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 MAY 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 of (I.R.S. Employer
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 May 31, 1999
- ------------------------------------ ----------------------------------------
Common Stock, $.01 par value 4,118,486
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
May 31, 1999
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 Financial Statements
Consolidated Balance Sheets at
May 31, 1999 and November 30, 1998 3
Consolidated Statements of Operations - Three and
Six Months Ended May 31, 1999 and May 31, 1998 5
Consolidated Statements of Cash Flows - Six 6
Months Ended May 31, 1999 and May 31, 1998
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 20
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
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PART I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
- --------------------------------------------------------------------------------
ASSETS 31-May 30-Nov
1999 1998
================================================================================
CURRENT ASSETS
Cash $ 1 $ 21
Accounts Receivable:
Trade, less allowance for
doubtful accounts 6,694 12,871
Related Parties 443 426
Inventories 278 275
Prepaid Expenses and Other Current Assets 309 225
-----------------------------
TOTAL CURRENT ASSETS 7,725 13,818
LONG TERM ASSETS
Computer Software, net 5,009 4,373
Investments in and Advances to
Unconsolidated Joint Ventures 291 291
Equipment and Leasehold Improvements, net 2,764 3,202
Intangible Assets, net 2,019 2,129
Other Assets 376 347
-----------------------------
TOTAL LONG TERM ASSETS 10,459 10,342
-----------------------------
TOTAL ASSETS $18,184 $24,160
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
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EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 31-May 30-Nov
1999 1998
===========================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 4,447 $ 3,662
Accrued Liabilities 1,755 2,937
Deferred Revenues 6,159 6,522
Customer Deposits 100 113
Current portion of
Long-term Obligations 5,323 6,194
-------------------------------
TOTAL CURRENT LIABILITIES 17,784 19,428
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 642 858
Long-term Obligations 274 242
-------------------------------
TOTAL LONG TERM LIABILITIES 916 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"); 1,875.37 shares of
Series B are issued and outstanding,(liquidation preference of
$1000 per share) 1,370 1411
Common Stock, $.01 par value; authorized 20,000,000
shares; issued 4,118,486 and 4,106,377 shares;
outstanding 4,105,861 and 4,093,752 shares 41 41
Common Stock Warrants 144 144
Additional Paid- in Capital 11,489 11,426
Retained Earnings (Deficit) (13,500) (9,330)
Cost of Common Stock in Treasury(12,625 shares) (60) (60)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY (516) 3,632
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,184 $24,160
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
- -----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
31-May 31-May 31-May 31-May
1999 1998 1999 1998
========================================================================================================================
NET REVENUES:
<S> <C> <C> <C> <C>
Software license fees $ 3,454 $ 4,372 $ 6,610 $ 9,707
Services 4,934 4,532 8,928 8,771
Hardware 232 444 558 1,116
-------- -------- ------- -------
Total net revenues 8,620 9,348 16,096 19,594
COST OF PRODUCTS AND SERVICES
Software license fees 1,013 1,381 1,929 3,104
Services 4,200 3,374 8,011 6,594
Hardware 180 353 461 880
-------- -------- ------- -------
Total cost of products and services 5,393 5,108 10,401 10,578
Selling and marketing expenses 2,980 3,401 5,801 7,026
General and administrative expenses 1,217 1,019 2,001 2,213
Product development expenses 838 684 1,719 1,521
Restructuring and other charges 0 6,836 0 6,836
-------- -------- ------- -------
Total costs and operating expenses 10,428 17,048 19,922 28,174
-------- -------- ------- -------
LOSS FROM OPERATIONS (1,808) (7,700) (3,826) (8,580)
Other (Income)/ Expense
Equity in (earnings)/loss of unconsolidated joint ventures 0 (1) 0 (1)
Interest (income) 0 (10) (8) (20)
Interest expense 178 184 352 337
-------- -------- ------- -------
178 173 344 316
-------- -------- ------- -------
LOSS BEFORE INCOME TAXES (1,986) (7,873) (4,170) (8,896)
Income tax (benefit) expense 9 0 0 33
-------- -------- ------- -------
NET LOSS ($1,995) ($ 7,873) ($4,170) ($8,929)
======== ======== ======= =======
Loss per share - basic ($ 0.48) ($ 1.93) ($1.01) ($ 2.19)
Loss per share - diluted ($ 0.48) ($ 1.93) ($1.01) ($ 2.19)
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
5
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<TABLE>
