and the accounting firm.
(g) The Company has good and marketable title to all of its material
property and assets and, except as set forth in the Memorandum or the Financial
Statements, none of such property or assets of the Company is subject to any
lien, mortgage, pledge, encumbrance or other security interest, other than such
liens, mortgages, pledges, encumbrances or other security interests which in the
aggregate would not have a Material Adverse Effect.
(h) Except as may be disclosed in the Memorandum, since November 30,
1997, there has not been any material adverse change in the financial condition
or in the operations, or business of the Company or any of the Subsidiaries from
that shown in the Financial Statements or
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<PAGE>
any damage or destruction, not covered by insurance, which materially affects
the business, property or assets of the Company or any of the Subsidiaries.
(i) Except as set forth in the Exhibits to the Memorandum, the Company
has not filed any Current Reports on Form 8-K or other reports filed with the
Securities and Exchange Commission (the "SEC") subsequent to November 30, 1997.
(j) Neither the execution or delivery of this Agreement, the Preferred
Stock or the Placement Agent Warrants by the Company nor the performance by the
Company of the transactions contemplated by this Agreement, the Preferred Stock
or the Placement Agent Warrants: (i) requires the consent, waiver, approval,
license or authorization of or filing with or notice to any person, entity or
public authority (except any filings required by Federal or state securities
laws); (ii) violates or constitutes a default under or breach of any law, rule
or regulation applicable to the Company; or (iii) conflicts with or results in a
breach or termination of any provision of, or constitutes a default under, or
will result in the creation of any lien, charge or encumbrance upon any of the
property or assets of the Company with or without the giving of notice, the
passage of time or both, pursuant to (A) the Company's restated articles of
incorporation or by-laws, (B) any mortgage, deed of trust, indenture, note, loan
agreement, security agreement, contract, lease, license, alliance agreement,
joint venture agreement, or other agreement or instrument, or (C) any order,
judgment, decree, statute, regulation or any other restriction of any kind or
character to which the Company is a party or by which any of the assets of the
Company may be bound, except in any case set forth above where the failure to
obtain such consent or the like, or such violation or breach would not have a
Material Adverse Effect.
(k) Neither the Company nor any of the Subsidiaries (other than for
inter-company debt) has any indebtedness to any officer, director, 5%
stockholder or other Affiliate (as defined in the Rules and Regulations of the
SEC under the 1933 Act) of the Company.
(l) The Company and each of the Subsidiaries is in compliance with all
laws, rules and regulations of all Federal, state and local government agencies
having jurisdiction over the Company and each of the Subsidiaries or affecting
the business, assets or properties of the Company or any of the Subsidiaries,
except where the failure to comply has not and will not have a Material Adverse
Effect. The Company and each of the Subsidiaries possess all licenses, permits,
consents, approvals and agreements which are required to be issued by any and
all applicable Federal, state or local authorities necessary for the operation
of their respective business and/or in connection with their respective assets
or properties, except where the failure to possess such licenses, permits,
consents, approvals or agreements has not and will not have a Material Adverse
Effect.
(m) Neither the Company nor any of the Subsidiaries is in default
under any note, loan agreement, security agreement, mortgage, contract,
franchise agreement, distribution agreement, lease, alliance agreement, joint
venture agreement, agreement, license, permit, consent, approval or instrument
to which it is a party, and no event has occurred which, with or without the
lapse of time or giving of notice, or both, would constitute such default
thereof by the Company or any of the
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<PAGE>
Subsidiaries or would cause acceleration of any obligation of the Company or any
of the Subsidiaries or would adversely affect the business, operations or
financial condition of the Company or any of the Subsidiaries, except where such
default or event, whether with or without the lapse of time or giving of notice,
or both, has not and will not have a Material Adverse Effect. To the best of the
knowledge of the Company and except for the cases in which it would not have a
Material Adverse Effect, no party to any note, loan agreement, security
agreement, mortgage, contract, franchise agreement, distribution agreement,
lease, alliance agreement, joint venture agreement, agreement, license, permit,
consent, approval or instrument with or given to the Company or any of the
Subsidiaries is in default thereunder and no event has occurred with respect to
such party, which, with or without the lapse of time or giving of notice, or
both, would constitute a default by such party or would cause acceleration of
any obligations of such party.
(n) To the best of the Company's knowledge, except as set forth in the
Memorandum, no officer, director or 5% stockholder of the Company and no
Affiliate of any such person either (i) holds any interest in any corporation,
partnership, business, trust, sole proprietorship or any other entity which is
engaged in a business substantially similar to that conducted by the Company or
any of the Subsidiaries (other than a passive immaterial interest in a public
company engaged in any such business) or (ii) engages in business with the
Company or any of the Subsidiaries.
(o) Except as set forth in the Memorandum, there are no material
(i.e., involving an asserted liability that reasonably could be expected to
result in a judgement in excess of four hundred thousand dollars ($400,000))
claims, actions, suits, proceedings or labor disputes, inquiries or
investigations (whether or not purportedly on behalf of the Company or any of
the Subsidiaries), pending or, to the best of the Company's knowledge,
threatened, against the Company or any of the Subsidiaries, at law or in equity
or by or before any Federal, state, county, municipal or other governmental
department, SEC, National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), board, bureau, agency or instrumentality, domestic or
foreign, whether legal or administrative or in arbitration or mediation, nor is
there any basis for any such action or proceeding. Neither the Company, any of
the Subsidiaries nor any of their respective assets are subject to, nor is the
Company or any of the Subsidiaries in default with respect to, any order, writ,
injunction, judgment or decree that could have a Material Adverse Effect.
(p) The accounts receivable of the Company and the Subsidiaries
represent receivables generated from the sale of goods and services in the
ordinary course of business. The Company knows of no material disputes
concerning accounts receivable of the Company and the Subsidiaries not disclosed
in the Memorandum.
(q) Except as set forth in the Memorandum or as set forth on Schedule
3(q), hereof, neither the Company nor any of the Subsidiaries has (i) any
written employment contracts and no oral employment contracts not terminable at
will by the Company or any Subsidiary, as applicable, with any 5% percent
shareholder, officer or director of the Company or any Subsidiary, as
applicable, (ii) any consulting agreement or other compensation agreement with
any 5% percent
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shareholder, officer or director of the Company or any Subsidiary, as
applicable, or (iii) any agreement or contract with any 5% percent shareholder,
officer or director of the Company or any Subsidiary, as applicable, that will
result in the payment by the Company or any Subsidiary, as applicable, or the
creation of any commitment or obligation (absolute or contingent), of the
Company or any Subsidiary, as applicable, to pay any severance, termination,
"golden parachute", or similar payment to any present or former personnel of the
Company or any Subsidiary, as applicable, following termination of employment.
No director or executive officer of the Company or any Subsidiary, as
applicable, has advised the Company that he or she intends to resign as director
and/or executive officer of the Company or any Subsidiary, as applicable, or to
terminate his or her employment with the Company or the Subsidiary, as
applicable.
(r) The accounts payable of the Company and the Subsidiaries represent
bona fide payables to third parties incurred in the ordinary course of business
and represent bona fide debts for services and/or goods provided to the Company
and the Subsidiaries.
