U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO
____________
Commission file number 0-23438
Effective Management Systems, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1292200
-------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12000 West Park Place, Milwaukee, WI 53224
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 359-9800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No _______
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 31, 1999
- ----------------------------------- ---------------------------------
Common Stock, $.01 par value 4,130,986
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
August 31, 1999
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 Financial Statements
Consolidated Balance Sheets at
August 31, 1999 and November 30, 1998 1
Consolidated Statements of Operations - Three and
Nine Months Ended August 31, 1999 and August 31, 1998 3
Consolidated Statements of Cash Flows -Nine 4
Months Ended August 31, 1999 and August 31, 1998
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
- ---------------------------
Item 2 Changes in Securities and Use of Proceeds 17
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 21
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
- --------------------------------------------------------------------------------------
<CAPTION>
ASSETS 31-Aug 30-Nov
1999 1998
==========================================================================================================
CURRENT ASSETS
<S> <C> <C>
Cash $3 $21
Accounts Receivable:
Trade, less allowance for
doubtful accounts 6,530 12,871
Related Parties 511 426
Inventories 265 275
Prepaid Expenses and Other Current Assets 194 225
---------------------------------------
TOTAL CURRENT ASSETS 7,503 13,818
LONG TERM ASSETS
Computer Software, net 5,230 4,373
Investments in and Advances to
Unconsolidated Joint Ventures 291 291
Equipment and Leasehold Improvements, net 2,507 3,202
Intangible Assets, net 1,964 2,129
Other Assets 182 347
---------------------------------------
TOTAL LONG TERM ASSETS 10,174 10,342
---------------------------------------
TOTAL ASSETS $17,677 $24,160
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
- --------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 31-Aug 30-Nov
1999 1998
==========================================================================================================
CURRENT LIABILITIES
<S> <C> <C>
Accounts Payable $4,067 $3,662
Accrued Liabilities 2,011 2,937
Deferred Revenues 6,431 6,522
Customer Deposits 13 113
Current portion of
Long-term Obligations 6,335 6,194
---------------------------------------
TOTAL CURRENT LIABILITIES 18,857 19,428
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 785 858
Long-term Obligations 248 242
---------------------------------------
TOTAL LONG TERM LIABILITIES 1,033 1,100
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized 3,000,000 shares of
which 5,000 shares are designated as Series B 8% Convertible
Redeemable Preferred Stock ("Series B"); 1,936.63 shares of
Series B are issued and outstanding (liquidation preference
of $1000 per share) 1,361 1411
Common Stock, $.01 par value; authorized 20,000,000
shares; issued 4,130,986 and 4,106,377 shares;
Outstanding 4,118,361 and 4,093,752 shares 42 41
Common Stock Warrants 144 144
Additional Paid- in Capital 11,502 11,426
Retained Earnings (Deficit) (15,202) (9,330)
Cost of Common Stock in Treasury(12,625 shares) (60) (60)
---------------------------------------
TOTAL STOCKHOLDERS' EQUITY (2,213) 3,632
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,677 $24,160
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<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
1999 1998 1999 1998
============================================================================================================================
<S> <C> <C> <C> <C>
NET REVENUES:
Software license fees $3,036 $3,866 $9,646 $13,573
Services 4,860 3,977 13,788 12,748
Hardware 152 339 710 1,455
---------- ---------- ---------- ----------
Total net revenues 8,048 8,182 24,144 27,776
COST OF PRODUCTS AND SERVICES
Software license fees 874 1,059 2,803 4,163
Services 3,805 3,581 11,816 10,175
Hardware 133 232 594 1,112
---------- ---------- ---------- ----------
Total cost of products and services 4,812 4,872 15,213 15,450
Selling and marketing expenses 2,380 3,017 8,181 10,043
General and administrative expenses 1,541 624 3,542 2,837
Product development expenses 812 597 2,531 2,118
Restructuring and other charges 0 0 0 6,836
---------- ---------- ---------- ----------
Total costs and operating expenses 9,545 9,110 29,467 37,284
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (1,497) (928) (5,323) (9,508)
Other (Income)/Expense
Equity in (earnings)/loss of unconsolidated joint ventures 0 0 0 (1)
Interest (income) (1) (19) (9) (39)
Interest expense 188 184 540 521
---------- ---------- ---------- ----------
187 165 531 481
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (1,684) (1,093) (5,854) (9,989)
Income tax (benefit) expense 18 0 18 33
---------- ---------- ---------- ----------
NET LOSS ($1,702) ($1,093) ($5,872) ($10,022)
========== ========== ========== ==========
Loss per share - basic ($0.41) ($.27) ($1.42) ($2.45)
Loss per share - diluted ($0.41) ($.27) ($1.42) ($2.45)
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- ------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED
31-August 31-August
1999 1998
====================================================================================================================
OPERATING ACTIVITIES
<S> <C> <C>
Net Loss ($5,872) ($10,022)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,034 1,044
Amortization of capitalized computer software development costs 1,458 2,277
Equity in earnings of joint ventures 0 0
Goodwill Amortization 165 176
Restructuring and Other Charges 0 6836
Changes in operating assets and liabilities:
Accounts Receivable 6,388 3,054
Inventories and other current assets (91) (25)
Accounts payable and other liabilities (784) (1,684)
--------------------------------
Total adjustments 8,171 11,678
--------------------------------
Net cash provided by operating activities 2,298 1,656
INVESTING ACTIVITIES
Additions to equipment and leasehold improvements (339) (439)
Software development costs capitalized (2,316) (2,800)
Other 166 527
--------------------------------
Net cash used in investing activities (2,489) (2,712)
FINANCING ACTIVITIES
Proceeds on long-term debt and other notes payable 147 61
Additional paid-in capital 76 90
Preferred stock dividend (50) 0
Proceeds from sale of stock 0 899
--------------------------------
Net cash provided (used) by financing activities 173 1,050
--------------------------------
Net increase (decrease) in cash ($18) $(6)
Cash-beginning of period $21 $14
================================
Cash-end of period $3 $8
====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999
(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, 1999 and August 31, 1998 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 three months ended August 31,
1999 are not necessarily indicative of the results of operations to be expected
for the entire fiscal year ending November 30, 1999. It is suggested that the
interim financial statements be read in conjunction with the audited
consolidated financial statements for the year ended November 30, 1998 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-1999 30-Nov-1998
-------------- -----------
Gross $10,252 $9,913
Less: Accumulated Depreciation ( 7,745) (6,711)
--------- ---------
Net $ 2,507 $3,202
Allowance for doubtful accounts
consisted of the following:
31-August-1999 30-Nov-1998
-------------- -----------
Balance $ 519 $ 506
Provision for doubtful accounts
consisted of the following:
31-August-1999 30-Nov-1998
-------------- -----------
$ 40 $ 17
5
<PAGE>
Note 3 - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options and warrants.
Earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended
August 31,
1999 1998
---- ----
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,131 4,098
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 4,131 4,098
=======================
Nine Months Ended
August 31,
1999 1998
---- ----
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,121 4,084
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 4,121 4,084
=======================
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On September 1, 1999, the Company entered into a definitive agreement and plan
of merger with IFS Americas, Inc. and IFS Acquisition, Inc. (collectively,
"IFS"). Pursuant to the agreement, IFS commenced a cash tender offer (the
"Tender Offer") for all of the shares of common stock, $.01 par value, of the
Company at a per share price of $4.50. The Tender Offer will expire on October
15, 1999, subject to extension. Assuming that the Tender Offer is successfully
completed, shares of common stock not tendered are expected to be "cashed out"
in a second-step merger (the "Merger") at $4.50 per share.
The Company had total revenues in the third quarter of $8,048,000 which was a
decrease of 2% from the $8,182,000 recognized in the third quarter of 1998. The
net loss for the quarter was $1,702,000 as compared with the net loss of
$1,093,000 for the third quarter of 1998. Neither period reflects any tax
benefit relating to the losses because the Company is in a loss carryforward
position for financial reporting purposes.
The Company's financial difficulties continue to be primarily in the division
selling the Baan ERP product, where losses on the operating level (before
interest expense but after overhead allocations) for the quarter were
approximately $1,128,000. The Company's TCM product line realized a profit of
approximately $255,000 and the Company's Intercim division incurred a loss of
approximately $230,000 in the third quarter of 1999.
For the nine months ended August 31, 1999, the Company had total revenues of
$24,144,000 which represents a 13.1% decrease from the $27,776,000 in revenues
for the same period in 1998. The net loss for the recent nine month period was
$5,872,000 compared to a net loss of $10,022,000 for the same period in 1998.
However, the 1998 figure included a restructuring charge of $6,836,000. Without
the restructuring charge the loss would have been $3,186,000.
As a result of the Company's recent financial performance, its ability to
continue to fund current operations is subject to significant doubt. Without an
infusion of new capital and improved financial performance, the Company will
continue to require covenant relief from its primary lender for covenant
violations. As a result of its financial situation, all of the Company's debt
has been classified as short-term and its fiscal 1998 audit report contains an
explanatory paragraph for going concern uncertainty, pursuant to which the
auditors expressed substantial doubt as to the Company's ability to continue as
a going concern.
7
<PAGE>
Results of Operations
Net Revenues
Net revenues for the quarter ended August 31, 1999, were $8,048,000 which was a
decrease of 2% from the $8,182,000 for the same quarter in the previous year.
For the nine months ended August 31, 1999, net revenues were $24,144,000
compared to $27,776,000 for the same period in 1998. This represents a decrease
of 13.1% on a year-to-date basis. The primary reason for the decrease on a
year-to-date basis is the decline in sales of new licenses caused by the
Company's switch in focus from selling its own ERP product to selling the Baan
ERP product.
The mix of revenues comparing software, services, and hardware revenues as a
percentage of net revenues was 37.7%, 60.4%, and 1.9%, respectively, in the
third quarter of fiscal 1999, as compared with 47.3%, 48.6%, and 4.1%,
respectively, in the third quarter of fiscal 1998. The mix of revenues comparing
software, services and hardware revenues as a percentage of net revenues was
40.0%, 57.1%, and 2.9%, respectively, in the nine months ended August 31, 1999,
as compared with 48.9%, 45.9%, and 5.2%, respectively, in the nine months ended
August 31, 1998.
International revenues represented less than 10% of net revenues for all periods
presented.
The Company's operating revenues can vary substantially from quarter to quarter
based on the size and timing of customer software orders and market acceptance
of new products. The Company has historically operated with little software
backlog because software orders are generally shipped as orders are received. As
a result, product revenue in any quarter is substantially dependent on software
orders booked and shipped during that quarter.
Software License Fees
Software license fees are customer charges for the right to use the Company's
software products. Software license fees decreased 21.5%, from $3,866,000 in the
third quarter of 1998 to $3,036,000 in the quarter ended August 31, 1999. On a
year-to-date basis, license fee revenues for the nine months ended August 31,
1999, was $9,646,000 which is a decline of 28.9% from the $13,573,000 in fee
revenues for the same nine month period in 1998.
The decrease is primarily attributable to the sharp drop in new purchases of ERP
systems in 1999, as companies focused on resolving problems related to the Year
2000 date conversion.
8
<PAGE>
Service Revenues
The Company offers a number of optional services to its customers, including
such services as telephone support, systems integration, custom software
development, implementation consulting, and formal classroom and on-site
training. Service revenues increased 22.4% in the third quarter to $4,860,000
compared to $3,977,000 in the same period of the prior year. For the nine month
period ended August 31, 1999 service revenues were $13,788,000, an increase of
8.2% over the $12,748,000 in service revenues for the nine months ended August
31, 1998. The increase is primarily due to the higher daily rate the Company has
begun charging its customers for its services.
Hardware Revenues
Hardware revenue decreased 55.2% for the third quarter, from $339,000 in the
third quarter of 1998 to $152,000 in the third quarter of 1999. For the nine
months ended August 31, 1999, sales of hardware totaled $710,000 which was a
drop of 51.3% from the $1,455,000 sold for the first nine months of 1998. The
drop in hardware sales was mainly the result of having sold fewer new systems in
1999 due to issues related to the Year 2000 date conversion. The Company expects
that sales of hardware will remain at lower levels going forward because the
Company is less interested in selling these items due to the lower profit
margins involved and due to the trend of increasing sales of software licenses
operating on platforms for which the Company does not supply hardware.
Cost of Software License Fees
The cost of software license fees as a percentage of related revenue was 28.8%
for the third quarter, compared to 27.4% for the third quarter of last year. For
the nine month period ended August 31, 1999, the cost was 29.1% of revenue
compared to 30.7% for the same nine months in 1998.
