Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 7389 39-1292200
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
12000 West Park Place
Milwaukee, Wisconsin 53224
(414) 359-9800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Michael D. Dunham, President and Chief Executive Officer
Effective Management Systems, Inc.
12000 West Park Place
Milwaukee, Wisconsin 53224
(414) 359-9800
Facsimile (414) 359-9011
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Phillip J. Hanrahan
Jay O. Rothman
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-2400
Facsimile: (414) 297-4900
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered(1) Offering Price Per Aggregate Offering Registration Fee
Share(4) Price
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share (2) 54,714 $2.09 $114,353 $ 32
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Common Stock, par value $.01 per
share (3) (4) 892,500 $2.09 $1,865,325 $519
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(1) In accordance with Rule 416, this Registration Statement includes an
indeterminable number of shares of common stock, par value $.01 per share
(the "Common Stock"), of Effective Management Systems, Inc. (the "Company"),
which may be necessary to adjust the number of shares to be issued upon
exercise or conversion of: (i) certain warrants (the "Warrants") to purchase
up to 54,714 shares of the Common Stock of the Company at an exercise price
of $3.60 per share and (ii) the Company's Series B 8% Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock").
(2) Represents shares of the Common Stock underlying the Warrants.
(3) Represents shares of the Common Stock underlying the Series B Preferred
Stock. Because the conversion price of the Series B Preferred Stock is
subject to adjustment based on the future market value of the Common Stock,
the Company is registering the maximum number of shares that could be
issuable following such adjustment.
(4) Pursuant to Rule 457(c), the proposed maximum offering price per share has
been calculated based on the average of the bid and asked prices for the
Common Stock on December 11, 1998.
</TABLE>
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Dated December 14, 1998
PROSPECTUS
947,214 Shares
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Common Stock
(par value $.01 per share)
This Prospectus relates to the public offering of common stock, par
value $.01 per share (the "Common Stock"), of Effective Management Systems, Inc.
("we" or the "Company"). We are registering 947,214 shares of the Common Stock
for sale by certain selling shareholders (each a "Selling Shareholder,"
collectively the "Selling Shareholders"), as follows:
- 54,714 shares of the Common Stock that may be issued upon
the exercise of certain warrants (the "Warrants"). We issued
the Warrants in connection with the sale of the Company's
Series A 8% Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock") and the Company's Series B 8%
Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock").
- Up to 892,500 shares of the Common Stock issuable in
connection with the conversion of the Series B Preferred
Stock. The conversion price for the Series B Preferred Stock
is subject to adjustment depending on the future market
value of the Common Stock. The 892,500 shares represents the
maximum number of shares of Common Stock that would be
issuable if the adjustment applies to the fullest extent
possible. This amount does not necessarily represent the
actual total number of shares of the Common Stock that these
holders of Series B Preferred Stock would receive if they
convert all of their shares because the conversion price is
also subject to certain anti-dilution adjustments.
We will not be selling any of the shares of the Common Stock that are
registered under this Prospectus. No underwriters will be used in selling the
shares. While we will pay the expenses incurred in registering the Common Stock,
including legal and accounting fees, we will not receive any proceeds from the
sale of these shares. However, we may receive gross cash proceeds of up to an
aggregate of $196,970 upon the exercise of the Warrants.
The Selling Shareholders may offer their shares of the Common Stock in
public or private transactions, on or off the OTC Bulletin Board, at prevailing
market prices, or at privately negotiated prices. In such transactions, the
Selling Shareholders and any broker-dealers through whom such Common Stock are
sold may be deemed to be underwriters within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), as more fully described herein. Any
commissions paid or concessions allowed to any broker-dealer, and, if any
broker-dealer purchases such Common Stock as a principal, any profits received
on the resale of such shares may be deemed to be underwriting discounts and
commissions under the Securities Act.
All selling and other expenses, including brokerage fees and any
underwriting discounts or commissions, incurred by individual Selling
Shareholders will be borne by such Selling Shareholders.
Each share of the Series B Preferred Stock is presently convertible at
any time at the option of the holders at a conversion price of $3.00, subject to
certain adjustments.
Investing in the Common Stock involves certain risks. See "Risks
Factors" beginning on page 8.
The Common Stock is traded on the OTC Bulletin Board and, as a result,
the market for the Common Stock is not particularly liquid. The price at which
the Common Stock trades may fluctuate and any
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market for the Common Stock may be subject to disruptions that could make it
difficult or impossible for the holders of the Common Stock to sell shares in a
timely manner, if at all, or to recoup their investment in the Common Stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Our principal executive offices are located at 12000 West Park Place,
Milwaukee, Wisconsin 53224, and our telephone number is (414) 359-9800.
The date of this Prospectus is __________, 1999
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AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document we file at the SEC's public
reference room at the following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically.
You can access the electronic versions of these filings on the Internet at the
SEC's website, located at http://www.sec.gov.
We have included this Prospectus in our registration statement that we
filed with the SEC (the "Registration Statement"). The Registration Statement
provides additional information that we are not required to include in the
Prospectus. You can receive a copy of the entire Registration Statement as
described above. Please note that the Registration Statement also includes
complete copies of the documents described in the Prospectus.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Prospectus are "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as the Company or we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe the Company's
future plans, objectives or goals are forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including those described in the section captioned "Risk Factors" below.
These factors are not exhaustive, and should be read in conjunction
with other cautionary statements that are included in this Prospectus. The
forward-looking statements made herein are only made as of the date of this
report and we are not obligated to publicly update forward-looking statements to
reflect subsequent events or circumstances.
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PROSPECTUS SUMMARY
As used in this Prospectus, unless the context otherwise requires, the
terms "we," "us" or "Company" mean Effective Management Systems, Inc. and its
subsidiaries. This summary highlights information contained elsewhere in this
Prospectus, and is not complete and may not contain all the information you
should consider before investing in the Common Stock. You should read the entire
Prospectus carefully.
THE COMPANY
Overview
We develop, procure, market and support integrated manufacturing and
business management software. We design our Time Critical Manufacturing/R/
("TCM/R/") software with the underlying philosophy that time is a crucial
element in manufacturing, and that reducing time in the manufacturing process
leads directly to increased profits for the manufacturer. TCM/R/ software
integrates technologies such as electronic data interchange, imaging,
bar-coding, factory automation, engineering system integration, distributed
numerical control, statistical process control and fourth generation language
tools with the Company's proprietary algorithms for scheduling and production,
to optimize the customer's labor, capital and inventory utilization. The
software we offer functions on the Windows NT, IBM AIX, Open VMS, and HP-UX
operating systems. We also provide services support for our software products
and sell computer hardware.
The software products we offer include: TCM/R/, which is a
pre-integrated enterprise resource planning, accounting and manufacturing
execution system, and FACTORYnet/R/ I/S, which is an integrated manufacturing
execution system, providing production management, shop floor scheduling, and
operations support. We also offer the manufacturing software of the Baan Company
("Baan"), which is an enterprise resource planning and accounting system that
will ultimately be combined with our manufacturing execution system. Our
distributor arrangement with Baan was entered into in April 1998.
Our software products are usually integrated with a bar code, data
collection system or direct machine controls, and provide up-to-the-minute
information to track production and business operations. This facilitates
real-time decision making and enables employees throughout an organization to
respond quickly to marketplace demands and unanticipated events.
We typically focus our sales and marketing efforts on discrete
("discrete" manufacturers assemble or fabricate parts into finished products as
distinguished from "process" manufacturers which mix, separate and otherwise
combine or control ingredients to create finished products) manufacturing
plants. We have licensed our software products to over 1,700 customer sites.
We distribute our products in the United States through eight branch
offices and through six joint ventures and independent distributors. We have
also established distribution channels through independent distributors in
Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, we
have a joint venture in China to support these distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary, and in 1996, we acquired the remaining interest in Darwin Data
Systems Corporation, another joint venture subsidiary. For further details
regarding these acquisitions, see Note 2 of Notes to the Company's Consolidated
Financial Statements.
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Strategy
Our objective is to grow as a leading provider of integrated business
software systems for discrete manufacturing plants within our target market. We
have identified three strategic initiatives to achieve this goal.
Focus on Time Critical Manufacturing. We believe that manufacturers
are striving to become more "time competitive," and that manufacturing software
which focuses solely on providing information for planning and on recording
information for historical analysis will be inadequate to meet the needs and
demands of manufacturers in the years to come. To be effective in the future, we
believe that manufacturing software will be required to empower individuals at
all levels of an organization to make immediate decisions regarding production
processes and business activities. With few exceptions, we believe that the
limited number of information system implementations currently in place which
have this "time" focus have been developed on an individual customized basis. We
are not aware of other major products available in our target market for
discrete manufacturers which offers both planning and execution systems and has
a strategy of focusing on time.
Commitment to Manufacturing Execution Systems. We believe that
discrete manufacturers can gain significant competitive advantage by
implementing Manufacturing Execution Systems. These systems bring together the
data and information from Enterprise Resource Planning Systems, Industrial
Control Systems and Engineering Systems.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our
experience in the marketplace resulted in the 1995 introduction of the first
"pre-integrated" Enterprise Resource Planning/Manufacturing Execution
System/Controls software offering for discrete manufacturers. The acquisition of
Intercim Corporation facilitated this pre-integration initiative.
Software pre-integration means that a customer can buy a comprehensive
set of software from the Company which has already been integrated and proven to
function. The pre-integration package also contemplates that other software, for
example, Computer Aided Design systems, may already be in place at the customer
site. "Off-the-shelf interfaces" for popular Computer Aided Design systems which
also are proven in advance are available to facilitate interaction with these
software products. Implementation time frames for pre-integrated software are
between nine and eighteen months. We plan to continue to focus on the
pre-integrated software marketplace.
We believe that "pre-integration" of much of our software reduces the
time and cost of system implementations and increases the business value to the
manufacturer similar to the way that "suites" of desktop software have affected
that marketplace as compared to custom integration of word processing, data base
and spreadsheet desktop products.
Software Products
We develop, market and support TCM/R/ application software for
discrete manufacturing companies. We currently offer licenses for three software
products: (a) TCM/R/, which is a full function business and Enterprise Resource
Planning software system, including a pre-integrated Manufacturing Execution
System providing production management, shop floor scheduling and operations
support; (b) FACTORYnet/R/ I/S, which is a Manufacturing Execution System that
provides production personnel with correct revisions of drawings,
specifications, procedures, and instructions to help them make a better product
and make it right the first time; and (c) the Baan product offering, which is a
full function business Enterprise Resource Planning and accounting system for
large companies that will be complemented by our pre-integrated Manufacturing
Execution System.
Markets and Customers
We primarily target companies operating discrete manufacturing plants
in the United States and Canada. These plants may be owned by privately held
companies or by large, multi-national public
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corporations. Our customers include, among others, capital equipment
manufacturers, job shops, high volume manufacturers, automotive suppliers,
consumer product manufacturers and aerospace equipment manufacturers.
Sales and Marketing
In the United States and Canada, we license our products and offer
services through seventeen branch offices and seven joint ventures and
independent distributors.
We market our products through advertising campaigns in national trade
periodicals and through direct mailings. We supplement these efforts with
listings in relevant directories and trade show and conference appearances. We
also receive leads regarding potential customers from hardware and services
vendors, existing customers and various accounting and consulting firms.
Sales cycles for our products vary substantially based on the degree
of integration, consulting and training required and also on the status of the
customer's hardware system implementation. A sales cycle is usually three to
twelve months from the time an initial sales presentation is made until the time
a signed license agreement is entered into with a customer.
Product Development
We believe we must continue to enhance, broaden and modify our
existing line of software products to meet the constantly evolving needs of
discrete manufacturers within our target market. We have relied on internal
development, outside procurement, and development related to customized projects
implemented at field sites to extend, enhance and support our software products,
and develop and integrate new capabilities.
Software development efforts currently in progress include the
development of product enhancements such as enhanced manufacturing functionality
(including visual scheduling and touch screen data collection), support for
Microsoft SQL server, electronic commerce, extended operation on various
relational database products, and other enhanced functional capability. There
can be no assurance, however, that these development efforts will result in
product enhancements that we will be able to market successfully. Certain of
these enhancements are dependent upon the development efforts of third party
suppliers over whom we have no control. In the event the development efforts of
the third party suppliers are delayed or are unsuccessful, our software
developments would be similarly delayed. Software development is, however, an
evolutionary process and the Company's management believes it could eventually
find other suppliers or, if unsuccessful in its search, that it could
successfully re-engineer existing products to fulfill its requirements.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to our products.
Some of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than we have.
Restructuring
In the quarter ended May 31, 1998, we 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 our
financial performance. In April 1998, we signed an agreement to resell the
manufacturing software of Baan. We intend to combine our manufacturing execution
software with the Baan software product to serve the high end of the
manufacturing mid-market. We have the right to represent the Baan product in the
entire United States, but we will focus our offering in a 19-state market
including much of the Midwest and Eastern regions of the United States.
The restructuring charge included $553,000 relating to the refocusing
of our geographic markets and the closing of operations in the West and
Southwest regions of the United States. From a geographic
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standpoint, the charge also includes $1,213,000 for exit costs and software
write-off related to international operations. In line with the introduction of
the new product for the high end of the mid-market, we are refocusing our
current TCM/R/ product to the lower end of the mid-market and we will continue
to develop and support our product for this marketplace. We also intend to
provide a path to the Baan product offering for those customers who are or may
grow into the need for a larger company solution. The charge included $2,656,000
for both the write-off of capitalized software pertaining to large company
functionality which is now supplied through the Baan product offering and the
write-off of other software whose future value was impaired by restructuring
actions. The charge also reflects costs of $1,841,000 associated with the
write-off of capitalized software mainly related to technology, the future value
of which was impaired by restructuring actions and management's assumptions
regarding future technological changes. We have also reduced certain of our
operating expenses primarily in development, marketing and administration
through the termination of employees and other expense reductions which resulted
in a charge of $573,000.
Employees
As of November 30, 1998, we had 299 full-time employees, of whom 60
were engaged in sales and marketing; 58 in product development; 140 in customer
service; and 41 in management, finance and administration. Our employees are not
represented by any collective bargaining organization and we have never
experienced a work stoppage. We consider our employee relations to be good.
THE SERIES B 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK OFFERING
In October, 1998, we sold 780 shares of our Series B Preferred Stock,
at a purchase price of $1,000 per share, for an aggregate gross purchase price
of $780,000. In addition, we exchanged 1,005 shares of our Series B Preferred
Stock for a like number of shares of our Series A Preferred Stock. We had issued
the Series A Preferred Stock in August, 1998 for an aggregate gross purchase
price of $1,005,000. Dividends accrue on the Series B Preferred Stock at a rate
of 8% per year and are cumulative. The holders of the Series B Preferred Stock
may convert their shares at any time into shares of the Common Stock at a
conversion price of $3.00 per share, subject to adjustment.
In addition, we issued the Warrants to purchase a total of up to
54,714 shares of Common Stock, in connection with the sale of the Series A and
Series B Preferred Stock. The Warrants are exercisable at a price of $3.60 per
share.
This Prospectus relates to the shares of the Common Stock that may be
issued upon conversion of the Series B Preferred Stock and upon the exercise of
the Warrants.
RISK FACTORS
An investment in the Common Stock involves certain risks that a
potential investor should carefully evaluate prior to making an investment. A
discussion of certain factors to be considered in evaluating the Company, its
business and an investment in the Common Stock is included in the section titled
"Risk Factors" immediately following this Summary.
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<TABLE>
Summary Historical Consolidated Financial and Operating Data
<CAPTION>
Year Ended November 30, Nine Months Ended
August 31,
(Dollars in Thousands) (Dollars in Thousands)
------------------------------------------------------------ ----------------------
1993 1994 1995(4) 1996 1997 1997 1998
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Income Statement Data:
Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748
Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573
Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455
-------- -------- -------- -------- -------- -------- --------
Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776
Cost of third party software
license fees 405 797 1,149 2,484 3,065 1,906 1,886
Software development
amortization 342 515 879 1,591 2,535 2,077 2,277
Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175
Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112
-------- -------- -------- -------- -------- -------- --------
Total cost of products/
services 9,397 9,925 15,300 21,163 22,860 16,641 15,450
Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326
-------- -------- -------- -------- -------- -------- --------
Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043
General and administrative
expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837
Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118
Restructuring and other charges 0 0 0 0 0 0 6,836
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284
Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508)
Other income (expense) (32) 342 80 (118) (337) (176) (481)
Income (loss) before income
taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989)
Income tax expense (benefits) 650 975 79 112 (618) (883) (33)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45)
Weighted average common and
common equivalent share
outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038
======== ======== ======== ======== ======== ======== ========
Other Data:
Software investment as a
percentage of software
license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2%
Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918
1
Balance Sheet Data:
Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575)
Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683
Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848
Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541
- ---------------
(1) Does not include capitalized software development costs of $691, $1,105,
$2,321, $3,372, and $4,471 recorded for the years ended November 1993,
1994, 1995, 1996 and 1997, respectively, and $3,207 and $2,800 for the
nine months ended August 31, 1997 and 1998, respectively.
(2) Weighted average common and common equivalent shares outstanding for the
periods shown include the effect of common stock equivalents, if
dilutive.
(3) Software investment consists of product development expense and
capitalized software development costs.
(4) Includes results of Effective Management Systems of Illinois, Inc. and
Intercim Corporation since being acquired effective March 31, 1995 and
September 6, 1995, respectively.
</TABLE>
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RISK FACTORS
The risk factors set forth below, as well as other information
appearing in this Prospectus should be carefully considered before making an
investment in the Common Stock. Certain statements in this Prospectus, including
statements relating to our expected operations and financing activities, are
forward-looking statements that involve certain risks and uncertainties. See
"Special Note Regarding Forward-Looking Statements."
Losses from Operations.
For the three and nine months ended August 31, 1998, we had operating
losses of $1,093,000 and $10,022,000, respectively, compared to operating losses
of $1,044,000 and $2,308,000 for the corresponding periods in 1997. As to the
operating losses for the nine months ended August 31, 1998, $6,836,000
represented restructuring and other charges. As of August 31, 1998, we had a
deficit in retained earnings of $8,761,000 compared to retained earnings of
$1,260,000 at November 30, 1997. Although we have taken steps to improve our
financial performance, we are unable to give any assurance that these actions
will reverse our pattern of net losses.
Net Income (Loss) for the Last Three Years.
For the fiscal year ended November 30, 1997 we had net loss of
$2,160,000. For the fiscal years ended November 30, 1996 and 1995, we had net
income of $153,000 and $131,000, respectively.
Absence Of Market For Common Stock
There is currently no formal trading market for the Common Stock.
Currently, the Common Stock trades only on the OTC Bulletin Board and, as a
result, the market for the Common Stock is not particularly liquid. The price at
which the Common Stock may trade may fluctuate and the market for the Common
Stock may be subject to disruptions that could make it difficult or impossible
for the holders of the Common Stock to sell shares in a timely manner, if at
all. In addition, if trading markets do develop, they may be unstable and
illiquid for an indeterminate period of time.
Dependence on Principal Products.
A significant portion of our revenue is derived from license fees for
TCM/R/ and for FACTORYnet/R/ I/S and the sale of related support services.
Accordingly, any event that could adversely affect license fees for TCM/R/ or
FACTORYnet/R/ I/S, such as significant flaws or incompatibility, negative
publicity or evaluation, or obsolescence of the hardware platforms on which the
systems run, could have a material adverse effect on our results of operation.
Our future financial performance will depend, in part, on the continued
development and introduction of new and enhanced versions of TCM/R/,
FACTORYnet/R/ I/S and other products, and customer acceptance of such new and
enhanced products.
Use of Proceeds.
We are not selling any of the shares offered in this Prospectus, and
we will not receive any of the proceeds from the sale of those shares. However,
we may receive gross cash proceeds from the exercise of the Warrants in an
amount equal to the number of Warrants exercised multiplied by $3.60 per share,
subject to adjustment. We will bear all of the costs and expenses associated
with registering the shares. The gross cash proceeds that we receive from the
exercise of these securities will be reduced by the amount of related expenses.
We anticipate that we will use the gross cash proceeds, if any, for working
capital and general corporate purposes.
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<PAGE>
Dependence on Third Party Software.
We recently entered into an arrangement pursuant to which we license
certain software products from Baan to sell into a segment of our marketplace.
As a result of this arrangement, we have refocused our current TCM/R/ product to
the lower end of the mid-market and will rely on the Baan product to service the
high end of the mid-market. There can be no assurance that we will be successful
in marketing the Baan product offering, that such offering will remain viable in
our target market or that Baan will continue such relationship after the
expiration of its initial term. In addition to the Baan relationship, internally
developed software products incorporate and use software technology and software
products developed by other third parties. There can be no assurance that all of
these companies will remain in business or that their product lines will remain
viable. If any of these companies fails to remain in business or abandons or
fails to enhance a particular product line, we may need to seek other suppliers.
This could result in us having to significantly alter our internally developed
product lines which could have a material adverse effect on our results of
operations. There also can be no assurance that our current suppliers will not
significantly alter their pricing in a manner adverse to us.
Dependence on Key Employees.
Our success is dependent to a significant extent on our executive
officers and other key personnel (including technical and sales personnel), the
loss of whom could have a material adverse effect on the Company. Our future
success will depend in large part on our ability to attract and retain talented
and qualified employees. Competition in the recruiting of highly-qualified
personnel in the management information systems industry is intense and there
can be no assurance that we can retain our key employees or that it can attract,
assimilate and retain other qualified personnel in the future. We have recently
experienced attrition at rates higher than our historical experience. We have
taken steps to curtail the attrition, but we can give no assurance that these
steps will be successful or that further attrition will not materially impact
our financial performance.
New Products and Technical Change.
The market for our products (including third-party supplied products)
is characterized by rapid technological advances, evolving industry standards,
changes in end-user requirements and frequent new product introductions and
enhancements. The introduction of products embodying new technologies and the
emergence of new industry standards could render our existing product offering
and products currently under development obsolete and unmarketable. Our future
success will depend upon our ability to enhance our current products and to
develop and introduce or obtain from third-party suppliers new products that
keep pace with technological developments, respond to evolving end-user
requirements and achieve market acceptance. Any failure by us to anticipate or
respond adequately to technological developments or end-user requirements, or
any significant delays in product development, acquisition or introduction,
could result in a loss of competitiveness or revenues. There can be no assurance
that we will be successful in developing, acquiring and marketing new products
or product enhancements on a timely basis or that we will not experience
significant delays in the future, which could have a material adverse effect on
our results of operation.
Success of Recent Restructuring.
In April 1998, we effected a major restructuring and recorded a
restructuring charge of approximately $6.8 million. The restructuring related to
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving our financial
performance. In connection with the restructuring, we closed facilities both in
the United States and internationally and took actions to rationalize our
workforce, particularly in the development, marketing and administrative areas.
Although we expect the restructuring to impact our financial performance
positively, no assurance can be given that the restructuring will be successful
or that it will not have unanticipated effects, such as the loss of significant
customers and/or key employees.
7
<PAGE>
Intellectual Property and Property Rights.
We regard our software products as proprietary, in that title to and
ownership of our software generally reside exclusively with the Company. We
attempt to protect ownership of our software with a combination of copyright,
trademark and trade secret laws, employee and third-party disclosure agreements
and other methods of protection common in the industry. Despite these
precautions, it may be possible for unauthorized third parties to copy or
reverse-engineer certain portions of our products or to obtain and use
information that we regard as proprietary. Like many software firms, we
presently have no patents. We license the source code for our software to some
customers for customization. Although our source code license contains
confidentiality and nondisclosure provisions, there can be no assurances that
such customers will take adequate precautions to protect such code. In addition,
the laws of some foreign countries do not protect the our proprietary rights to
the same extent as do the laws of the United States. There can be no assurance
that the mechanisms we use to protect our software will be adequate or that our
competitors will not independently develop software products that are
substantially equivalent or superior to our software products. Although we do
not believe that our products infringe on the existing proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against us.
Variability of Quarterly Operating Results; Limited Backlog.
Our operating results can vary substantially from quarter to quarter
due to various factors, including, among others: the size and timing of customer
orders; the buying patterns of manufacturers in our target market; delays in the
introduction of products or product enhancements by the Company or by other
providers of hardware, software and components for the management information
systems market; competition and pricing in the software industry; customer order
deferrals in anticipation of new products; market acceptance of new products;
reduction in demand for existing products; changes in operating expenses; and
general economic conditions. We have historically operated with little backlog
because software orders are generally shipped as orders are received. As a
result, product revenue in any quarter is dependent on orders booked and shipped
during that quarter. A significant portion of our operating expenses are based
on anticipated revenue levels and are relatively fixed in nature. If revenue
does not meet our expectations in any given quarter, operating results may be
adversely affected.
Competition.
The management information systems industry is intensely competitive
and rapidly changing. A number of companies offer products similar to the
products we offer. Some of our existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and larger
marketing and sale organizations and significantly greater financial resources
than the Company and its third-party suppliers. There can be no assurance that
such competitors will not develop products that are superior to the products we
offer or that achieve greater market acceptance. Our future success will depend,
in part, upon our ability to increase software license fee revenues in our
target markets. There can be no assurance that we will be able to compete
successfully against our competitors or that the competitive pressures we face
will not adversely affect our financial performance.
Expansion Plans.
We plan to expand our business within our distribution network in the
United States with the objective of increasing total net revenues and profits.
There can be no assurance, however, that the efforts and funds directed towards
enhancing our product offering and expanding within our distribution network
will result in revenue and profit growth. Any future growth of the Company will
also depend on, among other things, our ability to gain market acceptance for
our product offering in target geographic areas and to monitor and control the
additional costs and expenses associated with expansion. We are also dependent
upon securing services at competitive rates from third-party service providers.
No assurance can be given that we will be able to successfully manage these
aspects of our business.
8
<PAGE>
Financial Covenants and Limitations.
Our credit agreement with our primary lender contains certain
restrictive covenants, including covenants relating to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and tangible net worth. As a
result of our recent financial performance and restructuring, we have been
obligated to obtain and have obtained covenant relief from our lender relating
to the EBITDA and tangible net worth covenants. In the event that our financial
performance does not improve and if we are unable to secure additional
investment capital, we will require additional covenant relief. In the event
that such covenant relief is not obtained, it would likely have a material
adverse effect on our liquidity, including our ability to fund continuing
operations at current levels. In addition, our current credit facility contains
limits on the amount we may borrow based on the level of our outstanding
accounts receivable. At December 1, 1998, we had borrowing availability of
$559,000 under our credit agreement.
"Penny Stock" Rules.
The Common Stock is currently traded on the OTC Bulletin Board after
having been delisted from the Nasdaq National Market for failing to meet minimum
eligibility requirements. Since the Common Stock is not traded on the Nasdaq
National Market or the Nasdaq Small Cap Market, if no other exclusion from the
definition of "penny stock" under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is available, then any broker engaging in a
transaction in the Company's securities is required to provide any customer with
a risk disclosure document and the compensation of the broker/dealer in the
transaction and monthly account statements showing the market values of the
Company's securities held in the customer's accounts. The bid and offer
quotations and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. If brokers are
subject to the "penny stock" rules when engaging in transactions in our
securities, they may be less willing to engage in such transactions.
Control by Management.
Our management currently holds approximately 37% of the outstanding
Common Stock. As a result, management personnel have a significant impact, if
they act together, on the election of directors and shareholder approval of
various corporate actions.
No Dividends.
We have never paid any cash dividends on the Common Stock and do not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of dividends on the Common Stock by the Company will depend on our
earnings, financial condition and other business and economic factors affecting
the Company at that time as the Board of Directors may consider relevant.
Anti-Takeover Provisions of Charter, Bylaws and Wisconsin Law.
Certain provisions of our charter and bylaws may delay or frustrate
the removal of incumbent directors and may prevent or delay a merger, tender
offer or proxy contest involving the Company that is not approved by the Board
of Directors, even if such events may be beneficial to the interests of
shareholders. For example, our charter authorizes the Board of Directors,
without shareholder approval, to issue preferred stock in addition to the Series
A Preferred Stock and the Series B Preferred Stock with voting or conversion
rights which could adversely affect the voting power of the holders of the
Common Stock. In addition, the Wisconsin Business Corporation Law contains
provisions that may have the effect of delaying or making more difficult
attempts by others to obtain control of the Company without the approval of the
Board of Directors.
Year 2000 Compliance.
Many computer programs and applications define the applicable year
using two digits rather than four in order to save memory and enhance the speed
of repeated date-based calculations. The "Year 2000
9
<PAGE>
problem" refers to the inability of these computer programs on and after January
1, 2000 to recognize that "00" refers to "2000" rather than "1900." The term
"Year 2000-compliant" means a computer or a computer system which has been
designed or modified to recognize dates on and after January 1, 2000.
We utilize a combination of our own software and custom-written
systems for running our own operations. Based on our own evaluation, we believe
that we will incur no significant costs associated with ensuring Year 2000
compliance of our internal systems. Since the release of version 5.1.2 of the
Company's software product, our software product has been Year 2000 compliant.
Effect Of Future Sales Of Common Stock; Registration Rights
We cannot predict the effect, if any, that future sales or issuance of
the Common Stock or the availability of the Common Stock for future sale or
issuance will have on future market prices of the Common Stock. Sales of
substantial amounts of the Common Stock or the perception that such sales may
occur, could adversely affect prevailing market prices for the Common Stock.
The agreement under which we sold the Series B Preferred Stock (the
"Purchase Agreement") obligates us, at our sole cost and expense, to file a
registration statement covering shares of the Common Stock issuable upon
conversion of the Series B Preferred Stock and to use our best efforts to have
such registration statement declared effective as soon as possible after filing
and to keep the registration statement effective for up to three years. The
Registration Statement of which this Prospectus is a part is the registration
statement referred to in the Purchase Agreement. The Purchase Agreement also
provides for certain demand and piggyback registration rights. See "Description
of Capital Stock."