(s) Except as set forth in the Memorandum, neither the Company nor any
of the Subsidiaries is a party to a labor agreement with respect to any of their
respective employees with any labor organization, union, group or association
and there are no employee unions (nor any similar labor or employee
organizations). There is no labor strike or labor stoppage or slowdown pending,
or, to the best knowledge of the Company, threatened against the Company or any
of the Subsidiaries nor has the Company or any of the Subsidiaries experienced
in the last five (5) years any work stoppage or other labor difficulty. The
Company is in compliance with all applicable laws, rules and regulations
regarding employment practices, employee documentation, terms or conditions of
employment and wage and hours and the Company is not engaged in any unfair labor
practices, except where the failure to comply has not and will not have a
Material Adverse Effect. There are no unfair labor practices charges or
complaints against the Company or any of the Subsidiaries pending before the
National Labor Relations Board or any other governmental agency.
(t) Except as disclosed in the Memorandum, there are no employee
pension, retirement or other benefit plans, maintained, contributed to or
required to be contributed to by the Company or any of the Subsidiaries covering
any employee or former employee of the Company or any of the Subsidiaries.
Neither the Company nor any of the Subsidiaries has any material liability or
obligation of any kind or nature, whether accrued or contingent, matured or
unmatured, known or unknown, under any provision of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or any provision of the
Internal Revenue Code of 1986, as amended, specifically relating to persons
subject to ERISA.
(u) The Company and each of the Subsidiaries has timely filed with the
appropriate taxing authorities all returns in respect of taxes required to be
filed through the date hereof and each has timely paid all taxes that each is
required to pay or has established an adequate reserve therefor, except where
the Company or the Subsidiary, as applicable, has timely filed for extensions.
There are no pending or, to the best knowledge of the Company, threatened
audits,
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investigations or claims for or relating to any liability of the Company or any
of the Subsidiaries in respect of taxes.
(v) There are no finder's fees or brokerage commissions payable with
respect to the transactions contemplated by this Agreement, except as provided
in Paragraph 10 of this Agreement, and the Company agrees to indemnify and hold
harmless the Placement Agent from and against any and all cost, damage,
liability, judgment and expense (including reasonable fees and expenses of
counsel) arising out of or relating to claims for such fees or commissions.
(w) Except as set forth in the Memorandum, the Company is not
currently and has not during the past four (4) months been engaged in
substantive negotiations (as compared with informal discussions) with respect
to: (i) any merger or consolidation of the Company where the Company would not
be the surviving entity; or (ii) the sale of the Company, any of its
Subsidiaries or any of their assets other than sales in the ordinary course of
business.
(x) The Company and each of the Subsidiaries has the right to conduct
their respective business in the manner in which their respective business has
been heretofore conducted. To the best knowledge of the Company, the conduct of
such businesses by the Company and each of the Subsidiaries does not violate or
infringe upon the patent, copyright, trade secret or other proprietary rights of
any third party, other than any such violation or infringement that would not
have a Material Adverse Effect, and neither the Company nor any of the
Subsidiaries has received any notice of any claim of any such violation or
infringement.
(y) The Company and each of the Subsidiaries are currently in
compliance in all respects with all applicable Environmental Laws (as defined
below), including, without limitation, obtaining and maintaining in effect all
permits, licenses, consents and other authorizations required by applicable
Environmental Laws and the Company and each Subsidiary are each currently in
compliance with all such permits, licenses, consents and other authorizations,
except where the failure to comply has not and will not have a Material Adverse
Effect. Neither the Company nor any of its Subsidiaries has received notice from
any property owner, landlord, tenant or Governmental Authority (as defined
below) that Hazardous Wastes (as defined below) are being improperly used,
stored or disposed of at any property currently or formerly owned or leased by
the Company or any of its Subsidiaries or that any soil or ground water
contamination has emanated from any such property. For purposes hereof, the term
"Environmental Laws" means, collectively, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act, the Toxic Substances Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, any other "Superfund" or "Superlien"
law or any other federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to, or imposing liability or
standards of conduct concerning any hazardous, toxic or dangerous waste,
substance or material, as now or at any time hereafter in effect. For purposes
hereof, the term "Governmental Authority" shall mean the Federal Government of
the United States of America, any state or any political
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subdivision of the Federal Government or any state, including but not limited to
courts, departments, commissions, boards, bureaus, agencies, ministries or other
instrumentalities. For purposes hereof, the term "Hazardous Waste" shall mean
any regulated quantity of hazardous substances as listed by the United States
Environmental Protection Agency ("EPA") and the list of toxic pollutants
designated by the United States Congress and/or the EPA or defined by any other
Federal, state or local statute, law, ordinance, code, rule, regulation, order,
or decree regulating, relating to or imposing liability for standards of conduct
concerning any hazardous, toxic substance or material.
(z) The information contained in the Financial Statements and the
Memorandum, taken together, does not contain any misstatement of a material fact
or omit to state a material fact necessary to make the information not
misleading.
4. Survival of Representations and Warranties and Indemnification. The
representations and warranties of the Company set forth in Section 3 of this
Agreement shall survive the execution and delivery of the Preferred Stock. The
indemnification obligations of the Company as set forth in the indemnification
rider identified as Exhibit B (the "Indemnification Rider") to the August 14,
1998 engagement letter between the Company and the Placement Agent, as same
shall be supplemented and/or amended, is hereby incorporated herein by reference
in its entirety as if more fully set forth herein and the provisions of the
Indemnification Rider shall apply and be applicable to, among other things, all
representations and warranties of the Company contained herein.
5. Use of Proceeds. The net proceeds from the sale of the Preferred
Stock will be used by the Company as disclosed in the Memorandum.
6. Unregistered Securities. Neither the Preferred Stock, Conversion
Shares, Placement Agent Warrants nor PAW Exercise Shares have been registered
under the 1933 Act, in reliance upon the applicability of Section 3(b), 4(2),
4(6) and/or Regulation D of the 1933 Act to the transactions contemplated
hereby. The certificates representing the Preferred Stock and Placement Agent
Warrants will bear an investment legend and the certificates representing the
Conversion Shares and PAW Exercise Shares issued prior to their respective
registration under Section 3 of the Preferred Stock Purchase Agreement (a copy
of which is annexed as an exhibit to the Memorandum) and Section 7 below will
also bear investment legends.