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.
Cost of Services
The cost of services as a percentage of related revenue for the third quarter
decreased to 78.3%, compared to 90.0% for the same period of 1998. For the nine
month period ended August 31, 1999, the cost of services was 85.7% of related
revenue compared to 79.8% for the same period in 1998. The reason for the
decrease in the cost percentage experienced in the third quarter is the
increased daily rates the Company is now charging its customers for services.
9
<PAGE>
For the nine months ended August 31, 1999, the cost of sales on services is
higher in 1999 due to the inclusion of more ERP implementation services, which
are done by third parties and thus yield lower margins.
Cost of Hardware
For the third quarter of 1999 the cost of hardware as a percentage of related
revenue increased to 87.5%, compared to a cost of 68.4% for the third quarter of
1998. On a year to date basis, the cost of hardware as a percentage of related
revenue increased to 83.7% for the nine months ended August 31, 1999, compared
to 76.4% for the nine months ended August 31, 1998. 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. In general the higher costs reflected in 1999 are a product of
the competitive environment.
Selling and Marketing Expenses
Selling and marketing expense decreased to $2,380,000 in the third quarter, an
improvement of 21.1% over the $3,017,000 of expense incurred for the same
quarter in 1998. For the nine months ended August 31, 1999, sales and marketing
expense totaled $8,181,000, compared to $10,043,000 at this point last year.
This reduction of 18.5% resulted from the restructuring that was completed in
1998, coupled with higher than normal attrition the Company has experienced this
year. In addition, the Company's lower sales this year have also resulted in
lower commission expenses.
General and Administrative Expense
General and administrative expense was $1,541,000 for the third quarter,
compared to $624,000 for the same period in 1998. The increase resulted
partially from lower allocations of general and administrative expense to other
areas of the business due to lower headcounts, but also from accruals made for
potential sales tax liabilities of $200,000 and accruals for possible additional
legal and accounting expenses of $240,000.
On a year to date basis, general and administrative expenses are $3,542,000
compared to $2,837,000 for the same period of 1998. The primary reason for the
increase is the accruals mentioned above of $440,000 along with lower
allocations to other functional areas, which amounted to approximately $200,000.
Product Development Expense
Product development expense for the third quarter was $812,000 or 10.1% of
sales. This is 36% higher than the $597,000 expensed for the same quarter in
1998. For the
10
<PAGE>
nine month period ended August 31, 1999, this expense is $2,531,000 which is a
19% increase from the $2,118,000 expensed for the same nine month period in
1998. This increase is primarily related to a decrease in the amount of software
capitalized. The Company capitalizes costs in accordance with Statement of
Financial Accounting Standard (SFAS) No. 86. The Company has capitalized
$2,316,000 of product development cost in the first nine months of 1999 compared
to $2,800,000 for the same period in 1998.
Other Income/Expense - Net
Other income/expense consists primarily of interest expense on the Company's
line of credit. The net amount was $187,000 for the third quarter, which
compares to $165,000 for the same quarter last year. For the nine months just
ended the net amount is $531,000 compared to $559,000 for the same period of
1998. The expense varies with the amount of funds borrowed on the Company's
revolving line of credit, such that as borrowings increase the interest expense
increases.
Income Tax
A tax expense of $18,000 was recorded in the third quarter of 1999, which
consisted of some state and local minimum taxes due when the Company filed its
extended returns in August. There was no tax recorded in the third quarter of
1998 because these amounts were paid earlier. Because of this, on a year to date
basis the $18,000 for the current year compares to $33,000 expenses for the
first nine months of 1998.
For several years the Company has been 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, 1999, the Company had cash and marketable securities aggregating
$3,000. During the first nine months of fiscal 1999, the Company's operating
activities provided $2,298,000 of cash compared to providing $1,656,000 of cash
for the same period of the prior year. This increase in the cash provided was
mainly attributable to the Company's improved collection of accounts receivable.
Investing activities used cash of $2,489,000 in the first nine months of fiscal
1999 compared to $2,712,000 of cash used in the first nine months of fiscal
1998. The principal use of the cash fiscal 1999 was $2,316,000 for capitalized
product development. The principal uses of cash in fiscal 1998 included
$2,800,000 for capitalized product development.
Financing activities provided $173,000 of cash in the first nine months of
fiscal 1999 compared with providing $1,050,000 for the same period of fiscal
1998. The cash
11
<PAGE>
provided in fiscal 1999 came mainly from the Company's borrowing facilities. The
cash provided in 1998 came mainly as proceeds from the sale of stock. As of
August 31, 1999, the Company had no availability under its $7,000,000 line of
credit, which is based on the level of eligible accounts receivable.
The Company's credit agreement with Foothill Capital Corporation contains
certain restrictive covenants relating to income (EBITDA), tangible net worth,
and level of capital expenditures. On May 25, 1999, Foothill amended the credit
agreement raising the maximum revolving available amount to $7,000,000 subject
to collateral availability and, also, granted an "Additional Availability
Amount" of $750,000 in addition to the standard amount available under the
existing collateral calculation. On September 16, 1999, the Company obtained an
extension of this agreement until October 15, 1999. In addition, in August 1999,
the Company and Foothill entered into a consent agreement whereby Foothill
consented to the IFS transaction. Pursuant to the merger agreement, IFS agreed
to put in place a line of credit, subordinate to Foothill, to provide the
Company with up to $2,000,000 of additional financing. As of August 31, 1999,
the Company had borrowed $350,000 on this new line.
Because of its continued losses, the Company continues to be in violation of
certain tangible net worth and EBITDA covenants in its loan agreement with
Foothill. Foothill has waived these covenant violations in the quarter ended
August 31, 1999, and in prior quarters, but in the event that the acquisition by
IFS is not completed, no assurance can be given that future waivers or
additional financing will be available to the Company.
In the event that the Company is unable to secure necessary waivers or
additional financing, it would likely have a material adverse effect on the
Company's liquidity, including its ability to fund continuing operations at
current levels.
The Company currently has past due amounts with many of its vendors. The Company
has secured extended payment arrangements with some of these vendors and is in
the process of securing similar arrangements with other vendors. There can be no
assurance that the Company will be successful in extending these amounts owed to
other vendors or that funds will be available to pay obligations as they arise.