10
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
the Common Stock by the Selling Shareholders. If all of the Warrants are
exercised at the exercise price of $3.60, we will receive gross cash proceeds of
approximately $196,970. See "Plan of Distribution." The proceeds may be used for
working capital and general corporate purposes.
SELLING SECURITY HOLDERS
The following table sets forth the number of Shares (as hereinafter
defined) and the total number of Shares assuming the conversion or exercise of
all the Series B Preferred Stock and the Warrants owned by each of the Selling
Shareholders and registered hereunder. Because the Selling Shareholders may
offer all or part of the shares of the Common Stock received upon conversion or
exercise of the Series B Preferred Stock or the Warrants (the "Shares"), which
they hold pursuant to the offering contemplated by this Prospectus, and because
their offering is not being underwritten on a firm commitment basis, no estimate
can be given as to the amount of the Series B Preferred Stock or the Warrants
that will be held upon termination of this offering. The Shares offered by this
Prospectus may be offered from time to time by the Selling Shareholders named
below.
11
<PAGE>
Shares underlying the Series B Preferred Stock and Warrants to be registered and
offered by the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned After
Prior to Offering Offering (1)
Amount and Number of Amount and
Name and Address of Nature of Percentage Shares Offered Nature of Percentage of
Beneficial Owner Ownership of Class Hereby Ownership Class
<S> <C> <C> <C> <C> <C>
Selling Shareholders(2)(3):
Alvin R. Bonnette, Trustee 16,667 * 16,667 0 *
Arthur D. Sterling and Marie
Sterling 8,333 * 8,333 0 *
Christopher Schreiber(4) 6,145 * 6,145 0 *
Carl M. Birkelbach(7) 2,100 * 2,100 0 *
David H. Padden 1983 Trust 6,667 * 6,667 0 *
David Random 8,333 * 8,333 0 *
Donald Gross 3,333 * 3,333 0 *
Donald T. McKiernan(7) 3,200 * 3,200 0 *
Douglas E. Hailey(5) 14,965 * 14,965 0 *
EmJayco 10,000 * 10,000 0 *
Gary Arnold 50,000 1.1% 50,000 0 *
George N. Gaynor 6,667 * 6,667 0 *
Gustave Levinson and Lydia F
Levinson 8,333 * 8,333 0 *
JDN Partners, L.P. 66,667 1.4% 66,667 0 *
John Clifford 33,333 * 33,333 0 *
John D. Holley 50,000 1.1% 75,000 0 *
John L. Palazzola and Maria
Palazzola 8,333 * 8,333 0 *
John R. Bertsch 6,667 * 6,667 0 *
John R. Graham, Trustee of
the John R. Graham Trust
dated 1/3/92 3,333 * 3,333 0 *
Joseph G. D'Amadeo(7) 6,515 * 6,515 0 *
Laura A. Conroy(7) 2,400 * 2,400 0 *
Lawrence S. Smith 3,333 * 3,333 0 *
Lewco Securities as Nominee
for Schroder & Co. Custodian
f/b/o Ron Magruder and
Elizabeth Magruder 33,333 * 33,333 0 *
Lone Star Holdings Partners,
L.P 66,667 1.4% 66,667 0 *
Michael E. Recca(7) 7,754 * 7,754 0 *
Michael Taglich(6) 14,850 * 14,850 0 *
Morton Topfer 83,333 1.6% 83,333 0 *
Rafael Caballero 16,667 * 16,667 0 *
Richard C. Oh(7) 1,000 * 1,000 0 *
Robert C. Schroeder(7) 1,600 * 1,600 0 *
Robert F. Taglich(6) 8,333 * 8,333 0 *
Robert L DeBruyn and Tracey
H. DeBruyn 3,333 * 3,333 0 *
Sanford R. Penn Jr 16,667 * 16,667 0 *
Shadow Capital LLC 16,667 * 16,667 0 *
Thomas J. Waggoner and Patsy
Ann Waggoner 3,333 * 3,333 0 *
Thomas P. Morrisey 10,000 * 10,000 0 *
U.S. Bank, National
Association, as Trustee for
the Dorsey & Whitney Master
Trust FBO Stanley Rein 6,667 * 6,667 0 *
Vincent M. Palmieri(7) 1,000 * 1,000 0 *
William C. Smith Jr 3,333 * 3,333 0 *
William J. Easton Jr 3,333 * 3,333 0 *
William Kuntz 10,000 * 10,000 0 *
William Wieck & Elizabeth
Wieck 5,000 * 5,000 0 *
Wulf Paulick and Renate
Paulick 5,000 * 5,000 0 *
- -------------
* represents less than 1%.
(1) Assumes the sale of all of the Shares offered by each Selling Shareholder.
13
<PAGE>
(2) Percentage ownership for Selling Shareholders is based on 4,755,700
(4,105,986 outstanding as of October 22, 1998, plus 54,714 exercisable
through the Warrants and 595,000 exercisable through conversion of the
Series B Preferred Stock at $3.00) shares of the Common Stock outstanding.
(3) The number of shares beneficially owned with respect to Selling
Shareholders holding the Series B Preferred Stock is based on conversion at
the current conversion price of $3.00.
(4) Includes (i) 1,667 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 4,478 issuable upon exercise of
certain of the Warrants.
(5) Includes (i) 3,333 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 11,632 issuable upon exercise
of certain of the Warrants.
(6) Includes (i) 8,333 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 6,517 issuable upon exercise of
certain of the Warrants.
(7) Represents shares issuable upon exercise of certain of the Warrants.
</TABLE>
14
<PAGE>
DIVIDEND POLICY
We have no present intention of paying any dividends on the Common
Stock. We expect that, except for the dividends required to be paid or payable
to the holders of the Series A or Series B Preferred Stock, we will retain our
earnings, if any, to finance operations.
The declaration and payment of future dividends to holders of the
Common Stock will be at the discretion of the Company's Board of Directors and
will depend upon many factors, including the Company's financial condition,
earnings, the capital requirements of its operating subsidiaries, legal
requirements and such other factors as the Board of Directors deems relevant.
MARKET FOR THE COMMON STOCK
There is currently no established public trading market for the Common
Stock. The Common Stock is traded on the OTC Bulletin Board. See "Risk
Factors--Absence of Market for Common Stock." As of October 15, 1998, we had 432
record holders of the Common Stock and 304 record holders of certain publicly
traded warrants to purchase Common Stock (the "Public Warrants"). See
"Description of Capital Stock".
PRICE RANGE OF COMMON STOCK
The Company's Common Stock was traded on the Nasdaq National Market
for fiscal years ended November 30, 1996 and 1997, and through November 6, 1998
for the fiscal year ended November 30, 1998. Currently, the Company's Common
Stock is traded on the OTC Bulletin Board.
The range of high and low bid closing quotations for the Common Stock
and the Public Warrants for each fiscal quarter for the two (2) completed fiscal
years and the most current fiscal year, are as follows:
Common Stock Public Warrants
1999 High Low High Low
First Quarter $ ______ $ ______ $ ______ $ ______
(through _______,
1999)
1998 High Low High Low
First Quarter $ 4-3/8 $ 2-1/16 $ 2 $ 1-1/8
Second Quarter $ 5-7/8 $ 3 $ 1-5/8 $ 1
Third Quarter $ 2-7/8 $ 5-3/8 $ 1-1/2 $ 1/2
Fourth Quarter $ 3-3/4 $ 1-7/8 $ 1-1/8 $ 3/8
1997 High Low High Low
First Quarter $ 7-3/4 $ 5-1/2 $ 3-3/16 $ 2-1/2
15
<PAGE>
Common Stock Public Warrants
Second Quarter $ 7-1/2 $ 6-1/2 $ 2-1/2 $ 3/4
Third Quarter $ 6-1/8 $ 4 $ 1-1/2 $ 1
Fourth Quarter $ 6-1/2 $ 4 $ 2 $ 1-1/2
16
<PAGE>
Selected Historical Consolidated Financial Data
The following table sets forth the selected historical financial data
of the Company for each of the preceding five years ended November 30, 1997 and
for the nine month periods ended August 31, 1997 and 1998. The selected
historical data for each of the preceding five years ended November 30, 1997 are
derived from the audited consolidated financial statements of the Company. The
selected historical data for each of the nine month periods ended August 31,
1997 and 1998 are derived from the unaudited interim consolidated financial
statements of the Company. In the opinion of management, the interim
consolidated financial statements reflect all adjustments (consisting only of
normal and recurring adjustments necessary to fairly present the information
presented for such periods.) The selected historical financial data presented
herein are qualified in their entirety by, and should be read in conjunction
with, the Company's Consolidated Financial Statements and Notes thereto included
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
Summary Historical Consolidated Financial and Operating Data
<CAPTION>
Year Ended November 30, Nine Months Ended
August 31,
(Dollars in Thousands) (Dollars in Thousands)
------------------------------------------------------------ ----------------------
1993 1994 1995(4) 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748
Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573
Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455
-------- -------- -------- -------- -------- -------- --------
Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776
Cost of third party software
license fees 405 797 1,149 2,484 3,065 1,906 1,886
Software development
amortization 342 515 879 1,591 2,535 2,077 2,277
Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175
Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112
-------- -------- -------- -------- -------- -------- --------
Total cost of products/
services 9,397 9,925 15,300 21,163 22,860 16,641 15,450
Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326
-------- -------- -------- -------- -------- -------- --------
Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043
General and administrative
expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837
Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118
Restructuring and other charges 0 0 0 0 0 0 6,836
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284
Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508)
Other income (expense) (32) 342 80 (118) (337) (176) (481)
Income (loss) before income
taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989)
Income tax expense (benefits) 650 975 79 112 (618) (883) (33)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45)
Weighted average common and
common equivalent share
outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038
======== ======== ======== ======== ======== ======== ========
Other Data:
Software investment as a
percentage of software
license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2%
Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918
1
Balance Sheet Data:
Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575)
Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683
Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848
Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541
- ---------------
(1) Does not include capitalized software development costs of $691,
$1,105, $2,321, $3,372, and $4,471 recorded for the years ended
November 1993, 1994, 1995, 1996 and 1997, respectively, and $3,207 and
$2,800 for the nine months ended August 31, 1997 and 1998,
respectively.
(2) Weighted average common and common equivalent shares outstanding for
the periods shown include the effect of common stock equivalents, if
dilutive.
(3) Software investment consists of product development expense and
capitalized software development costs.
</TABLE>
17
<PAGE>
(4) Includes results of Effective Management Systems of Illinois, Inc. and
Intercim Corporation since being acquired effective March 31, 1995 and
September 6, 1995, respectively.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - At and for the Three and Nine Months Ended August 31, 1998
Compared to the Three AND Nine Months Ended August 31, 1997.
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 because the Company is
in a loss carry forward 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. Our long term success is also dependent on our ability
to attract and retain a highly qualified sales, development and service staff.
We have recently experienced attrition at rates higher than our historical
experience. We have 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 our 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 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%, 41.8%, and 9.1%, 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 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
19
<PAGE>
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
We offer a number of optional services to our 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 $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. We have
expanded our recruiting efforts and have 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. We wrote off a
substantial portion of our past investment in software development in
conjunction with our 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 $343,000 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.
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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. We have experienced
increased levels of service business from our 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. We also continue to take further steps to reduce the level of
customer warranty work by enhancing the quality of our 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
9.5%, 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 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 $24,000, and capitalized software decreased by $308,000. Product
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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 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)
Other income (expense) 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) 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 restructuring of our 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 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. 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, we, based on the level
of eligible accounts receivable, had $1,828,000 of availability under our then
$6,000,000 line of credit. As of September 30, 1998, we had $569,000 of
availability under our 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
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expenditures. On October 6, 1998, we amended our 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. We are continuing
our review of alternative sources of financing to deal with our 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 we are 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - AT AND FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995.
Overview
The Company recorded a loss of approximately $2.2 million in fiscal
1997 as compared with net income of $153,000 in fiscal 1996. The decline-in
results of operation was due in part to the delayed introduction of version 6.0
of the Company's TCM software product as well as increased service costs
associated with the implementation of new products and technologies. On November
26, 1997, the Company released version 6.0 of its TCM product which management
believes will positively impact the Company's position in the market. TCM
version 6.0 of the Company's product basically completed the application of a
Windows compliant interface, the lack of which had negatively impacted software
sales in the past. Also in fiscal 1997, the Company initiated a cost reduction
program (the "1997 Cost Reduction") with the goal of reducing costs by $2
million per annum. The Company also announced a restructuring of executive
management, which included the departure of two executives. The results of both
these cost reductions are expected to be fully realized as fiscal 1998
progresses.
The Company recorded a small increase in net income for fiscal 1996
compared with fiscal 1995. The increase was mainly the result of the
introduction of new products and technologies along with the expansion of new
market channels. During fiscal 1996, the Company became the first pre-integrated
supplier of manufacturing software to fully integrate customer service,
engineering, production control, dispatching, quality control and machine tool
communication.
Effective March 3 1,1995, the Company acquired the remaining 50%
interest (in addition to the 50% interest previously owned) in Effective
Management System of Illinois, Inc. ("EMS-ILL") for a cost of approximately
$793,000 in Company common stock, cash, and related direct acquisition costs.
The acquisition was accounted for as a purchase and resulted in the Company
recording $395,000 of goodwill, which is being amortized over a twenty-year
period.
On September 6, 1995, the Company acquired all of the common stock of
Intercim Corporation ("Intercim") for a cost of approximately $3,355,000 in
Company common stock, warrants and related direct acquisition costs. The
warrants have a ten-year term and an exercise price of 56.75. The acquisition
was accounted for as a purchase. Goodwill of $1,437,000 resulted from the
transaction, which is being amortized
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over a twelve-year period. The acquisitions of EMS-ILL and Intercim are herein
referred to as the "1995 Acquisitions."
Results of Operations
Total Revenue. Total revenue for fiscal 1997 increased 3.4% to
$42,645,000 from $41,257,000 in fiscal 1996 and grew 42.1% from $29,024,000 in
fiscal 1995 to fiscal 1996. The mix of software, services, and hardware revenues
was 51.0%, 39.4%, and 9.6%, respectively, in fiscal 1997 as compared to 46.3%,
37.4%, and 16.3%, respectively, in 1996, and 39.7%, 37.8%, and 22.5%,
respectively, in 1995. The growth in software and service revenues as a
percentage of total revenues during these years was the result of a strategic
decision by the Company to focus its marketing and selling efforts on generating
an increased percentage of its revenues from higher margin software and services
as opposed to lower margin hardware sales. International revenues represented
less than 10% of total revenues for all periods presented.
Software License Fee Revenues. Software license fee revenues are
customer charges for the right to use the Company's software products. These
revenues increased 13.9% to $21,752,000 in fiscal 1997 from $19,094,000 in
fiscal 1996. The main reason for this increase was the additional sales made to
new customers during fiscal 1997. Software license fee revenues increased to
$19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995
Acquisitions accounted for $4,622,000 of the fiscal 1996 increase in revenues.
Exclusive of the revenues from the 1995 Acquisitions, the increase in software
license fees during fiscal 1996 was mainly the result of new sales from a
marketing relationship with International Business Machines Corporation, the
hiring of additional sales personnel, and increased productivity of existing
sales personnel.
Service Revenues. The Company offers both mandatory and optional
services to its customers. Services provided include a telephone support
program, systems integration, custom software development, implementation
consulting, and formal classroom and on-site training. Service revenues
increased 8.9% to $16,781,000 in fiscal 1997 from $15,412,000 in fiscal 1996.
Service revenues increased 40.6% to $15,412,000 from $10,962,000 in fiscal 1995.
These increases were primarily due to growth in the customer base and normal
price increases. Of the increase in fiscal 1996, $4,496,000 was attributable to
the 1995 Acquisitions.
Hardware Revenues. As an option, the Company sells computer hardware
manufactured by others, along with the Company's software and services, to
provide its customers "integrated" solutions to their management information
system needs. Hardware revenues decreased 39.1% to $4,112,000 in fiscal 1997
from $6,751,000 in fiscal 1996. The decrease was mainly due to increased sales
of software on platforms for which the Company does not supply hardware. The
Company has decided to reduce its sales of commodity priced hardware products
and those which require specific expertise beyond the scope of the Company's
product focus. The Company has developed relationships with various system
integrators which sell the hardware and provide these value-added hardware
services. Hardware revenues increased 3.4% to $6,751,000 in fiscal 1996 from
$6,528,000 in fiscal 1995. This increase was primarily attributable to the 1995
Acquisitions.
Cost of Third-Parry Software License Fees. Most of the Company's
system sales also include the sale of a report writer, a word processor, and/or
other software components provided by outside suppliers. The integration of
these products into the Company's software products generally requires that the
Company pay royalties to these suppliers. Cost of third-party software license
fees increased to $3,065,000 in fiscal 1997 from $2,484,000 in fiscal 1996, and
from $1,419,000 in fiscal 1995. Since these third-party software products are
generally sold in conjunction with the Company's software license, the increase
was primarily attributable to a rise in the level of the Company's software
license fees. In fiscal 1996, the 1995 Acquisitions added $470,000 to the cost
of third-party software license fees.
Software Development Amortization. Software development amortization
represents the amortization of past investments made by the Company in product
development. Software development amortization increased from $879,000 in fiscal
1995 to $1,591,000 in fiscal 1996, and to $2,535,000 in fiscal 1997. In 1994,
the Company made a decision to significantly advance software products and
technologies. This strategic decision resulted in a substantial increase in the
Company's investment in software product development.
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During the three-year period ended November 30, 1997 and prior to the final
completion of the software products, growth in software development amortization
exceeded the growth of software license fees.
Cost of Services. Cost of services as a percentage of related revenues
increased to 83.4% in 1997 from 78.6% in 1996. The main reasons for the
increases include allocation of resources to assist in developing new product,
educational costs related to new products and technologies, training costs
associated with new personnel, increased costs related to warranty work, and the
costs of establishing a sales and service presence in China ($245,000). The 1997
Cost Reduction reduced fiscal 1997 cost of services by $264,000 through a work
force reduction and a decrease of indirect activities. Cost of services as a
percentage of related revenues increased to 78.6% in fiscal 1996 from 71.9% in
fiscal 1995. The increase was attributable to a rising cost of labor; additional
management expense relating to expanding the service organization; additional
expenses to further develop a worldwide learning initiative related to new
selling relationships (3.5% of related revenues in fiscal 1996); and the
training expense related to newly-hired employees.
Cost of Hardware. Cost of hardware as a percentage of related revenues
increased to 79.3% in fiscal 1997 compared to 73.8% in fiscal 1996. Cost of
hardware as a percentage of hardware revenues decreased to 73.8% in 1996 from
78.4% in fiscal 1995. Cost of hardware as a percentage of related revenues
varies with the amount of price discounting, the proportion of high margin
hardware sales where the Company brings technical expertise to the process, and
the proportion of customers who purchase low margin hardware from the Company.
Cost of hardware as a percentage of related revenues can rise or fall depending
on the mix of these factors. Additionally, the cost of hardware as a percentage
of hardware revenues can vary due to the proportion of lower-margin sales (cost
plus 11 %) made to the Company's joint ventures and affiliates, which were
$534,000, $1,264,000, and $1,091,000 in fiscal 1997, 1996, and 1995,
respectively. Commencing January 1, 1996, the Company began charging 11% over
cost on hardware sales (previously sold at cost) to EMS Solutions, In:., an
affiliated entity owned by certain officers of the Company, to match similar
terms offered to the Company's joint ventures. In June, 1997, EMS Solutions,
Inc. ceased the purchase of hardware from the Company and began sourcing the
hardware through non-affiliated outside vendors. Sales of hardware to EMS
Solutions, Inc. were $331,000 in fiscal 1997, $851,000 in fiscal 1996 and
$926,000 in fiscal 1995.
Net Product Development Expenses. Product development expenses, net of
amounts capitalized, increased from $1,086,000 in fiscal 1995 to $2,235,000 in
fiscal 1996 and to $2,391,000 in fiscal 1997. These increases were mainly the
result of the Company's strategic initiative to increase investment in the
development of future products, including the incorporation of various new
technologies into the Company's software products. The 1997 Cost Reduction
lowered new product development expense by $876,000 through reduction of the use
of third-party consultants and a work force reduction. Management does not
expect the reductions to impair the Company's research and development since
such cost reductions represent a reduction in a temporary ramp-up to speed
delivery of version 6.0 of the Company's software and a reduction in the number
of consultants retained in respect to a customer project which was subsequently
discontinued by the customer. In fiscal 1996, tie 1995 Acquisitions Added
$659,000 to product expense, excluding $1,329,000 which was capitalized in
accordance with Statement of Financial Standards (SFAS) No. 86. Management
expects product development expense to stabilize in 1998 as effort relating to
the incorporation of certain new technologies concludes. Total development
expense (defined as net development expense plus amounts capitalized) increased
to $6,862,000 in fiscal 1997 from $5,607,000 in fiscal 1996 and from $3,407,000
in fiscal 1995. These expenses expressed as a percent of related software
revenues were 31.5%, 29.4% and 29.5% in fiscal 1997, 1996 and 1995,
respectively.
Selling and Marketing Expenses. Selling and marketing expenses
increased to $15,957,000 in fiscal 1997 from $14,060,000 in fiscal 1996 and
$9,479,000 in fiscal 1995. As a percent of gross margin (total net revenues
minus total costs of products and services), selling and marketing expense
increased from 70.0% to 80.7% between fiscal 1996 and fiscal 1997, and from
69.1% to 70.0% between fiscal 1995 and fiscal 1996, respectively. The increase
in selling and marketing expense as a percent of gross margin between fiscal
1997 and fiscal 1996 was due to: 1) lower margin due to higher costs of software
license fees (see above) and higher costs of services (see above); 2) increased
expenses from developing international markets ($134,000) and lower productivity
of new personnel; and 3) concern of prospective customers regarding the
Company's negative operational results for fiscal 1997. The 1997 Cost Reduction
lowered selling and marketing expense by $730,000 in fiscal 1997, mainly through
a decrease in international market expansion, a focusing of market
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communications, and work force reduction. The 1995 Acquisitions accounted for
$1,756,000 of the increase in the selling and marketing expenses in fiscal 1996.
General and Administrative Expenses. For fiscal 1997, general and
administrative expense increased to $3,838,000 from $3,416,000 in fiscal 1996
and from $3,029,000 in fiscal 1995. As a percent of gross margin (total net
revenues minus total costs of products and services), these expenses were 22.1%,
17.0% and 19.4% in fiscal 1995, 1996 and 1997, respectively. The increase in
general and administrative expense as a percent of gross margin from fiscal 1996
to fiscal 1997 was mainly due to an increase in the provision for bad debts
(2.5%). The 1997 Cost Reduction lowered general and administrative expense by
$303,000 in fiscal 1997 mainly through a work force reduction. The 1995
Acquisitions increased general and administrative expense by $1,009,000 in
fiscal 1996. Other primary reasons for the increase in fiscal 1996 compared to
fiscal 1995 include additional depreciation from rising levels of capital
purchases ($161,000); added support personnel for system and facilities needs
($71,000); and additional administrative costs attributable to the growth in
hardware and service revenues.
Other Income/Expense. Other income/expense provided $377,000 of
expense for fiscal 1997 compared with $118,000 of expense for fiscal 1996 and
$80,000 of income for fiscal 1995. Equity losses from affiliates were $25,000 in
fiscal 1997 compared with $25,000 of income for fiscal 1996 and $31,000 of
losses in fiscal 1995. The equity earnings for fiscal 1995 declined, in part,
due to the merger with EMS-ILL, which resulted in reduced equity earnings from
this former joint venture. Interest expense and interest income were $399,000
and $47,000, respectively, in fiscal 1997; $145,000 and $89,000, respectively,
in fiscal 1996; and $52,000 and $176,000, respectively, in fiscal 1995. The
decrease in interest income and the simultaneous rise in interest expense were
mainly due to the Company's reduction in cash and short-term assets to fund
investments in products, distribution channels, and service infrastructure. The
Company anticipates that interest expense will continue to rise in the
short-term with continued application of cash for operating and capital
expenditure purposes.
Income Tax Expense. The effective income tax benefit rate was 22.2%
for fiscal 1997 versus an effective income tax rate of 42.3% for fiscal 1996 and
37.6% for fiscal 1995. In fiscal 1997, the Company recorded a valuation
allowance equal to 100% of the net deferred tax assets based on uncertainty
regarding realization of such assets and thereby reduced the amount of tax
benefit recorded by $329,000. In fiscal 1996, the effective income tax rate was
higher than in fiscal 1995 due to reduced tax-exempt interest income and
non-deductible meals and entertainment expenses.
Liquidity and Capital Resources
Cash provided by operations was $1,733,000 in fiscal 1997, $2,906,000
in fiscal 1996 and $1,915,000 in fiscal 1995. Non-cash expenditures, including
both depreciation relating to capital expenditures and amortization associated
with software product development, contributed to the cash provided.
Investment activities used cash of $5,363,000 in fiscal 1997 compared
to $4,163,000 of cash in fiscal 1996 and $1,850,000 of cash in fiscal 1995. The
cash was used to fund capital expenditures of $1,177,000, $1,424,000, and
$1,430,000 in fiscal 1997, 1996, and 1995, respectively, and to fund investment
in capitalized software product development of $4,471,000, $3,372,000 and
$2,321,000 in fiscal 1997, 1996, and 1995, respectively. The Company sold
$505,000 of available-for-sale securities in fiscal 1997, $1,247,000 of
available-for-sale securities in fiscal 1996, and $1,584,000 of
available-for-sale securities and $743,000 hold-to-maturity securities in fiscal
1995, which funded, in part, the capital expenditures and capitalized product
development. For fiscal 1998, the Company estimates that capital expenditures
will approximate $1,000,000 and capitalized software product development will
approximate $4,000,000.
Financing activities provided $2,778,000 of cash in fiscal 1997,
$1,788,000 of cash in fiscal 1996, and used $10,000 of cash in fiscal 1995. As
of November 30, 1997, the Company had $2,538,000 of availability under its then
existing $6,300,000 revolving line of credit based on the level of the Company's
eligible accounts receivable. On December 31, 1997, the Company entered into a
new borrowing agreement with Foothill Capital Corporation to replace its prior
facility. The new facility includes a $6,000,000 revolving line of
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credit and a three-year term note for $3,112,500. Interest on the revolver is
payable monthly based on the bank's base rate plus .75% (9.25% on December 31,
1997); the term note bears interest at 13.5% per year. The new agreement does
contain certain restrictive covenants relating to income (EBITDA) ,tangible net
worth and level of capital expenditures. In order to meet these covenants, the
Company will need positive operational results in fiscal 1998. As of December
31, 1997, the Company had $3,751,000 of availability under the new revolving
line of credit.
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 there will be 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.
American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition" (SOP 97-2), was issued in October
1997. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. Therefore, SOP 97-2 will effect transactions
entered into by the Company beginning December 1, 1998. SOP 97-2 addresses
various aspects of the recognition of revenue on software transactions and
supersedes SOP 91-1, the policy currently followed by the Company. SOP 97-2
provides guidance on software arrangements consisting of multiple elements,
evidence of fair value, delivery of elements, accounting for service elements,
and software arrangements requiring significant Production, modification, or
customization of software.
BUSINESS
Overview
We develop, market and support integrated manufacturing and business
management software. Our Time Critical Manufacturing/TM/ ("TCMJ/TM/") software
is designed with the underlying philosophy that time is a crucial element in
manufacturing, and that reducing time in the manufacturing process leads
directly to increased profits for the manufacturer. TCMJ/TM/ software integrates
technologies such as electronic data interchange ("EDI"), imaging, bar-coding,
factory automation, engineering system integration, distributed numerical
control ("DNC"), statistical process control ("SPC"), and fourth generation
language ("4GL") tools with our proprietary algorithms for scheduling and
production, to optimize the customer's labor, capital and inventory utilization.
The software we offer functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix,
and HP-UX operating systems. We also provide services support for its software
products and, on a selective basis, sells computer hardware.
Software products offered by the Company include: TCM/R/, which is a
pre-integrated enterprise resource planning, accounting and manufacturing
execution system; and FACTORYnet/R/ I/S, which is an integrated Manufacturing
Execution System, providing production management, shop floor scheduling, and
operations support. These software products are usually integrated with a bar
code data collection system or direct machine controls, and provide
up-to-the-minute information to track production and business operations. This
facilitates real-time decision making and enables employees throughout an
organization to respond quickly to marketplace demands and unanticipated events.
We typically focus our sales and marketing efforts on discrete
manufacturing plants. We have licensed our software products to over 1,500
customer sites. We distribute our products in the United States through eight
branch offices and through six joint ventures and independent distributors. We
have also established distribution channels through independent distributors in
Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, the
Company has joint ventures in China to support these distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary. In 1996, we acquired the remaining interest in Darwin Data Systems
Corporation another joint
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venture subsidiary. For further details regarding these acquisitions, see Note 2
of Notes to the Company's Consolidated Financial Statements.
Industry Background
In the early 1970's, the Material Requirements Planning ("MRP")
approach was developed to enable manufacturing companies, with the aid of
computers, to plan and manage their businesses more efficiently by managing the
flow of materials at various stages of the manufacturing process. In the 1980's,
this management approach evolved into Manufacturing Resource Planning ("MRP
II"), which considers labor and equipment planning for the manufacturing process
as part of an iterative materials planning approach. Concurrently with the
evolution of MRP II, manufacturing companies (predominantly in Japan) developed
a management technique which emphasizes the supply of component parts to
"assembly-oriented" manufacturing plants on a "just-in-time" basis. This
technique not only was the first to emphasize "time" in its orientation, but
also had other desirable outcomes for manufacturers, including improved quality,
lower costs and lower inventory levels.