7. Registration Rights and "Piggy-Back" Registration Rights.
(a) As soon as possible after the Final Closing Date, but in no event
later than forty-five (45) days after the Final Closing Date (regardless of
whether the maximum number of shares of Preferred Stock shall have been sold),
the Company shall, at its sole cost and expense, file a registration statement
on the appropriate form with the SEC covering all of the PAW Exercise Shares and
such additional shares of Common Stock that may be issued pursuant to the
anti-dilution rights contained in the Placement Agent Warrants and as set forth
below in this Section 7(a) (collectively, the "Registrable Securities"), time
being of the essence. The Company will use its best efforts to have such
registration statement declared effective as soon as possible after filing, and
shall
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keep such registration statement current and effective for at least three (3)
years from the effective date thereof or until such earlier date as all of the
Registrable Securities registered pursuant to such registration statement shall
have been sold. Notwithstanding anything to the contrary contained herein, if
such registration statement shall not be filed with the SEC within forty-five
(45) days after the Final Closing Date or the Registration Statement shall not
be declared effective within one hundred eighty (180) days after the Final
Closing Date (regardless of whether the maximum number of shares of Preferred
Stock shall have been sold), then the exercise price for the Placement Agent
Warrants shall be reduced by the percentage resulting from multiplying 3% by the
number of thirty (30) day periods, or any part thereof, beyond said forty-five
(45) day or one hundred eighty (180) day period, as applicable, until the
initial registration statement described herein covering the Registrable
Securities is filed or declared effective, as applicable. The maximum reduction
pursuant to this provision shall be eighteen (18%) percent.
(b) In the event the Company effects any registration under the 1933
Act of any Registrable Securities pursuant to Paragraphs 7(a) above or 7(g)
below, the Company shall indemnify, to the extent permitted by law, and hold
harmless any registered holder whose Registrable Securities are included in such
registration statement (each, a "Seller"), any underwriter, any officer,
director, employee or agent of any Seller or underwriter, and each other person,
if any, who controls any Seller or underwriter within the meaning of Section 15
of the 1933 Act, against any losses, claims, damages or liabilities, judgment,
fines, penalties, costs and expenses, joint or several, or actions in respect
thereof (collectively, the "Claims"), to which each such indemnified party
becomes subject, under the 1933 Act or otherwise, insofar as such Claims arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement or prospectus or any
amendment or supplement thereto or any document filed under a state securities
or blue sky law (collectively, the "Registration Documents") or insofar as such
Claims arise out of or are based upon the omission or alleged omission to state
in any Registration Document a material fact required to be stated therein or
necessary to make the statements made therein not misleading, and will reimburse
any such indemnified party for any legal or other expenses reasonably incurred
by such indemnified party in investigating or defending any such Claim; provided
that the Company shall not be liable in any such case to a particular
indemnified party to the extent such Claim is based upon an untrue statement or
alleged untrue statement of a material fact or omission or alleged omission of a
material fact made in any Registration Document in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such indemnified party specifically for use in the preparation of such
Registration Document.
(c) In connection with any registration statement in which any Seller
is participating, each Seller, severally and not jointly, shall indemnify, to
the extent permitted by law, and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
other person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act, each other Seller and each underwriter, any officer, director,
employee or agent of any such other Seller or underwriter and each other person,
if any, who controls such other Seller or underwriter within the meaning of
Section 15 of the 1933 Act against any Claims to
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which each such indemnified party may become subject under the 1933 Act or
otherwise, insofar as such Claims (or actions in respect thereof) are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any Registration Document, or insofar as any Claims are based upon the
omission or alleged omission to state in any Registration Document a material
fact required to be stated therein or necessary to make the statements made
therein not misleading, and will reimburse any such indemnified party for any
legal or other expenses reasonably incurred by such indemnified party in
investigating or defending any such claim; provided, however, that such
indemnification or reimbursement shall be payable only if, and to the extent
that, any such Claim arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Registration Document in reliance upon and in conformity with written
information furnished to the Company by the Seller specifically for use in the
preparation thereof.
(d) Any person entitled to indemnification under Paragraphs 7(b) or
7(c) above shall notify promptly the indemnifying party in writing of the
commencement of any Claim if a claim for indemnification in respect thereof is
to be made against an indemnifying party under this Paragraph 7(d), but the
omission of such notice shall not relieve the indemnifying party from any
liability which it may have to any indemnified party otherwise than under
Paragraph 7(b) or 7(c) above, except to the extent that such failure shall
materially adversely affect any indemnifying party or its rights hereunder. In
case any action is brought against the indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it chooses, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party;
and, after notice from the indemnifying party to the indemnified party that it
so chooses, the indemnifying party shall not be liable for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof; provided, however, that (i) if the indemnifying party fails to
take reasonable steps necessary to defend diligently the Claim within twenty
(20) days after receiving notice from the indemnified party that the indemnified
party believes it has failed to do so; (ii) if the indemnified party who is a
defendant in any action or proceeding which is also brought against the
indemnifying party reasonably shall have concluded that there are legal defenses
available to the indemnified party which are not available to the indemnifying
party; or (iii) if representation of both parties by the same counsel is
otherwise inappropriate under applicable standards of professional conduct, the
indemnified party shall have the right to assume or continue its own defense as
set forth above (but with no more than one firm of counsel for all indemnified
parties, except to the extent any indemnified party or parties reasonably shall
have concluded that there are legal defenses available to such party or parties
which are not available to the other indemnified parties or to the extent
representation of all indemnified parties by the same counsel is otherwise
inappropriate under applicable standards of professional conduct) and the
indemnifying party shall be liable for any reasonable expenses therefor;
provided, that no indemnifying party shall be subject to any liability for any
settlement of a Claim made without its consent (which may not be unreasonably
withheld, delayed or conditioned). If the indemnifying party assumes the defense
of any Claim hereunder, such indemnifying party shall not enter into any
settlement without the consent of the indemnified party if such settlement
attributes liability to the indemnified party.
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(e) If for any reason the indemnity provided in Paragraphs 7(b) or
7(c) above is unavailable, or is insufficient to hold harmless, an indemnified
party, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of any Claim in such proportion as
is appropriate to reflect the relative benefits received by the indemnifying
party on the one hand and the indemnified party on the other from the
transactions contemplated by this Agreement. If, however, the allocation
provided in the immediately preceding sentence is not permitted by applicable
law, then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the indemnifying
party and the indemnified party as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable in
respect of any Claim shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such Claim. Notwithstanding the foregoing, no underwriter or
controlling person thereof, if any, shall be required to contribute, in respect
of such underwriter's participation as an underwriter in the offering, any
amount in excess of the amount by which the total price at which the Registrable
Securities underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligation of any underwriters to contribute pursuant to
this paragraph (e) shall be several in proportion to their respective
underwriting commitments and not joint.
(f) The provisions of Paragraphs 7(b) through 7(e) of this Agreement
shall be in addition to any other rights to indemnification or contribution
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party and shall survive the
transfer of the Registrable Securities by any such party.
(g) The Sellers shall have certain "piggy-back" registration rights
with respect to the Registrable Securities as hereinafter provided:
A. If at any time after the Final Closing Date and prior to the
date that the Registered Securities are registered under the 1933 Act pursuant
to Section 7(a) above, the Company shall file with the SEC a registration
statement under the 1933 Act (other than a registration statement on Form S-4 or
Form S-8 or any successor thereof, or filed in connection with an exchange offer
or an offer of securities solely to the Company's existing shareholders)
registering any shares of Common Stock, the Company shall give written notice to
each Seller thereof prior to such filing.