<CAPTION>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
31-May 31-May
1999 1998
==============================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss ($4,170) ($8,929)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 689 693
Amortization of capitalized computer software development costs 972 1891
Equity in earnings of joint ventures 0 0
Goodwill Amortization 109 117
Restructuring and Other Charges 0 6836
Changes in operating assets and liabilities:
Accounts Receivable 6271 2251
Inventories and other current assets (198) (560)
Accounts payable and other liabilities (991) (1106)
-------------------------
Total adjustments 6852 10122
-------------------------
Net cash provided by operating activities 2682 1193
INVESTING ACTIVITIES
Additions to equipment and leasehold improvements (251) (254)
Software development costs capitalized (1608) (2063)
Other (28) 17
-------------------------
Net cash used in investing activities (1887) (2300)
FINANCING ACTIVITIES
Proceeds on long-term debt and other notes payable (837) 1283
Additional paid-in capital 22 41
Preferred stock dividend 0 0
-------------------------
Net cash provided (used) by financing activities (815) 1324
-------------------------
Net increase (decrease) in cash ($ 20) $ 217
Cash-beginning of period $ 21 $ 14
=========================
Cash-end of period $ 1 $ 231
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 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
six month periods ended May 31, 1999 and May 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 May 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
<TABLE>
<CAPTION>
Equipment and leasehold improvements consisted of the following:
31-May-1999 30-Nov-1998
----------- -----------
<S> <C> <C>
Gross $ 10,163 $ 9,913
Less: Accumulated Depreciation ( 7,400) ( 6,711)
----------- -----------
Net $ 2,763 $ 3,202
Allowance for doubtful accounts consisted of the following:
31-May-1999 30-Nov-1998
----------- -----------
Balance $ 147 $ 506
Provision for doubtful accounts consisted of the following:
31-May-1999 30-Nov-1998
----------- -----------
$ 244 $ 17
</TABLE>
7
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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.
<TABLE>
<CAPTION>
Three Months Ended
May 31,
1999 1998
---- ----
<S> <C> <C>
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,118 4,080
Effect of dilutive securities - stock options
and warrants 5 0
Effect of dilutive securities - preferred stock 0 0
--------------------- -------------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,123 4,080
===================== ===================
<CAPTION>
Six Months Ended
May 31,
1999 1998
---- ----
<S> <C> <C>
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,116 4,077
Effect of dilutive securities - stock options
and warrants 6 0
Effect of dilutive securities - preferred stock 0 0
--------------------- -------------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,122 4,077
===================== ===================
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company incurred a 7.8% decrease in net revenues and a net loss of
$1,995,000 for the second quarter of fiscal 1999 compared with a net loss of
$7,873,000 for the second quarter of fiscal 1998. The Company incurred a 17.9%
decrease in net revenues and a net loss of $4,170,000 for the first half of
fiscal 1999 compared with a net loss of $8,929,000 for the first half of fiscal
1998. All periods presented do not reflect a tax benefit relating to the loss
since for book purposes the Company is in a loss carry-forward position.
Software revenues were down 21.0% in the second quarter of fiscal 1999 compared
to the same period in the prior year and were down 31.9% in the first half of
1999 compared to the same period in the prior year. Management believes this
decrease in software revenues was mainly the result of a general industry
decline in demand for Enterprise Resource Planning ("ERP") software, a decline
in the Company's proprietary TCM product revenues due to recent prospect focus
on the Company's poor financial results, and reduced revenues from restructured
operations for the first half of 1999. Revenues in fiscal 1999 were also
negatively impacted by lower than expected revenues for the Baan products
distributed by the Company. The Company did experience an increase in revenues
from its Intercim division both in the second quarter of 1999 and in the first
half of fiscal 1999 as compared with the similar periods of 1998. The Company
also reduced its level of personnel through attrition and several April, 1999
terminations (mostly administrative related) in order to reduce its expense
levels to more appropriate levels. The Company expects its expense levels to
decrease by $87,000 per month from previous levels.