In the 1990's, new management approaches for manufacturing companies
have emerged which focus on "time" as the critical element in the manufacturing
process. In these management approaches, the manufacturer analyzes the component
of time across its entire organization with the goal of correlating the
expenditure of time to the addition of value to the finished product or service.
Beyond the production focus of the "just-in-time" environment, this new approach
focuses on time in all areas of the operation from engineering to manufacturing
and from customer order processing to shipment. This new approach differs from
MRP II in that it often focuses on improving business operations by treating
plant capacity and labor resources as the primary scheduling items and treating
material availability as a secondary consideration in manufacturing planning.
The new approach emphasizes "operations decision-making" support in contrast to
the planning emphasis of MRP II and more recently developed planning systems
such as Enterprise Resource Planning ("ERP"). In addition, a category of
information systems has been identified as Manufacturing Execution Systems which
compliments ERP systems by making available real-time information from the
factory floor and enhancing production performance and decision-making
associated with plant operations. We believe that these Manufacturing Execution
Systems represent a relatively new marketplace with substantial benefit
potential for manufacturers. We believe that this "time emphasis" in
manufacturing management, which is the focus of our TCM/R/ and FACTORYnet/R/ I/S
products, will be an essential component of the management approach for many
manufacturers in the future.
Strategy
Our objective is to grow as a leading provider of integrated business
software systems for discrete manufacturing plants within its target market. We
have identified three strategic initiatives to achieve this goal.
Focus on Time Critical Manufacturing. We believe that manufacturers
are striving to become more "time competitive," and that manufacturing software
which focuses solely on providing information for planning and on recording
information for historical analysis will be inadequate to meet the needs and
demands of manufacturers in the years to come. To be effective in the future, we
believe that manufacturing software will be required to empower individuals at
all levels of an organization to make immediate decisions regarding production
processes and business activities. Since 1988, we have focused our resources on
developing software to assist time-oriented manufacturing management. Our
software facilitates real-time decision-making by enabling employees to change
processes proactively and react quickly to marketplace demands and unanticipated
events. With few exceptions, we believe that the limited number of information
system implementations currently in place which have this "time" focus have been
developed on an individual customized basis. We are not aware of other major
products available in its target market for discrete manufacturers which offers
both planning and execution systems and has a strategy of focusing on time.
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Commitment to Manufacturing Execution Systems. We believe that
discrete manufacturers can gain significant competitive advantage by
implementing Manufacturing Execution Systems. These systems bring together the
data and information from ERP Systems, Industrial Control Systems, and
Engineering Systems as illustrated below.
We offered our first Manufacturing Execution System package in 1988 and believe
that it is currently a leader in this software segment. Typical business
functions included in a Manufacturing Execution System are described below (see
- - "Time Critical Manufacturing - Software Products"). Although the people in an
organization which use this software on a minute-to-minute and hour-to-hour
basis are the factory operations personnel, we believe that the value
manufacturers realize from implementing a Manufacturing Execution System extends
far beyond this realm. We believe, based on the experience of our customers,
that the major benefit of implementing a Manufacturing Execution System within
an organization is improved customer service and competitiveness. These systems
allow an organization to reduce non-value added elapsed time in the overall
business process. We currently offer two Manufacturing Execution System
products, one which is pre-integrated with a total software offering for the
entire enterprise (TCM/R/) and the second is FACTORYnet/R/ I/S in which our
personnel use Manufacturing Execution System software to "round out" and
complete partial manufacturing execution system initiatives already undertaken
by the customer.
Management believes Manufacturing Execution Systems provide a
significant market opportunity for us and, correspondingly, has strategically
committed the Company to enhancing its Manufacturing Execution System offerings
and marketplace presence.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our
experience in the marketplace resulted in the 1995 introduction of the first
"pre-integrated" ERP/Manufacturing Execution System/Controls software offering
for discrete manufacturers. This pre-integration initiative was facilitated by
the acquisition of Intercim Corporation. In the first era of "custom" software,
only large corporations could afford the risk and capital outlays necessary to
develop such software. Results from these software investments were mixed and
implementation times generally spanned from five years to infinity.
During the 1980's the industry entered its second era of "custom
systems integrated" software. During this era, which actually spans from the
mid-1980's until the present time, systems integration organizations worked with
manufacturing companies to procure software components (for example, ERP,
Statistical Process Control, Plant Maintenance, etc.) and integrated them on a
custom basis for a given facility or corporation. The advent of this era
dramatically reduced risk and capital capacity and for the first time made such
products affordable for mid-sized corporations. Implementation time frames were
reduced to three to five years. This approach represents the state-of-the-art
for many manufacturers today.
We introduced the "pre-integrated" era in 1995 when we offered the
first pre-integrated software package for discrete manufacturers. Software
pre-integration means that a customer can buy a comprehensive set of software
from us which has already been integrated and proven to function. The various
software components may be built by us or suppliers to us. In the case where
there are suppliers to us, we have generally established alliances so that it
can have design influence over the software. The pre-integration package also
contemplates that other software, for example, Computer Aided Design systems,
may already be in place at the customer site. "Off-the-shelf interfaces" for
popular Computer Aided Design systems which also are proven in advance are
available to facilitate interaction with these software products. Pre-integrated
software reduces risk and cost for the manufacturing company and also allows
manufacturers of varying sizes to take advantage of the features offered by the
software. Implementation time frames for pre-integrated software are between
nine and eighteen months. We plan to continue to focus on the pre-integrated
software marketplace. During 1996, Version 5.3 of TCM/R/ became the first
industry product to span the business functions from ERP through Manufacturing
Execution Systems to Statistical Process Control (SPC) and Direct Numerical
Control (DNC). This was followed in 1997 by Version 6.0 of TCM/R/, which brought
this functionality into a Graphical User Interface (GUI) product, which improved
the software's ease of use.
We believe that "pre-integration" of much of this software reduces the
time and cost of system implementations and increases the business value to the
manufacturer similar to the way that "suites" of desktop
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software have affected that marketplace as compared to custom integration of
word processing, data base, and spreadsheet desktop products.
Software Products
We develop, market and support TCM/TM/ application software for
discrete manufacturing companies. We currently offer licenses for two software
products: (a) TCM/R/, which is a full function business and ERP software system,
including a pre-integrated Manufacturing Execution System providing production
management, shop floor scheduling and operations support; and b) FACTORYnet/R/
I/S, which is a Manufacturing Execution System that provides production
personnel with correct revisions of drawings, specifications, procedures, and
instructions to help them make a better product and make it right the first
time. Our software products are intended to provide a set of "tactical tools"
which will enable the customer to achieve its strategic goals by correlating the
expenditure of time to the addition of value to the finished product or service.
Our products are designed for discrete manufacturers, including both
stand-alone manufacturing plants and autonomous divisions of large corporations.
"Discrete" manufacturers assemble or fabricate parts into finished products as
distinguished from "process" manufacturers which mix, separate and otherwise
combine or control ingredients to create finished products. Our focus on
discrete manufacturers includes the market segments of repetitive and
electronics manufacturers which some people identify as additional market
segments.
Time Critical Manufacturing -- Software Products
Our software provides assistance for a broad range of tasks identified
in the six categories set forth below. The TCM/R/ product can include software
from all of these six categories. TCM/R/ and FACTORYnet/R/ I/S provide different
capabilities within the Manufacturing Execution System and Decision Support
Tools categories described below. We anticipate that over time the two
Manufacturing Execution System product offerings will evolve into a single
product which is more comprehensive than either of the current Manufacturing
Execution System offerings.
<TABLE>
<CAPTION>
Time Critical Manufacturing Software Suites
<S> <C> <C>
I. PLANNING
Master Production Scheduling Manufacturing Resource Planning II Capacity Planning
II. PRODUCT DATA MANAGEMENT
Product Configurator Engineering Change Control Standard Bills of Material
Standard Routings Computer Aided Manufacturing ("CAM") Document Library
Item Master Computer Aided Design ("CAD") Standard Cost Build Up
Interface
III. SUPPLY CHAIN MANAGEMENT
Customer Service Inventory Control Procurement
---------------- ----------------- -----------
Estimate/Quote Inventory Management Requisitions
Customer Maintenance Distribution Management Vendor Maintenance
Customer Order Processing Purchase Orders
Shipping Vendor Performance
Liability & Warranty Electronic Data Interchange
Electronic Data Interchange
IV. MANUFACTURING EXECUTION SYSTEM
Shop Floor management Job Cost
Bar Code Factory Data Collection Time & Attendance
Plant & Equipment Maintenance Shop Floor Scheduling
"As Built History" Quality Management*
Electronic Traveler Machine Interface
Message & Alarms EMS Gateway
Electronic Work Instructions
Distributed Numerical Control
V. FINANCE, ACCOUNTING AND
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ADMINISTRATION General Ledger Fixed Assets*
Accounts Receivable Human Resources*
Accounts Payable Payroll*
Standard Cost
VI. DECISION SUPPORT TOOLS
Executive Information System Document Library
Report Writer E-Mail
Database Internet
Notification Services ODBC Access
</TABLE>
*These Products Are Provided Based On Third Party Sublicensing Alliances.
I. Planning.
The planning modules provide master production scheduling capability
integrated with rough cut capacity planning to assist production organizations
in planning materials requirements and manufacturing resource levels for the
manufacturing facility.
II. Product Data Management ("PDM").
PDM modules allow for product definition and control of engineering
changes and relationships among component parts. These modules include software
which interface with industry popular CAD systems and offer CAM software.
III. Supply Chain Management.
Customer Service. Modules provide control over the customer order
cycle, including quotations, order entry, acknowledgment printing, pick ticket
printing, shipping and invoicing. These modules allow for flexible pricing
tables and multiple order types, including telephone orders, blanket orders and
releases, over-the-counter orders and credit memos. We believe that our software
for EDI, which facilitates electronic order entry and advance shipping
notification, is particularly useful in meeting the needs of the automotive and
retail supply industries.
Inventory Management. The Inventory Management modules provide
engineering data control and offer inventory record keeping, availability
projections and replenishment planning. These modules provide bin, lot and
serial number control, multi-location support, cycle counting and physical
inventory control.
Procurement. The Procurement modules provide control of the purchasing
cycle, including authorized vendor price quotations, purchase order entry and
printing, receipts entry and vendor performance analysis. These modules
coordinate blanket orders and releases, one-time purchase orders, orders for
non-productive materials and electronic mail notification upon receipt.
IV. Manufacturing Execution System.
The TCM/R/ and FACTORYnet/R/ I/S software products offer integrated
Manufacturing Execution Systems which (i) provide production management, shop
floor scheduling, distribution of "electronic drawings" as well as textual
information on factory floor computer workstations, (ii) collect information
from bar coding systems and (iii) facilitate the establishment of direct
connections for virtually any NC/CNC machine tool and/or CAD systems. The
products also include quality systems integration for SPC analysis. These
Manufacturing Execution Systems may operate as stand-alone systems or be
integrated into existing customer systems, and are pre-integrated with the
remainder of the our software.
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V. Finance, Accounting and Administration.
These modules provide general accounting and financial assistance in
tracking and estimating planned and actual work-in-process costs. Any
information from the finance and accounting database may be readily pulled into
personal computer spreadsheet systems for further analysis and reporting. These
modules also interface with third party human resource, fixed assets, and
payroll software products sold by us.
VI. Decision Support Tools.
These software modules are a combination of internally developed and
third party software sold by us which facilitate easy data management, analysis,
customization, communication, etc., with and between the our software and other
software in the customer's computing environment.
Our software modules may be licensed individually or in combination to
allow companies with differing business needs and schedules to have flexibility
in the implementation of the software system. Customers generally license
between $30,000 and $1,000,000 of software per plant, with the total license
fees per plant based on the modules licensed and a per seat license fee.
Software Technology
We invest in a wide range of software technologies which are important
not only for the our end user customer but also for our internal software
development and distribution. In appropriate circumstances, we have licensed
software developed by others and integrated various features of that software
into its own software products. For example, our software products incorporate
imaging technology, which enables the user to store and interactively display
images such as photographs of steps in a particular production process, diagrams
of manufacturing sub-assemblies or motion video depicting the proper operation
of a machine. This imaging capability facilitates manufacturing and production
set-up and also assists users in satisfying ISO 9000 certification criteria (a
set of international quality standards). Our products also include EDI, which
facilitates electronic order entry and advance shipping notification.
For internal software development, we employ 4GL sets of development
tools which we believe are instrumental in achieving software productivity
improvements and allow end users flexibility to customize their software
systems. We have also developed proprietary software which facilitates the
conversion of our software products into various foreign languages, including
complex Asian languages. We believe that this technology is useful not only in
penetrating foreign software markets, but also in assisting customers which use
our software products on a multi-national basis.
For a further discussion of our ongoing efforts to develop new
software technologies, see "Product Development."
Customer Services
We offer comprehensive services for customers. Services provided by us
include a telephone support program, system integration, custom software
development, implementation consulting, and formal classroom and on-site
training. At the customer's option, these services, which are available for both
of our software products, can be provided entirely by us or may be supplied in
part by the customer or another third party such as a systems integrator or
consulting firm. These services, which provide a recurring stream of revenue for
us, are offered on an unbundled basis for either an annual or a multi-year
subscription period. All of the services offered by us are optional, except that
we require first-time licensees of our software to subscribe for at least two
years of telephone support. We believe that the availability of effective
customer services is critical for customer satisfaction and to increase software
license fee revenues. We further believe that services can provide a continuing
and more predictable source of revenue as compared to software license fee
revenues. For the years ended November 30, 1995, 1996, 1997 and the nine months
ended August 31, 1998, services revenues accounted for 37.8%, 37.4%, 39.4% and
45.9% of our total net revenues, respectively.
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The following is a brief description of the various services we provide:
Telephone Support Program. Our telephone support program is a
comprehensive, fee-based program designed to help customers obtain the maximum
benefit from our business management software. The telephone support program is
handled out of our Minnesota, Illinois, and Wisconsin offices and is staffed by
thirty trained professionals. The program includes, among other services,
answering technical questions regarding standard software, and diagnosing and
resolving equipment and software problems.
System Integration and Custom Software Development. We offer system
integration and custom software development services, on a fee basis, to meet
specific customer requirements and to integrate our software with a customer's
existing computer system. We have developed a Time Critical Implementation
Methodology ("TCIM"), which is a proprietary implementation methodology intended
to facilitate integration and efficient implementation of our products at
customer sites. This approach is designed to allow the customer to obtain
business benefits sooner than with less structured methodologies. Ongoing
technical support is also available from us to all customers who elect to
purchase custom software development services.
Implementation Consulting. We provide consulting services, on a fee
basis, to assist customers in implementing our software systems using the TCIM
approach. These services include value-added implementation planning, project
management and specialized customer training. We employ a full-time professional
services staff to provide these and other services.
Training. We offer customers a series of both classroom and on-site
training options. Training includes classroom and personal instruction at a
number of our locations or at the customer's plant site. Standardized training
is offered for a fixed fee per class.
Hardware Products
We sell computer hardware and data collection equipment in order to
facilitate sales of our software products to customers requiring a complete
management information system. We sell, among other hardware, factory data
collection equipment, CAMates/R/ (a small specialized computer allowing users to
monitor and collect data from production machines), bar coding systems,
networking and communication equipment, and occasionally server and client
computer hardware. The factory data collection and bar coding hardware is
purchased from the original manufacturers and resold on a project basis. This
equipment ranges from fixed mount bar code scanners and printers to portable
units and radio frequency network units. We also offer our customers networking
and communication hardware and server and client computing hardware which we
purchase from original manufacturers, including Intermec Corporation, plus two
distributors, Keylink SystemsSM and Ingram Micro, Inc. During the past several
years, we have focused our efforts on generating an increasing percentage of our
net revenues from software license fees, which have a higher margin than
hardware revenues.
Markets and Customers
We target companies operating discrete manufacturing plants in the
United States, Canada, the Pacific Rim, and Europe. These plants may be owned by
privately held companies or by large, multi-national public corporations. Our
customers include, among others, capital equipment manufacturers, job shops,
high volume manufacturers, automotive suppliers, consumer product manufacturers,
and aerospace equipment manufacturers. During each of the past three fiscal
years, no one customer has accounted for more than 10% of our total net
revenues.
Sales and Marketing
In the United States and Canada, we license our products and offer
services through a direct branch office sales force, joint ventures and
independent distributors as reflected in the table below:
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Branch Office Locations Independent Distributor Joint Venture
Territories Location
Austin, TX Camarillo, CA Cleveland, OH
Baltimore, MA Miller Place, NY
Boston, MA Menomonee, MI
Chicago, IL Pittsburgh, PA
Cincinnati, OH Wausau, WI
Detroit, MI West Des Moines, IA
Green Bay, WI
Houston, TX
Indianapolis, IN
Los Angeles, CA
Milwaukee, WI
Minneapolis, MN
Norwalk, CN
Philadelphia, PA
Port St. Lucie, FL
Rockford, IL
San Jose, CA
We own 50% of the joint venture operating in Cleveland. We obtained
our interest in this joint venture primarily in exchange for technical knowledge
and management expertise. We have no obligation to fund any losses that may be
incurred by the joint venture.
Our direct sales personnel are compensated on a salary plus commission
basis. Our joint venture and independent distributor agreements generally
provide that sales will be made by authorized resellers from offices within a
designated territory. The agreements obligate us to license the reseller at
specified prices and to provide training to each reseller. Resellers are
normally obligated to sell a specified minimum amount of our software to keep
the agreements in effect. We also maintain a staff of systems consultants who
offer pre- and post-sales support to the sales and distribution network.
We market our products through advertising campaigns in national trade
periodicals and through direct mailings. These efforts are supplemented by
listings in relevant directories and trade show and conference appearances. We
are also given leads regarding potential customers by its hardware and services
vendors, existing customers and various accounting and consulting firms.
Sales cycles for our products vary substantially based on the degree
of integration, consulting and training required and also on the status of the
customer's hardware system implementation. A sales cycle is usually three to
twelve months from the time an initial sales presentation is made until the time
a signed license agreement is entered into with a customer.
In addition to our domestic markets, over the last several years we
have begun efforts to develop a market for its products in the Pacific Rim and
Europe. We have established independent distributor relationships in Japan,
South Korea, the Peoples Republic of China, the United Kingdom, and Belgium. In
each of these countries, our software products have been or are in the process
of being converted to the local language. We have, as part of a 20% owned joint
venture, an office in Hong Kong to support our Asian distributors.
Strategic Arrangements
A facet of our strategy is to establish arrangements with suppliers of
state of the art information systems technology. Over the last five years we
have worked to expand the number of its strategic relationships.
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We have distributor relationships with Keylink SystemsSM, a subsidiary
of Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which
supply computers, associated peripherals and third party software. We have
arrangements with Intermec Corporation relating to bar code data collection
systems which are integrated on an "off-the-shelf" basis into our software
products. Our software has been integrated with other bar coding systems on a
customized basis. We also have a relationship with the Datamyte Division of
Rockwell Automation for its Quantum quality control software product line.
In addition to its relationships with equipment providers, we have
relationships with numerous software product suppliers. These companies provide
software which we use within its TCM/R/ and FACTORYnet/R/ I/S software. Synergex
International Corporation has provided the Synergy 4GL Applications Development
Environment since 1990. We purchase EDI software from Supply Tech and Radley
Corporation.
Our relationship with the equipment and software product suppliers
described above is basically that of a reseller of such suppliers' products. As
such, we are entitled to volume discounts on products which it purchases and is
generally entitled to the benefits of cooperative marketing programs.
Product Development
We believe it must continue to enhance, broaden and modify its
existing line of software products to meet the constantly evolving needs of
discrete manufacturers within its target market. We have relied on internal
development and development related to customized projects implemented at field
sites to extend, enhance and support its software products, and develop and
integrate new capabilities.
In general, we have historically made one new product release each
year. These formal releases are supplemented by periodic releases for its EDI
software to respond to ongoing changes in trading partner requirements.
During the fiscal years ended November 30, 1995, 1996 and 1997, our
total software investment (consisting of product development expenses and
capitalized software development costs) was $3.4 million, $5.6 million and $6.9
million, respectively. Product development expenditures which were expensed and
not capitalized during those three fiscal years totaled $1.1 million, $2.2
million and $2.4 million, respectively.
Software development efforts currently in progress include the
development of product enhancements such as additional object orientation
features within our products, enhanced client-server network operations on
various operating systems, extended operation on various relational database
products, and enhanced functional capability. There can be no assurance,
however, that these development efforts will result in product enhancements that
we will be able to market successfully. Certain of these enhancements are
dependent upon the development efforts of third party suppliers over whom we
have no control. In the event the development efforts of the third party
suppliers are delayed or are unsuccessful, our software developments would be
similarly delayed. Software development is, however, an evolutionary process and
our management believes it could eventually find other suppliers or, if
unsuccessful in its search, that it could successfully re-engineer existing
products to fulfill its requirements.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to our products.
Some of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than us.
We believe that its employees' understanding of diverse manufacturing
operations and processes and the potential business benefits of the TCMJ
management approach to such operations allow us to differentiate itself from
competitors. Other competitive factors include software product features and
functions, product
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architecture, the ability to function on a variety of operating systems,
technical support and other related services, ease of product integration with
third party application software, price, and performance. In December 1997,
Gartner Group identified twenty-four competitors of the Company in the North
American mid-market Enterprise Resource Planning area for discrete
manufacturers. Additionally, that firm identified eight competitors in the
Manufacturing Execution Systems market as of June, 1997. Although Gartner Group
identified a limited number of competitors in its Manufacturing Execution
Systems study, we generally do not encounter these competitors in the
marketplace. We believe that our primary competition for its Manufacturing
Execution System products are customized software products developed by internal
data processing staffs or by third party customized software developers. None of
the competitors identified by Gartner Group had integrated product offerings for
both ERP and Manufacturing Execution System discrete manufacturers.
Intellectual Property
We have registered or have applied for registration of our "EMS" and
"TCMJ" trademarks for software services and products with the United States
Patent and Trademark Office and with the equivalent offices of most foreign
countries in which we currently do business. Among others, we have also received
or applied for trademarks for products marketed under the names FACTORYnet/R/
I/S and CAMate/R/.
We regard our software products as proprietary in that title to and
ownership of our software reside exclusively with us. We attempt to protect our
rights with a combination of trademark, copyright and employee and third-party
nondisclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of our software
products. While our competitive position could conceivably be threatened by our
inability to protect our proprietary information, we believe that copyright and
trademark protection are less important to our success than other factors such
as the knowledge, ability and experience of our personnel, name recognition and
ongoing product development and support.
Employees
As of November 30, 1998, we had 299 full-time employees, of whom 60
were engaged in sales and marketing; 58 in product development; 140 in customer
service; and 41 in management, finance and administration. Our employees are not
represented by any collective bargaining organization and we have never
experienced a work stoppage. We consider our employee relations to be good.
Properties
Our Corporate headquarters are located in Milwaukee, Wisconsin, in a
leased office consisting of approximately 42,000 square feet under a lease
expiring November 30, 2003. We lease additional facilities domestically in
Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati, Ohio;
Detroit, Michigan; Hartford, Connecticut; Houston, Texas; Indianapolis, Indiana;
Minneapolis, Minnesota; Philadelphia, Pennsylvania; Port St. Lucie, Florida;
Rockford, Illinois and San Jose, California. We lease office space
internationally in Hong Kong, and China. See Note 7 of the Notes to Consolidated
Financial Statements for information regarding our total lease obligations.
Legal Proceedings
As of the date of this filing, neither we nor any of our subsidiaries
is a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material effect on our results of operations
or financial position. In December, 1998, a judgement was issued in a legal
proceeding that resulted in the Company being ordered to pay $212,000.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position with the
Company of each person who, as of November 30, 1998, is a director, nominee for
director, and/or executive officer of the Company:
Name Age Position with the Company
Helmut M. Adam 47 Director
Jeffrey J. Fossum 45 Chief Financial Officer and Assistant
Treasurer
Michael D. Dunham 53 President and Chief Executive Officer;
Director
Robert E. Weisenberg 49 Director
Scott J. Mermel 50 Director
Thomas M. Dykstra 57 Vice President, Secretary and Treasurer;
Director
Wayne T. Wedell 39 Vice President - Services
Helmut M. Adam, 47, a director since 1987, has served as President of
Olympus Flag & Banner, Inc., a manufacturer of banners, flags and display
products, since 1992. Prior thereto, Mr. Adam was President of Ransomes, Inc., a
manufacturer of commercial grass mowing equipment. Mr. Adam is a Certified
Public Accountant.
Michael D. Dunham, 53, a director since 1978 and co-founder of the
Company, has served as President and Chief Executive Officer of the Company
since its inception in 1978. Mr. Dunham has over 20 years of experience in
management, sales, consulting, software design and development in the
manufacturing and distribution software industry. Mr. Dunham has a B.S. degree
in electrical engineering from the University of Denver and a Masters of
Management Science degree from the Stevens Institute of Technology. Mr. Dunham
is a Fellow of the American Production and Inventory Control Society.
Scott J. Mermel, 50, a director since 1987, is a private investor.
From April 1997 to July 1998, Mr. Mermel served as Vice President, Marketing of
Metrix, Inc., a developer and marketer of customer service and product support
software. From 1980 to April 1997, Mr. Mermel was a floor trading member of the
Chicago Mercantile Exchange. Prior to that, he held several managerial positions
with Xerox Computer Services, a developer and marketer of software systems for
manufacturing companies.
Robert E. Weisenberg, 49, a director since 1993, is President of
Northwoods Software Development, Inc., a software development firm. From
December 1989 to December 1997, Mr. Weisenberg was Vice President - Operations
and General Manager of the Company. Mr. Weisenberg also served as Assistant
Secretary of the Company from December 1993 until December 1997. Mr. Weisenberg
has a B.A. from Stanford University and is a Certified Public Accountant.
Thomas M. Dykstra, 57, a director since 1978 and a co-founder of the
Company, has served as a Vice President and as Secretary and Treasurer of the
Company since its incorporation in 1978. During his tenure with the Company, Mr.
Dykstra has managed several different functions including product development,
marketing, affiliate sales, finance, and administration and support. Mr. Dykstra
has a degree in mathematics from Hope College and an M.B.A. degree from the
University of Chicago. Mr. Dykstra is a Fellow of the American Production and
Inventory Control Society.
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Jeffrey J. Fossum, 45, has served as Chief Financial Officer of the
Company since 1987 and as Assistant Treasurer since December 1993. From 1983 to
1987, Mr. Fossum was the Controller of Berg Company, a manufacturer of
restaurant equipment. Mr. Fossum received his B.A. degree from the University of
Wisconsin-Eau Claire. Mr. Fossum is a Certified Public Accountant.
Wayne T. Wedell, 39, joined the Company in 1981 and has held positions
of Account Manager, Senior Account Manager, Group Manager as well as
Professional Services Manager, and was promoted to Vice President - Services in
1992. Mr. Wedell holds a B.A. degree in business administration from the
University of Wisconsin-Milwaukee.
Executive Compensation
The following table sets forth certain information concerning
compensation paid for the last three fiscal years to the Company's Chief
Executive Officers and each of the Company's other executive officers who earned
cash compensation in excess of $100,000 for the fiscal year ended November 30,
1998. The persons named in the table are sometimes referred to herein as the
"Named Executive Officers."
Name and Other
Principal Position Year Salary(1) Bonus Compensation
Michael D. Dunham 1998 $170,351 $ -0- $ -0-
President and CEO 1997 $185,586 -0- -0-
1996 $175,148 -0- -0-
Thomas M. Dykstra 1998 $161,735 $ -0- $ -0-
Vice President, Secretary 1997 $176,308 -0- -0-
and Treasurer 1996 $164,739 -0- -0-
(1) Certain personal benefits provided by the Company and its subsidiaries
to the Named Executive Officers are not included in the table. Such
benefits consisted of Company-provided automobiles and reimbursement of
certain medical expenses. The aggregate amount of such benefits for
each Named Executive Officer in each year reflected in the table did
not exceed 10% of the sum of such officer's salary and bonus in each
respective year.
Director Compensation
Directors who are officers or employees of the Company receive no
compensation as such for service as members of either the Board or committees
thereof. In fiscal 1998, the non-employee directors received a cash retainer fee
of $3,500. In addition, non-employee directors of the Company are entitled to
receive grants of options to purchase Common Stock under the Company's 1993
Stock Option Plan (the "1993 Plan"). Under the 1993 Plan, each person who is
first elected as a non-employee director automatically receives on the date of
his or her election an option to purchase 2,030 shares of the Common Stock. On
the day following the annual meeting of shareholders in each year, each
non-employee director is also entitled to receive an option to purchase 1,500
shares of the Common Stock for serving on the Board and an option to purchase
1,000 shares of the Common Stock for each Board committee on which the director
serves. Options granted to non-employee directors have a per share exerciser
price of 100% of the fair market value of a share of the Common Stock on the
date of the grant. Non-employee director options under the 1993 Plan vest as to
10% of the shares subject thereto on the first anniversary of the grant date, an
additional 20% on the second anniversary of the grant date, an additional 30% on
the third anniversary of the grant date, and the final 40% on the fourth
anniversary of the grant date, except that if the non-employee director ceases
to be a director by reason of death, disability or retirement during such
period, or in the event of a change in control of the Company, the option will
become immediately exercisable in full. Options granted to non-employee
directors will terminate on the earlier of (a) ten years after the date of
grant, (b) six months after the non-employee director ceases to be a director of
the
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Company by reason of death, or (c) three months after the non-employee director
ceases to be a director of the Company for any reason other than death. Under
the terms of the 1993 Plan, Messrs. Mermel and Adam each received in fiscal 1998
an option to purchase 3,500 shares, and Mr. Weisenberg received an option to
purchase 1,500 shares, of the Common Stock at a per share exercise price of
$3-7/16. No options were exercised by the non-employee directors during fiscal
1998.