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B. Within fifteen (15) days after such notice from the Company,
each Seller shall give written notice to the Company whether or not the Seller
desires to have all of the Seller's Registrable Securities included in the
registration statement. If a Seller fails to give such notice within such
period, such Seller shall not have the right to have Seller's Registrable
Securities registered pursuant to such registration statement. If a Seller gives
such notice, then the Company shall include such Seller's Registrable Securities
in the registration statement, at the Company's sole cost and expense, subject
to the remaining terms of this Paragraph 7(g); provided, however, that each
Seller shall pay all underwriting discounts, commissions, and transfer taxes
relating to the sale of such Seller's Registered Securities, as well as his, her
or its own counsel fees, if any, relating to the sale of the Seller's Registered
Securities.
C. If the registration statement relates to an underwritten
offering, and the underwriter in its sole discretion shall determine in writing
that the total number of shares of Common Stock to be included in the offering,
including the Registrable Securities, shall exceed the amount which the
underwriter in its sole discretion deems to be appropriate for the offering, the
number of shares of the Registrable Securities shall be reduced pro rata (based
on the number of Registered Securities requested to be included). The Sellers
shall enter into such agreements as may be reasonably required by the
underwriters.
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D. The holders of Placement Agent Warrants shall have two (2)
opportunities to have the Registrable Securities registered under this Paragraph
7(g).
E. Seller shall furnish in writing to the Company such
information as the Company shall reasonably require in connection with a
registration statement.
F. The Company may, at any time and in its sole discretion,
decide not to proceed with the filing of a registration statement which may have
given rise to "piggy-back" rights under this Section 7(g) or may at any time
terminate or suspend such registration, in which event each Seller's rights
under this Section 7 as to the number of opportunities to "piggy-back" shall be
reset.
(h) If and whenever the Company is required by the provisions of
Paragraph 7(a) to use its best efforts to register any Registrable Securities
under the 1933 Act, the Company shall, as expeditiously as possible under the
circumstances and subject to the terms of this Section 7:
A. Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective as soon as possible after filing and
remain effective.
B. Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement current and effective
and to comply with the provisions of the 1933 Act, and any regulations
promulgated thereunder, with respect to the sale or disposition of all
Registrable Securities covered by the registration statement required to effect
the distribution of the securities, but in no event shall the Company be
required to do so for a period of more than three (3) years following the
effective date of the registration statement.
C. Furnish to the Sellers participating in the offering, copies
(in reasonable quantities) of summary, preliminary, final, amended or
supplemented prospectuses, in conformity with the requirements of the 1933 Act
and any regulations promulgated thereunder, and other documents as reasonably
may be required in order to facilitate the disposition of the securities, but
only while the Company is required under the provisions hereof to keep the
registration statement current.
D. Use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions of the United States as the Sellers
participating in the offering shall reasonably request, and do any and all other
acts and things which may be reasonably necessary to enable each participating
Seller to consummate the disposition of the Registrable Securities in such
jurisdictions.
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E. Notify each Seller selling Registrable Securities, at any time
when a prospectus relating to any such Registrable Securities covered by such
registration statement is required to be delivered under the 1933 Act, of the
Company's becoming aware that the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, and promptly prepare and furnish to each such Seller selling
Registrable Securities a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing.
F. As soon as practicable after the effective date of the
registration statement, and in any event within eighteen (18) months thereafter,
make generally available to Sellers participating in the offering an earnings
statement (which need not be audited) covering a period of at least twelve (12)
consecutive months beginning after the effective date of the registration
statement which earnings statement shall satisfy the provisions of Section 11(a)
of the 1933 Act, including, at the Company's option, Rule 158 thereunder. To the
extent that the Company files such information with the SEC in satisfaction of
the foregoing, the Company need not deliver the above referenced earnings
statement to Sellers.
G. Upon request, deliver promptly to counsel of each Seller
participating in the offering copies of all correspondence between the SEC and
the Company, its counsel or auditors and all memoranda relating to discussions
with the SEC or its staff with respect to the registration statement and permit
each such Seller to do such investigation at such Seller's sole cost and
expense, upon reasonable advance notice, with respect to information contained
in or omitted from the registration statement as it deems reasonably necessary.
Each Seller agrees that it will use its best efforts not to interfere
unreasonably with the Company's business when conducting any such investigation
and each Seller shall keep any such information received pursuant to this
Paragraph 7(h)G confidential.
H. Provide a transfer agent located in the United States for all
such Registrable Securities covered by such registration statement not later
than the effective date of such registration statement.
I. List the Registrable Securities covered by such registration
statement on such exchanges and/or on the NASDAQ as the Common Stock is then
currently listed upon.
J. Pay all Registration Expenses (as defined below) incurred in
connection with a registration of Registrable Securities, whether or not such
registration
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statement shall become effective; provided that each Seller shall pay all
underwriting discounts, commissions and transfer taxes, and their own counsel
fees, if any, relating to the sale or disposition of such Seller's Registrable
Securities pursuant to a registration statement. As used herein, "Registration
Expenses" means any and all reasonable and customary expenses incident to
performance of or compliance with the registration rights set forth herein,
including, without limitation, (i) all SEC and stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees, (ii) all
fees and expenses of complying with state securities or blue sky laws (including
reasonable fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities but no other expenses
of the underwriters or their counsel), (iii) all printing, messenger and
delivery expenses, and (iv) the reasonable fees and disbursements of counsel for
the Company and the Company's independent public accountants.
(i) The Company acknowledges that there is no adequate remedy at law
for failure by it to comply with the provisions of this Paragraph 7 and that
such failure would not be adequately compensable in damages, and therefore
agrees that its agreements contained in this Paragraph 7 may be specifically
enforced. In the event that the Company shall fail to file such registration
statement when required pursuant to Paragraph 7(a) above or to keep any
registration statement effective as provided in this Paragraph or otherwise
fails to comply with its obligations and agreements in this Paragraph 7, then,
in addition to any other rights or remedies Sellers may have at law or in
equity, including without limitation, the right of rescission, the Company shall
indemnify and hold harmless each holder of Placement Agent Warrants from and
against any and all manner or loss which they may incur as a result of such
failure. In addition, the Company shall also reimburse such holders for any and
all reasonable legal fees and expenses incurred by them in successfully
enforcing their rights pursuant to this Paragraph 7, regardless of whether any
litigation was commenced; provided, however, that the Company shall not be
liable for the fees and expenses of more than one law firm, which firm shall be
designated by the Placement Agent.
8. Conditions. The following obligations of the Company shall be
satisfied or fulfilled on or prior to the date of each Closing, unless otherwise
agreed to in writing by the Placement Agent:
(a) The Company shall have delivered to the Placement Agent, at the
Initial Closing, (i) a currently-dated long-form good standing or comparable
certificate or telegram from the Secretary of State or other appropriate
authority where the Company and each U.S.- based Subsidiary is incorporated and
each other jurisdiction in which the Company and any of the Subsidiaries is
qualified to do business as a foreign corporation; (ii) the certificate of
incorporation of the Company and each Subsidiary, as currently in effect,
certified by the Secretary of State or other appropriate authority of the state
where the Company and each Subsidiary is incorporated; (iii) a certified copy of
the filed Articles of Amendment setting forth the designation, preference
rights, qualifications, limitations or restrictions of the Preferred Stock; (iv)
by-laws of the Company certified by the secretary of the Company; and
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<PAGE>
(v) certified resolutions of the Board of Directors of the Company approving
this Agreement, the execution of the Preferred Stock and the Placement Agent
Warrants, the registration of the Registerable Securities and the other
transactions contemplated by the Preferred Stock.