The Company is dependent on success in its efforts to complete the IFS
transaction, which would allow for increased borrowing to meet these
obligations.
As a result of its current financial situation, the Company, in accordance with
generally accepted accounting principles, has reclassified all of its
outstanding debt under its credit facility as short-term debt. All debt
pertaining to the credit facility having cross-default provisions has been so
reclassified regardless of whether or not covenant violations have occurred or
are anticipated. The Company's report from its independent accountants for the
year ended November 30, 1998, contains a going concern explanatory paragraph,
pursuant to which the auditors expressed substantial doubt as to the Company's
ability to continue as a going concern.
12
<PAGE>
Market Risk
Due to the variable rate paid on the revolver portion of its credit facility,
the Company is exposed to market risk from changes in interest rates. Generally,
if the base rate on the revolver averaged 2% more in fiscal 1999 than in fiscal
1998, the Company's interest expense would increase by $45,000. This amount is
determined by considering the impact of the hypothetical interest rate on the
Company's borrowing cost, but does not consider the effects of the reduced level
of economic activity that could exist in such an environment. The Company has
not historically used financial instruments to hedge interest rate exposure and
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
Year 2000 Compliance
The Company faces "Year 2000" compliance issues similar to other companies in
the manufacturing software industry. The problem relates to software systems and
programs that use only two digits, rather than four digits, to represent a year.
This does not allow processing of dates beyond the year 1999 and may result in
incorrect calculations, reports or other information. Additionally, this may
cause system failures from processors that are embedded in a multitude of
devices.
To address the Year 2000 problem, the Company established a corporate readiness
program which began in fiscal 1994 with a detailed analysis of the Company's
software products sold to its customers. The Company had originally started
addressing the changes to the program code of its software products for Year
2000 issues in 1985. The Company later, in 1998, added the analysis of internal
systems and third party suppliers of both software and any other goods that may
have Year 2000 problems. The Company has completed its detailed assessment plan
which has now been approved by the Board of Directors.
State of Readiness
Company's Products
The Company's current products have been designed and tested for Year 2000
compliance. However, due to the complexity of software products, there can be no
absolute assurance that the Company's software products contain all the
necessary date code changes. The Company's versions of the software prior to
version 5.1.2 in 1994 are known to contain code that is not Year 2000 compliant.
In 1996, the Company notified customers of prior versions of this non-compliance
and customers were offered upgrades and implementation assistance to migrate to
a Year 2000 compliant version. The Company's agreements with the customers since
1992 do not expressly obligate the Company to furnish an updated version of the
software that is Year 2000 compliant. The Company's analysis of contracts prior
to 1992 indicate an immaterial level of Company obligation to furnish updated
software.
13
<PAGE>
Internal Systems
The Company has completed an assessment of the Year 2000 readiness of its
internal computer information system and non-computer systems , such as
telecommunications equipment, network equipment, etc., to determine whether such
systems are Year 2000 compliant. A list of all mission critical items has been
identified, and the Company expects to complete deployment of Year 2000
corrections on or around November of 1999.
Third Party Reseller and Key Suppliers
The Company has completed a comprehensive list of its resellers and key
suppliers. With respect to certain of its most significant resellers and
suppliers, the Company has already made inquiries to assess their readiness and
has obtained published information indicating that they are in compliance. The
Company expects to totally complete its assessment of all its resellers and key
suppliers on or about November, 1999.
Costs
The Company estimates the historical costs to remediate the Year 2000 issues
have totaled over $1,000,000 and future costs to remediate will be approximately
$200,000. The Company expects to fund the future costs of remediation from
operations.
Risk
Failure to correct critical Year 2000 issues could cause a serious interruption
in business operations of the Company's customers and/or internal systems. Such
interruptions could have a material impact on the Company's results of
operations, liquidity, and financial condition. The Company is taking actions to
minimize these risks, but no assurance can be given that all potential issues
can be eliminated. Additionally, the effects of potential litigation can not be
estimated and could also have a material effect on the results of operations.
Finally, factors outside the Company's control could also cause disruption of
business activities which could materially affect the results of operations.
Contingency Plans
The Company is in the process of evaluating contingency plans to handle the
controllable risks regarding Year 2000 compliance. Certain of the risks such as
lengthy power outages or communication failures may not be circumvented. A
detailed plan of controllable risks is expected to be available in the near
future.
14
<PAGE>
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE
ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED
IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH
UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPLETION OF THE
IFS TRANSACTION AND THE FACTORS DESCRIBED IN THE SECTION CAPTIONED "BUSINESS
RISK FACTORS" IN ITEM 1 OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED NOVEMBER 30, 1998, WHICH INCLUDE, BUT ARE NOT LIMITED TO, "FINANCIAL
RESULTS FOR THE LAST THREE YEARS," "FINANCIAL COVENANTS AND LIMITATIONS;
LIQUIDITY," "SUCCESS OF RECENT RESTRUCTURING," "DEPENDENCE ON PRINCIPAL
PRODUCTS," "BAAN RELATIONSHIP; DEPENDENCE ON THIRD PARTY SOFTWARE," "DEPENDENCE
ON KEY EMPLOYEES" AND "CONTROL BY MANAGEMENT."
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Reference is made to the information in Item 2 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Market Risk," which information is incorporated herein by reference.
16
<PAGE>
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the terms of the Company's Series B 8% Convertible Redeemable
Preferred Stock (the "Series B"), the Company was obligated to pay cumulative
preferential dividends to the holders of the Series B on January 2, 1999, April
1, 1999, July 1, 1999, and October 1, 1999.
With respect to each of the above-referenced dividend payment dates, the Board
of Directors of the Company, in accordance with the terms of the Series B,
having reviewed the cash situation of the Company, determined that the Company
would pay the dividends in shares of Series B. Thus, on (i) January 2, 1999, in
accordance with and pursuant to the terms of the Series B, 34.74 shares of the
Series B were issued in payment of the dividends due the holders of the Series
B, (ii) on April 1, 1999, in accordance with and pursuant to the terms of the
Series B, 55.63 shares of the Series B were issued in payment of the dividends
due the holders of the Series B (iii) on July 1, 1999 in accordance with and
pursuant to the terms of the Series B, 61.23 shares were issued in payment of
the dividends due the holders of the Series B and (iv) on October 1, 1999 in
accordance with and pursuant to the terms of the Series B, 48.43 shares were
issued in payment of the dividends due the holders of the Series B. Such shares
of Series B were issued in transactions exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger, dated as of September 1, 1999, by and
among IFS Americas, Inc., IFS Acquisition, Inc. and Effective
Management Systems, Inc.