Board of Directors Committees
The Board has standing Audit and Compensation Committees. The Audit
Committee is responsible for recommending to the Board the appointment of
independent auditors, approving the scope of the annual audit activities of the
auditors, approving the audit fee payable to the auditors and reviewing audit
results. Messrs. Adam, Dunham and Mermel are members of the Audit Committee. The
Audit Committee held one meeting in fiscal 1998.
The Compensation Committee (a) reviews and recommends to the Board the
compensation structure for the Company's directors, officers and other
managerial personnel, including salary rates, participation in any incentive
bonus plans, fringe benefits, non-cash perquisites and other forms of
compensation, and (b) administers the Company's 1993 Plan and the 1994 Employee
Stock Purchase Plan. The Compensation Committee also administers the 1998 Stock
Purchase Plan. Messrs. Adam and Mermel are members of the Compensation
Committee. The Compensation Committee held five meeting in fiscal 1998.
The Board has no standing nominating committee. The Board selects the
director nominees to stand for election at the Company's annual meetings of
shareholders and to fill vacancies occurring on the Board. The Board will
consider nominees recommended by shareholders, but has no established procedures
which shareholders must follow to make a recommendation. The Company's Bylaws
also provide for shareholder nominations of candidates for election as
directors. These provisions require such nominations to be made pursuant to
timely notice (as specified in the Bylaws) in writing to the Secretary of the
Company. The shareholder's notice of nomination must contain information
relating to the nominee which is required to be disclosed by the Company's
Bylaws and the Exchange Act.
Stock Options
The Company has in effect the 1993 Plan pursuant to which options to
purchase the Common Stock may be granted to employees (including executive
officers) of the Company and its subsidiaries. No options were granted to the
Named Executive Officers during fiscal 1998 and no Named Executive Officer held
options to acquire the Common Stock during fiscal 1998.
Employment Agreements
Messrs. Fossum and Wedell have entered into Special Compensation and
Separation Agreements. Mr. Fossum's Agreement obligates the Company to
compensate Mr. Fossum at a level consistent with his position relative to other
executives, but the Agreement may be terminated at any time with certain
exceptions related to the Company closing a transaction with an alliance partner
prior to July 1, 1999. Mr. Wedell's Agreement is for eight years and obligates
the Company to compensate Mr. Wedell at an initial salary of $90,000 (future
salary to be set by the Compensation Committee of the Company), and pursuant to
his Agreement, the Company, under certain circumstances, must pay consideration
in the event it terminates Mr. Wedell prior to the end of the eight-year term.
Related Party Transactions
Michael D. Dunham, the Company's President, Thomas M. Dykstra, the
Company's Vice President, Secretary and Treasurer, Robert E. Weisenberg, the
former Vice President-Operations and General Manager and Assistant Secretary of
the Company, and Donald W. Vahlsing, an employee of the Company, own all of the
outstanding common stock of EMS Solutions, Inc. ("EMS Solutions"). EMS Solutions
employs 18
39
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people, including a full-time Vice President and General Manager. Although
Messrs. Dunham and Dykstra are shareholders and directors and Messrs. Weisenberg
and Vahlsing are shareholders of EMS Solutions, they are not involved in the
daily management of its operations.
EMS Solutions develops and sells computer software and related
hardware to the food vending and food distribution industry. In the past, the
Company provided office space, accounting and administrative services, computer
processing time, and other miscellaneous services to EMS Solutions. Fees
received for these services amounted to approximately $122,000 for the fiscal
year ended November 30, 1997. Management believes that the fees charged for
these services were comparable to the fees that would have been charged by
unaffiliated third parties. The Company also sold computer hardware to EMS
Solutions. Sales of such hardware to EMS Solutions by the Company totaled
approximately $331,000 for the fiscal year ended November 30, 1997. At November
30, 1997, EMS Solutions had debt outstanding to the Company of approximately
$404,000. Such debt represented trade payables for services and equipment
provided by the Company to EMS Solutions. Interest was paid by EMS Solutions
with respect to these trade payables at a rate equal to the Company's cost of
funds under its revolving line of credit. The rate of interest charged (which
was recalculated monthly) on the trade payables of EMS Solutions was 9.5% at
November 30, 1997. On July 1, 1997, EMS Solutions moved to new facilities and no
longer utilizes office space or other material services of the Company. In
addition, EMS Solutions no longer purchases computer hardware from the Company.
On September 29, 1998, the Company received payment in full of $307,000 on a
note from EMS Solutions, Inc.
STOCK HELD BY OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
beneficial ownership of shares of the Common Stock on November 30, 1998 by: (i)
each director of the Company, (ii) each executive officer of the Company, and
(iii) all director and current executive officers as a group. None of these
individuals are selling Common Stock pursuant to this Prospectus.
Shares Beneficially Owned
Prior to Offering
Name and Address of Amount and Percentage
Beneficial Owner(1) Nature of of Class
Ownership(1) (1)(2)
Directors and Officers(7)(8):
Michael D. Dunham 637,300 15.6%
Thomas M. Dykstra 575,000(3) 14%
Robert E. Wiesenberg(4) 283,200 6.9%
Donald W. Vahlsing(5) 250,900 6.1%
Richard W. Grelck 216,304 5.2%
Helmut M. Adam 24,435 *
Scott J. Mermel 24,435 *
Wayne T. Wedell 27,460 *
Jeffrey J. Fossum 20,821 *
All Directors and Executive
Officers as a Group (7 1,808,955(6) 44%
persons)
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- ------------
* Represents less than 1%.
(1) The address of each person who holds in excess of 5% of the Common
Stock identified in this table is 12000 West Park Place, Milwaukee,
Wisconsin 53224.
(2) Includes the following shares subject to stock options which were
exercisable as of or within 60 days of November 30, 1998: Mr. Grelck,
189,804 shares; Mr. Adam, 22,435 shares; Mr. Mermel, 22,435 shares;
and all directors and executive officers as a group, 257,394 shares.
(3) Consists of (a) 165,000 shares held by the Dykstra Family Limited
Partnership for which Mr. Dykstra acts as managing general partner and
(b) 410,000 shares held by a family trust for which Mr. Dykstra serves
as trustee.
(4) Mr. Weisenberg resigned as Vice President--Operations and General
Manager and Assistant Secretary of the Company on December 31, 1997.
(5) Mr. Vahlsing works part-time for the Company.
(6) Assumes the exercise of all options held by the group which were
exercisable as of or within 60 days of November 30, 1998. The number
of shares reflected as beneficially owned by all directors and
executive officers does not include the shares owned by Mr. Vahlsing.
Other Beneficial Owner
The following tables sets forth information, as of December 31, 1997,
regarding beneficial ownership by the only other person known to the Company to
own beneficially more than 5% of the outstanding Common Stock as of such date.
The beneficial ownership set forth has been reported on a filing made by such
beneficial owner on Schedule 13G with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
Voting Power Investment Power
Name and Address Sole Shared Sole Shared Aggregate Percent of
of Beneficial Owner Class
<S> <C> <C> <C> <C> <C> <C>
Heartland Advisors, Inc.(1) 707,800 0 780,800 0 780,000 19.1%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
- -------------
(1) The filing made by Heartland Advisors, Inc. indicates that the Common Stock as to which it is deemed to be beneficial owner is
held in various investment advisory accounts.
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of twenty million
(20,000,000) shares of the Common Stock and three million (3,000,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock").
The Common Stock is entitled to such dividends as may be declared from
time to time by the Board of Directors of the Company in accordance with
applicable law.
Except as provided under Wisconsin law, and except for the voting
rights of holders of Series B Preferred Stock, only the holders of the Common
Stock are entitled to vote for the election of directors of the Company and on
all other matters. Holders of the Common Stock are entitled to one vote for each
share of the Common Stock held by them subject to section 180.1150 of the
Wisconsin Statutes. (See "Certain Statutory Provisions" below). Holders of the
Common Stock do not have cumulative voting rights in connection with the
election of directors, which means that holders of shares entitled to exercise
more than 50% of the voting power represented at any meeting of shareholders
have the power to elect all of the directors to be elected at any such meeting.
All shares of the Common Stock are entitled to participate equally in
distributions in liquidation subject to any preferential right of holders of
Preferred Stock. Except as the Board of Directors may in its discretion
otherwise determine, holders of the Common Stock have no preemptive rights to
subscribe for or to purchase shares of the Company's capital stock. There are no
conversion rights, sinking fund, or redemption provisions applicable to the
Common Stock. Section 180.0622(2)(b) of the Wisconsin Statutes and judicial
interpretations thereof provide that shareholders are personally liable for
debts owing to employees of the company for services performed (not to exceed
six months' service in any one case).
Certain Statutory Provisions
Section 180.1150 of the Wisconsin Statutes provides that the voting
power of shares held by any person or persons acting as a group that is greater
than 20% of the voting power in the election of directors is limited to 10% of
the full voting power of those shares. This restriction does not apply to shares
acquired directly from the Company or in certain specified transactions or
shares for which full voting power has been restored pursuant to a vote of
shareholders.
Sections 180.1140 to 180.1144 of the Wisconsin Statutes contain
certain limitations and special voting provisions applicable to specified
business combinations involving the Company and a significant shareholder,
unless the Board of Directors approves the business combination or the
shareholder's acquisition of shares before such shares are acquired. Similarly,
sections 180.1130 to 180.1133 of the Wisconsin Statutes contain special voting
provisions applicable to certain business combinations, unless specified minimum
price and procedural requirements are met.
Following commencement of a takeover offer, section 180.1134 of the
Wisconsin Statutes imposes special voting requirements on certain share
repurchases effected at a premium to the market and on certain asset sales by
the Company, unless, as it relates to the potential sale of assets, the
corporation has at least three independent directors and a majority of the
independent directors vote not to have the provision apply to the corporation.
The foregoing provisions of the Wisconsin Statutes could have the
effect of delaying, deterring, or preventing a change in control of the Company.
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Restated Articles of Incorporation
Under the Restated Articles of Incorporation of the Company (the
"Restated Articles of Incorporation") and Bylaws of the Company, the Board of
Directors is comprised of five members who are elected by the shareholders for
three year terms at the annual meeting of shareholders. The Restated Articles of
Incorporation provide that any vacancies on the board of Directors are filled
only by the affirmative vote of a majority of the directors in office, even if
less than a quorum. Any director so elected will serve until the next election
of directors and until his or her successor is duly elected and qualified.
The Restated Articles of Incorporation provide that any director may
be removed from office with or without cause, but only by the affirmative vote
of at least sixty-six and two-thirds percent of the voting power of the then
outstanding shares entitled to vote in the election of directors.
The provisions of the Restated Articles of Incorporation summarized
above could have the effect of delaying, deterring, or preventing a change in
control of the Company.
Preferred Stock
The Company has the authority to issue, in one or more series, up to
3,000,000 shares of Preferred Stock. The Preferred Stock is issuable in series,
each of which may vary as determined by the Board of Directors as to the
designation and minimum number of shares of each series, the voting power of the
holders thereof, the dividend rate, redemption terms and prices, voluntary and
involuntary liquidation preferences, conversion rights and sinking fund
requirements, if any. As of the date of this Prospectus, the only shares of
Preferred Stock issued and outstanding are the shares of Series B Preferred
Stock.
Series B Preferred Stock
General. The Series B Preferred Stock has been authorized as a series
consisting of a maximum of five thousand (5,000) shares of which 1,785 shares
are issued and outstanding.
Dividends. Holders of the Series B Preferred Stock are entitled to
receive cumulative preferential dividends payable quarterly in cash on January
2, April 1, July 1 and October 1 of each year at the rate of eight (8%) percent
per annum. The first dividend payment date with respect to the Series B
Preferred Stock shall be January 2, 1999, which dividend shall be paid on a pro
rata basis for the period such shares of the Series B Preferred Stock are
outstanding. Commencing with the quarterly period beginning January 2, 2002, the
annual dividend rate will increase each quarterly period beginning January 2,
2002, the annual dividend rate will increase each quarterly period by two (2%)
percent up to a maximum dividend of eighteen (18%) percent per annum (e.g., the
annual dividend rate for the quarterly period commencing January 2, 2002 will be
ten (10%) percent per annum and the annual dividend rate for the quarterly
period commencing April 1, 2002 will be twelve (12%) per annum). In the event
that the Company cannot, as determined by the Board of Directors in its sole
discretion, pay dividends in cash on a dividend payment date, the Company shall
pay dividends in shares of the Series B Preferred Stock valued at eighty (80%)
percent of the lesser of : (i) $1,000 and (b) the Conversion Price (as defined
in the Company's Restated Articles of Incorporation).
Voting Rights. The holders of the Series B Preferred Stock shall be
entitled to vote, on all matters in which holders of the Common Stock are
entitled to vote, voting together with the Common Stock. The holders of the
Series B Preferred Stock shall have the number of votes that they would have
assuming conversion of the Series B Preferred Stock into the Common Stock as of
the record date for the meeting of the Company's shareholders, with fractional
shares being disregarded. The holders of the Series B Preferred Stock shall be
entitled to receive all communications sent by the Company to the holders of the
Common Stock. The holders of the Series B Preferred Stock are entitled to vote
together as a class on the issuance of any class of equity securities which
ranks equal or senior to the Series B Preferred Stock, and on any change or
repeal of any of the express terms of the Series B Preferred Stock. When voting
as a separate class, the affirmative vote of not less
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<PAGE>
than a majority of the outstanding shares of the Series B Preferred Stock shall
be required for approval of such matters.
Liquidation. On any liquidation, dissolution, or winding up of the
Company, after payment of all creditors of the Company, the holders of the
Series B Preferred Stock will have the right to receive out of the remaining
assets of the Company, before the holders of any other equity interest in the
Company are entitled to receive anything, the sum of one thousand dollars
($1,000) per share, plus any accrued and unpaid dividends.
Voluntary Conversion. Each share of the Series B Preferred Stock is
convertible, at the option of the holder, into shares of the Common Stock at any
time prior to the effective date of the forced conversion or redemption at the
Conversion Price, subject to adjustment, and subject to further reduction in the
Conversion Price in the event that the average closing price for the Common
Stock on the highest five (5) out of the last ten (10) trading days of the
calendar month of January 1999 is not five and 25/100 dollars ($5.25) per share
of the Common Stock or greater, then effective January 31, 1999, the Conversion
Price shall be reduced to the lowest closing bid price within thirty (30) days
after October 30, 1998, but in no event less than two dollars ($2.00) per share
of the Common Stock, subject to adjustment. In no event shall the Conversion
Price be increased as a result of the foregoing. The Company will not issue
fractional shares of the Common Stock upon conversion of the Series B Preferred
Stock, but will pay a cash adjustment for any such fraction.
Forced Conversion. The Company shall have the right to force
conversion of the Series B Preferred Stock into shares of the Common Stock at
any time after issuance of the Series B Preferred Stock, provided: (i) that on
the Forced Conversion Notice Date and on the Forced Conversion Date (each as
defined in the Restated Articles of Incorporation) the Common Stock issuable
upon conversion of the Series B Preferred Stock has been registered pursuant to
the Securities Act and such registration is then currently effective; and (ii)
the average of the closing bid price of the Common Stock as listed on the
NASDAQ, the NYSE, the ASE or wherever the Common Stock then trades, is at least
one hundred seventy-five (175%) percent 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) nor
more than forty-five (45) days prior to the Forced Conversion Date. On the
Forced Conversion Date, the Company shall pay to all registered holders of the
Series B Preferred Stock all accrued and unpaid dividends through and including
the Forced Conversion Date. In the event that the Board of Directors of the
Company approves a transaction whereby the holders of Common Stock would be paid
a per share price equal to or in excess of one hundred seventy-five (175%)
percent of the Conversion Price (the "Sale Event") and on the Forced Conversion
Notice Date and on the Forced Conversion Date the condition set forth in
subsection (i) above has been satisfied, the Company can require all holders of
the Series B Preferred Stock to convert their shares of the Series B Preferred
Stock into shares of the Common Stock immediately prior to the closing of the
Sale Event. Notwithstanding anything to the contrary, holders of the Series B
Preferred Stock shall not have the right to vote together with the holders of
the Common Stock or as a separate class on whether to approve the Sale Event
(although a holder of the Series B Preferred Stock that converts the Series B
Preferred Stock into the Common Stock prior to the record date for the
shareholders' meeting to vote on the Sale Event wold be entitled to vote such
shares of the Common Stock) during the one hundred fifty (150) day period
following the Forced Conversion Notice Date. In the event that the foregoing
does not eliminate the voting rights of the Series B Preferred Stock with
respect to a Sale Event, then the holders of such Series B Preferred Stock shall
be deemed to have granted to the President and Secretary of the Company (and
each of them individually) an irrevocable proxy for such one hundred fifty (150)
day period to vote the Series B Preferred Stock for the approval of the Sale
Event. In the event that the Sale Event would result in the holders of the
Series B Preferred Stock receiving securities, it is a condition to the
Company's right to force conversion resulting from a Sales Event that the
securities to be received by the holders of the Series B Preferred Stock are
registered under the Securities Act and are freely transferable.
Adjustment to Conversion Price. The shares of the Series B Preferred
Stock provide for adjustment to the Conversion Price upon (i) any subdivision or
reverse split of the outstanding shares of the Common Stock into a greater or
lesser number of shares of the Common Stock; (ii) any declaration of a dividend
or other distribution by the Company upon the Common Stock payable in shares of
the Common Stock; or (iii) any capital reorganization or reclassification of the
capital stock of the Company. If the Company, through either
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<PAGE>
a private placement or a public offering (but other than pursuant to options
granted under the Company'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 the Warrants) issues shares of the Common Stock, or
options to purchase the Common Stock or rights to subscribe for the Common Stock
or securities convertible into or exchangeable for the Common Stock at a price
(such price, if other than cash, as determined by the Company's Board of
Directors) less than the then market price 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 the Common Stock outstanding immediately prior to such issuance, sale
or distribution plus the number of shares of the Common Stock which the
aggregate consideration received or to be received by the Company 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 the Common Stock
outstanding immediately after giving effect to such issuance, sale or
distribution. The Company will not issue fractional shares of the Common Stock
upon conversion of the Series B Preferred Stock, but will pay a cash adjustment
for any such fraction. There will be no adjustment in the event that the Company
pays a dividend in cash to its holders of the Common Stock; provided, however,
the Company will give the holders of the Series B Preferred Stock written notice
at least thirty (30) days prior to the record date for the cash dividend, that
the Company intends to declare a cash dividend.
Redemption. Commencing three (3) years after October 30, 1998, the
Company may redeem all of the outstanding Series B Preferred Stock at any time
at a redemption price of one thousand dollars ($1,000) per share, plus all
accrued and unpaid dividends, if any, to the date fixed for redemption. Notice
of redemption shall be on not less than thirty (30) nor more than forty-five
(45) days' notice prior to the date fixed for redemption.
Change in Control. When an Event (as defined in the Restated Articles
of Incorporation) occurs, each holder of shares of the Series B Preferred Stock
shall have the option to (i) convert the Series B Preferred Stock into shares of
the Common Stock immediately prior to the Event at a price equal to the lesser
of (a) the Conversion Price or (b) the price per share of the Common Stock in
the Event; provided, however, that the Conversion Price shall not be reduced
under this subsection (i)(b) by more than thirty (30%) percent or (ii) retain
ownership of the Series B Preferred Stock, in which event appropriate provisions
shall be made so that the Series B Preferred Stock will become convertible at
the holder's option into shares of common stock of the surviving or acquiring
entity.
Restrictions on Transfer. The Series B Preferred Stock has not been
registered under the Securities Act or any state securities laws. Consequently,
the shares of the Series B Preferred Stock may not be offered, sold or resold
unless they are (a) registered or (b) exempt from the registration requirements
of the Securities Act and all applicable state securities laws. As set forth
above, the Company has agreed to register the Common Stock issuable upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants.
Warrants
In connection with the issuance of the Series B Preferred Stock, the
Company issued the Warrants to purchase in the aggregate 54,714 shares of the
Common Stock. The Warrants are immediately exercisable at a price of $3.60 per
share, and expire on October 31, 2003. The exercise price is subject to
adjustment pursuant to certain anti-dilution provisions in the event the Company
takes certain actions, such as, but not limited to, a stock dividend or
reclassification of the Common Stock.
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Public Warrants
In connection with the acquisition of all the common stock of Intercim
Corporation, the Company issued the Public Warrants. The Public Warrants have a
ten-year term and an exercise price of $6.75.
Registration Rights
The Company has entered into the Purchase Agreement pursuant to which
the Company agreed to (i) use its reasonable best efforts to file a registration
statement for a shelf offering within forty-five (45) days after October 30,
1998 (the "Shelf Registration"), (ii) use its reasonable best efforts to cause
the Shelf Registration to be declared effective within one hundred eighty (180)
days of October 30, 1998 and (iii) to keep such Shelf Registration continuously
effective, supplemented and amended until the disposition of all registerable
securities under the Shelf Registration or as otherwise provided in the Purchase
Agreement. This Prospectus has been filed as part of the required Shelf
Registration.
If the Company proposes to file a registration statement for its own
account (other than a registration statement on Form S-4 or S-8 (or any
successor form thereto)), then the Company will offer the Selling Shareholders
the opportunity to register the number of registerable securities as each such
holder may request (a "Piggyback Registration"). If the Company is advised by an
underwriter that the amount of the shares to be registered in the Piggyback
Registration would adversely affect the marketability of the shares to be
offered, then the Company will be able to minimize the adverse effect by
reducing pro rata (based on the number of registerable securities requested to
be included) the number of Piggyback shares to be registered. Shareholders
participating in a Piggyback Registration may withdraw any or all of their
registerable securities from the registration by giving notice to the Company
prior to the effectiveness of the relevant registration statement.
The Purchase Agreement also sets forth the procedures which are to be
followed in effecting any registration required under the Purchase Agreement.
The Company will bear all of the expenses relating to its compliance with the
above-referenced agreements, including all registration and filing fees, fees
and expenses of the Company's own counsel and accountants, and all delivery,
printing and copying expenses. However, in the case of a Piggyback Registration,
participating Selling Shareholders shall pay all underwriting discounts,
commissions and transfer taxes as well as their own counsel fees.
The Company will indemnify each holder of registerable securities,
each affiliate of such holder, each person who controls (within the meaning of
the Securities Act) such holder, and their respective officers, directors,
employees, shareholders, investment advisor and agents against all losses,
claims, damages, liabilities and expenses (collectively, the "Losses") caused
by, resulting from or relating to any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or caused by any
omission or alleged omission of material fact required to be stated therein or a
fact necessary to make the statements therein not misleading, except where such
misstatement or omission was caused by information provided to the Company by
the holder or where the holder failed to deliver materials furnished to it by
the Company.
Each holder of registerable securities participating in an offering
agrees to indemnify and hold harmless the Company, and its directors, officers,
employees, advisors, agents and each person who controls (within the meaning of
the Securities Act and the Exchange Act) the Company for any material
misstatement or omission in the offering materials that was caused by
information provided by such holder to the Company; provided, however, that the
liability of any such holder will be limited to the amount of the net proceeds
received by such holder in the offering giving rise to such liability.
PLAN OF DISTRIBUTION
The Selling Shareholders may, from time to time, sell all or a portion
of the Shares on the OTC Bulletin Board (or any exchange on which the Common
Stock may from time to time be trading), in privately
46
<PAGE>
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices.
The Company will receive no proceeds from this offering. The Common
Stock may be sold from time to time to purchasers directly by any of the Selling
Shareholders. Alternatively, any of the Selling Shareholders may from time to
time, offer the Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Common
Stock for whom they may act at agent. The Selling Shareholders and any
underwriters, dealers or agents that participate in the distribution of the
Common Stock may be deemed to be underwriters, and any profit on the sale of the
Common Stock by them and any discounts, commissions or concessions received by
any such underwriters, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act. If the Company is advised
that an underwriter has been engaged with respect to the sale of any the Common
Stock offered hereby, or in the event of any other material change in the plan
of distribution, the Company will cause appropriate amendments to the
Registration Statement of which this prospectus forms a part to be filed with
the Commission reflecting such engagement or other change.
At the time a particular offer of the Common Stock is made, to the
extent required, a Prospectus Supplement will be provided by the Company and
distributed by the relevant Selling Shareholder which will set forth the
aggregate amount of the Common Stock being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commission and other items constituting compensation from the
Selling Shareholders and any discount, commissions or concessions allowed or
reallowed or paid to dealers.
The Common Stock may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the Selling Shareholders or by agreement between the Selling
Shareholders and underwriters or dealers.
There is no established public trading market for the Common Stock,
and as a result the market for the Common Stock is not particularly liquid. The
price at which the Common Stock trades may fluctuate and any market for the
Common Stock may be subject to disruptions that could make it difficult or
impossible for the holders of the Common Stock to sell in a timely manner, if at
all, or to recoup their investment in the Common Stock. See "Risk Factors --
Absence of Market for Common Stock."
Under applicable rules and regulations under the Exchange Act any
person engaged in a distribution of the Common Stock may not simultaneously
engage in market-making activities with respect to such Common Stock for a
period of nine business days prior to the commencement of such distribution and
ending upon the completion of such distribution. In addition to and without
limiting the foregoing, each Selling Shareholder will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Regulation M, which provisions may limit the timing
of purchases and sales of any of the Common Stock by the Selling Shareholders.
All of the foregoing may affect the marketability of the Common Stock and the
ability of any person or entity to engage in market-making activities with
respect to the Common Stock.
Pursuant to the Purchase Agreement, the Company is obligated to pay
substantially all of the expenses incident to the registration and offering of
the Common Stock of the Selling Shareholders to the public other than
commissions and discounts of underwriters, dealers or agents. The Selling
Shareholder or Shareholders bear all selling and other expenses.
The Company has agreed to indemnify in certain circumstances the
Selling Shareholders against certain liabilities, including liabilities under
the Securities Act. The Selling Shareholders have agreed to indemnify in certain
circumstances the Company against certain liabilities, including liabilities
under the Securities Act.
47
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of November
30, 1997 and 1996 and for each of the three years in the period ended November
30, 1997 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of the Common
Stock offered hereby will be passed upon for the Company by Foley & Lardner,
Milwaukee, Wisconsin.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Audited Financial Statements
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets as of November 30, 1996 and 1997........ F-3
Consolidated Statements of Operations for
the Years Ended November 30, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Stockholders Equity for
the Years Ended November 30, 1995, 1996 and 1997.............. F-6
Consolidated Statements of Cash Flows for
the Years Ended November 30, 1995, 1996 and 1997.............. F-7
Notes to Consolidated Financial Statements for
the Years Ended November 30, 1996 and 1997.................... F-9
Unaudited Interim Financial Statements
Unaudited Consolidated Condensed Balance Sheets as of
November 30, 1997 and August 31, 1998......................... F-21
Unaudited Consolidated Condensed Statements of Operations for
the Nine Months Ended August 31, 1997 and 1998................ F-23
Unaudited Consolidated Condensed Statements of Cash Flows for
the Nine Months Ended August 31, 1997 and 1998................ F-24
Notes to Unaudited Consolidated Condensed Financial Statements
for the Nine Months Ended August 31, 1997 and 1998............ F-25
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Effective Management Systems, Inc.
We have audited the accompanying consolidated balance sheets of Effective
Management Systems, Inc. (the Company) and subsidiaries as of November 30, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended November
30, 1997 These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
A - change to 1997 opinion (should go between the current 2nd and 3rd
paragraphs)
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated January 16, 1998,
the Company, as discussed in Note 12, has experienced significant operating
losses that adversely affect the Company's current results of operations and
liquidity. Note 12 describes management's plans to address these issues.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries at November 30, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended November 30, 1997, in conformity with generally accepted
accounting principles.
/s/Ernst & Young
Milwaukee, Wisconsin
January 16, 1998
(except for Notes 12 and 13, as to which the date is December 14, 1998)
F-2
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Balance Sheets
(Dollars in Thousands)
November 30
1997 1996
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 14 $ 866
Investment in available-for-sale
securities (Note 3) -- 505
Accounts receivable:
Trade, less allowance for doubtful
accounts of $462--1997; $346--1996 12,370 11,146
Related parties 604 693
-------- -------
12,988 11,839
Refundable income taxes 312 159
Inventories 280 391
Deferred income taxes (Note 10) -- 175
Prepaid expenses and other current
assets 146 174
-------- -------
Total current assets 13,726 14,109
Software development costs, net 7,717 5,781
Investments in and advances to unconsolidated
joint ventures 182 199
Equipment and leasehold improvements, net
(Note 4) 3,917 3,961
Intangible assets, net (Note 5) 2,444 2,690
Other assets 811 706
-------- -------
Total assets $ 28,797 $27,446
======== =======
F-3
<PAGE>
November 30
1997 1996
---- ----
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,272 $ 2,026
Accrued liabilities 2,773 2,846
Deferred revenue 5,887 4,605
Customer deposits 63 109
Current portion of long-term obligations
(Note 7) 946 127
-------- --------
Total current liabilities 11,941 9,713
Deferred revenue and other long-term
liabilities 317 453
Long-term obligations (Note 7) 3,966 2,123
Deferred income taxes (Note 10) -- 560
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 3,000,000 shares,
none issued or outstanding -- --
Common stock, $.01 par value; authorized
20,000,000 shares, issued 4,067,310
and 4,011,018 shares; outstanding
4,054,685 and 4,008,393 shares 41 41
Common stock warrants 4 4
Additional paid-in capital 11,328 11,137
Retained earnings 1,260 3,420
Cost of common stock in treasury (12,625
and 2,625 shares) (60) (5)
-------- --------
12,573 14,597
Total liabilities and stockholders' equity $ 28,797 $ 27,446
======== ========
See accompanying notes.