(b) There shall have occurred no material adverse event affecting the
Company or the Subsidiaries or any of their respective businesses or assets or
the Company's securities since the date of this Agreement which has had or will
have a Material Adverse Effect.
(c) No litigation or administrative proceeding shall have been
threatened or commenced against the Company or any of the Subsidiaries which (i)
seeks to enjoin or otherwise prohibit or restrict the consummation of the
transactions contemplated by this Agreement or (ii) if adversely determined,
would have a Material Adverse Effect or have a material adverse effect on the
Company's securities.
(d) The Company shall have delivered to the Placement Agent a
certificate of its principal executive and financial officers as to the matters
set forth in Paragraphs 8(a), (b) and (c) of this Agreement and to the further
effect that (i) neither the Company nor any Subsidiary is in default, in any
respect, under any note, loan agreement, security agreement, mortgage, deed of
trust, indenture, contract, alliance agreement, lease, license, joint venture
agreement, agreement or other instrument to which it is a party, except as
disclosed in the Financial Statements or the Memorandum and except where such
default has not and will not have a Material Adverse Effect; (ii) the Company's
representations and warranties contained in this Agreement are true and correct
in all material respects on such date with the same force and effect as if made
on such date; (iii) there has been no amendment or changes to the Company's or
Subsidiaries' charter or by-laws or authorizing resolutions from those delivered
pursuant to Paragraph 8(a) of this Agreement; and (iv) no event has occurred
which, with or without the lapse of time or giving of notice, or both, would
constitute a material breach or default thereof by the Company or any Subsidiary
or would cause acceleration of any material obligation of the Company or any
Subsidiary, or could materially and adversely affect the business, operations or
financial condition of the Company.
(e) The Placement Agent shall have received the opinion of Foley &
Lardner, counsel for the Company, dated as of the closing date in form and
substance reasonably satisfactory to the Placement Agent and its counsel.
(f) The Company shall have prepared and filed or delivered to counsel
for filing with the SEC and any states in which such filing is required, a Form
D relating to the sale of the Preferred Stock and such other documents and
certificates as are required.
(g) Subscriptions for at least the Minimum Amount of Preferred Stock
shall have been accepted by the Company.
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<PAGE>
(h) In addition to the right of the Placement Agent to terminate this
Agreement and not consummate the transactions contemplated by this Agreement as
a result of the failure of the Company to comply with any of its obligations set
forth in this Agreement, this Agreement may be terminated by the Placement Agent
by written notice to the Company at any time prior to the Initial Closing if, in
the Placement Agent's sole judgment, (i) the Company and/or Subsidiaries shall
have sustained a loss that is material to the Company or its Subsidiaries, taken
as a whole, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government
action, order or decree; (ii) trading in securities on any exchange or system
shall have been suspended or limited either generally or specifically with
respect to the Common Stock; (iii) material governmental restrictions have been
imposed on trading in securities generally or specifically with respect to the
Common Stock (not in force and effect on the date of this Agreement); (iv) a
banking moratorium shall have been declared by Federal or New York State
authorities; (v) an outbreak of major international hostilities or other
national or international calamity shall have occurred; (vi) the Congress of the
United States or any state legislative body shall have passed or taken any
action or measure, or such bodies or any governmental body or any authoritative
accounting institute, or board, or any governmental executive shall have adopted
any orders, rules or regulations, which the Placement Agent reasonably believes
is likely to have a material adverse effect on the business, financial condition
or financial statements of the Company or the market for the Preferred Stock;
(vii) the Common Stock shall have been delisted from NASDAQ; or (viii) there
shall have been, in the Placement Agent's judgment, a material decline in the
Dow Jones Industrial Index or the market price of the Common Stock at any time
subsequent to the date of this Agreement.
9. Covenants of the Company. The Company agrees at all times as long
as the Preferred Stock and the Placement Agent Warrants may be converted or
exercised, to keep reserved from the authorized and unissued Common Stock, such
number of shares of Common Stock as may be, from time to time, issuable upon
conversion of the Preferred Stock and exercise of the Placement Agent Warrants.
10. Fees.
(a) Upon the receipt by the Company of the payments from the
Purchasers, the Company shall pay to the Placement Agent a fee equal to 8% of
the gross proceeds from the Preferred Stock sold pursuant to this Agreement, a
portion of which may be paid by the Placement Agent to other registered
broker-dealers; provided, however, that the Company shall have no obligation
with respect to payments that may be due such broker-dealers. Such amount may be
deducted by the Placement Agent from the payment being made to the Company
pursuant to Paragraph 2 of this Agreement. In addition, the Company shall issue
at the Final Closing, five (5) year warrants to purchase an amount of Common
Stock equal to 10% of the shares of Common Stock that the Preferred Stock could
be converted into, at an exercise price of 120% of the Conversion Price, subject
to adjustment (the "Placement Agent Warrants"), a portion of which may be
allotted by the Placement Agent to other registered
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<PAGE>
broker-dealers; provided, however, that the Company shall have no obligation
with respect to the allocation of the Placement Agents Warrants to such
broker-dealers. The persons in whose name the Placement Agent Warrants are
issued shall all be "accredited investors" as defined in the regulations
promulgated under the 1933 Act and such persons shall acquire such warrants for
investment purposes only and not with a view towards the redistribution thereof.
The Company shall reimburse the Placement Agent for up to $32,500 of its
reasonable costs and expenses, including the reasonable fees and expenses of
counsel to the Placement Agent, if and when a closing occurs.
(b) The Company shall pay any fees required in connection with the
qualification of the sale of the Preferred Stock under the state securities or
blue sky laws of any state which the Placement Agent reasonably deems necessary
and any other out-of-pocket expenses incurred by the Company in connection with
the transaction contemplated by this Agreement.
(c) All payments in connection with the sale of the Preferred Stock
shall be made pursuant to the terms and conditions of the escrow agreement dated
as of August 17, 1998 between Placement Agent and American Stock Transfer &
Trust Company, an executed copy of which has been delivered to and acknowledged
by the Company.
11. Notices. All notices provided for in this Agreement shall be in
writing signed by the party giving such notice, and delivered personally or sent
by overnight courier or messenger against receipt thereof or sent by registered
or certified mail, return receipt requested, or by facsimile transmission, if
confirmed by mail as provided in this Paragraph 11. Notices shall be deemed to
have been received on the date of personal delivery or facsimile or, if sent by
certified or registered mail, return receipt requested, shall be deemed to be
delivered on the third business day after the date of mailing. Notices shall be
sent to the following addresses:
To the Company:
EFFECTIVE MANAGEMENT SYSTEMS, INC.
12000 West Park Place
Milwaukee, WI 53224
Telecopier: (414) 359-9011
Attention: Michael D. Dunham
Jeffrey J. Fossum
With a copy to:
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
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<PAGE>
Telecopier: (414) 297-4900
Attention: Jay O. Rothman, Esq.