4.1 Fifth Amendment to Loan Agreement by and among Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.,
and Effective Management Systems of Illinois, Inc., dated August 1,
1999.
4.2 Consent and Sixth Amendment to Loan Agreement by and among Foothill
Capital Corporation and Effective Management Systems, Inc., EMS-East,
Inc., and Effective Management Systems of Illinois, Inc., dated August
31, 1999.
4.3 Seventh Amendment to Loan Agreement by and among Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.,
and Effective Management Systems of Illinois, Inc., dated September
16, 1999.
4.4 Waiver to Loan Agreement by and among Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated October 12, 1999.
4.5 Stock Option Agreement, dated as of September 1, 1999, by and between
IFS Americas, Inc., IFS Acquisition, Inc. and Effective Management
Systems, Inc.
10.1 Fairness opinion of Tucker Anthony Cleary Gull, dated September 1,
1999.
18
<PAGE>
10.2 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Michael D. Dunham.
10.3 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Thomas M. Dykstra.
10.4 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Donald W. Vahlsing.
10.5 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Robert E. Weisenberg.
10.6 Mutual Nondisclosure Agreement, executed on or about May 24, 1999, by
and between Effective Management Systems, Inc. and IFS Americas, Inc.
10.7 Letter of Industrial & Financial Systems, IFS AB to Effective
Management Systems, Inc., dated September 1, 1999, regarding funding
for the Offer and the Merger.
10.8 Letter of Michael D. Dunham to IFS, Inc., dated August 31, 1999,
regarding the purchase of shares of stock of Industrial and Financial
Systems, IFS AB.
19
<PAGE>
10.9 Letter of Thomas M. Dykstra to IFS, Inc., dated August 31, 1999,
regarding the purchase of shares of stock of Industrial and Financial
Systems, IFS AB.
10.10 Non-competition Agreement by and between Effective Management Systems,
Inc. and Helmut M. Adam, dated September 1, 1999.
10.11 Non-competition Agreement by and between Effective Management Systems,
Inc. and Scott J. Mermel, dated September 1, 1999.
27 Financial Data Schedule [EDGAR version only].
(b) Reports on Form 8-K:
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
October 15, 1999
By:/s/ Michael D. Dunham
Michael D. Dunham
President (principal executive officer)
By:/s/ Thomas G. Hickinbotham
Thomas G. Hickinbotham
Chief Financial Officer and Assistant Treasurer
(principal financial and accounting officer)
21
<PAGE>
Exhibit Index
Effective Management Systems, Inc.
Exhibit Number Exhibit
- -------------- -------
2.1 Agreement and Plan of Merger, dated as of September 1, 1999, by and
among IFS Americas, Inc., IFS Acquisition, Inc. and Effective
Management Systems, Inc. [Incorporated by reference to Exhibit (c)(1)
to Effective Management Systems, Inc.'s Solicitation/ Recommendation
Statement on Schedule 14D-9, dated September 8, 1999].
4.1 Fifth Amendment to Loan Agreement by and among Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.,
and Effective Management Systems of Illinois, Inc., dated August 1,
1999.
4.2 Consent and Sixth Amendment to Loan Agreement by and among Foothill
Capital Corporation and Effective Management Systems, Inc., EMS-East,
Inc., and Effective Management Systems of Illinois, Inc., dated August
31, 1999.
4.3 Seventh Amendment to Loan Agreement by and among Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.,
and Effective Management Systems of Illinois, Inc., dated September
16, 1999.
4.4 Waiver to Loan Agreement by and among Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated October 12, 1999.
4.5 Stock Option Agreement, dated as of September 1, 1999, by and between
IFS Americas, Inc., IFS Acquisition, Inc. and Effective Management
Systems, Inc. [Incorporated by reference to Exhibit (c)(2) to
Effective Management Systems, Inc.'s Solicitation/ Recommendation
Statement on Schedule 14D-9, dated September 8, 1999].
10.1 Fairness opinion of Tucker Anthony Cleary Gull, dated September 1,
1999 [Incorporated by reference to Exhibit (a)(3) to Effective
Management Systems, Inc.'s Solicitation/ Recommendation Statement on
Schedule 14D-9, dated September 8, 1999].
22
<PAGE>
Exhibit Number Exhibit
- -------------- -------
10.2 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Michael D. Dunham
[Incorporated by reference to Exhibit (c)(3) to Effective Management
Systems, Inc.'s Solicitation/ Recommendation Statement on Schedule
14D-9, dated September 8, 1999].
10.3 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Thomas M. Dykstra
[Incorporated by reference to Exhibit (c)(4) to Effective Management
Systems, Inc.'s Solicitation/ Recommendation Statement on Schedule
14D-9, dated September 8, 1999].
10.4 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Donald W. Vahlsing
[Incorporated by reference to Exhibit (c)(5) to Effective Management
Systems, Inc.'s Solicitation/ Recommendation Statement on Schedule
14D-9, dated September 8, 1999].
10.5 Stockholder Agreement, dated as of September 1, 1999, by and among IFS
Americas, Inc., IFS Acquisition, Inc. and Robert E. Weisenberg
[Incorporated by reference to Exhibit (c)(6) to Effective Management
Systems, Inc.'s Solicitation/ Recommendation Statement on Schedule
14D-9, dated September 8, 1999].
10.6 Mutual Nondisclosure Agreement, executed on or about May 24, 1999, by
and between Effective Management Systems, Inc. and IFS Americas, Inc.
[Incorporated by reference to Exhibit (c)(15) to Effective Management
Systems, Inc.'s Solicitation/ Recommendation Statement on Schedule
14D-9, dated September 8, 1999].
10.7 Letter of Industrial & Financial Systems, IFS AB to Effective
Management Systems, Inc., dated September 1, 1999, regarding funding
for the Offer and the Merger [Incorporated by reference to Exhibit
(c)(16) to Effective Management Systems, Inc.'s Solicitation/
Recommendation Statement on Schedule 14D-9, dated September 8, 1999].