F-4
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Operations
(In Thousands, except per share amounts)
Year Ended November 30
1997 1996 1995
---- ---- ----
Net revenues:
Software license fees $ 21,752 $ 19,094 $ 11,534
Services 16,781 15,412 10,962
Hardware 4,112 6,751 6,528
-------- -------- --------
42,645 41,257 29,024
Costs of products and services:
Cost of third-party software license fees 3,065 2,484 1,419
Software development amortization 2,535 1,591 879
Cost of services 14,000 12,109 7,884
Cost of hardware 3,260 4,979 5,118
-------- -------- --------
22,860 21,163 15,300
Selling and marketing expenses 15,957 14,060 9,479
General and administrative expenses 3,838 3,416 3,029
Software development expenses 2,391 2,235 1,086
-------- -------- --------
45,046 40,874 28,894
-------- -------- --------
Income (loss) from operations (2,401) 383 130
Other income (expense):
Equity in earnings (losses) of
unconsolidated joint Ventures (25) 25 (31)
Interest income 47 89 176
Interest expense (399) (145) (52)
Other -- (87) (13)
-------- -------- --------
(377) (118) 80
-------- -------- --------
Income (loss) before income taxes (2,778) 265 210
Income tax benefit (expense) 618 (112) (79)
-------- -------- --------
Net income (loss) $ (2,160) $ 153 $ 131
======== ======== ========
Net income (loss) per common share -
Primary and fully diluted $ (.53) $ .04 $ .04
======== ======== ========
Weighted average common and common
equivalent shares -
Primary and fully diluted 4,048 3,965 3,669
======== ======== ========
See accompanying notes.
F-5
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
<CAPTION>
Common
Stock
And
Common Warrants
Common Stock To be Paid-in Retained Treasury
Shares Stock Warrants Issued Capital Earnings Stock Total
---------- ----------- ---------- ---------- ---------- ---------- --------- ---------
Balance, November 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 3,545,215 $ 36 $ -- $ -- $ 7,187 $ 3,136 $ (5) $ 10,354
Issuance of common
stock:
Acquisitions 328,393 3 -- -- 2,338 -- -- 2,341
Stock options 30,002 -- -- -- 71 -- -- 71
Employee stock
purchase Plan 18,671 -- -- -- 96 -- -- 96
Issuance of common
stock
Warrants for
acquisitions -- -- 3 -- 970 -- -- 973
Common stock and
warrants to
Be issued to complete
Intercim transaction -- -- -- 211 -- -- -- 211
Net income -- -- -- -- -- 131 -- 131
---------- -------- -------- -------- ------- ------- ------- --------
Balance, November 30,
1995 3,922,281 39 3 211 10,662 3,267 (5) 14,177
Issuance of common
stock:
Acquisitions 24,000 -- -- -- 132 -- -- 132
Stock options 35,000 1 -- -- 60 -- -- 61
Employee stock
purchase Plan 29,718 -- -- -- 113 -- -- 113
Warrants 19 -- -- -- -- -- -- --
Issuance of
additional common
stock and Warrants
to complete
Intercim transaction -- 1 1 (172) 170 -- -- --
Purchase of shares
from Dissenting
former Imercim
shareholder -- -- -- (39) -- -- -- (39)
Net income -- -- -- -- -- 153 -- 153
---------- -------- -------- -------- ------- ------- ------- --------
Balance, November 30,
1996 4,011,018 41 4 -- 11,137 3,420 (5) 14,597
Issuance of common
stock:
Stock options 39,500 -- -- -- 68 -- -- 68
Employee stock
purchase Plan 26,792 -- -- -- 123 -- -- 123
Purchase of treasury
shares (10,000) -- -- -- -- -- (55) (55)
Net loss -- -- -- -- -- (2,160) -- (2,160)
---------- -------- -------- -------- ------- ------- -------- --------
Balance, November 30,
1997 4,067,310 $ 41 $ 4 $ -- $11,328 $ 1,260 $ (60) $ 12,573
========== ======== ======== ======== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<CAPTION>
Year Ended November 30
1997 1996 1995
<S> <C> <C> <C>
Operating activities
Net income (loss) $(2,160) $ 153 $ 131
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 1,234 1,037 730
Amortization, other 246 189 82
Amortization of capitalized computer software
development costs 2,535 1,591 879
Equity in losses (earnings) of joint ventures 25 (25) 31
(Gain) loss on disposal of equipment and
leasehold improvements -- (24) 4
Deferred income taxes (385) 202 554
Changes in operating assets and liabilities:
Accounts receivable (1,135) (1,770) (297)
Inventories and other current assets 100 341 265
Accounts payable and other liabilities 1,273 1,212 (464)
------- ------- -------
Total adjustments 3,893 2,753 1,784
------- ------- -------
Net cash provided by operating activities 1,733 2,906 1,915
Investing activities
Acquisition of Darwin Data Systems, net of cash
received of $19 -- (51) --
Acquisition of EMS-Illinois, net of cash received
of $160 -- -- (238)
Acquisition of Intercim -- -- (225)
Additions to equipment and leasehold improvements (1,177) (1,424) (1,430)
Purchases of available-for-sale securities -- (495) --
Proceeds from sales of available-for-sale securities 505 1,247 1,584
Proceeds from sales of held-to-maturity securities -- -- 743
Proceeds from sale of equipment and leasehold
Improvements 7 68 39
Increase in cash surrender value of life insurance (25) (25) (31)
Software development costs capitalized (4,471) (3,372) (2,321)
Other (202) (111) 29
Net cash used in investing activities (5,363) (4,163) (1,850)
See accompanying notes.
F-7
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<CAPTION>
Year Ended November 30
1997 1996 1995
<S> <C> <C> <C>
Financing activities
Proceeds from issuance stock to employees 191 174 167
Proceeds from increase in debt 2,797 1,864 --
Payments on long-term debt and capital lease
obligations (155) (250) (177)
Purchase of treasury stock (55) -- --
------- ------- -------
Net cash provided by (used in) financing activities 2,778 1,788 (10)
------- ------- -------
Net increase (decrease) in cash (852) 531 55
Cash:
Beginning of year 866 335 280
------- ------- -------
End of year $ 14 $ 866 $ 335
======= ======= =======
Supplemental cash flow information:
Interest paid $ 399 $ 133 $ 52
Income taxes paid (refunded), net (172) (464) 357
Noncash transactions:
Equipment recorded under capital lease
obligations 20 371 ---
Issuance of common stock and warrants for
Acquisitions --- 132 3,525
</TABLE>
See accompanying notes.
F-8
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Effective Management Systems, Inc. (the Company) and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Business and Concentration of Credit Risk
The Company develops, sells, and services computer software and related hardware
throughout the United States and certain foreign countries that meet the
Company's credit policies. The Company performs periodic credit evaluations of
its customers' financial condition and generally follows a policy to obtain
deposits for sales to new customers.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized in accordance with the provisions of AICPA Statement of
Position (SOP) 91-1, "Software Revenue Recognition," as follows:
Software and Hardware Sales
Revenue is recognized when the product is delivered.
Professional Fees and Services
Revenue is recognized as time and material costs are incurred.
Software Support Fees
Revenue is recognized ratably over the terms of the nonrefundable support
contract.
Annual Upgrade Fees
Revenue is recognized ratably over the nonrefundable annual upgrade contact
period.
F-9
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which changes the requirements for revenue recognition and supersedes SOP 91-1
effective for transactions that the Company will enter into beginning December
1, 1998. The Company intends to review the provisions of its software license
contracts and make the changes necessary to have them meet the standards of the
new SOP.
Investments
Debt securities are classified as available-for-sale and are carried at fair
value, which approximates cost. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in interest income.
Inventory Valuation
Inventories are carried at the lower of cost or market with cost determined on a
first-in, first out (FIFO) basis.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," the Company capitalizes internal costs in developing software
products upon determination that technological feasibility has been established
for the product, whereas costs incurred prior to the establishment of
technological feasibility are charged to product development expense. When the
product is available for general release to customers, capitalization ceases and
such costs are amortized on a product-by-product basis based on current and
future revenue with an annual minimum equal to the straight-line amortization
over the remaining estimated economic useful life of the product.
Capitalized software development costs, stated at the lower of cost or net
realizable value, were $7,717 and $5,781 at November 30, 1997 and 1996,
respectively, which is net of accumulated amortization of $7,877 and $5,342,
respectively.
Investment in Unconsolidated Joint Ventures
Investments in unconsolidated joint ventures are accounted for on the equity
method wherein the Company's share of the joint ventures' net earnings or losses
is recorded as an adjustment to the investment.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are depreciated
using the straight-line method for financial reporting purposes. The estimated
useful lives used to calculate depreciation are as follows:
F-10
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
Years
Leasehold improvements 5
Furniture and fixtures 10
Equipment 5
Assets under capital leases are amortized on a straight-line basis over their
useful lives.
Intangible Assets
Intangible assets are amortized using the straight-line method for financial
reporting purposes over the following estimated lives:
Years
Customer list 15
Goodwill 12-20
Other intangibles 6-40
Income Taxes
Deferred income taxes are provided for temporary differences between financial
reporting and income tax bases of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding for the periods presented. Net income per
common share includes the dilutive effect of stock options and warrants
calculated using the "treasury stock" method.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which is required
to be adopted for periods ending after December 15, 1997. In the first quarter
of fiscal 1998, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements, basic earnings per share will exclude the dilutive effect of stock
options and warrants. Basic earnings per share for the year ended November 30,
1997 and 1996 would have been the same as previously reported primary earnings
per share. The impact of Statement No. 128 on the calculation of fully diluted
earnings per share is not expected to be material.
F-11
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, marketable securities, trade receivables, related-party
receivables, trade payables and debt instruments. The book values of cash and
cash equivalents, marketable securities, trade receivables, related-party
receivables and trade payables are considered to be representative of their
respective fair values. None of the Company's debt instruments that are
outstanding as of November 30, 1997, have readily ascertainable market values;
however, the carrying values are considered to approximate their respective fair
values. See Note 8 for the terms and carrying values of the Company's various
debt instruments.
Stock Compensation
As is permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for employee stock compensation (e.g., stock options) in
accordance with APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Under APB 25, the total compensation expense recognized is equal to
the difference between the award's exercise price and the underlying stock's
market price (referred to as "intrinsic value") at the measurement date, which
is the first date that both the exercise price and number of shares to be issued
is known. See Note 9.
New Pronouncements
The Company will be required to adopt SPAS No. 130, "Reporting Comprehensive
Income," for years beginning after December 15, 1997. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Since this
standard applies only to the presentation of comprehensive income, it will not
have any impact on the Company's results of operations, financial position or
cash flows.
SPAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for years beginning after December 15, 1997. This
statement changes the way that public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in interim
financial reports issued to shareholders. Management has not completed its
review of SPAS No. 131, but does not anticipate that the adoption of this
statement will have a significant effect on the Company's reported segments.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
F-12
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - ACQUISITIONS
Effective April 15, 1996, the Company completed the purchase of the remaining
75% of Darwin Data Systems (Darwin). Consideration for this acquisition was
$303, consisting of $101 in notes payable, 24,000 shares of the Company's common
stock valued at $132 and $70 of acquisition costs.
Effective March 31, 1995, the Company completed the purchase for $793 of the
remaining 50% of the capital stock of EMS-Illinois not then owned by the
Company.
The purchase price consisted of 50,200 shares of the Company's common stock
valued at $395, $380 in cash and $18 of acquisition costs.
On September 6, 1995, the Company acquired all of the common stock of Intercim
for approximately $3,355, composed of 278,193 shares of the Company's common
stock valued at $7.50 per share and 278,193 of the Company's warrants valued at
$3.75 per share, and direct acquisition costs of $225. Because the average
trading price (Price) of the warrants for the 15 trading days prior to April 18,
1996, was less than $3.8075, the Company was required to issue 123,719
additional warrants, which was equal to the difference between the number of
warrants originally issued and the warrants which should have been issued at the
Price above, had the Price been known at September 6, 1995.
The acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the assets and liabilities of such companies have been
adjusted to their estimated fair values. The excess of cost over the net assets
acquired has been allocated to goodwill.
The results of operations for Darwin, EMS--Illinois and Intercim have been
included in the Company's consolidated financial statements from their
respective acquisition dates. The unaudited pro forma results of operations
below for EMS--Illinois and Intercim assume that the acquisitions had occurred
at the beginning of the period. In addition to combining the historical results
of all the entities, the pro forma calculations include adjustments for
amortization of various intangibles acquired in conjunction with the acquisition
and elimination of intercompany transactions with EMS--Illinois. However, no
adjustments hay been reflected for nonrecurring expenses as a result of the
combination of the entities.
Year ended November 30, 1995 (Unaudited):
Total net revenue $34,174
Net income (loss) (505)
Earnings per share (.13)
Pro forma results have not been included for 1996 for the Darwin acquisition
because the impact was not significant.
F-13
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS
The following is a summary of investment securities at November 30, 1996:
Available-for-Sale Securities
Gross
Unrealized
Gains Estimated
Obligations of states Cost (Losses) Fair Value
and political subdivisions $505 $-- $505
All of the above securities were due in one year or less.
During the years ended November 30, 1997 and 1996, debt available-for-sale and
certain debt held-to-maturity securities with fair market value of $505 and
$1,247, respectively, were sold, with proceeds received approximating cost. The
sales were made to provide funding for certain acquisitions, software
development and normal operations. No unrealized holding gains (losses) on
available-for-sale securities, which would be included as a separate component
of shareholders' equity, have been recorded as cost approximated estimated fair
value as of November 30, 1996.
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at November 30:
1997 1996
-------- --------
Equipment $7,119 $6,090
Furniture and fixtures 1,346 1,199
Leasehold improvements 478 426
Equipment under capital leases 416 454
-------- --------
9,359 8,169
Less accumulated depreciation
and amortization (5,442) (4,208)
------ --------
Equipment and leasehold improvements, net $3,917 $3,961
======== ========
F-14
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consisted of the following at November 30:
1997 1996
-------- --------
Goodwill $1,445 $1,445
Customer list 1,400 1,400
Other 200 200
-------- --------
3,045 3,045
Less accumulated amortization (601) (355)
======== ========
Intangible asset, net $2,444 $2,690
======== ========
NOTE 6 - AFFILIATED COMPANY
Certain of the Company's stockholders also own all of the common stock of an
affiliated company, EMS Solutions, Inc. (Solutions), which develops and sells
computer software ant related hardware to the food vending and food distribution
industry. The Company has provided certain services to Solutions for which the
Company received fees of $122, $269 and $321 in 1997, 1996 and 1995,
respectively, that are recorded as an offset to general an administrative
expense. The Company also sells computer hardware to Solutions that totaled
$331, $851 and $926 in 1997, 1996 and 1995, respectively. Amounts due from
Solutions were $404 and $445 at November 30, 1997 and 1996, respectively.
Material transactions with Solutions must be approved by a majority of the
Company's external directors.
On July 1, 1997, Solutions moved to new facilities and no longer utilizes office
space or other material services of the Company. In addition, Solutions no
longer purchases computer hardware from the Company.
NOTE 7 - LONG-TERM DEBT AND LEASE COMMITMENTS
Long-term obligations consist of the following at November 30:
1997 1996
--------- ----------
Line of credit $3,762 $1,864
Notes payable 910 27
Capital lease obligations 240 359
--------- ----------
4,912 2,250
Less amounts due within one year (946) (127)
--------- ----------
$3,966 $2,123
========= ==========
On December 31, 1997, the Company entered into a loan and security agreement
(Agreement) with Foothill Capital Corporation (Foothill), which includes a
revolving line of credit facility (Revolver) providing for maximum borrowings of
$6,000 and a three-year term note for $3,112. The term note calls for 36 monthly
payments of $65 with the remaining balance of principal due December 30, 2000.
Amounts outstanding have been classified as long-term based upon the stated
maturity date and the Company's estimates that borrowings will not decrease
during fiscal 1998. Interest on the Revolver is payable monthly based on the
bank's base rate plus .75% (9.25% at December 31, 1997); the term note bears
interest at 13.5% per year.
F-15
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND LEASE COMMITMENTS(CONTINUED)
Borrowings under the Agreement are secured by substantially all assets of the
Company (except inventory subject to the lien of a vendor). In addition, the
Agreement requires the Company to maintain compliance with various covenants,
including minimum levels of tangible net worth and adjusted operating income.
The Company is also required to pay a monthly commitment fee of .50% per annum
on the difference between the commitment amount and balance outstanding under
the Revolver in lieu of a minimum monthly interest payment.
The Company leases computer and other equipment under capital leases. The
Company also leases office space, automobiles, and certain other equipment under
operating leases.
At November 30, 1997, future payments under capital and noncancellable operating
leases were as follows:
Fiscal Year Ending November 30 Capital Leases Operating Leases
------------------- --------------------
1998 $162 $1,198
1999 111 1,159
2000 -- 1,132
2001 -- 989
2002 -- 713
Thereafter -- 849
----------- -----------
Total minimum lease obligations 273 $6,040
===========
Amounts representing interest (33)
-----------
Capital lease obligations $240
===========
Amortization expense relating to assets under capital leases is included in
total depreciation expense for the period.
Total rent expense on all operating leases was approximately $1,663, $1,404 and
$1,042 in 1997, 1996 and 1995, respectively.
NOTE 8 - STOCKHOLDERS' EQUITY
As of November 30, 1995, the Company had 18,801 shares of common stock and
18,801 warrants with an aggregate value of $211 that were to be issued in
exchange for common stock of former Intercim stockholders. These amounts, which
were classified as common stock and warrants to be issued in stockholders'
equity at November 30, 1995, were substantially issued in 1996.
In connection with the acquisition of Intercim (see Note 2), the
Company issued common stock warrants. Each warrant entitles the holder, at any
time prior to September 6, 2005, to purchase one share of the Company's common
stock at $6.75 per share.
NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS
The Company maintains the 1986 Employees' Stock Option Plan (the 1986 Plan)
pursuant to which executive officers and other key employees of the Company have
received options to purchase shares of the Company's common stock. Options under
the 1986 Plan were granted at exercise prices equal to the fair market value of
the
F-16
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED)
common stock on the date of grant. Options to purchase an aggregate of 57,000
shares have previously been granted and remain outstanding at November 30, 1997.
No additional options will be granted under the 1986 Plan.
In December 1993, the Company's Board of Directors adopted the Effective
Management Systems, Inc. 1993 Stock Option Plan (the 1993 Plan). The 1993 Plan,
as amended, provides for the granting of both incentive stock options and
nonqualified stock options to employees and nonqualified stock options to
non-employee directors of the Company covering up to a maximum of 550,025
shares. Under the 1993 Plan, the exercise price of options granted cannot be
less than 100% of the fair market value of a share of the Company's stock at the
date of grant.
On September 6, 1995, in conjunction with the merger of Intercim (see Note 2),
the Company adopted a new stock option plan, pursuant to which the Company
granted stock options to those holders who agreed to the cancellation of their
Intercim stock options.
The Company has also issued nonqualified stock options to certain of its
executives and other nonemployee directors. These options have various vesting
schedules.
Information with respect to stock options granted under all plans is as follows:
Weighted
Number of Exercise Price Average
Shares Per Share Exercise Price
----------- -------------- --------------
Outstanding at November 30, 1994 389,424 $1.57-$8.00
Granted 518,352 6.125-7.25
Exercised (29,949) 1.57-6.25
Canceled or expired (47,399) 6.25
----------- --------------- -------------
Outstanding at November 30, 1995 830,428 1.57-8.00
Granted 124,043 4.75-7.00
Exercised (35,000) 1.71
Canceled or expired (14,569) 5.75-7.50
----------- --------------- -------------
Outstanding at November 30, 1996 904,902 1.71-7.50 $6.13
Granted 109,938 4.63-6.75 5.73
Exercised (39,500) 1.71-1.71 1.71
Canceled or expired (54,961) 4.75-7.50 6.63
----------- --------------- -------------
Canceled or expired Outstanding at
November 30, 1997 920,379 $2.29-$8.25 $6.24
=========== =============== =============
At November 30, 1997, options to purchase 513,287 shares were exercisable under
all plans, at a weighted average exercisable price of $6.29 and a weighted
average contractual life of 7.3 years.
F-17
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED)
In determining the effect of FASB Statement No. 123, the Black-Scholes option
pricing model was used with the following weighted-average assumptions for 1997:
risk-free interest rates of 5.36%, dividend yields of 0%, volatility factors of
the expected market price of the Company's common stock of .92, and a
weighted-average expected life of the options of 4.93 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company's pro forma information, as if these options had been expensed in
accordance with FASB Statement No. 123, follows:
1997 1996
---- ----
Pro forma net income (loss) $(2,286) $114
Pro forma earnings (loss) per share (.56) .03
In December 1993, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (Stock Purchase Plan), which permits employees to purchase shares
of the Company's common stock during six-month periods beginning on June 1 and
December 1 of each year. The purchase price of such shares will be equal to the
lesser of 85% of the fair market value of the stock at the beginning or end of
each six-month offering period. During fiscal 1997 and 1996, 26,792 and 29,718
shares, respectively, were purchased under the Stock Purchase Plan. The maximum
cumulative number of shares that may be purchased under the Stock Purchase Plan
is 100,240.
The Company has reserved 1,508,813 shares of its common stock for potential
conversion of common stock warrants and issuance under the stock option and
purchase plans described above.
NOTE 10 - INCOME TAXES
Income tax expense (credit) in the consolidated statement of operations consists
of the following:
Year ended November 30
1997 1996 1995
-------------- --------------- ---------------
Current:
Federal $(233) $(170) $(485)
State -- 80 10
-------------- --------------- ---------------
(233) (90) (475)
Deferred (385) 202 554
-------------- --------------- ---------------
$(618) $112 $ 79
============== =============== ===============
F-18
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES(CONTINUED)
The reconciliation of income tax expense (benefit) computed at the U.S. federal
statutory rate to income tax expense (benefit) is:
Year ended November 30
1997 1996 1995
------------ -------------- --------------
Tax at U.S. statutory rate of 34% $(945) $ 90 $ 71
State income taxes, net of federal
benefit -- 14 7
Nondeductible items -- 112 82
Tax-exempt investment income -- (13) (32)
General business credits -- (98) (69)
Change in valuation allowance 329 -- 22
Other (2) 7 (2)
------------ -------------- --------------
$(618) $112 $ 79
============ ============== ==============
The significant components of the deferred tax accounts recognized for financial
reporting purposes at November 30 were as follows:
1997 1996
--------------- -------------
Deferred tax liabilities:
Capitalized computer software costs $3,087 $2,341
Depreciation 342 328
Other, net 16 15
--------------- -------------
Total deferred tax liabilities 3,445 2,684
Deferred tax assets:
Net operating loss carryforwards 2,902 1,578
Allowance for doubtful accounts 185 108
Deferred revenue 127 72
Inventory 30 40
General business credit carryforwards 442 448
Other, net 88 53
--------------- -------------
Total deferred tax assets 3,774 2,299
Valuation allowance (329) --
Net deferred tax liabilities $ -- $ 385
=============== ============
F-19
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES(CONTINUED)
At November 30, 1997, the Company had net federal and state operating loss
carryforward (NOLs) of approximately $6.8 million and $8.3 million,
respectively, available to offset future federal and state taxable income. The
utilization of $2,730,000 of the NOLs is subject to an annual limitation of
approximately $182,000 annually and expires in the year 2010. The carryforwards
resulted from the Company's acquisition of Intercim Corp. (Intercim) in 1995 and
net operating losses. In addition, the Company has general business credits
totaling $442,000 which can be used to reduce federal taxable income through
2011.
In 1997, a valuation allowance equal to 100% of the net deferred tax assets has
been recognized based on uncertainty regarding realization of such assets.
NOTE 11 - SAVINGS PLAN
The Company has a defined contribution 401(k) savings plans that covers
substantially all employees meeting certain minimum eligibility requirements.
Participating employees can elect to defer a portion of their compensation and
contribute it to the plan on a pretax basis The Company also matches certain
amounts and/or provides additional discretionary contributions, as defined. The
Company's contributions to the various plans were $310, $345 and $246 for 1997,
1996 and 1995, respectively.
NOTE 12 - LIQUIDITY AND MANAGEMENT'S PLAN
The Company has experienced significant recurring losses and negative cash flow
since November 30, 1997. As of August 31, 1998, current liabilities exceeded
current assets by $1,575.
In April 1998, management approved a major restructuring plan and recorded a
restructuring charge of approximately $6.8 million. The restructuring included
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving the Company's financial
performance. In connection with the restructuring, the Company closed facilities
both in the United States and internationally and decreased it's workforce,
particularly in development, marketing and administration. In October, 1998, the
Company amended its credit facility to reset certain covenants. The amendment
also increased the term loan facility by $777.
Management believes that operations and additional sources of financing will
generate sufficient cash flow to fund its operations in fiscal 1999. The Company
is investigating alternative sources of financing. Accordingly, the financial
statements have been prepared on the basis of a going concern, which
contemplates realization of assets and satisfaction of liabilities in the normal
course of business.
NOTE 13 - SUBSEQUENT EVENT
The Company is a party to various legal proceedings arising in the ordinary
course of business. The Company believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
condition or results of operations. In December, 1998, a judgement was issued in
a legal proceeding that resulted in the Company being ordered to pay $212.
F-20
<PAGE>
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.
F-21
<PAGE>
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, $.0l 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.
F-22
<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.
F-23
<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)
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.
F-24
<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
F-25
<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 3l,
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.
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 an 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
F-26
<PAGE>
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.
F-27
<PAGE>
==================================== ==========================================
No person has been authorized to
give any information or make any
representations other than those
contained in this Prospectus, and,
if given or made, such information
or representations must not be
relied upon as having been Effective Management
authorized. This Prospectus does not Systems, Inc.
constitute an offer to sell or the
solicitation of an offer to buy any
securities other than the securities
to which it relates or an offer to
sell or the solicitation of an offer
to buy such securities in any
circumstances in which such offer or Common Stock
solicitation is unlawful. Neither (par value $.01 per share)
the delivery of this Prospectus nor
any sale made hereunder shall, under
any circumstances, create any
implication that there has been no
change in the affairs of the Company
since the date hereof or that the
information contained herein is
correct as of any time subsequent to
its date.
-------------------
TABLE OF CONTENTS
Page
Forward-Looking Statements.....
Prospectus Summary............. ___________________
Risk Factors...................
The Company....................
Use of proceeds................
Market for Common Stock........
Dividend Policy................ PROSPECTUS
Capitalization.................
Selected Consolidated Financial
and Operating Data............
Management's Discussion and ___________________
Analysis of Financial
Condition and Results
of Operations at and for the
Three and Nine Months Ended
August 31, 1998...............
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations at and for
the Fiscal Years Ended .......
Business.......................
Management.....................
Principal Shareholders.........
Description of Certain
Indebtedness..................
Description of Capital Stock...
Plan of Distribution...........
Experts........................
Legal Matters..................
Additional Information.........
Index to Financial Statements..F-1
==================================== ==========================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission filing fee............ $551
Accountants' fees and expenses........................... *
Legal fees and expenses.................................. *
Miscellaneous............................................ *
Total........................................... *
------------------------
* To be filed by amendment.
The foregoing costs and expenses will be paid by the Company. Other
than the Securities and Exchange Commission filing fee, all fees and expenses
are estimated.
Item 14. Indemnification of Directors and Officers.
Pursuant to the provisions of the Wisconsin Business Corporation Law
and the Registrant's Bylaws, directors and officers of the Registrant are
entitled to mandatory indemnification from the Registrant against certain
liabilities and expenses (i) to the extent such officers or directors are
successful in the defense of a proceeding and (ii) in proceedings in which the
director or officer is not successful in defense thereof, unless (in the latter
case only) it is determined that the director or officer breached or failed to
perform his or her duties to the Registrant and such breach or failure
constituted: (a) a willful failure to deal fairly with the Registrant or its
shareholders in connection with a matter in which the director or officer had a
material conflict of interest; (b) a violation of the criminal law unless the
director or officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(c) a transaction from which the director or officer derived an improper
personal profit; or (d) willful misconduct. It should be noted that the
Wisconsin Business Corporation Law specifically states that it is the public
policy of Wisconsin to require or permit indemnification in connection with a
proceeding involving securities regulation, as described therein, to the extent
required or permitted as described above. Additionally, under the Wisconsin
Business Corporation Law, directors of the Registrant are not subject to
personal liability to the Registrant, its shareholders or any person asserting
rights on behalf thereof for certain breaches or failures to perform any duty
resulting solely from their status as directors, except in circumstances
paralleling those outlined in (a) through (d) above.
Expenses for the defense of any action for which indemnification may
be available may be advanced by the Company under certain circumstances.
The indemnification provided by the Wisconsin Business Corporation Law
and the Registrant's Bylaws is not exclusive of any other rights to which a
director or officer of the Registrant may be entitled.
The Company maintains a liability insurance policy for its directors
and officers as permitted by Wisconsin law which may extend to, among other
things, liability arising under the Securities Act of 1933, as amended.
Item 15. Recent Sales of Unregistered Securities.
Series A Preferred Stock
On August 28, 1998, the Company sold 1,005 shares of its Series A 8%
Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), in a non-public offering exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) and Rule 506 of Regulation D thereunder. The Series A
Preferred Stock was sold at a price of $1,000 per share to accredited investors,
as such term is defined in Rule 501(a) under the Securities Act. All shares of
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the Series A Preferred Stock were subsequently exchanged for shares of the
Series B 8% Convertible Redeemable Preferred Stock, par value $.01 per share
(the "Series B Preferred Stock"), and no shares of the Series A Preferred Stock
remain outstanding.
Series B Preferred Stock
On October 27, 1998, the Company issued 780 shares of the Series B
Preferred Stock, in a non-public offering exempt from registration pursuant to
Section 4(2) of the Securities Act, and Rule 506 of Regulation D thereunder. The
Series B Preferred Stock was sold at a price of $1,000 per share to accredited
investors, as such term is defined in Rule 501(a) under the Securities Act.