To Placement Agent:
TAGLICH BROTHERS, D'AMADEO, WAGNER
& COMPANY, INCORPORATED
100 Wall Street
New York, NY 10005
Telecopier: (212) 509-6587
Attention: Mr. Michael N. Taglich
With a copy to:
ROBINSON SILVERMAN PEARCE ARONSOHN
& BERMAN LLP
1290 Avenue of the Americas
New York, New York 10104
Telecopier: (212) 541-4630
Attention: Robert G. Leonard, Esq.
or to such other address as any party shall designate in the manner provided in
this Paragraph 11.
12. Miscellaneous.
(a) This Agreement constitutes the entire agreement between the
parties relating to the subject matter hereof, superseding any and all prior or
contemporaneous oral and prior written agreements and understandings. This
Agreement may not be modified or amended nor may any right be waived except by a
writing which expressly refers to this Agreement, states that it is a
modification, amendment or waiver and is signed by all parties with respect to a
modification or amendment or the party granting the waiver with respect to a
waiver. No course of conduct or dealing and no trade custom or usage shall
modify any provisions of this Agreement.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts made and to be
performed entirely within such state. Each party hereby consents to the
exclusive jurisdiction of the Federal and State Courts situated in New York
County, New York in connection with any action arising out of or based upon this
Agreement and the transaction contemplated by this Agreement.
(c) This Agreement shall be binding upon and inure to the benefit of
the parties hereto, and their respective personal representatives, successors
and permitted assigns.
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<PAGE>
(d) In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
(e) Each party shall, without payment of any additional consideration
by any other party, at any time on or after the date of any Closings take such
further action and execute such other and further documents and instruments as
the other party may request in order to provide the other party with the
benefits of this Agreement.
(f) The captions and headings contained herein are solely for
convenience and reference and do not constitute a part of this Agreement.
(g) All references to any gender shall be deemed to include the
masculine, feminine or neuter gender, the singular shall include the plural and
the plural shall include the singular.
(h) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same document.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first aforesaid.
EFFECTIVE MANAGEMENT TAGLICH BROTHERS, D'AMADEO, WAGNER
SYSTEMS, INC. & COMPANY, INCORPORATED
By: /S/ Thomas M. Dykstra By: /s/ Richard Oh
Name: Thomas M. Dykstra Name: Richard Oh
Title: Secretary Title: Vice President
PROMISSORY NOTE
Date: January 1, 1998 Principal: $394,854
Term: 6 Year Interest Rate: 12% Fixed
1. Principal. FOR VALUE RECEIVED, the undersigned, EMS Solutions, Inc., a
Wisconsin corporation ("Borrower") with offices at N56 W16743 Ridgewood Dr. Ste
300, Menomonee Falls, WI 53051, promises to pay to the order of Effective
Management Systems, Inc., its successors and assigns ("Lender"), at its offices
located at 12000 W. Park Pl., Milwaukee, WI 53224 or such other location as is
designated by Lender, the principal sum of $394,854, together with interest as
set forth below.
2. Interest Rate. The interest rate hereunder shall be equal to 12% per annum
compounded annually. The unpaid balance from time to time outstanding shall bear
interest after default or maturity (whether by acceleration or otherwise) at 12%
per annum. Interest shall be computed daily based upon a 360-day year.
3. Term. Borrower shall repay principal and interest on this loan in 72 equal
monthly payments of approximately $7,500 but specifically as set forth in the
attached and herein incorporated amortization schedule, with the first such
payment due February 1, 1998. Each payment shall be first applied to interest
accrued and unpaid to the date payment is received and any remainder shall be
applied to principal except that Borrower shall have 10 days grace period before
payment shall be deemed in default and if paid within such period no additional
shall be applied.
4. Deferrals. No additional deferral of time of payment shall be valid unless
the holder consents in writing with reference to this Note and, if such deferral
is granted, the deferred amount shall bear interest at 12% per annum from the
original due date and shall become an additional obligation under this Note.
Borrower hereby waives presentment, protest, and notice of dishonor and gives
consent to holder to extend time, accept partial payments, and to compound,
release or delay enforcement of rights against any party liable under this Note.
5. Default. Upon a second default in payment in any 12 month period and written
notice to Borrower within 90 days of such second default, or, upon written
notice, in the event Borrower ceases to exist, becomes insolvent or the subject
of bankruptcy or insolvency proceedings, the entire principal balance may be
accelerated by Lender and, if so, shall become immediately due and payable.
Interest after maturity on the unpaid principal balance hereunder shall be
charged at 12% per annum. In the event of default, Borrower agrees to pay all
expenses of collection, including reasonable attorneys' fees.
In Witness Whereof, the signatories represent full authority to enter into this
Note on behalf of their respective parties and that each has carefully reviewed
the Note and consulted with such experts and advisors as each felt appropriate.
This Note is executed in Milwaukee, WI.
EMS Solutions, Inc.
By:
Richard E. Ray, Controller
Receipt Acknowledged
Effective Management Systems, Inc.
By:
Michael D. Dunham, President
Special Compensation and Separation Agreement
This Special Compensation and Separation Agreement (Agreement) is executed by
Jeffrey J. Fossum (Employee) and Effective Management Systems, Inc. its
operations, divisions, subsidiaries, and other affiliated organizations; its
successors, assigns, and transferees; and its directors, officers, shareholders,
partners, agents, employees, or representatives (Company). It is effective as of
January 1, 1998 (the Effective Date).
In light of the Company's pursuit of additional financing and needed
responsiveness to potential alliance partner inquiries and the effort and
continuity required for that effort, the parties find the terms of this
Agreement to be in their mutual best interests.
The terms of this Agreement are as follows:
1. Ongoing Services. From the Effective Date until the Separation Date ( the
Term), Employee shall continue to faithfully and diligently perform his present
duties as CFO, or such other duties as are assigned to him from time to time so
long as such duties are reasonably within his skills and capabilities and
involve, overall, a position of reasonably equivalent title and responsibility,
from his present or an equivalent substitute Milwaukee area location.
2. Consideration. In consideration for Employee's Ongoing Services, but only for
so long as the parties mutually agree to continue this relationship (Term),
Employee shall be compensated, with associated benefits, at a level consistent
with his position in relation to other executives. Except as affected by the
occurrence of a Special Event as hereafter set forth, this Agreement may be
terminated (Separation Date) by either party at any time for no reason or any
reason, without any severance or similar payment obligation.
3. Special Event. A Special Event shall have occurred when a Board approved
transaction has closed with an alliance partner prior to July 1, 1999 unless,
prior to the closing, Employee voluntarily resigns effective prior to the
closing.