10.8 Letter of Michael D. Dunham to IFS, Inc., dated August 31, 1999,
regarding the purchase of shares of stock of Industrial and Financial
Systems, IFS AB [Incorporated by reference to Exhibit (c)(17) to
Effective Management Systems, Inc.'s Solicitation/ Recommendation
Statement on Schedule 14D-9, dated September 8, 1999].
23
<PAGE>
Exhibit Number Exhibit
- -------------- -------
10.9 Letter of Thomas M. Dykstra to IFS, Inc., dated August 31, 1999,
regarding the purchase of shares of stock of Industrial and Financial
Systems, IFS AB [Incorporated by reference to Exhibit (c)(18) to
Effective Management Systems, Inc.'s Solicitation/ Recommendation
Statement on Schedule 14D-9, dated September 8, 1999].
10.10 Non-competition Agreement by and between Effective Management Systems,
Inc. and Helmut M. Adam, dated September 1, 1999 [Incorporated by
reference to Exhibit (c)(19) to Effective Management Systems, Inc.'s
Solicitation/ Recommendation Statement on Schedule 14D-9, dated
September 8, 1999].
10.11 Non-competition Agreement by and between Effective Management Systems,
Inc. and Scott J. Mermel, dated September 1, 1999 [Incorporated by
reference to Exhibit (c)(20) to Effective Management Systems, Inc.'s
Solicitation/ Recommendation Statement on Schedule 14D-9, dated
September 8, 1999].
27 Financial Data Schedule [EDGAR version only].
24
Exhibit 4.1
FIFTH AMENDMENT TO
LOAN AGREEMENT
THIS FIFTH AMENDMENT (this "Amendment") is entered into as of August
1, 1999, among Effective Management Systems, Inc. ("EMS"), a Wisconsin
corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective
Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation
(EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and
collectively "Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security
Agreement dated as of December 30, 1997 (the "Loan Agreement");
WHEREAS, Borrowers have requested that Lender amend the Loan
Agreement, and Lender has agreed to do so subject to the terms and conditions
contained herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Amendments to Loan Agreement. Subject to the satisfaction of the
conditions set forth in Section 5 hereof, the Loan Agreement is amended as
follows:
(a) Section 2.1(a) of the Loan Agreement is hereby amended and
restated in its entirety, as follows:
(a) Subject to the terms and conditions of this Agreement, Foothill
agrees to make advances ("Advances") to Borrowers in an amount outstanding not
to exceed at any one time the lesser of (i) the Maximum Revolving Amount less
the outstanding balance of all undrawn or unreimbursed Letters of Credit, or
(ii) the Borrowing Base less (A) the aggregate amount of all undrawn or
unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing
Base", as of any date of determination, shall mean the result of:
(x) the lesser of (i) 80% of Eligible Accounts of Borrowers, less the
amount, if any, of the Dilution Reserve, and (ii) an amount equal to Borrowers'
Collections with respect to Accounts of Borrowers for the immediately preceding
100 day period (provided, that such period may be adjusted for seasonality in
Foothill's reasonable credit judgment), minus
(y) the aggregate amount of reserves, if any, established by Foothill
under Section 2.1(b), plus
1
<PAGE>
(z) the "Additional Availability Amount" (as defined below). The
"Additional Availability Amount" means (i) during the period commencing on
August 1, 1999 and ending on September 15, 1999, 1999 an amount equal to
$750,000 and (ii) at all times on and after September 16, 1999 an amount equal
to zero.
3. Ratification. This Amendment, subject to satisfaction of the
conditions provided below, shall constitute amendments to the Loan Agreement and
all of the Loan Documents as appropriate to express the agreements contained
herein. In all other respects, the Loan Agreement and the Loan Documents shall
remain unchanged and in full force and effect in accordance with their original
terms.
4. Conditions to Effectiveness. Subject to Section 6 below, the
amendments to the Loan Agreement set forth in this Amendment shall become
effective as of the date of this Amendment and upon the satisfaction of the
following conditions precedent in form and substance satisfactory to Lender:
(a) Modification Fee. Borrower shall pay to Lender a modification fee
equal to Seven Thousand Five Hundred Dollars ($7,500).
(b) No Default. No Event of Default or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, shall
have occurred and be continuing, and, after giving effect to the amendments
contained herein, no Event of Default or event which, with the giving of notice
or the passage of time, or both, would become an Event of Default, shall have
occurred and be continuing.
5. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to
enter into this Amendment, each Borrower hereby warrants to Lender, as of the
date hereof, that:
(i) The warranties of such Borrower contained in the Loan Agreement,
as herein amended, are true and correct as of the date hereof as if made on the
date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by such Borrower in connection with this Amendment, the Loan
Agreement and the other Loan Documents are accurate and correct in all material
respects and complete insofar as may be necessary to give Lender true and
accurate knowledge of the subject matter thereof. Such Borrower has disclosed to
Lender every fact of which it is aware which would reasonably be expected to
materially and adversely affect the business, operations or financial condition
of such Borrower or the ability of such Borrower to perform its obligations
under this Amendment, the Loan Agreement or under any of the other Loan
Documents. None of the information furnished to Lender by or on behalf of such
Borrower contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained herein or
therein not materially misleading.
2
<PAGE>
(iii) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the date
hereof.
(b) Expenses. Borrowers agree to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrowers agree to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment or the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this Section 6 (b) shall survive any termination of
this Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of California.
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) Reference to Loan Agreement. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any Loan Documents, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) Successors. This Amendment shall be binding upon Borrowers, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrowers, Lender and their respective successors and assigns.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EMS-EAST, INC., a Massachusetts corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, INC., an Illinois corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Scott D. Ryan
Scott D. Ryan
Title: Vice President
4
Exhibit 4.2
CONSENT AND SIXTH AMENDMENT TO
LOAN AGREEMENT
THIS CONSENT AND SIXTH AMENDMENT (this "Amendment") is entered into as
of August 31, 1999, among Effective Management Systems, Inc. ("EMS"), a
Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation,
Effective Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois
corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower",
and collectively "Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security
Agreement dated as of December 30, 1997 (the "Loan Agreement");
WHEREAS, Borrowers have requested that Lender consent to the execution
and delivery by EMS of an Agreement and Plan of Merger by and among IFS
Americas, Inc. ("Parent"), IFS Acquisition, Inc. ("Purchaser") and EMS, a copy
of which is attached hereto (the "Merger Agreement");
WHEREAS, Borrowers have requested that Lender amend the Loan
Agreement, and Lender has agreed to do so subject to the terms and conditions
contained herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as
follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Consent. Subject to the satisfaction of the conditions set forth in
Section 5 hereof, Lender hereby consents to the execution and delivery of the
Merger Agreement by EMS; provided that each Borrower acknowledges and agrees
that it will not pay any of the merger consideration under the Merger Agreements
(such merger consideration to be paid solely by Parent) or pay any dividends or
distributions, make any loans or advances or otherwise make any payments or
transfer any assets, to Parent or any of Parent's affiliates.