On October 27, 1998, as part of the Company's offering of its Series B
Preferred Stock, the Company issued to (i) certain warrants to purchase 28,714
shares of common stock, par value $.01 per share (the "Common Stock") and (ii)
certain warrants to purchase 26,000 shares of the Common Stock. The warrants are
immediately exercisable for a five year period at a price of $3.60 per share,
subject to certain adjustment as provided in the warrant agreement.
On October 30, 1998, the Company exchanged, on a one-for-one basis,
1,005 shares of the Series A Preferred Stock for 1,005 shares of its Series B
Preferred Stock.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The exhibits filed herewith are as specified on the
Exhibit Index included herein.
(b) Financial Statement Schedules. The schedules filed herewith are
as specified on the Index to Schedules included herein.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(i) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement;
(ii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement
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relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Milwaukee,
State of Wisconsin, on this 14th day of December, 1998.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By /s/ Michael D. Dunham
Michael D. Dunham
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below as of this 14th day of December,
1998 by the following persons in the capacities indicated. Each person whose
signature appears below constitutes and appoints Michael D. Dunham and Jeffrey
J. Fossum, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and any additional registration statement to be filed pursuant to rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title
/s/ Michael D. Dunham President and Director
Michael D. Dunham (Principal Executive Officer)
/s/ Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer
Jeffrey J. Fossum (Principal Financial and Accounting Officer)
/s/ Helmut M. Adam Director
Helmut M. Adam
/s/ Robert E. Weisenberg Director
Robert E. Weisenberg
/s/ Scott J. Mermel Director
Scott J. Mermel
/s/ Thomas M. Dykstra Director
Thomas M. Dykstra
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EXHIBIT INDEX
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Exhibit
Number Exhibit
2.1 Agreement and Plan of Merger, dated as of February 17, 1995 among
Effective Management Systems, Inc., EMS Acquisition Corp. and
Intercim Corporation [Incorporated by reference to Exhibit 2.1 to
Effective Management Systems, Inc.'s Registration Statement on
Form S-4 (Registration No. 33-95338)].
2.2 Amendment No. 1 to Agreement and Plan of Merger described in
Exhibit 2.1, dated as of June 30, 1995 [Incorporated by reference
to Exhibit 2.2 to Effective Management Systems, Inc. Registration
Statement on Form S-4 (Registration No. 33-95338)].
2.3 Amendment No. 2 to Agreement and Plan of Merger described in
Exhibit 2.1, dated as of July 31, 1995 [Incorporated by reference
to Exhibit 2.3 to Effective Management Systems, Inc. Registration
Statement on Form S-4 (Registration No. 33-95338)].
2.4 Agreement of Merger, dated as of March 22, 1995, among Effective
Management Systems, Inc., EMS Illinois Acquisition Corp.,
Effective Management Systems of Illinois, Inc., Richard W. Grelck
and Daniel E. Long [Incorporated by reference to Exhibit 2.2 to
Effective Management Systems, Inc.'s Quarterly Report on Form
10-QSB for the quarter ended February 28, 1995].
3.1 Amendment to Restated Articles of Incorporation for the Series B
Preferred Stock.
3.2 Restated Articles of Incorporation of Effective Management
Systems, Inc., as amended
3.4 Bylaws of Effective Management Systems, Inc. [Incorporated by
reference to Exhibit 3.2 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)].
4.1 Article 4 of the Restated Articles of Incorporation of Effective
Management Systems, Inc., as amended. [See exhibit 3.2].
4.2 Loan and Security Agreement by and between Foothill Capital
Corporation and Effective Management Systems, Inc EMS-East, Inc.
and Effective Management Systems of Illinois, Inc. dated December
31, 1997 [Incorporated by reference to Exhibit 4.14 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
4.3 Waiver and First Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc. and Effective Management Systems of Illinois, Inc.,
dated May 8, 1998 [Incorporated by reference to Exhibit 4.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
4.4 Waiver to Loan Agreement between Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated July 13, 1998
[Incorporated by reference to Exhibit 4.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
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4.5 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, 1988 [Incorporated by reference to Exhibit 4.1
to Effective Management System, Inc.'s Quarterly Report on Form
10-Q for the quarter ended August 31, 1998].
4.6 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 [Incorporated by reference to Exhibit 4.2 to
Effective Management System, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended August 31, 1998].
4.7 Form of Common Stock Warrant Issued in Connection With the Sale of
the Series A Preferred Stock.
4.8 Form of Common Stock Warrant Issued in Connection With the Sale of
the Series B Preferred Stock.
5.1 Opinion of Foley & Lardner.
10.1 Business Agreement by and between Digital Equipment Corporation
and Effective Management Systems, Inc., effective as of February
8, 1994 [Incorporated by reference to Exhibit 10.1 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)].
10.2 Addendum to Business Agreement by and between Digital Equipment
Corporation and Effective Management Systems, Inc., effective as
of February 8, 1994 [Incorporated by reference to Exhibit 10.2 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)].
10.3 Value Added Reseller Agreement by and between Digital Information
Systems Corporation and Effective Management Systems, Inc.,
effective as of November 9, 1992 [Incorporated by reference to
Exhibit 10.3 to Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 registration No. 33-73354)].
10.4 Domestic Value Added Reseller Agreement between Intermec
Corporation and Effective Management Systems, Inc., dated as of
march 4, 1991 [Incorporated by reference to Exhibit 10.4 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)].
10.5 Amendment No. 1 to Domestic Value Added Reseller Agreement between
Intermec Corporation and Effective Management Systems, Inc., dated
as of October 29, 1991 [Incorporated by reference to Exhibit 10.5
to Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)].
10.6 Amendment No. 2 to Domestic Value Added Reseller Agreement between
Intermec Corporation and Effective Management Systems, Inc., dated
as of June 11, 1993 [Incorporated by reference to Exhibit 10.6 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)].
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10.7 Software Supplier Agreement dated August 6, 1994, by and between
Effective Management Systems, Inc. and Hewlett Packard Company
[Incorporated by reference to Exhibit 10.7 to Effective Management
Systems, Inc.'s Annual Report on Form 10-KSB for the year ended
November 30, 1994].
10.8 Joint Venture Agreement, dated September 15, 1985, by and between
Effective Management Systems, Inc. and Joseph H. Schlanser,
Aurinee M. Schansler and Barton R. Benjamin [Incorporated by
reference to Exhibit 10.9 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)].
10.9 International Marketing Agreement, dated July 5, 1994, by and
between Effective Management Systems, Inc. Systems, Inc. and
Systems Technology Management Corporation [Incorporated by
reference to Exhibit 10.11 to Effective Management Systems, Inc.'s
Annual Report on Form 10-KSB for the year ended November 30,
1994].
10.10 Lease by and between Effective Management Systems, Inc. and
Milwaukee Park Place Limited Partnership, as amended [Incorporated
by reference to Exhibit 10.10 to Effective Management Systems,
Inc.'s Registration Statement on Form SB-2 (Registration No.
33-73354)].
10.11 Effective Management Systems, Inc. 1986 Employee's Stock Option
Plan [Incorporated by reference to Exhibit 10.11 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)].
10.12 Warrant Agreement between Effective Management Systems, Inc. and
American Stock Transfer & Trust Company, dated as of September 6,
1995 [Incorporated by reference to Exhibit 4.2 to Effective
Management Systems, Inc.'s Current Report on Form 8-K dated
September 6, 1995].
10.13 Stock Option Agreement by and between Helmut M. Adam and Effective
Management Systems, Inc., dated as of December 17, 1993
[Incorporated by reference to Exhibit 10.13 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)].
10.14 Stock Option Agreement by and between Scott J. Mermel and
Effective Management Systems, Inc., dated as of December 17, 1993
[Incorporated by reference to Exhibit 10.14 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.15 Bonus Arrangement by and between Thomas G. Allen and Effective
Management Systems, Inc. [Incorporated by reference to Exhibit
10.16 to Effective Management Systems, Inc.'s Annual Report on
Form 10-KSB for the year ended November 30, 1994].
10.16 IBM Business Partner Agreement between International Business
Machines Corporation and Effective Management Systems, Inc., dated
as of March 3, 1995 [Incorporated by reference to Exhibit 10.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form
10-QSB for the quarter ended February 28, 1995].
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10.17 Software Reseller Agreement between International Business
Machines corporation and Effective Management Systems, Inc., dated
as of September 6, 1995 [Incorporated by reference to Exhibit
10.18 to Effective Management Systems, Inc.'s Annual Report on
Form 10-KSB for the year ended November 30, 1995].
10.18 Distributor Agreement with Pioneer Standard Electronics, Inc.
[Incorporated by reference to Exhibit 10.1 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1997].
10.19 IBM Market Development Program Agreement dated September 3, 1997
[Incorporated by reference to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended August 31,
1997].
10.20 Relationship Agreement with CIMX, an Ohio Limited Liability
Company and Effective Management Systems, Inc. dated December 31,
1997 [Incorporated by reference to Exhibit 10.20 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
10.21 Reseller Agreement and Addendum Number One by and between Baan
Midmarket Solutions, LLC and Effective Management Systems, Inc.,
dated April 9, 1998 [Incorporated by reference to Exhibit 10.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.22 Distribution Agreement between EMS Asia Pacific Limited and
Effective Management Systems, Inc. dated May 29, 1988
[Incorporated by reference to Exhibit 10.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
10.23 Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended [Incorporated by reference to Exhibit 10.3 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998].
10.24 Preferred Stock Placement Agreement, dated as of August 28, 1998
between Effective Management Systems, Inc. and Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated [Incorporated by
reference to Exhibit 10.1 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended August 31,
1998].
10.25 Loan Agreement by and between EMS Solutions, Inc. and Effective
Management Systems, Inc. dated January 1, 1998 [Incorporated by
reference to Exhibit 10.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May 31, 1998].
10.26 Special Compensation and Separation Agreement by and between
Jeffrey J. Fossum and Effective Management Systems, Inc. effective
January 1, 1998 [Incorporated by reference to Exhibit 10.3 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.27 Special Compensation and Separation Agreement by and between Wayne
T. Wedell and Effective Management Systems, Inc. effective January
1, 1998 [Incorporated by reference to Exhibit 10.4 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998].
10.28 Series B Preferred Stock Placement Agreement, dated as of October
27, 1998 between Effective Management Systems, Inc. and Taglich
Brothers, D'Amadeo, Wagner & Company, Incorporated.
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10.29 Series B Preferred Stock Purchase Agreement.
21 List of Subsidiaries of Effective Management Systems, Inc.
23 Consent of Ernst & Young, LLP.
EXHIBIT 3.1
ARTICLES OF AMENDMENT
Relating to
SERIES B 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 B 8% Convertible
Redeemable Preferred Stock.
2. That said resolution of the Board of Directors of the
Corporation creating the series designated as Series B 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
(6) of Section A of Article 4 of the Corporation's Restated Articles of
Incorporation:
(6) Series B 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 B 8%
Convertible Redeemable Preferred Stock" (hereinafter referred to
as the "Series B"); the number of shares constituting such series
shall be 5,000. 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 B 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 B, the holders of the Series B
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
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October 1 of each year to holders of record of Series B 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"). The first dividend payment
date with respect to the Series B shall be January 2, 1999,
which dividend shall be paid on a pro rata basis for the
period such shares of Series B 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 B
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 B, 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 B. If any dividends are paid on any of
the Series B at any time in an aggregate amount less than
the total dividends then accumulated and payable on all
shares of Series B entitled to dividends then outstanding,
the amount to be distributed shall be paid on each share of
Series B 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 B entitled to dividends.
(c) Date of Payment. In any case where the due date for the
payment of dividends on the Series B 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 B shall rank on a parity with
each other and shall be preferred to the Common Stock and, other
than the corporation's Series
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A 8% Convertible Redeemable Preferred Stock (the "Series A"),
which shall rank on a parity with the Series B, 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 B without the consent of the holders of the
Series B. The holders of the Series B (together with the holders
of 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 and Series B; provided, however, that
should the corporation issue and sell prior to October 30, 1998 at
least 700 shares of Series B and, at any time thereafter through
October 30, 1998, subject to the terms of the Series A and 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 $2.75 million and the aggregate purchase price for the
number of shares of Series B sold, with different terms than the
Series B (the "Other Securities"), the corporation shall have the
right, without the approval of the holders of the Series B, to
sell the Other Securities and to have such Other Securities rank
equal in priority to the Series B.
(iv) Voluntary Conversion Rights.
(a) Voluntary Conversion. Each holder of Series B 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 B 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 B being taken at
$1,000 per share for the purposes of such conversion. The
initial Conversion Price is $3.00 per share of Common Stock
(the "Initial Conversion Price"). Notwithstanding anything
to the contrary contained in the terms of the Series B, in
the event that the average closing price for the
corporation's Common Stock on the highest five (5) out of
the last ten (10) trading days of the calendar month of
January 1999 is not $5.25 per share of Common Stock or
greater, then effective January 31, 1999, the Initial
Conversion Price shall automatically be reduced to the
lowest closing bid price within thirty (30) days after the
date that the last sale of the Series B occurs, but in no
event less than $2.00 per share of Common Stock. In no
event shall the Initial Conversion Price be increased as a
result of the foregoing. The Initial Conversion Price shall
be further 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 B shall
thereafter be entitled to receive upon conversion, at the
Conversion
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Price, the number of shares of Common Stock obtained by
multiplying $1,000 times the number of shares of Series B
being converted and dividing such product by the Conversion
Price.
(b) Method of Conversion. In order to convert shares of the
Series B into Common Stock, the holder thereof shall
surrender the certificates representing the Series B 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 B shares, and give written notice
to the corporation at said office that the holder elects to
convert said shares of Series B. Shares of the Series B
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 B 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 B 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 B 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 B 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 B 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 B all accrued and
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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 on 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 B to convert
their shares of Series B into shares of Common Stock immediately
prior to the closing of the Sale Event. Notwithstanding anything
to the contrary, holders of Series B 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 B that voluntarily converts shares of Series B 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 B is no
longer outstanding during such period and that the only rights of
the Series B 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 B (either class voting rights or the right to
vote with the Common Stock) with respect to a Sale Event, the
holders of the Series B 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 B 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 B 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 B 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 B 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 B 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
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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 October 22, 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 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
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<PAGE>
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 B 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 Stock immediately theretofore purchasable and
receivable upon the conversion of Series B 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 B) 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 B, 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
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<PAGE>
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 B shall
have been given a reasonable opportunity to then elect to
receive upon the conversion of Series B, 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 B,
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 B upon the conversion of the Series B 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 B 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 B to the end that the provisions of the Series B
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 B. Upon the
occurrence of any event described in this Section (vi)(e),
the holders of the Series B 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)(i)(2) by more than thirty (30%) percent, or
(ii) retain ownership of the shares of Series B, in which
event, appropriate provisions shall be made so that the
shares of Series B 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 B 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
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<PAGE>
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 B. 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 B 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 B to the holders of record of the
outstanding shares of the Series B, 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 B, the full number
of shares of Common Stock then deliverable upon the
conversion of all shares of the Series B 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 B and
shall use its best efforts to effect such listing.
9
<PAGE>
(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 B 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 B 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 B 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 B 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 Series A and Other Securities,
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<PAGE>
if any, without regard to class. The holders of the Series
B shall have the number of votes that they would have had
assuming conversion of the Series B 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 B 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 B shall not be entitled to vote as a
separate class.
(b) No Cumulative Voting. The holders of shares of the Series B
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 B, the Series A and
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 B,
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; or
ii. amend, alter, change, or repeal any of the express
terms of the Series B, the Series A or the Other
Securities.
(ix) Redemption.
(a) Redemption. Commencing three (3) years following the last
issuance of the shares of Series B, the corporation may
redeem the Series B 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 B 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 B, 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 B so to be
redeemed. Each notice of redemption of shares of the Series
B shall state:
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<PAGE>
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 B 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 B 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 B shall be
entitled to convert all or any portion of such holder's
Series B 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 B, the shares of the Series B 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 B 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
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<PAGE>
shares of Common Stock or of any other equity security of
the corporation other than the Series A and the Other
Securities, each holder of a share of the Series B 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 B and any other stock ranking on a parity
therewith (including the Series A and 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 B 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 B 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
B 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 B is surrendered to the corporation, the corporation
shall execute and deliver in exchange therefor a new
certificate for Series B 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 B and (ii) such reasonable
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<PAGE>
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 B 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 B, a new certificate of Series B 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 B 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 B
issued pursuant to this Section (xi), in lieu of any
destroyed, lost or stolen certificate of Series B, shall
constitute an original additional contractual obligation of
the corporation, whether or not the destroyed, lost or
stolen certificate of Series B shall be at any time
enforceable by anyone. Any new certificate for Series B
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 B.
* * *
3. That none of the shares of Series B 8% Convertible Redeemable
Preferred Stock have been issued.
4. That the amendment creating the Series B 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 ____ day of October, 1998.
By: ___________________________________
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.
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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 the
<PAGE>
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,
the first dividend payment date with respect to the Series A shall be January 2,
1999, which
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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 and the aggregate purchase price for the number of shares of Series A
sold, with different terms than the Series
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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 1933, as amended (the
"Act"), and such registration is then currently effective; and (b) the
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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
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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 or
payable with respect to or in exchange for a number of outstanding shares of
such Common
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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 immediately prior to such
transaction (without giving effect to any restriction upon such
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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 for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken, the
date as
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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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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.
(iv) 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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(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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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.
(6) Series B 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 B 8% Convertible
Redeemable Preferred Stock" (hereinafter referred to as the "Series B"); the
number of shares constituting such series shall be 5,000. 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 B 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 B, the holders of the Series B 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 B 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"). The first dividend payment date
with respect to the Series B shall be January 2, 1999, which dividend shall be
paid on a pro rata basis for the period such shares of Series B 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 B 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
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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 B, 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 B. If any dividends are
paid on any of the Series B at any time in an aggregate amount less than the
total dividends then accumulated and payable on all shares of Series B entitled
to dividends then outstanding, the amount to be distributed shall be paid on
each share of Series B 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 B entitled
to dividends.
(c) Date of Payment. In any case where the due date for the
payment of dividends on the Series B 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 B shall rank on a parity
with each other and shall be preferred to the Common Stock and, other than the
corporation's Series A 8% Convertible Redeemable Preferred Stock (the "Series
A"), which shall rank on a parity with the Series B, 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 B without the consent of the holders of the Series B. The
holders of the Series B (together with the holders of 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 and Series B;
provided, however, that should the corporation issue and sell prior to October
30, 1998 at least 700 shares of Series B and, at any time thereafter through
October 30, 1998, subject to the terms of the Series A and 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 $2.75 million and the aggregate purchase price for the number
of shares of Series B sold, with different terms than the Series B (the "Other
Securities"), the corporation shall have the right, without the approval of the
holders of the Series B, to sell the Other Securities and to have such Other
Securities rank equal in priority to the Series B.
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(iv) Voluntary Conversion Rights.
(a) Voluntary Conversion. Each holder of Series B 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 B 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 B being taken at $1,000 per share
for the purposes of such conversion. The initial Conversion Price is $3.00 per
share of Common Stock (the "Initial Conversion Price"). Notwithstanding anything
to the contrary contained in the terms of the Series B, in the event that the
average closing price for the corporation's Common Stock on the highest five (5)
out of the last ten (10) trading days of the calendar month of January 1999 is
not $5.25 per share of Common Stock or greater, then effective January 31, 1999,
the Initial Conversion Price shall automatically be reduced to the lowest
closing bid price within thirty (30) days after the date that the last sale of
the Series B occurs, but in no event less than $2.00 per share of Common Stock.
In no event shall the Initial Conversion Price be increased as a result of the
foregoing. The Initial Conversion Price shall be further 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 B 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 B being converted and dividing such
product by the Conversion Price.
(b) Method of Conversion. In order to convert shares of the
Series B into Common Stock, the holder thereof shall surrender the certificates
representing the Series B 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 B shares, and give
written notice to the corporation at said office that the holder elects to
convert said shares of Series B. Shares of the Series B 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 B 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 B 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 B 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 B 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
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following conditions are satisfied: (a) the Common Stock issued and/or issuable
upon conversion of the Series B 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 B 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 on 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 B to convert
their shares of Series B into shares of Common Stock immediately prior to the
closing of the Sale Event. Notwithstanding anything to the contrary, holders of
Series B 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 B that voluntarily converts shares of Series B 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 B is no
longer outstanding during such period and that the only rights of the Series B
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 B (either class voting rights or the
right to vote with the Common Stock) with respect to a Sale Event, the holders
of the Series B 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 B 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 B 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 B 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 B 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
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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 B 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 October 22, 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 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 B shall thereafter
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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 Stock immediately theretofore purchasable and receivable upon
the conversion of Series B 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 B) 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 B, 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 B shall have been given a
reasonable opportunity to then elect to receive upon the conversion of Series B,
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 B, 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 B upon the conversion of the Series B after the effective
date of such transaction shall be entitled to receive the kind and amount of
shares, evidences of
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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 B 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 B to the end that the provisions of the Series B 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 B. Upon the occurrence of any event
described in this Section (vi)(e), the holders of the Series B 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)(i)(2)
by more than thirty (30%) percent, or (ii) retain ownership of the shares of
Series B, in which event, appropriate provisions shall be made so that the
shares of Series B 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 B 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 B. 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 B 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 B to the holders of record of the
outstanding shares of the Series B, at least
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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
B, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of the Series B 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 B 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 B 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 B 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
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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 B 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).
(vii) Voting.
(a) Voting. The holders of the Series B 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 Series A and Other Securities, if
any, without regard to class. The holders of the Series B shall have the number
of votes that they would have had assuming conversion of the Series B 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 B
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 B shall not
be entitled to vote as a separate class.
(b) No Cumulative Voting. The holders of shares of the
Series B 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 B, the
Series A and 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 B, 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; or
(ii) amend, alter, change, or repeal any of
the express terms of the Series B, the
Series A or the Other Securities.
(iv) Redemption.
(a) Redemption. Commencing three (3) years following the
last issuance of the shares of Series B, the corporation may redeem the Series B
in whole
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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 B 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 B, 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 B so to be redeemed. Each notice of
redemption of shares of the Series B 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 B
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 B 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 B shall be entitled to convert
all or any portion of such holder's Series B 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 B, the shares of
the Series B 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.
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(e) Cancellation of Shares. Shares of the Series B 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 Series A and the Other Securities, each holder of a share of the Series
B 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 B
and any other stock ranking on a parity therewith (including the Series A and
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 B 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 B 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 B 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 B is surrendered to the corporation, the corporation shall execute and
deliver in
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<PAGE>
exchange therefor a new certificate for Series B 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 B 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 B 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 B, a new certificate of Series B 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 B 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 B issued pursuant to this Section (xi), in lieu
of any destroyed, lost or stolen certificate of Series B, shall constitute an
original additional contractual obligation of the corporation, whether or not
the destroyed, lost or stolen certificate of Series B shall be at any time
enforceable by anyone. Any new certificate for Series B 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 B.
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.
-24-
<PAGE>
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 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.
-25-
<PAGE>
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 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.
-26-
EXHIBIT 4.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR ANY STATE SECURITIES
LAWS AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR
OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, BY THE HOLDER
EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS
COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE
EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT
AND APPLICABLE STATE SECURITIES LAWS.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Common Stock Purchase Warrant
to
Purchase _______ Shares
of
Common Stock
This Common Stock Purchase Warrant is issued to:
------------------------
c/o Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated
100 Wall Street
10th Floor
New York, NY 10005
by EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation (hereinafter
called the "Company", which term shall include its successors and assigns).
FOR VALUE RECEIVED and subject to the terms and conditions hereinafter
set out, the registered holder of this Warrant as set forth on the books and
records of the Company (the "Holder") is entitled upon surrender of this Warrant
to purchase from the Company _________________________________________________
fully paid and nonassessable (except as otherwise provided in Section
180.0622(2)(b) of the Wisconsin Business Corporation Law) shares of Common
Stock, $ .01 par value (the "Common Stock"), at the Exercise Price (as defined
below) per share.
This Warrant shall expire at the close of business on October 31, 2003.
1. (a) The right to purchase shares of Common Stock represented by this
Warrant may be exercised by the Holder, in whole or in part, by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company at 12000 West Park Place, Milwaukee, Wisconsin
<PAGE>
53224 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company), and upon payment to the Company, by cash or by certified
check or bank draft, of the Exercise Price for such shares. The Company agrees
that the shares of Common Stock so purchased shall be deemed to be issued to the
Holder as the record owner of such shares of Common Stock as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for such shares of Common Stock as aforesaid. Certificates for the
shares of Common Stock so purchased (together with a cash adjustment in lieu of
any fraction of a share) shall be delivered to the Holder within a reasonable
time, not exceeding five (5) business days, after the rights represented by this
Warrant shall have been so exercised, and, unless this Warrant has expired, a
new Warrant representing the number of shares of Common Stock, if any, with
respect to which this Warrant shall not then have been exercised, in all other
respects identical with this Warrant, shall also be issued and delivered to the
Holder within such time, or, at the request of the Holder, appropriate notation
may be made on this Warrant and the same returned to the Holder.
(b) This Warrant may be exercised to acquire, from and after the date
hereof, the number of shares of Common Stock set forth on the first page hereof;
provided, however, the right hereunder to purchase such shares of Common Stock
shall expire at the close of business on October 31, 2003.
2. This Warrant is being issued by the Company to Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated ("Taglich Brothers"), or its designee
(provided that such designee is an "accredited investor" as defined in the rules
and regulations of the Securities and Exchange Commission promulgated under the
1933 Act), pursuant to a Preferred Stock Placement Agreement between the Company
and Taglich Brothers dated as of August 28, 1998 (the "Placement Agreement").
This Warrant is being issued today pursuant to the terms of the Company's
Confidential Private Placement Memorandum dated October 22, 1998 (the
"Memorandum") pursuant to which the Company agreed to issue, in the aggregate,
warrants to purchase 28,714 shares of common stock at $3.60 per share, as
partial compensation for the sale by Taglich Brothers of 1,005 shares of the
Company's Series A Preferred Stock.
3. The Company covenants and agrees that all Common Stock upon issuance
against payment in full of the Exercise Price by the Holder pursuant to this
Warrant will be validly issued, fully paid and nonassessable (except as
otherwise provided by Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law) and free from all taxes, liens and charges with respect to the
issue thereof (except to the extent resulting from the Holder=s own
circumstances, actions or omissions); and, without limiting the generality of
the foregoing, the Company covenants and agrees that it will take from time to
time all such action as may be requisite to assure that the par value per share
of the Common Stock is at all times equal to or less than the then effective
Exercise Price. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will have at all times authorized, and reserved for the purpose of issue
or transfer upon exercise of the rights evidenced by this Warrant, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant, and will procure at its sole expense upon each such
reservation of shares the listing thereof (subject to issuance or notice of
issuance) on all stock exchanges on which the Common Stock is then listed or
inter-dealer trading systems on which the Common Stock is
<PAGE>
then traded. The Company will take all such action as may be necessary to assure
that such shares of Common Stock may be so issued without violation of any
applicable law or regulation, or of any requirements of any national securities
exchange upon which the Common Stock may be listed or inter-dealer trading
system on which the Common Stock is then traded. The Company will not take any
action which would result in any adjustment in the number of shares of Common
Stock purchasable hereunder if the total number of shares of Common Stock
issuable pursuant to the terms of this Warrant after such action upon full
exercise of this Warrant and, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise of all
options and other rights to purchase shares of Common Stock then outstanding,
would exceed the total number of shares of Common Stock then authorized by the
Company's Restated Articles of Incorporation, as then amended.
4. The Initial Exercise Price is $3.60 per share of Common Stock ("Initial
Exercise Price"). The Initial Exercise Price shall be adjusted as provided for
below in this Section 4 (the Initial Exercise Price, and the Initial Exercise
Price, as thereafter then adjusted, shall be referred to as the "Exercise
Price") and the Exercise Price from time to time shall be further adjusted as
provided for below in this Section 4. Upon each adjustment of the Exercise
Price, the Holder shall thereafter be entitled to receive upon exercise of this
Warrant, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock obtained by (i) multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
purchasable hereunder immediately prior to such adjustment, and (ii) dividing
the product thereof by the Exercise Price resulting from such adjustment. The
Exercise Price shall be adjusted as follows:
(i) In the case of any amendment to the Company's Restated
Articles of Incorporation of the Company to change the
designation of the Common Stock or the rights, privileges,
restrictions or conditions in respect to the Common Stock or
division of the Common Stock, this Warrant shall be adjusted so
as to provide that upon exercise thereof, the Holder shall
receive, in lieu of each Common Stock theretofore issuable upon
such exercise, the kind and amount of shares, other securities,
money and property receivable upon such designation, change or
division by the Holder issuable upon such exercise had the
exercise occurred immediately prior to such designation, change
or division. This Warrant 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 4.
The provisions of this Subsection 4(i) shall apply in the same
manner to successive reclassifications, changes, consolidations
and mergers.
(ii) If the Company 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 Exercise Price in effect immediately prior to such
subdivision or dividend or other distribution shall be
proportionately reduced, and conversely, in case
-3-
<PAGE>
the outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Exercise Price in
effect immediately prior to such combination shall be
proportionately increased.
(iii) If case the Company shall, through either a private
placement or a public offering (but other than pursuant to
options granted under the Company=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 October 22, 1998 and other than warrants
granted to Taglich Brothers and/or its designees) 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 price, if other
than cash, as determined by the Board of the Board of Directors)
less than 120% of the then Market Price (as defined below) on the
date of sale, the Exercise Price then in effect shall
automatically be reduced by multiplying the then Exercise 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 Company for such issuance, sale or distribution
would purchase at 120% of 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 for the ten (10) consecutive
trading days immediately prior to the date of sale.
Notwithstanding the foregoing, in no event shall the Exercise
Price ever be increased as a result of this Subsection 4(iii).