4. Special Event Obligations. Upon the occurrence of a Special Event, the
following shall apply; a. Lump Sum Payment. A special bonus in the gross
amount of twenty-five thousand dollars ($25,000.) shall be due and payable,
subject to federal, state, and local income tax withholding and the
withholding of Employee's share of FICA taxes, and any other deductions
either required by law or consistent with past practices for Employee's
share of costs for benefits elected. b. Contingent on Actions Subsequent to
Occurrence. If, subsequent to the related definitive agreement and within
twenty-four (24) months of the Special Event occurrence, Employee is
terminated, as defined below, Employee shall be entitled to the following:
i) immediate vesting of all then outstanding but not then vested Company
stock options; ii) full tuition reimbursement for the period Employee
reasonably pursues completion, whether part time or full time, of his MBA
or equivalent degree at the actual cost of such tuition not to exceed the
then equivalent cost at the University of Wisconsin-Milwaukee; and iii)
continuation of Employee's base salary and all insurance benefits (eg.
medical, life, disability, etc.) as they existed prior to the earlier of
the termination or such an occurrence, and use of an executive level
Company supplied automobile, for a period of twelve months from such
termination, except that, if Employee obtains alternative full-time
employment, though not obligated to pursue such employment, then such
continuation shall cease upon the earlier of the expiration of such twelve
month period or four months after commencement of such alternative
employment. c. Termination. For purposes of this provision, `termination'
shall include, in addition to an actual termination, for whatever reason,
by the Company, a physical relocation outside the Milwaukee area, a
reduction in overall compensation and benefits, or a reduction in overall
level of job content, title, and responsibility. Employee may elect the
provisions in b) above at any time within ninety (90) days of such a
termination by written notice to the Company's President referencing this
Agreement.
<PAGE>
5. Limitation. Except as specifically set forth above, Employee will be paid no
further wages, bonuses, commissions, benefits, compensation, or remuneration of
any kind, other than those required by law, specifically provided above, and any
earned benefits which Employee is otherwise entitled to pursuant to a plan or
policy sponsored by the Company, such as 401K, as of the Separation Date.
6. In exchange, Employee specifically agrees to the following:
a. Release of All Claims. Employee hereby irrevocably and unconditionally
releases and discharges forever the Company from any and all claims and
expenses, known or unknown, which Employee now has on account of Employee's
employment or termination. This Release includes, but is not limited to,
any claim arising under any federal, state, or local law, including the
Civil Rights Act, the Age Discrimination in Employment Act, and Section 510
of the Employee Retirement Income Security Act.
b. Return of Company Property. Employee agrees to return any Company
property in his possession by the Separation Date except as set forth
above.
c. Confidentiality. Employee is under a Confidentiality agreement with the
Company and agrees to abide by the terms of that agreement.
d. No Denigration. Employee agrees that he will not at any time in the
future make any statements to former, current, or prospective customers or
employees of Company or the media or to anyone in the industry or community
in general which could be construed by a reasonable person as being in any
way derogatory or negative about the Company.
e. Confidentiality of Agreement. Employee agrees that this Agreement and
its terms are strictly confidential and shall not be divulged to any person
other than to his legal counsel and accountant, but subject to this
confidentiality provision, solely for purposes of advice.
8. Complete Agreement. The parties understand and agree that this Agreement is
final and complete, with respect to the matters set forth herein, and may not be
amended except in writing referencing this Agreement and is binding upon them
and their heirs, successors, and assigns. The parties' preexisting
Confidentiality agreement remains in full force and effect.
9. Voluntary Act and Revocation. Employee acknowledges that he has been given a
copy of this Agreement with a period of twenty-one days to review and consider
it before signing it, and an opportunity to consult with an attorney, that he
has carefully read the entire document and understands its provisions and has
signed it as his free act and deed. Employee may revoke this Agreement within
seven days of signing by written notice delivered to Mike Dunham, President at
the Company's Milwaukee office.
10. Other. This Agreement shall be interpreted and construed and enforced in
accordance with the laws of the State of Wisconsin, except as preempted by
federal law, and before the tribunals of the State of Wisconsin.
It has been executed in duplicate originals.
In Witness Whereof, the parties herein executed this Special Compensation and
Separation Agreement as of the Effective Date.
Effective Management Systems, Inc. Jeffrey J. Fossum, an individual
by: /s/ Michael D. Dunham /s/ Jeffrey J. Fossum
Michael D. Dunham, President Jeffrey J. Fossum
Witness: /s/ Patricia L. Hoppe
Patricia L. Hoppe
Wayne Wedell
1342 Sunny Dale Ct
Hubertus, WI 53033
December 18, 1997
Mike Dunham
President & CEO
Effective Management Systems, Inc.
12000 West Park Place
Milwaukee, WI 53224
Dear Mike,
This letter constitutes an Employment and Separation Agreement
("Agreement") between myself, Wayne Wedell ("Employee"), and Effective
Management Systems, Inc. ("EMS"). It is effective as of January 1, 1998 (the
Effective Date). This Agreement recognizes my contributions, dedication, and
dependability to EMS, including:
Over sixteen years of management, leadership, technical, administrative,
consulting and/or other expertise which is and has been beneficial to EMS; and
consistent high performance in the areas of revenue and margin generation,
attracting and developing top employees to EMS, and consistent high customer
satisfaction.
Both parties to this Agreement recognize that it is in the best interests of EMS
that the Employee continues to be employed by EMS, and EMS desires to employ
Employee and Employee desires to be employed by EMS.
In consideration of the mutual covenants contained herein, the parties agree to
the following:
1. Employment. EMS hereby employs Employee and Employee hereby accepts continued
employment with EMS. The Term of this Agreement shall run from the Effective
Date until the Separation Date. The Separation Date shall be this Agreement's
termination date. This Agreement will terminate December 31, 2006 after a period
of eight (8) years from the date of this Agreement unless earlier terminated or
extended pursuant to the terms and conditions of this Agreement. Except as
specifically set forth below for certain specified early separation
circumstances, all benefits and compensation will cease as of the Separation
Date.
2. Duties. During the Term, Employee shall be a Vice-President, or any other
position which, overall, is of reasonably equal or higher responsibility.
Employee shall devote his skills, labor and attention to the performance of his
duties under this Agreement. Employee shall perform such duties as are requested
and assigned to him by the President, or other duly authorized employee of EMS.
3. Salary Compensation. Employee shall be paid an initial salary in the amount
of Ninety Thousand Dollars ($90,000.00) per year commencing with the Effective
Date, payable at the regular pay periods of EMS subject to required and elected
deductions. Employee's annual salary for each subsequent year shall be
established by the Compensation Committee of EMS, but shall be no less than the
prior years' salary plus an annual increase from the prior year equivalent to
the Bureau of Labor Statistics' CPI cost of living change for the prior year,
except in a year where there is a salary freeze or salary reduction applicable
to EMS employees of his position level, in which case his then current base
salary shall be proportionally impacted as per such others.
<PAGE>
4. Bonus Compensation. In addition to the salary set forth in Paragraph 3,
Employee shall be eligible for an annual bonus, based on Employee's performance,
at the discretion of the EMS' Compensation Committee.
5. Vacation Benefit. Employee shall be entitled to vacation and personal days
each year pursuant to the terms of EMS' Employee Handbook applicable to all
other employees of his position level and length of employment. In any event,
Employee shall be entitled to no less than three weeks of paid vacation per
calendar year.