1
<PAGE>
3. Amendments to Loan Agreement. Subject to the satisfaction of the
conditions set forth in Section 5 hereof, the Loan Agreement is amended as
follows:
(a) Section 1.1 of the Loan Agreement is hereby amended to add the
following definitions in appropriate alphabetical order:
7.9 Change of Control.
Cause, permit, or suffer, directly or indirectly, any Change of
Control; except in connection with the merger contemplated by the Merger
Agreement (as defined in the Consent and Sixth Amendment to this Agreement).
4. Ratification. This Amendment, subject to satisfaction of the
conditions provided below, shall constitute amendments to the Loan Agreement and
all of the Loan Documents as appropriate to express the agreements contained
herein. In all other respects, the Loan Agreement and the Loan Documents shall
remain unchanged and in full force and effect in accordance with their original
terms.
5. Conditions to Effectiveness. Subject to Section 6 below, the
amendments to the Loan Agreement set forth in this Amendment shall become
effective as of the date of this Amendment and upon the satisfaction of the
following conditions precedent in form and substance satisfactory to Lender:
(a) No Default. No Event of Default or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, shall
have occurred and be continuing, and, after giving effect to the amendments
contained herein, no Event of Default or event which, with the giving of notice
or the passage of time, or both, would become an Event of Default, shall have
occurred and be continuing.
6. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to
enter into this Amendment, each Borrower hereby warrants to Lender, as of the
date hereof, that:
(i) The warranties of such Borrower contained in the Loan Agreement,
as herein amended, are true and correct as of the date hereof as if made on the
date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by such Borrower in connection with this Amendment, the Loan
Agreement and the other Loan Documents are accurate and correct in all material
respects and complete insofar as may be necessary to give Lender true and
accurate knowledge of the subject matter thereof. Such Borrower has disclosed to
Lender every fact of which it is aware which would reasonably be expected to
materially and adversely affect the business, operations or financial condition
of such Borrower or the ability of such Borrower to perform its obligations
under this Amendment, the Loan Agreement or under any of the other Loan
Documents. None of the information furnished to Lender by or on behalf of such
Borrower contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained herein or
therein not materially misleading.
2
<PAGE>
(iii) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the date
hereof.
(b) Expenses. Borrowers agree to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrowers agree to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment or the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this Section 6 (b) shall survive any termination of
this Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of California.
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) Reference to Loan Agreement. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any Loan Documents, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) Successors. This Amendment shall be binding upon Borrowers, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrowers, Lender and their respective successors and assigns.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EMS-EAST, INC., a Massachusetts corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, INC., an Illinois corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Scott D. Ryan
Scott D. Ryan
Title: Vice President
4
<PAGE>
EXHIBIT A
See Attached. [See Exhibit 2.1]
5
Exhibit 4.3
SEVENTH AMENDMENT TO
LOAN AGREEMENT
THIS SEVENTH AMENDMENT (this "Amendment") is entered into as of
September 16, 1999, among Effective Management Systems, Inc. ("EMS"), a
Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation,
Effective Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois
corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower",
and collectively "Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security
Agreement dated as of December 30, 1997 (the "Loan Agreement");
WHEREAS, Borrowers have requested that Lender amend the Loan
Agreement, and Lender has agreed to do so subject to the terms and conditions
contained herein;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Amendments to Loan Agreement. Subject to the satisfaction of the
conditions set forth in Section 5 hereof, the Loan Agreement is amended as
follows:
(a) Section 2.1(a) of the Loan Agreement is hereby amended and
restated in its entirety, as follows:
(a) Subject to the terms and conditions of this Agreement, Foothill
agrees to make advances ("Advances") to Borrowers in an amount outstanding not
to exceed at any one time the lesser of (i) the Maximum Revolving Amount less
the outstanding balance of all undrawn or unreimbursed Letters of Credit, or
(ii) the Borrowing Base less (A) the aggregate amount of all undrawn or
unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing
Base", as of any date of determination, shall mean the result of:
1
<PAGE>
(x) the lesser of (i) 80% of Eligible Accounts of Borrowers, less the
amount, if any, of the Dilution Reserve, and (ii) an amount equal to Borrowers'
Collections with respect to Accounts of Borrowers for the immediately preceding
100 day period (provided, that such period may be adjusted for seasonality in
Foothill's reasonable credit judgment), minus
(y) the aggregate amount of reserves, if any, established by Foothill
under Section 2.1(b), plus
(z) the "Additional Availability Amount" (as defined below). The
"Additional Availability Amount" means (i) during the period commencing on
September 16, 1999 and ending on October 15, 1999 an amount equal to $750,000
and (ii) at all times on and after October 16, 1999 an amount equal to zero.
3. Ratification. This Amendment, subject to satisfaction of the
conditions provided below, shall constitute amendments to the Loan Agreement and
all of the Loan Documents as appropriate to express the agreements contained
herein. In all other respects, the Loan Agreement and the Loan Documents shall
remain unchanged and in full force and effect in accordance with their original
terms.
4. Conditions to Effectiveness. Subject to Section 6 below, the
amendments to the Loan Agreement set forth in this Amendment shall become
effective as of the date of this Amendment and upon the satisfaction of the
following conditions precedent in form and substance satisfactory to Lender:
(a) Modification Fee. Borrower shall pay to Lender a modification fee
equal to Seven Thousand Five Hundred Dollars ($7,500).
(b) No Default. No Event of Default or event which, with the giving of
notice or the passage of time, or both, would become an Event of Default, shall
have occurred and be continuing, and, after giving effect to the amendments
contained herein, no Event of Default or event which, with the giving of notice
or the passage of time, or both, would become an Event of Default, shall have
occurred and be continuing.