There will be no adjustment in the event that the Company pays a
dividend in cash to its holders of Common Stock; provided,
however, the Company will give the holder of this Warrant written
notice at least thirty (30) days prior to the record date for the
cash dividend, that the Company intends to declare a cash
dividend.
(iv) If any capital reorganization or reclassification of
the capital stock of the Company, or any consolidation or merger
of the Company with another corporation or entity, or the sale of
all or substantially all of the Company'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 4), lawful and adequate provisions shall be made
whereby the Holder 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 Stock
immediately theretofore purchasable and receivable upon the
exercise of this Warrant under this
-4-
<PAGE>
Section 4 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 Holder to the end that the provisions
hereof (including, without limitation, provisions for adjustments
of the Exercise Price and of the number of shares of Common Stock
receivable upon the exercise of this Warrant) 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 Exercise 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 Exercise Price in effect immediately
prior to such consolidation or merger; provided, however, that
the Exercise Price shall not be reduced under this Section 4(iv)
by more than thirty (30%) percent). Subject to the terms of this
Warrant, in the event of a merger or consolidation of the Company
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
outstanding immediately prior to such merger or consolidation,
then the Exercise 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 Company shall not effect any such
consolidation, merger or sale, unless, prior to the consummation
thereof, the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument
executed and mailed or delivered to the Holder, the obligation to
deliver to the Holder such shares of stock, securities, other
evidence of equity ownership or assets as, in accordance with the
foregoing provisions, the Holder 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 Company
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 Holder of this Warrant shall have been given a
reasonable opportunity to then elect to receive upon the exercise
of this Warrant the amount of stock, securities, other evidence
of equity ownership or assets then issuable with respect to the
number of shares of Common Stock in accordance with such offer.
(v) In case the Company shall, at any time prior to exercise
of this Warrant, consolidate or merge with any other corporation
or other entity (where the Company is not the surviving entity)
or transfer all or substantially all of its assets to any other
corporation or other entity, then the Company shall, as a
condition precedent to such transaction, cause effective
provision to be made so that the Holder of this Warrant upon the
exercise of this Warrant 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
-5-
<PAGE>
of the number of shares of Common Stock as to which Warrant was
exercisable immediately prior to such transaction (without giving
effect to any restriction upon such exercise); and, in any such
case, appropriate provision shall be made with respect to the
rights and interest of the Holder of this Warrant to the end that
the provisions of this Warrant 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 exercise of this Warrant. Upon the
occurrence of any event described in this Section 4(v), the
holder of this Warrant shall have the right to (i) exercise this
Warrant immediately prior to such event at a Exercise Price equal
to lesser of (1) the then Exercise Price or (2) 120% of the price
per share of Common Stock paid in such event; provided, however,
that the Exercise Price shall not be reduced under this Section
4(v) (2) by more than thirty (30%) percent, or (ii) retain
ownership of this Warrant, in which event, appropriate provisions
shall be made so that the Warrant shall be exercisable at the
Holder's option into shares of stock, securities or other equity
ownership of the surviving or acquiring entity.
Whenever the Exercise Price shall be adjusted pursuant to this
Section 4, the Company shall issue a certificate signed by its President or Vice
President and by its Treasurer, Assistant Treasurer, Secretary or Assistant
Secretary, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board of
Directors of the Company made any determination hereunder), and the Exercise
Price after giving effect to such adjustment, and shall cause copies of such
certificates to be mailed (by first-class mail, postage prepaid) to the Holder
of this Warrant. The Company shall make such certificate and mail it to the
Holder promptly after each adjustment.
No fractional Common Stock shall be issued in connection with
any exercise of this Warrant, but in lieu of such fractional shares, the Company
shall make a cash payment therefor equal in amount to the product of the
applicable fraction multiplied by the Exercise Price then in effect.
5. In the event the Company grants rights (other than rights granted
pursuant to a shareholder rights or poison pill plan) to all shareholders to
purchase Common Stock, the Holder shall have the same rights as if this Warrant
had been exercised immediately prior to such grant.
6. The Holder shall, with respect to the shares of Common Stock issuable
upon the exercise of this Warrant, have the registration rights and "piggy back"
registration rights set forth in the Placement Agreement. Such registration
rights and "piggy back" registration rights are incorporated herein by this
reference as if such provisions had been set forth herein in full.
7. This Warrant need not be changed because of any change in the
Exercise Price or in the number of shares of Common Stock purchased hereunder.
8. The terms defined in this paragraph, whenever used in this Warrant,
shall, unless the context otherwise requires, have the respective meanings
hereinafter specified. The term "Common
-6-
<PAGE>
Stock shall mean and include the Company's Common Stock, $.01 par value per
share, authorized on the date of the original issue of this Warrant and shall
also include in case of any reorganization, reclassification, consolidation,
merger or sale of assets of the character referred to in paragraph 4 hereof, the
stock, securities or assets provided for in such paragraph. The term "Company"
shall also include any successor corporation to EFFECTIVE MANAGEMENT SYSTEMS,
INC. by merger, consolidation or otherwise. The term "outstanding" when used
with reference to Common Stock shall mean at any date as of which the number of
shares thereof is to be determined, all issued shares of Common Stock, except
shares then owned or held by or for the account of the Company. The term "1933
Act" shall mean the Securities Act of 1933, as amended, or any successor Federal
statute, and the rules and regulations of the Securities and Exchange
Commission, or any other Federal agency then administering the 1933 Act,
thereunder, all as the same shall be in effect at the time.
9. This Warrant is exchangeable, upon the surrender hereby by the Holder
at the office or agency of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares of Common Stock as shall be designated by the Holder at
the time of such surrender. Upon receipt of evidence satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant or any such new
Warrants and, in the case of any such loss, theft, or destruction, upon delivery
of a bond of indemnity, reasonably satisfactory to the Company, or, in the case
of any such mutilation, upon surrender or cancellation of this Warrant or such
new Warrants, the Company will issue to the Holder a new Warrant of like tenor,
in lieu of this Warrant or such new Warrants, representing the right to
subscribe for and purchase the number of shares of Common Stock which may be
subscribed for and purchased hereunder.
10. The Company agrees to use its best efforts to file timely all
reports required to be filed by it pursuant to Sections 13 or 15 of the
Securities Exchange Act of 1934, as amended, and to provide such information as
will permit the Holder to sell this Warrant or any shares of Common Stock
acquired upon exercise of this Warrant in accordance with Rule 144 under the
1933 Act.
11. The Company will at no time close its transfer books against the
transfer of this Warrant or of any shares of Common Stock issued or issuable
upon the exercise of this Warrant in any manner which interferes with the timely
exercise of this Warrant. This Warrant shall not entitle the Holder to any
voting rights or any rights as a shareholder of the Company. The rights and
obligations of the Company, of the Holder, and of any holder of shares of Common
Stock issuable hereunder, shall survive the exercise of this Warrant.
12. This Warrant sets forth the entire agreement of the Company and the
Holder of the Common Stock issuable upon the exercise of this Warrant with
respect to the rights of the Holder and the Common Stock issuable upon the
exercise of this Warrant, notwithstanding the knowledge of such Holder of any
other agreement or the provisions of any agreement, whether or not known to the
Holder, and the Company represents that there are no agreements inconsistent
with the terms hereof or which purport in any way to bind the Holder of this
Warrant or the Common Stock.
-7-
<PAGE>
13. The validity, interpretation and performance of this Warrant and
each of its terms and provisions shall be governed by the laws of the State of
New York.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal and dated as of October __,
1998.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By:_______________________________________
Name: Jeffrey Fossum
Title: Chief Financial Officer
[CORPORATE SEAL]
-9-
EXHIBIT 4.8
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR ANY STATE SECURITIES
LAWS AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR
OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, BY THE HOLDER
EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS
COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY
BE SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE
EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT
AND APPLICABLE STATE SECURITIES LAWS.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Common Stock Purchase Warrant
to
Purchase _______ Shares
of
Common Stock
This Common Stock Purchase Warrant is issued to:
------------------------
c/o Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated
100 Wall Street
10th Floor
New York, NY 10005
by EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation (hereinafter
called the "Company", which term shall include its successors and assigns).
FOR VALUE RECEIVED and subject to the terms and conditions hereinafter
set out, the registered holder of this Warrant as set forth on the books and
records of the Company (the "Holder") is entitled upon surrender of this Warrant
to purchase from the Company ________________________________________________
fully paid and nonassessable (except as otherwise provided in Section
180.0622(2)(b) of the Wisconsin Business Corporation Law) shares of Common
Stock, $ .01 par value (the "Common Stock"), at the Exercise Price (as defined
below) per share.
This Warrant shall expire at the close of business on October 31, 2003.
1. (a) The right to purchase shares of Common Stock represented by this
Warrant may be exercised by the Holder, in whole or in part, by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company at 12000 West Park Place, Milwaukee, Wisconsin
<PAGE>
53224 (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company), and upon payment to
the Company, by cash or by certified check or bank draft, of the Exercise Price
for such shares. The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder as the record owner of such shares of
Common Stock as of the close of business on the date on which this Warrant shall
have been surrendered and payment made for such shares of Common Stock as
aforesaid. Certificates for the shares of Common Stock so purchased (together
with a cash adjustment in lieu of any fraction of a share) shall be delivered to
the Holder within a reasonable time, not exceeding five (5) business days, after
the rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of shares of
Common Stock, if any, with respect to which this Warrant shall not then have
been exercised, in all other respects identical with this Warrant, shall also be
issued and delivered to the Holder within such time, or, at the request of the
Holder, appropriate notation may be made on this Warrant and the same returned
to the Holder.
(b) This Warrant may be exercised to acquire, from and after the
date hereof, the number of shares of Common Stock set forth on the first page
hereof; provided, however, the right hereunder to purchase such shares of Common
Stock shall expire at the close of business on October 31, 2003.
2. This Warrant is being issued by the Company to Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated ("Taglich Brothers"), or its designee
(provided that such designee is an "accredited investor" as defined in the rules
and regulations of the Securities and Exchange Commission promulgated under the
1933 Act), pursuant to a Series B Preferred Stock Placement Agreement between
the Company and Taglich Brothers dated as of October 27, 1998 (the "Placement
Agreement"), whereby the Company agreed to issue a five (5) year warrant
exercisable at the Exercise Price per share to Taglich Brothers, or its
designee, equal to ten (10%) percent of the total number of shares of Common
Stock issuable upon the conversion of the Company's Series B 8% convertible
redeemable preferred stock sold for cash by Taglich Brothers in a Private
Placement pursuant to the Company's Confidential Private Placement Memorandum
dated October 22, 1998 (the "Memorandum").
3. The Company covenants and agrees that all Common Stock upon issuance
against payment in full of the Exercise Price by the Holder pursuant to this
Warrant will be validly issued, fully paid and nonassessable (except as
otherwise provided by Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law) and free from all taxes, liens and charges with respect to the
issue thereof (except to the extent resulting from the Holder's own
circumstances, actions or omissions); and, without limiting the generality of
the foregoing, the Company covenants and agrees that it will take from time to
time all such action as may be requisite to assure that the par value per share
of the Common Stock is at all times equal to or less than the then effective
Exercise Price. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will have at all times authorized, and reserved for the purpose of issue
or transfer upon exercise of the rights evidenced by this Warrant, a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant, and will procure at its sole expense upon each such
reservation of shares the listing thereof
<PAGE>
(subject to issuance or notice of issuance) on all stock exchanges on which the
Common Stock is then listed or inter-dealer trading systems on which the Common
Stock is then traded. The Company will take all such action as may be necessary
to assure that such shares of Common Stock may be so issued without violation of
any applicable law or regulation, or of any requirements of any national
securities exchange upon which the Common Stock may be listed or inter-dealer
trading system on which the Common Stock is then traded. The Company will not
take any action which would result in any adjustment in the number of shares of
Common Stock purchasable hereunder if the total number of shares of Common Stock
issuable pursuant to the terms of this Warrant after such action upon full
exercise of this Warrant and, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise of all
options and other rights to purchase shares of Common Stock then outstanding,
would exceed the total number of shares of Common Stock then authorized by the
Company's Restated Articles of Incorporation, as then amended.
4. The Initial Exercise Price is $3.60 per share of Common Stock
("Initial Exercise Price"). The Initial Exercise Price shall be adjusted as
provided for below in this Section 4 (the Initial Exercise Price, and the
Initial Exercise Price, as thereafter then adjusted, shall be referred to as the
"Exercise Price") and the Exercise Price from time to time shall be further
adjusted as provided for below in this Section 4. Upon each adjustment of the
Exercise Price, the Holder shall thereafter be entitled to receive upon exercise
of this Warrant, at the Exercise Price resulting from such adjustment, the
number of shares of Common Stock obtained by (i) multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares of Common
Stock purchasable hereunder immediately prior to such adjustment, and (ii)
dividing the product thereof by the Exercise Price resulting from such
adjustment. The Exercise Price shall be adjusted as follows:
(i) In the case of any amendment to the Company's
Restated Articles of Incorporation of the Company to change the
designation of the Common Stock or the rights, privileges,
restrictions or conditions in respect to the Common Stock or
division of the Common Stock, this Warrant shall be adjusted so
as to provide that upon exercise thereof, the Holder shall
receive, in lieu of each Common Stock theretofore issuable upon
such exercise, the kind and amount of shares, other securities,
money and property receivable upon such designation, change or
division by the Holder issuable upon such exercise had the
exercise occurred immediately prior to such designation, change
or division. This Warrant 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 4.
The provisions of this Subsection 4(i) shall apply in the same
manner to successive reclassifications, changes, consolidations
and mergers.
(ii) If the Company 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 Exercise Price in effect immediately prior to such
subdivision or
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<PAGE>
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 Exercise Price in effect immediately prior to such
combination shall be proportionately increased.
(iii) If case the Company shall, through either a
private placement or a public offering (but other than pursuant
to options granted under the Company'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 October 22, 1998 and other
than warrants granted to Taglich Brothers and/or its designees)
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 price, if other than cash, as determined by the Board of
the Board of Directors) less than 120% of the then Market Price
(as defined below) on the date of sale, the Exercise Price then
in effect shall automatically be reduced by multiplying the then
Exercise 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 Company for such issuance,
sale or distribution would purchase at 120% of 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 for the ten (10)
consecutive trading days immediately prior to the date of sale.
Notwithstanding the foregoing, in no event shall the Exercise
Price ever be increased as a result of this Subsection 4(iii).
There will be no adjustment in the event that the Company pays a
dividend in cash to its holders of Common Stock; provided,
however, the Company will give the holder of this Warrant
written notice at least thirty (30) days prior to the record
date for the cash dividend, that the Company intends to declare
a cash dividend.
(iv) If any capital reorganization or reclassification
of the capital stock of the Company, or any consolidation or
merger of the Company with another corporation or entity, or the
sale of all or substantially all of the Company'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 4), lawful and adequate
provisions shall be made whereby the Holder 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 Stock immediately
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<PAGE>
theretofore purchasable and receivable upon the exercise of this
Warrant under this Section 4 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 Holder to the end
that the provisions hereof (including, without limitation,
provisions for adjustments of the Exercise Price and of the
number of shares of Common Stock receivable upon the exercise of
this Warrant) 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 Exercise 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 Exercise Price in effect immediately prior to such
consolidation or merger; provided, however, that the Exercise
Price shall not be reduced under this Section 4(iv) by more than
thirty (30%) percent). Subject to the terms of this Warrant, in
the event of a merger or consolidation of the Company 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
outstanding immediately prior to such merger or consolidation,
then the Exercise 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 Company shall not effect
any such consolidation, merger or sale, unless, prior to the
consummation thereof, the successor corporation (if other than
the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the Holder, the
obligation to deliver to the Holder such shares of stock,
securities, other evidence of equity ownership or assets as, in
accordance with the foregoing provisions, the Holder 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 Company 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 Holder of this Warrant
shall have been given a reasonable opportunity to then elect to
receive upon the exercise of this Warrant the amount of stock,
securities, other evidence of equity ownership or assets then
issuable with respect to the number of shares of Common Stock in
accordance with such offer.
(v) In case the Company shall, at any time prior to
exercise of this Warrant, consolidate or merge with any other
corporation or other entity (where the Company is not the
surviving entity) or transfer all or substantially all of its
assets to any other corporation or other entity, then the
Company shall, as a condition precedent to such transaction,
cause effective provision to be made so that the Holder of this
Warrant upon the exercise of this Warrant after the effective
date of such transaction shall be entitled to receive the kind
and amount of shares, evidences of indebtedness
-5-
<PAGE>
and/or other securities or property receivable on such
transaction by a holder of the number of shares of Common Stock
as to which Warrant was exercisable immediately prior to such
transaction (without giving effect to any restriction upon such
exercise); and, in any such case, appropriate provision shall be
made with respect to the rights and interest of the Holder of
this Warrant to the end that the provisions of this Warrant
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 exercise of
this Warrant. Upon the occurrence of any event described in this
Section 4(v), the holder of this Warrant shall have the right to
(i) exercise this Warrant immediately prior to such event at a
Exercise Price equal to lesser of (1) the then Exercise Price or
(2) 120% of the price per share of Common Stock paid in such
event; provided, however, that the Exercise Price shall not be
reduced under this Section 4(v) (2) by more than thirty (30%)
percent, or (ii) retain ownership of this Warrant, in which
event, appropriate provisions shall be made so that the Warrant
shall be exercisable at the Holder's option into shares of
stock, securities or other equity ownership of the surviving or
acquiring entity.
Whenever the Exercise Price shall be adjusted pursuant to this
Section 4, the Company shall issue a certificate signed by its President or Vice
President and by its Treasurer, Assistant Treasurer, Secretary or Assistant
Secretary, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board of
Directors of the Company made any determination hereunder), and the Exercise
Price after giving effect to such adjustment, and shall cause copies of such
certificates to be mailed (by first-class mail, postage prepaid) to the Holder
of this Warrant. The Company shall make such certificate and mail it to the
Holder promptly after each adjustment.
No fractional Common Stock shall be issued in connection with
any exercise of this Warrant, but in lieu of such fractional shares, the Company
shall make a cash payment therefor equal in amount to the product of the
applicable fraction multiplied by the Exercise Price then in effect.
5. In the event the Company grants rights (other than rights granted
pursuant to a shareholder rights or poison pill plan) to all shareholders to
purchase Common Stock, the Holder shall have the same rights as if this Warrant
had been exercised immediately prior to such grant.
6. The Holder shall, with respect to the shares of Common Stock issuable
upon the exercise of this Warrant, have the registration rights and "piggy back"
registration rights set forth in the Placement Agreement. Such registration
rights and "piggy back" registration rights are incorporated herein by this
reference as if such provisions had been set forth herein in full.
7. This Warrant need not be changed because of any change in the
Exercise Price or in the number of shares of Common Stock purchased hereunder.
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<PAGE>
8. The terms defined in this paragraph, whenever used in this Warrant,
shall, unless the context otherwise requires, have the respective meanings
hereinafter specified. The term "Common Stock shall mean and include the
Company's Common Stock, $.01 par value per share, authorized on the date of the
original issue of this Warrant and shall also include in case of any
reorganization, reclassification, consolidation, merger or sale of assets of the
character referred to in paragraph 4 hereof, the stock, securities or assets
provided for in such paragraph. The term "Company" shall also include any
successor corporation to EFFECTIVE MANAGEMENT SYSTEMS, INC. by merger,
consolidation or otherwise. The term "outstanding" when used with reference to
Common Stock shall mean at any date as of which the number of shares thereof is
to be determined, all issued shares of Common Stock, except shares then owned or
held by or for the account of the Company. The term "1933 Act" shall mean the
Securities Act of 1933, as amended, or any successor Federal statute, and the
rules and regulations of the Securities and Exchange Commission, or any other
Federal agency then administering the 1933 Act, thereunder, all as the same
shall be in effect at the time.
9. This Warrant is exchangeable, upon the surrender hereby by the Holder
at the office or agency of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for and purchased hereunder,
each of such new Warrants to represent the right to subscribe for and purchase
such number of shares of Common Stock as shall be designated by the Holder at
the time of such surrender. Upon receipt of evidence satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant or any such new
Warrants and, in the case of any such loss, theft, or destruction, upon delivery
of a bond of indemnity, reasonably satisfactory to the Company, or, in the case
of any such mutilation, upon surrender or cancellation of this Warrant or such
new Warrants, the Company will issue to the Holder a new Warrant of like tenor,
in lieu of this Warrant or such new Warrants, representing the right to
subscribe for and purchase the number of shares of Common Stock which may be
subscribed for and purchased hereunder.
10. The Company agrees to use its best efforts to file timely all
reports required to be filed by it pursuant to Sections 13 or 15 of the
Securities Exchange Act of 1934, as amended, and to provide such information as
will permit the Holder to sell this Warrant or any shares of Common Stock
acquired upon exercise of this Warrant in accordance with Rule 144 under the
1933 Act.
11. The Company will at no time close its transfer books against the
transfer of this Warrant or of any shares of Common Stock issued or issuable
upon the exercise of this Warrant in any manner which interferes with the timely
exercise of this Warrant. This Warrant shall not entitle the Holder to any
voting rights or any rights as a shareholder of the Company. The rights and
obligations of the Company, of the Holder, and of any holder of shares of Common
Stock issuable hereunder, shall survive the exercise of this Warrant.
12. This Warrant sets forth the entire agreement of the Company and the
Holder of the Common Stock issuable upon the exercise of this Warrant with
respect to the rights of the Holder and the Common Stock issuable upon the
exercise of this Warrant, notwithstanding the knowledge of such Holder of any
other agreement or the provisions of any agreement, whether or not known
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<PAGE>
to the Holder, and the Company represents that there are no agreements
inconsistent with the terms hereof or which purport in any way to bind the
Holder of this Warrant or the Common Stock.
13. The validity, interpretation and performance of this Warrant and
each of its terms and provisions shall be governed by the laws of the State of
New York.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal and dated as of October __,
1998.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By:_______________________________________
Name: Jeffrey Fossum
Title: Chief Financial Officer
[CORPORATE SEAL]
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F O L E Y & L A R D N E R
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
December 14, 1998
Effective Management Systems, Inc.
12000 West Park Place
Milwaukee, Wisconsin 53224
Gentlemen:
We have acted as counsel for Effective Management Systems, Inc., a
Wisconsin corporation (the "Company"), with respect to the preparation of a
Registration Statement on Form S-1 (the "Registration Statement"), including the
prospectus constituting a part thereof (the "Prospectus"), to be filed by the
Company with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), relating to the proposed sale of up to
947,214 shares of common stock, par value $.01 per share, of the Company (the
"Common Stock"), issuable upon the exercise of certain warrants (the "Warrants")
or in connection with the conversion of the Company's Series B 8% Convertible
Redeemable Preferred Stock (the "Series B Preferred Stock"), by certain selling
shareholders listed therein (the "Selling Shareholders").
In connection with our representation, we have examined: (a) the
Registration Statement, including the Prospectus; (b) the exhibits (including
those incorporated by reference) constituting a part of said Registration
Statement; (c) the Restated Articles of Incorporation and By-Laws of the
Company, as amended to date; (d) resolutions of the Company's Board of Directors
relating to the authorization of the issuance of the securities subject to the
Registration Statement; and (e) such other proceedings, documents and records as
we have deemed necessary to enable us to render this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation validly existing under the laws of the
State of Wisconsin.
2. The shares of Common Stock subject to sale by the Selling
Shareholders as contemplated by the Registration Statement, when issued upon
exercise of the Warrants or
<PAGE>
FOLEY & LARDNER
Effective Management Systems, Inc.
December 14, 1998
Page 2
upon conversion of the Series B Preferred Stock, as the case may be, and upon
receipt of the consideration contemplated upon the exercise or conversion
thereof, will be validly issued, fully paid and nonassessable, except with
respect to wage claims of, or other debts owing to, employees of the Company for
services performed, but not exceeding six months' service in any one case, as
provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law and
as such section may be interpreted by a court of law.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to our firm therein. In giving our consent, we
do not admit that we are "experts" within the meaning of Section 11 of the
Securities Act or within the category of persons whose consent is required by
Section 7 of the Securities Act.
Very truly yours,
FOLEY & LARDNER
EXHIBIT 10.28
SERIES B PREFERRED STOCK PLACEMENT AGREEMENT
SERIES B PREFERRED STOCK PLACEMENT AGREEMENT ("Agreement") dated as of
the 27th day of October, 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 700 and a maximum of 2,750 shares of Series B 8%
convertible redeemable preferred stock (the "Series B Preferred Stock") at
$1,000 per share of Series B Preferred Stock (the "Purchase Price") for an
amount of $700,000 in aggregate gross cash proceeds ("Minimum Amount") and a
maximum of $2,750,000 in the aggregate ("Maximum Amount"), with each share of
the Series B 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 $3.00 per share, and the persons and entities so purchasing the
Series B Preferred Stock from time to time and the number of shares of Series B
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 Series B Preferred Stock are being issued
pursuant to the Company's Confidential Private Placement Memorandum and Exhibits
thereto dated October 22, 1998, as the same may be amended and/or supplemented
from time to time (collectively, the "Memorandum"); and
WHEREAS, on August 28, 1998, the Company sold 1,005 shares of Series A
8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") for
an aggregate gross sales price of $1,005,000; and
WHEREAS, pursuant to the Memorandum, the holders of the Series A
Preferred Stock may purchase the Series B Preferred Stock by tendering their
shares of Series A Preferred Stock to the Company, with each share of Series A
Preferred Stock being valued at $1,000 per share (the "Exchange Offer"); and
<PAGE>
WHEREAS, the shares of Series B Preferred Stock are being issued and
the Exchange Offer is occurring 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 Series B Preferred Stock and Exchange Offer.
(a) Subject to the terms and conditions of this Agreement, the Company
shall sell to the Purchasers a minimum of 700 and a maximum of 2,750 shares of
Series B 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 Series B Preferred Stock is included in
the Memorandum. The Company will execute each certificate of Series B Preferred
Stock.
(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 Series B 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 October 30, 1998 unless, to the extent
permitted by the terms of the Series A Preferred Stock, such date is extended by
the Company and the Placement Agent to a date no later than November 29, 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) As provided in the Memorandum, the Purchase Price for the Series B
Preferred Stock is $1,000 per share with a minimum purchase price of $20,000 per
subscriber. As provided in the Memorandum, any holder of Series A Preferred
Stock may subscribe to purchase Series B Preferred Stock by tendering to the
Company all or a portion of the holder=s Series A Preferred Stock.
(d) All defined terms used in this Agreement which are not otherwise
defined shall have the meanings ascribed to them in the Memorandum.
<PAGE>
2. Payment and Exchange Offer. At each Closing, the Company shall deliver
to Placement Agent, on behalf of the Purchasers, the original executed Series B
Preferred Stock certificates being purchased by the Purchasers, against its
receipt of payment therefor by delivery to the Company of (i) the original
Series A Preferred Stock certificates, if any, duly endorsed for transfer and
subject to the Exchange Offer, and (ii) certified or bank checks drawn on a bank
located in the United States, or by Federal wire transfer, in the amount of the
aggregate cash purchase price for the Series B Preferred Stock being sold for
cash, less the amount of fees payable to Placement Agent pursuant to Paragraph
10(a) of this Agreement. All Series B 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 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 7,000
shares have been designated as Series A Preferred Stock and of which 5,000
shares have been designated as Series B Preferred Stock. As of the date of this
Agreement, (i) 4,105,986 shares of Common Stock are
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<PAGE>
issued and outstanding, (ii) 12,625 shares of Common Stock are held in treasury,
(iii) 1,005 shares of Series A Preferred Stock are issued and outstanding (no
other shares of preferred stock being issued and outstanding other than as may
be issued at any prior Closing pursuant to the Memorandum), and (iv) 1,530,192
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 Series B
Preferred Stock and the shares of Common Stock (the "PAW Exercise Shares")
issuable upon exercise of the Placement Agent Warrants (as defined below) and
excluding shares of Common Stock reserved for issuance upon the conversion of
the Series A Preferred Stock. 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 Series B Preferred Stock, the
Exchange Offer and the Placement Agent Warrants. This Agreement has been duly
executed by the Company and, at each Closing, the Series B Preferred Stock and
the Placement Agent Warrants being issued will have been duly executed by the
Company, and this Agreement, the Series B Preferred Stock, the Exchange Offer
and the Placement Agent Warrants and the transactions contemplated by this
Agreement, the Series B Preferred Stock, the Exchange Offer 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 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).
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(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 Series B
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, May 31 and August
31, 1998, and (iii) unaudited statements of operations and cash flows for the
fiscal quarters ended February 28, May 31 and August 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 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.
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(j) Neither the execution or delivery of this Agreement, the Series B
Preferred Stock or the Placement Agent Warrants by the Company nor the
performance by the Company of the transactions contemplated by this Agreement,
the Series B Preferred Stock or the Placement Agent Warrants nor the
consummation of the Exchange Offer: (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) Except as set forth in the Memorandum, 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 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
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<PAGE>
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.
<PAGE>
(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, 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 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
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<PAGE>
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, investigations or claims for or relating to any liability of the Company
or any of the Subsidiaries in respect of taxes.
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<PAGE>
(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 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
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<PAGE>
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.
(aa) Except as set forth in the Memorandum, the Common Stock is
currently traded on the NASDAQ National Market System. NASDAQ has advised that
as of May 31, 1998, the Company failed to satisfy the $4 million minimum net
tangible asset test imposed by NASDAQ for continued listing on the National
Market System and/or initial listing on the SmallCap Market. The Company also
currently fails to satisfy the $5 million market value of public float
requirement imposed by NASDAQ. A hearing was held by NASDAQ on September 25,
1998 regarding the continued listing of the Common Stock. As of the date of this
Agreement, the Company has not received either oral or written confirmation from
NASDAQ that the Common Stock has been delisted. In the even that the Common
Stock is delisted, the Company will use its best efforts to have the Common
Stock traded on the OTC Bulletin Board System.