6. Other Benefits. Employee shall be entitled to receive all other benefits as
made available from time to time to employees of his position level at EMS such
as sick pay, holiday pay, heath insurance, disability insurance, dental
insurance, life insurance, and company matching 401k.
7. Automobile Expense Benefit. Employee shall have use of an automobile owned by
EMS at EMS' expense, which automobile shall be equipped with a cellular
telephone for use by Employee.
8. Business Expense Reimbursement. As and to the extent made available to other
employees of his position level, Employee shall be reimbursed for all reasonable
and necessary business expenses incurred by Employee in the performance of
Employee's duties for EMS such as sales expense, travel expense, business home
phone, and entertainment expenses. Similarly, Employee shall be permitted to
utilize an EMS credit card to incur such expenses in the performance of
Employees duties for EMS.
9. Private Office. As and to the extent made available to other employees of his
position level, Employee shall have full and complete use of a private office at
the EMS facility located in the greater Milwaukee area.
10. Limitation on Business Travel. EMS agrees that the Employee's business
travel overnight away from the office shall be limited to no more than 25% of
all business working days in any given calendar year.
11. Option to Renew. Employee and EMS shall have the option to extend this
Agreement for addition periods of five (5) years. This contract will
automatically extend its Term for additional five (5) year periods unless either
Employee or EMS gives written notice of non-renewal to the other at least one
hundred fifty (150) days in advance of the full Term expiration date of this
Agreement.
12. Termination of the Agreement
A. EMS may terminate Employee's employment upon thirty (30) calendar
days written notice during the term of this Agreement, subject to the provisions
of paragraph 13 herein.
B. In the event that Employee is terminated subsequent to a Change in
Control, Employee shall be entitled to receive all of the payments and enjoy all
the benefits specified in paragraph 13 herein.
C. In the event that Employee should determine, in good faith and after
reasonable effort in performing such duties as are requested and assigned to
him, that his status or responsibilities with EMS has or have diminished
subsequent to a Change in Control, and shall for that reason, resign from his
employment with EMS within one year after such Change in Control, Employee shall
be entitled to receive all the payments and enjoy all the benefits specified in
paragraph 13 herein. A "Change in Control" shall mean the acquisition by any
corporation or group of associated persons acting in concert, excluding
affiliates, if any, of EMS as of the date hereof, of an aggregate of more than
25% of the outstanding shares of voting stock of EMS coupled with or followed by
the election as directors of EMS of persons who were not directors at the time
of such acquisition of such persons shall become a majority of Board of
Directors of EMS.
<PAGE>
D. Employee may terminate his employment upon ninety (90) calendar days
written notice during the term of this Agreement without recourse by EMS against
Employee.
13. Additional Consideration. Any termination pursuant to Paragraph 12A, 12B, or
12C shall obligate EMS to pay Employee for the following:
A. Employee will receive an amount equal to seventy five percent (75%)
of his highest annual base salary since the start of this Agreement to be paid
or payable by EMS to Employee through a lump sum payment of twenty five percent
(25%) of that amount payable within 30 days after termination of this Agreement,
and the balance of said amount shall be paid in bimonthly payments over a one
(1) year period. Payments will stop if Employee has obtained an acceptable
equivalent position in the Milwaukee area.
B. EMS will also provide, at no cost to Employee, equivalent insurance
benefits and use of company automobile for a period of one year starting at the
termination date. Provisions by EMS to pay Employee for these insurance and
automobile benefits will stop if Employee has obtained an acceptable equivalent
position in the Milwaukee area.
14. Notices. Any notices desired or required under the terms of this Agreement
shall be in writing and shall be deemed served when deposited with postage
prepaid, certified mail, in the United States mail address to the respective
parties hereto at the addresses designated by each party. Either party may
notify the other party that such party's address has changed for notice purposes
and in such case shall be sent by the other to such new address.
15. Assignment. This Agreement may not be assigned buy either party.
16. Governing Law. This Agreement shall be interpreted in the courts and under
the laws of the State of Wisconsin. If any portion of this Agreement is held to
be invalid under applicable law, only that portion of such law has application
and the remaining portions shall remain in full force and effect.
17. Complete and Binding Agreement. The parties understand and agree that this
Agreement is final and complete with respect to the matters set forth herein,
and may not be amended except in writing referencing this Agreement. This
Agreement binds the parties hereto, and their respective heirs, successors and
representatives.
18. Cost / Attorney's Fees. If EMS is proven to have violated this Agreement in
any manner, upon such findings by a court of competent jurisdiction, it shall
pay Employee the reasonable attorney's fees and costs incurred to pursue action
defending such breach.
19. In Exchange. In exchange for the consideration set forth herein and subject
to the faithful performance of the terms herein by EMS, Employee specifically
agrees to the following:
A. Return of EMS Property. Employee agrees to return any EMS property
in his possession by the Separation Date except as set forth above.
B. Confidentiality. Employee is under a Confidentiality agreement with
EMS and agrees to abide by the terms of that agreement.
C. No Denigration. Employee agrees that he will not at any time in the
future make any statements to former, current, or prospective customers or
employees of EMS or the media or to anyone in the industry or community in
general which could be construed by a reasonable person as being in any way
derogatory or negative about EMS.
D. Confidentiality of Agreement. Employee agrees that this Agreement
and its terms are strictly confidential and shall not be divulged to any person
other than to his legal counsel and accountant, but subject to this
confidentiality provision, solely for purposes of advice.
<PAGE>
20. Voluntary Act and Revocation. Employee acknowledges that he has been given a
copy of this Agreement with a period of twenty-one days to review and consider
it before signing it, and an opportunity to consult with an attorney, that he
has carefully read the entire document and understands its provisions and has
signed it as his free act and deed. Employee may revoke this Agreement within
seven days of signing by written notice delivered to Mike Dunham, President of
EMS, at its Milwaukee office.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of December 31, 1997.
Wayne Wedell, Employee Effective Management Systems, Inc.
By: /s/ Wayne Wedell By: /s/ Mike Dunham
Wayne Wedell Mike Dunham, President & CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
FINACIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYTEMS, INC. AS OF AND FOR THE NINE
MONTHS ENDED AUGUST 31, 1998 AND IS QULAIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 9,586
<ALLOWANCES> (547)
<INVENTORY> 334
<CURRENT-ASSETS> 9,719
<PP&E> 9,798
<DEPRECIATION> (6486)
<TOTAL-ASSETS> 19,683
<CURRENT-LIABILITIES> 11,294
<BONDS> 0
0
826
<COMMON> 41
<OTHER-SE> 2,674
<TOTAL-LIABILITY-AND-EQUITY> 19,683
<SALES> 1,455
<TOTAL-REVENUES> 27,776
<CGS> 1,112
<TOTAL-COSTS> 37,284
<OTHER-EXPENSES> 481
<LOSS-PROVISION> 82
<INTEREST-EXPENSE> 521
<INCOME-PRETAX> (9,989)
<INCOME-TAX> 33
<INCOME-CONTINUING> (10,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,022)
<EPS-PRIMARY> (2.45)
<EPS-DILUTED> 0<F1>
<FN>
<F1> Not required to be calculated in accordance with generally accepted
accounting principles.
</FN>
</TABLE>