2
<PAGE>
5. Miscellaneous.
(a) Warranties and Absence of Defaults. In order to induce Lender to
enter into this Amendment, each Borrower hereby warrants to Lender, as of the
date hereof, that:
(i) The warranties of such Borrower contained in the Loan Agreement,
as herein amended, are true and correct as of the date hereof as if made on the
date hereof.
(ii) All information, reports and other papers and data heretofore
furnished to Lender by such Borrower in connection with this Amendment, the Loan
Agreement and the other Loan Documents are accurate and correct in all material
respects and complete insofar as may be necessary to give Lender true and
accurate knowledge of the subject matter thereof. Such Borrower has disclosed to
Lender every fact of which it is aware which would reasonably be expected to
materially and adversely affect the business, operations or financial condition
of such Borrower or the ability of such Borrower to perform its obligations
under this Amendment, the Loan Agreement or under any of the other Loan
Documents. None of the information furnished to Lender by or on behalf of such
Borrower contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained herein or
therein not materially misleading.
(iii) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the date
hereof.
(b) Expenses. Borrowers agree to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
In addition, Borrowers agree to pay, and save Lender harmless from all liability
for, any stamp or other taxes which may be payable in connection with the
execution or delivery of this Amendment or the Loan Agreement, as amended
hereby, and the execution and delivery of any instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith.
All obligations provided in this Section 6 (b) shall survive any termination of
this Amendment and the Loan Agreement as amended hereby.
(c) Governing Law. This Amendment shall be a contract made under and
governed by the internal laws of the State of California.
(d) Counterparts. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
3
<PAGE>
(e) Reference to Loan Agreement. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any Loan Documents, or other
agreements, documents or other instruments executed and delivered pursuant to
the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) Successors. This Amendment shall be binding upon Borrowers, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrowers, Lender and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized and delivered
as of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EMS-EAST, INC., a Massachusetts corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, INC., an Illinois corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Scott D. Ryan
Scott D. Ryan
Title: Vice President
4
Exhibit 4.4
WAIVER
THIS WAIVER (this "Waiver") is entered into as of October 12, 1999,
among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation,
EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management
Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS,
EMS-East and EMS-Illinois are each individually a "Borrower", and collectively
"Borrowers"), and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security
Agreement dated as of December 30, 1997, as amended (the "Loan Agreement");
WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net
Worth (as defined in the Loan Agreement) for the fiscal quarter ended August 31,
1999 is approximately negative Ten Million Five Hundred Eighty-Six Thousand
Dollars (-$10,586,000);
WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as
defined in the Loan Agreement) for the three month period ending August 31, 1999
is approximately negative One Million One Hundred Four Thousand Dollars
(-$1,104,000);
WHEREAS, as a result of the foregoing, Borrowers have breached
Sections 7.20(a) and 7.20(b) of the Loan Agreement and Events of Default exist
under Section 8.2 of the Loan Agreement;
WHEREAS, Borrowers have requested that Lender waive the foregoing
Events of Default and Lender has agreed to do so subject to the terms hereof;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Waiver. Subject to the reaffirmation by each Borrower of its
representations and warranties under the Loan Agreement and its representations
and warranties set forth herein and receipt by Lender of the waiver fee referred
to below, Lender hereby waives the Events of Default arising solely as a result
of the (i) Tangible Net Worth of Borrowers not being at least negative Two
Million Seven Hundred and Fifty Thousand Dollars (-$2,750,000) plus the Equity
Infusion Amount for the fiscal quarter ended August 31, 1999 and (ii) EBITDA of
Borrowers not being at least Five Hundred Thousand Dollars ($500,000) for the
three month period ending August 31, 1999. The foregoing waiver shall not
constitute a waiver of any other Event of Default that may exist, or a wavier of
any future Event of Default that may occur (including, without limitation, any
Event of Default occurring as a result of a breach of Section 7.20(a) or Section
7.20(b) as of any date or for any period ending after August 31, 1999).
1
<PAGE>
3. Representations. In order to induce Lender to enter into this
Waiver, Borrower hereby represents and warrants to Lender that:
(a) The representations and warranties of each Borrower contained in
the Loan Agreement, are true and correct as of the date hereof as if made on the
date hereof;
(b) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the date
hereof (other than as described in Section 2 above);
(c) The Tangible Net Worth of Borrowers as of August 31, 1999 is
approximately negative Ten Million Five Hundred Eighty-Six Thousand Dollars
(-$10,586,000); and
(d) The EBITDA of Borrowers for the three month ending August 31, 1999
is approximately negative One Million One Hundred Four Thousand Dollars
(-$1,104,000).
4. Waiver Fee. In consideration of the waiver described above,
Borrowers agree to pay Lender a waiver fee of Two Thousand Five Hundred Dollars
($2,500) on the date hereof.
The remainder of the page is intentionally left blank
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver
to be executed by their respective officers thereunto duly authorized and
delivered as of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By /s/ T.G. Hickinbotham
T.G. Hickinbotham
Title: Chief Financial Officer
EMS-EAST, INC., a Massachusetts corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, an Illinois corporation
By /s/ Michael D. Dunham
Michael D. Dunham
Title: President
FOOTHILL CAPITAL CORPORATION
By /s/ Scott D. Ryan
Scott D. Ryan
Title: Vice President
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC.
AS OF AND FOR THE NINE MONTHS ENDED AUGUST 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 7,560
<ALLOWANCES> (519)
<INVENTORY> 265
<CURRENT-ASSETS> 7,503
<PP&E> 10,252
<DEPRECIATION> (7,745)
<TOTAL-ASSETS> 17,677
<CURRENT-LIABILITIES> 18,857
<BONDS> 0
0
1,361
<COMMON> 42
<OTHER-SE> (3,616)
<TOTAL-LIABILITY-AND-EQUITY> 17,677
<SALES> 710
<TOTAL-REVENUES> 24,144
<CGS> 594
<TOTAL-COSTS> 29,467
<OTHER-EXPENSES> 531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (5,854)
<INCOME-TAX> 18
<INCOME-CONTINUING> (5,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,872)
<EPS-BASIC> (1.42)
<EPS-DILUTED> 0<F1>
<FN>
F1>Not required to be calculated in accordance with generally accepted
accounting principles.
</FN>
</TABLE>