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 Series B Preferred
Stock. The indemnification obligations of the Company as set forth in the
indemnification rider annexed hereto as Exhibit B 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 Series B
Preferred Stock will be used by the Company as disclosed in the Memorandum.
6. Unregistered Securities. Neither the Series B 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 Series B 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 Series B 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 Series B Preferred Stock shall have been
sold), the Company shall, at its sole cost and
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<PAGE>
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 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 Series B 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.
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<PAGE>
(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 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
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<PAGE>
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.
(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.
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<PAGE>
(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 or with
respect to securities issuable upon conversion of the Series A Preferred Stock)
registering any shares of Common Stock, the Company shall give written notice to
each Seller thereof prior to such filing.
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.
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.
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<PAGE>
(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:
<PAGE>
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.
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.
-15-
<PAGE>
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 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
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<PAGE>
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 Series B Preferred
Stock; (iv) by-laws of the Company certified by the secretary of the Company;
and (v) certified resolutions of the Board of Directors of the Company approving
this Agreement, the execution of the Series B Preferred Stock, the Exchange
Offer and the Placement Agent Warrants, the registration of the Registerable
Securities and the other transactions contemplated by the Series B 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
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<PAGE>
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 Series B Preferred Stock and such other documents
and certificates as are required.
(g) Subscriptions for at least the Minimum Amount of Series B
Preferred Stock shall have been accepted by the Company.
(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 Series B Preferred
Stock; (vii) the Common Stock shall have been delisted from NASDAQ and the
Company has failed to use its best efforts to cause the Common Stock to be
traded over the bulletin board; or (viii) there shall have
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<PAGE>
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
Series B 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 Series B 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 aggregate gross cash proceeds from the Series B 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.
Notwithstanding the foregoing, no fee or commission shall be payable to the
Placement Agent as a result of the sale of shares of Series B Preferred Stock in
the Exchange Offer. In addition, the Company shall issue at the Final Closing,
five (5) year warrants to purchase an amount of Common Stock at $3.60 per share
equal to 10% times the gross cash proceeds received by the Company divided by
the Conversion Price, subject to adjustment (the "Placement Agent Warrants"), a
portion of which may be allotted by the Placement Agent to other registered
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 exercise price of the Placement Agent Warrants will be equal
to 120% of the Conversion Price. 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 $5,000 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 Series B 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 Series B 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.
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<PAGE>
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
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.
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<PAGE>
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.
(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:_______________________________ By:_______________________________________
Name: Name: Richard Oh
Title: Title: Vice President
<PAGE>
EXHIBIT A
Names, Addresses and
Social Security or Number of
Employer Identification Shares of
Numbers of Purchasers Series B Preferred Stock
<PAGE>
EXHIBIT B
Indemnification Rider
(a) Effective Management Systems, Inc. (the "Company") shall indemnify and
hold harmless: (I) TAGLICH BROTHERS, D=AMADEO, WAGNER & COMPANY, INCORPORATED
(the "Placement Agent"), (II) each person and entity that directly, or
indirectly though one or more intermediaries, controls or is controlled by, or
is under common control with, the Placement Agent (each, an "Affiliate"), and
(III) the Placement Agent's and each Affiliate's respective officers, directors,
affiliates, shareholders, agents and employees (collectively, the "Other
Parties" and individually "Other Party") from and against any loss, claim,
penalty, fine, judgment, damage or liability, joint or several of any sort of
kind, and any action in respect thereof, to which the Placement Agent, any
Affiliate or any Other Party may become subject, under the Securities Act of
1933, as amended ("1933 Act"), the Securities Exchange Act of 1934, as amended
("1934 Act"), any state law or otherwise, insofar as such loss, claim, penalty,
fine, judgment, damage, liability or action relates to or arises out of (i) any
alleged untrue statement of a material fact contained in any information or
documents issued or supplied by the Company regarding the sale of its securities
as contemplated by the Series B Preferred Stock Placement Agreement between the
Company and the Placement Agent (the PSP Agreement) to which this Exhibit B is
annexed, including the Company's Confidential Private Placement Memorandum and
all exhibits thereto (collectively, the "Offering Information"), or the alleged
omission to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, (ii)
any transaction contemplated by the PSP Agreement or the engagement of the
Placement Agent pursuant to, and the performance by the Placement Agent of the
services contemplated by, the PSP Agreement, (iii) any breach by the Company of
the representations, warranties or covenants contained in the: (1) PSP
Agreement; (2) certificate of designation or other document filed by the Company
with the appropriate authorities in the state of its incorporation which sets
forth the rights, qualifications, preferences, designations, powers and
restrictions of the securities to be sold as contemplated by the PSP Agreement;
and/or (3) preferred stock purchase agreement to be entered into between the
Company and each investor acquiring the securities being offered; and shall
reimburse the Placement Agent, any Affiliate and each Other Party for any legal
or other expenses reasonably incurred by the Placement Agent, any Affiliate
and/or such Other Party in connection with investigating or defending any such
loss, claim, penalty, fine, judgment, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, penalty, fine, judgment, damage, liability or action
relates to or arises out of any alleged untrue statement or alleged omission
contained therein relating to the Placement Agent, any Affiliate or such Other
Party or that was made in reliance upon and in conformity with information
furnished to the Company in writing by the Placement Agent, any Affiliate or
such Other Party, in any such case expressly for use in the Offering Information
or, provided, further, that the Company will not be liable under clause (ii)
above for any loss, claim, penalty, fine, judgment, damage, liability or action
(or expenses relating thereto) that are finally judicially determined by a court
of competent jurisdiction to have resulted from: (A) the bad faith, negligence,
or willful misconduct of the Placement Agent; or (B) the breach by the Placement
Agent of any agreement contained in the PSP Agreement that results from the
negligence or willful misconduct of the
<PAGE>
Placement Agent. The foregoing indemnity is in addition to any liability, which
the Company may otherwise have to the Placement Agent, any Affiliate and/or any
Other Party. In the event the Placement Agent, any Affiliate or any Other Party
is requested or required to appear as a witness in any action brought by or on
behalf of or against the Company or any participant in a transaction covered
hereby in which the Placement Agent, any Affiliate or such Other Party is not
named as a defendant, the Company agrees to reimburse the Placement Agent,
Affiliate and/or such Other Party for all out of pocket expenses reasonably
incurred by it in connection with such party's appearing and preparing to appear
as a witness, including, without limitation the reasonable fees and
disbursements of its legal counsel.
(b) The Placement Agent shall indemnify and hold harmless the Company and
its officers, directors, affiliates, agents and employees and any person who
controls the Company within the meaning of the 1933 Act or the 1934 Act from and
against any loss, claim, penalty, fine, judgment, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any officer,
director, affiliates, agents, employee or person who controls the Company or any
of them may become subject under the 1933 Act, the 1934 Act, any state law or
otherwise, insofar as such loss, claim, penalty, fine, judgment, damage,
liability or action relates to or arises out of (i) the bad faith, negligence or
willful misconduct of the Placement Agent, any Affiliate or Other Party or the
breach by the Placement Agent of any agreement contained in the PSP Agreement
that results from the negligence or willful misconduct of the Placement Agent;
or (ii) any alleged untrue statement of a material fact that relates to the
Placement Agent, any Affiliate or Other Party contained in the Offering
Information or that was made in reliance upon and in conformity with the
information furnished to the Company in writing by the Placement Agent, any
Affiliate or Other Party, in any such case expressly for use therein or the
omission or alleged omission to state therein a material fact that relates to
the Placement Agent, any Affiliates or Other Party or that was made in reliance
upon and in conformity with information furnished to the Company in writing by
the Placement Agent, any Affiliate or Other Party, in any such case expressly
for use in the written Offering Information necessary to make the statements
therein, in the light of the circumstances under which they were made not
misleading, and the Placement Agent shall reimburse the Company and each such
party for any legal or other expenses reasonably incurred by the Company, or
such indemnified party in connection with investigating or defending any such
loss, claim, penalty, fine, judgment, damage, liability or action. The only
information provided to the Company by the Placement Agent, any Affiliate or
Other Party is the Placement Agent=s name. The foregoing indemnity is in
addition to any liability, which the Placement Agent may otherwise have to the
Company, or such indemnified party.
(c) Promptly after receipt by an indemnified party under this Exhibit B of
notice of any claim or the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Exhibit B, notify such indemnifying party in writing of the
claim or the commencement of that action provided that the failure to notify the
indemnifying party will not relieve it from any liability which it may have to
an indemnified party otherwise than under this Exhibit B. If any such claim or
action is brought against any indemnified party, and it shall notify an
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified party,
<PAGE>
to assume the defense thereof, with counsel reasonably satisfactory to the
indemnified party (which shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party, which consent may not be
unreasonably withheld). After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim or action,
the indemnifying party shall not be liable to the indemnified party under this
Exhibit B for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
out-of-pocket costs of investigation incurred prior to the indemnifying party
assuming the defense thereof. With respect to any such claim or action for which
the indemnifying party does not assume the defense thereof, the indemnifying
party shall not be obligated to pay the reasonable fees and expenses of more
than one counsel for the indemnified party or parties.
(d) If the indemnification provided for in this Exhibit B shall for any
reason be unavailable to an indemnified party under subsections (a) or (b)
herein in respect of any loss, claim, penalty, fine, judgment, damage or
liability, or any action in respect thereof, referred to therein, then the
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, penalty, fine, judgment, damage or liability, or action in
respect thereof, (i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company on the one hand and the Placement
Agent on the other from the private placement of the securities by the Company
pursuant to the Offering Information, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Placement Agent on the other with respect to the statements or omissions which
resulted in such loss, claim, penalty, fine, judgment, damage, or liability, or
action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Placement Agent on the other with respect to the private placement of
the securities shall be deemed to be in the same proportion as the total net
proceeds received by the Company from the private placement (before deducting
expenses) bears to the total compensation received by the Placement Agent with
respect to the private placement, provided, that in no event shall liability of
the Placement Agent or any Affiliate exceed the aggregate placement fees paid to
the Placement Agent. The relative fault shall be determined be reference to: (i)
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company, on the one hand, or the Placement Agent, on the other, (ii) whether
there was a breach of a representation, warranty or covenant by the Company, or
(iii) the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement, omission or
breach. The parties agree that it would not be just and equitable if
contributions pursuant to this subsection (d) were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, penalty, fine, judgment,
damage, or liability, or action in respect thereof, referred to above in this
subsection (d) shall be deemed to include, for purposes of this subsection (d),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
EXHIBIT 10.29
EFFECTIVE MANAGEMENT SYSTEMS, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
SERIES B PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") made
as of this ____ day of ________, 1998 between EFFECTIVE MANAGEMENT SYSTEMS,
INC., a Wisconsin corporation, with its principal offices at 12000 West Park
Place, Milwaukee, WI 53224 (the "Company") and the undersigned (the
"Subscriber").
W I T N E S S E T H :
WHEREAS, the Company desires to issue shares of its Series B 8
% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") at
$1,000 per share with a minimum aggregate purchase price of $700,000 in gross
cash proceeds and, in one or more tranches, a maximum aggregate purchase price
of $2,750,000; and
WHEREAS, each share of Series B Preferred Stock is convertible
into shares of the Company's Common Stock, $.01 par value (the "Common Stock")
per share, at the price per share, subject to adjustment (the "Conversion
Price") as set forth in the Company's Confidential Private Placement Memorandum
dated October 22, 1998, together with all exhibits thereto, as same may
thereafter be supplemented and/or amended (collectively, the "Memorandum"); and
WHEREAS, on August 28, 1998, the Company sold 1,005 shares of
Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock") for an aggregate gross sales price of $1,005,000; and
WHEREAS, pursuant to the Memorandum, the holders of the Series
A Preferred Stock may purchase the Series B Preferred Stock by tendering their
shares of Series A Preferred Stock to the Company, with each share of Series A
Preferred Stock being valued at $1,000 per share (the "Exchange Offer"); and
WHEREAS, the Series B Preferred Stock is being issued and the
Exchange Offer is occurring pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, Subscriber desires to acquire shares of Series B
Preferred Stock having an aggregate purchase price set forth on the signature
page hereof (the "Purchase Price").
NOW, THEREFORE, for and in consideration of the premises and
the mutual covenants hereinafter set forth, the parties hereto do hereby agree
as follows:
<PAGE>
1. SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS AND COVENANTS BY
SUBSCRIBER.
1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Company for
$1,000 per share, shares of Series B Preferred Stock aggregating the Purchase
Price and the Company agrees to sell such Series B Preferred Stock to the
Subscriber for the Purchase Price, subject to the Company's right to sell to the
Subscriber such lesser amount of Series B Preferred Stock as it may, in its sole
discretion, deem necessary or desirable. The Purchase Price is payable by wire
transfer or by check, subject to collection, as set forth in the "INSTRUCTIONS
TO SUBSCRIBERS" contained in the Subscription Documents Booklet of which this
Agreement is a part. Subscribers that are holders of Series A Preferred Stock
shall, rather than submitting a check or wire transfer to the Escrow Agent,
shall tender to the Company by delivery to the Placement Agent their original
certificate (duly endorsed for transfer) for the Series A Preferred Stock.
1.2 The Subscriber recognizes that the purchase of the Series B
Preferred Stock involves a high degree of risk in that (i) no public market
exists for the Series B Preferred Stock; (ii) the shares of Common Stock
issuable upon conversion of the Series B Preferred Stock (the "Conversion
Shares") have not been registered under the 1933 Act, and the Company has no
obligation to register the Conversion Shares, except as set forth in Section 3
below; (iii) an investment in the Series B Preferred Stock is highly speculative
and only investors who can afford the loss of their entire investment should
consider investing in the Company and the Series B Preferred Stock; (iv) the
Subscriber may not be able to liquidate the Subscriber's investment; and (v) the
Subscriber could sustain the loss of Subscriber's entire investment. Such risks
are more fully set forth in the Memorandum.
1.3 The private placement of the Series B Preferred Stock by the
Company (the "Offering") and the Exchange Offer pursuant to the Memorandum shall
continue for a period commencing on the date of the Memorandum and ending on the
date set forth in the Memorandum.
1.4 The Subscriber represents as follows:
(a) The Subscriber represents that the Subscriber is an
Accredited Investor (as defined in Rule 501 of Regulation D promulgated under
the 1933 Act) as indicated by the Subscriber's responses to the Confidential
Investor Questionnaire, a copy of which is included in the Subscription
Documents Booklet, and that the Subscriber is able to bear the economic risk of
an investment in the Series B Preferred Stock.
(b) The Subscriber acknowledges that the Subscriber has
significant prior investment experience, including investment in non-listed and
non-registered securities. The Subscriber recognizes the highly speculative
nature of this investment. The Subscriber acknowledges that the Subscriber has
carefully read the Memorandum, including but not
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limited to, the Company's Form 10-K for the fiscal year ended November 30, 1997,
the Company's Form 10-Qs for the fiscal quarters ended February 28, May 31, and
August 31, 1998, and the terms and conditions of the Series B Preferred Stock
and fully understands the contents thereof.
(c) The Subscriber hereby acknowledges that this Offering, the
Series B Preferred Stock and the Memorandum have not been reviewed by the United
States Securities and Exchange Commission ("SEC") or by any state securities
regulator because it is intended to be a nonpublic offering pursuant to Sections
3(a), 4(2) and 4(6) of the 1933 Act and Rule 506 of Regulation D promulgated
thereunder. The Subscriber represents that the Series B Preferred Stock is being
purchased for the Subscriber's own account, for investment purposes only and not
for distribution or resale to others. The Subscriber agrees that the Subscriber
will not sell or otherwise transfer the Series B Preferred Stock or Conversion
Shares unless they are registered under the 1933 Act or unless an exemption from
such registration is available.
(d) The Subscriber understands that the Series B Preferred Stock
has not been registered under the 1933 Act by reason of a claimed exemption
under the provisions of the 1933 Act which depends, in part, upon the
Subscriber's investment intention. In this connection, the Subscriber
understands that it is the position of the SEC that the statutory basis for such
exemption would not be present if the Subscriber's representation merely meant
that the Subscriber's present intention was to hold the Series B Preferred Stock
(and/or the Conversion Shares) for a short period, such as the capital gains
period of tax statutes, for a deferred sale, for a market rise, assuming that a
market develops, or for any other fixed period. The Subscriber realizes that, in
the view of the SEC, a purchase now with an intent to resell after a
pre-determined amount of time would represent a purchase with an intent
inconsistent with the Subscriber's representation to the Company, and the SEC
might regard such a sale or disposition as a deferred sale to which such
exemptions are not available.
(e) The Subscriber understands that Rule 144 (the "Rule")
promulgated by the SEC under the 1933 Act requires, among other conditions, a
one year holding period prior to the resale (in limited amounts) of securities
acquired in a non-public offering without having to satisfy the registration
requirements under the 1933 Act. The Subscriber understands that the Company
makes no representation or warranty regarding its fulfillment in the future of
any reporting requirements under the Securities Exchange Act of 1934, as
amended, or its dissemination to the public of any current financial or other
information concerning the Company, as is required by the Rule as one of the
conditions of its availability. The Subscriber understands and hereby
acknowledges that the Company is the only entity that can register the
Conversion Shares under the 1933 Act and that the Company is under no obligation
to register the Series B Preferred Stock or Conversion Shares under the 1933
Act, with the exception of certain registration rights set forth in Section 3
below. The Subscriber acknowledges that the Company may, if it desires, permit
the transfer of the Series B Preferred Stock or the Conversion Shares out of the
Subscriber's name only when the Subscriber's request for transfer is accompanied
by an opinion of counsel reasonably satisfactory to the Company that neither the
sale nor the proposed transfer results in a violation of
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the 1933 Act or any applicable state "blue sky" laws and subject to the
provisions of Section 1.4(f) hereof.
(f) The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Series B Preferred Stock and the
Conversion Shares stating that they have not been registered under the 1933 Act
and under applicable state securities laws and setting forth or referring to the
restrictions on transferability and sale thereof.
(g) The Subscriber understands that the Company will review this
Agreement and the Confidential Investor Questionnaire; and it is further agreed
that the Company reserves the unrestricted right to reject or limit any
subscription and to close the Offering at any time.
(h) The Subscriber hereby represents that the address of
Subscriber furnished by the Subscriber at the end of this Agreement is the
Subscriber's principal residence, if the Subscriber is an individual, or its
principal business address, if the Subscriber is a corporation or other entity.
(i) The Subscriber has had a reasonable opportunity to ask
questions of and receive answers from the Company concerning the Company and the
Offering, and all such questions, if any, have been answered to the full
satisfaction of the Subscriber; and the Company shall provide Subscriber with
the opportunity to ask additional questions of and receive answers (all of which
information shall be limited to information in the public realm) from the
Company concerning the Company during the period which the Subscriber owns the
Series B Preferred Stock.
(j) The Subscriber has such knowledge and expertise in financial
and business matters that the Subscriber is capable of evaluating the merits and
risks involved in an investment in the Series B Preferred Stock.
(k) The Subscriber has full power and authority to execute and
deliver this Agreement and to perform the obligations of the undersigned
hereunder; and this Agreement is a legally binding obligation of the undersigned
enforceable in accordance with its terms.
(l) Except as set forth in this Agreement, the Series B
Preferred Stock, the Memorandum and the public documents of the Company (e.g.,
the fiscal 1997 Form 10-K, the Form 10-Qs for the first three quarters of fiscal
1998, the fiscal 1997 Annual Report and the 1998 Proxy Statement; collectively,
the "Public Documents"), no representations or warranties have been made to the
Subscriber by the Company, the Placement Agent (as defined in the Memorandum) or
any of their respective agents, employees or affiliates, and in entering into
this transaction, the Subscriber is not relying on any information, other than
that contained in the Series B Preferred Stock, the Memorandum, the Public
Documents and the results of an independent investigation by the Subscriber.
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<PAGE>
(m) The Subscriber agrees that he, she or it will not sell or
otherwise transfer the Series B Preferred Stock or Conversion Shares unless they
are registered under the 1933 Act and applicable state "blue sky" laws or unless
an exemption from such registration is available. The Subscriber represents that
(i) the Subscriber has adequate means of providing for the Subscriber's current
needs and possible personal contingencies, (ii) the Subscriber has no need for
liquidity in this investment, (iii) the Subscriber is able to bear the
substantial economic risk of an investment in the Series B Preferred Stock for
an indefinite period, and (iv) at the present time the Subscriber could afford a
complete loss of such investment.
(n) It is understood that all documents, records and books
pertaining to this investment have been made available for the inspection by the
Subscriber's attorney and/or accountant and the Subscriber.
1.5 If the Subscriber is participating in the Exchange Offer, the
Subscriber represents and warrants to the Company that the Subscriber owns the
Series A Preferred Stock subject to the Exchange Offer, that the Series A
Preferred Stock subject to the Exchange Offer is free and clear of all liens,
claims and encumbrances and that the Subscriber has the right, power and
authority to enter into the Exchange Offer.
1.6 The Subscriber agrees not to sell the Company's Common Stock
short from the Initial Closing Date (as defined in the Memorandum) through and
including January 31, 1999.
1.7 The Subscriber, in the event of Forced Conversion, as defined in
Paragraph (6) of Section A of Article 4 of the Company's Restated Articles of
Incorporation (the "Restated Articles"), hereby constitutes and appoints the
President and Secretary of the Company, with power of substitution, attorney and
proxy for and in the name and place of the Subscriber, to appear and vote with
the same effect as the Subscriber, as a holder of the Company's Series B
Preferred Stock for approval of the Sale Event (as defined in the Restated
Articles), such proxy to be irrevocable (since it is coupled with an interest)
for the 150-day period provided for in the Restated Articles, all shares of the
Series B the Subscriber is entitled to vote.
2. TERMS OF SUBSCRIPTION.
The Offering of the Series B Preferred Stock is being made on a
"best efforts" basis as more particularly set forth in the Memorandum.
3. REGISTRATION RIGHTS.
(a) As soon as possible after the Final Closing Date (as defined
in the Memorandum), but in no event later than forty-five (45) days after the
Final Closing Date (regardless of whether the maximum number of shares of Series
B Preferred Stock shall have been sold), the Company shall, at its sole cost and
expense, file a registration statement on the appropriate form under the 1933
Act with the SEC covering all of the Conversion Shares and such additional
shares of Common Stock that may be issued as a result of any adjustment to the
Conversion Price as set forth in the Memorandum and as set forth below
(collectively, the "Registrable Securities") for all
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<PAGE>
holders of the Series B Preferred Stock and Registrable Securities
(collectively, the "Registered Holders"), time being of the essence. Such
registration statement may also include securities issuable upon conversion of
the Series A Preferred Stock. The Company will use its best efforts to have such
registration statement declared effective as soon as possible after filing, and
shall 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 if 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 Series B
Preferred Stock shall have been sold), then the Conversion Price shall be
reduced (and concomitantly the number of shares of Common Stock issuable upon
the conversion of the Series B Preferred Stock shall increase) by the percentage
resulting from multiplying three (3%) percent by the number of thirty (30) day
periods, or any part thereof, beyond said forty-five (45) 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 Section 3(a) above or 3(g)
below, the Company shall indemnify, to the extent permitted by law, and hold
harmless any person or entity whose Registrable Securities are included in such
registration statement (each, a "Seller"), any underwriter, any officer,
director, affiliate, shareholder, 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, 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
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Section 15 of the 1933 Act, each other Seller and each underwriter, any officer,
director, affiliate, shareholder, 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 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 Section 3(b) or
3(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 Section 3(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
Section 3(b) or 3(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,
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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.
(e) If for any reason the indemnity provided in Section 3(b) or
3(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 Section 3(b) through 3(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 Registered Holders shall have certain "piggy-back"
registration rights with respect to the Registrable Securities as hereinafter
provided:
A. If at any time after the date of the Final Closing Date
and prior to the date that the Registrable Securities are registered under the
1933 Act pursuant to Section 3(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 thereto, or filed in connection with
an exchange offer or an offering of securities solely to the Company's existing
shareholders or with respect to securities issuable upon conversion of the
Series A Preferred Stock)
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registering any shares of Common Stock, the Company shall give written notice to
each Registered Holder thereof prior to such filing.
B. Within fifteen (15) days after such notice from the
Company, each Registered Holder shall give written notice to the Company whether
or not the Registered Holder desires to have all of the Registered Holder's
Registrable Securities included in the registration statement. If a Registered
Holder fails to give such notice within such period, such Registered Holder
shall not have the right to have such Registered Holder's Registrable Securities
registered pursuant to such registration statement. If a Registered Holder gives
such notice, then the Company shall include such Registered Holder's Registrable
Securities in the registration statement, at the Company's sole cost and
expense, subject to the remaining terms of this Section 3(g); provided, however,
that each Registered Holder shall pay all underwriting discounts, commissions
and transfer taxes as well as his, her or its own counsel fees, if any, relating
to the sale of such Registered Holder's Registrable Securities.
C. If the registration statement relates to an underwritten
offering, and the underwriter 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
Registrable Securities requested to be included). The Registered Holders
participating in the offering shall enter into such agreements as may be
reasonably required by the underwriters.
D. The Registered Holders shall have two (2) opportunities
to have the Registrable Securities registered under this Section 3(g); provided
however that their Registrable Securities are not sooner registered under the
1933 Act pursuant to Section 3(a) above.
E. The Registered Holder 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
give rise to "piggy back" rights under this Section 3(g) or may at any time
terminate or suspend such registration, in which event each Registered Holder's
rights under this Section 3(g) as to the number of opportunities to "piggy-back"
shall be reset.
T (h) If and whenever the Company is required by the provisions
of this Section 3(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 3:
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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.
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 Seller.
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<PAGE>
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
Section 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 incurred in connection with
a registration of Registrable Securities, whether or not such registration
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 Section 3 and that
such failure would not be adequately compensable in damages, and therefore
agrees that its agreements contained in this Section 3 may be specifically
enforced. In the event that the Company shall fail to file such registration
statement when required pursuant to Section 3(a) above or to keep any
registration statement effective as provided in this Section 3 or otherwise
fails to comply with its obligations and agreements in this Section 3, then, in
addition to any other rights or remedies the Registered Holders may have at law
or in equity, including without limitation, the right of rescission, the Issuer
shall indemnify and hold harmless the Registered Holders from and against any
and all manner or loss which they may incur as a result of such failure. In
addition, the Issuer shall also reimburse the Registered Holders for any and all
reasonable legal fees and expenses incurred by them in
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<PAGE>
successfully enforcing their rights pursuant to this Section 3, regardless of
whether any litigation was commenced.
4. MISCELLANEOUS.
4.1 All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (a)
when delivered by hand, (b) one business day after the business day of
transmission if sent by telecopier (with receipt confirmed), provided that a
copy is mailed by certified mail, return receipt requested, or (c) one business
day after the business day of deposit with the carrier, if sent for next
business day delivery by Express Mail, Federal Express or other recognized
express delivery service (receipt requested), in each case addressed to the
Company at the address indicated on the first page of this Agreement marked
"Attention: Jeffrey Fossum, Chief Financial Officer", and to the Subscriber at
the Subscriber's address indicated on the last page of this Agreement (or to
such other addresses, the telecopier numbers as a party may designate as to
itself by notice to the other parties).
4.2 This Agreement shall not be changed, modified or amended
except by a writing signed by the parties to be charged, and this Agreement may
not be discharged except by performance in accordance with its terms or by a
writing signed by the party to be charged.
4.3 This Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter thereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
4.4 Notwithstanding the place where this Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of New York. The parties hereby agree that any dispute
which may arise between them arising out of or in connection with this Agreement
shall be adjudicated before a court located in New York and they hereby submit
to the exclusive jurisdiction of the courts of the State of New York and of the
federal courts in New York with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Agreement or any acts or omissions relating
to the sale of the securities hereunder, and consent to the service of process
in any such action or legal proceeding by means of registered or certified mail,
return receipt requested, in case of the address set forth below or such other
address as the undersigned shall furnish in writing to the other.
4.5 This Agreement may be executed in counterparts. Upon the
execution and delivery of this Agreement by the Subscriber, this Agreement shall
become a binding obligation of the Subscriber with respect to the purchase of
the Series B Preferred Stock as herein provided; subject, however, to the right
hereby reserved to the Company to enter into the same agreements with other
subscribers and to add and/or to delete other persons as subscribers.
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<PAGE>
4.6 The holding of any provision of this Agreement to be invalid
or unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Agreement, which shall remain in full force and effect.
4.7 It is agreed that a waiver by either party of a breach of
any provision of this Agreement shall not operate, or be construed, as a waiver
of any subsequent breach by that same party.
4.8 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first written above.
TO BE COMPLETED BY SUBSCRIBER
-------------------------------------
Print Name
Signature for Individual Subscriber Signature of Subscriber Other than
Individual
_____________________________ By:__________________________________
Signature Name:
Title:
-------------------------------------
Address
-------------------------------------
City State Zip Code
-------------------------------------
Aggregate Purchase Price for Series B
Preferred Stock
-------------------------------------
Social Security or Employer Identification
Number
Aggregate Purchase Price being paid as follows:
(please check applicable box)
__Cash __ Tender of shares of
Series A Preferred Stock
SUBSCRIPTION ACCEPTED:
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By:_______________________________________
Name:
Title:
Date:_____________________________________
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EXHIBIT 21
Subsidiaries of Effective Management Systems, Inc.
1. Effective Management Systems of Illinois, Inc.
2. EMS-East, Inc.
3. Total Management Systems, Inc.
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 16, 1998 (except notes 12 and 13, as to which
the date is December 14, 1998) in the Registration Statement (Form S-1) and the
related Prospectus of Effective Management Systems, Inc. for the registration of
947,214 shares of its common stock.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
December 14, 1998