Although the Company has taken various actions with the objective of returning
the Company to profitability, no assurance can be given that these measures will
actually result in the achievement of this objective. In addition, as a result
of the recent losses, the Company has been required to obtain waivers from its
primary lender for covenant violations. In the event that, in the near term, the
Company's financial performance does not improve or if it is unable to secure
additional investment capital or sell assets to bolster its financial position,
the Company will continue to require additional covenant relief. In the event
that such covenant relief cannot be obtained, it would likely have a material
adverse effect on the Company's liquidity, including its ability to fund current
operations. The Company's ability to borrow additional funds under its existing
credit facility remains limited. 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 our ability to continue
as a going concern.
9
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The Company's on-going operations are also dependent on its ability to attract
and retain a highly qualified sales, development and service staff. The Company
has recently experienced attrition at rates higher than historical levels. The
Company has taken steps to curtail the attrition, but no assurance can be given
that these steps will be successful or that further attrition will not
materially impact the Company's financial performance.
Results of Operations
Total Revenues
Net revenues decreased to $8,620,000 for the three months ended May 31, 1999,
which represented a 7.8% decrease from the $9,348,000 in revenues for the same
quarter in the previous year. Net revenues decreased to $16,096,000 for the six
months ended May 31, 1999, which represented a 17.9% decrease from the
$19,594,000 in revenues for the same period in the previous year. The mix of
revenues comparing software, services, and hardware revenues as a percentage of
net revenues was 40.1%, 57.2%, and 2.7%, respectively, in the second quarter of
fiscal 1999, as compared with 46.8%, 48.5%, and 4.7%, respectively, in the
second quarter of fiscal 1998. The mix of revenues comparing software, services
and hardware revenues as a percentage of net revenues was 41.1%, 55.5%, and
3.4%, respectively, in the first half of fiscal 1999, as compared with 49.5%,
44.8%, and 5.7%, respectively, in the first half of fiscal 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 orders and market acceptance of new
products. The Company has historically operated with little backlog because
software orders are generally shipped as orders are received. As a result,
product revenue in any quarter is substantially dependent on 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 21.0% to $3,454,000 in the
second quarter of fiscal 1999 from $4,372,000 in the second quarter of fiscal
1998. Software license fees decreased 31.9% to $6,610,000 in the first half of
fiscal 1999 from $9,707,000 in the first half of fiscal 1998. Management
believes this decrease in software revenues was mainly the result of a general
industry decline in demand for ERP software, a decline in the Company's
proprietary TCM product revenues due to recent prospect
11
<PAGE>
focus on the Company's poor financial results (a trend the Company expects to
continue), and reduced revenues from restructured operations (a reduction of
$275,000 from the second quarter of 1998 and $524,000 from the first half of
1998). Revenues in fiscal 1999 were also negatively impacted by lower than
expected revenues for the Baan products distributed by the Company. Software
revenues for the Companys' Intercim division increased $381,000 to $1,174,00 in
the second quarter of 1999 as compared to $793,000 the corresponding period of
1998 and increased $447,000 to $2,439,000 in the first half of 1999 as compared
to $1,992,000 the corresponding period of 1998.
Service Revenues
The Company offers a number of optional services to its customers, including
such services as a telephone support program, systems integration, custom
software development, implementation consulting, and formal classroom and
on-site training. Service revenues increased to $4,934,000 for the three months
ended May 31, 1999, as compared with $4,532,000 for the same period of the prior
year. Service revenues increased to $8,928,000 for the six months ended May 31,
1999, as compared with $8,771,000 for the same period of the prior year. The
increase in revenues was mainly the result of an increase in Baan service
revenues on new accounts ( an increase of $727,000 compared to the second
quarter of 1998 and an increase of $1,142,000 compared to the first half of
1998) , and an increase in revenues related to rising Intercim product sales (
an increase of $411,000 compared to the second quarter of 1998 and an increase
of $562,000 compared to the first half of 1998).
Hardware Revenues
Hardware revenues decreased 47.8% to $232,000 in the second quarter of fiscal
1999 compared with $444,000 for the corresponding period of 1998. Hardware
revenues decreased 50.0% to $558,000 in the first half of fiscal 1999 compared
with $1,116,000 for the corresponding period of 1998. This decrease was mainly
due to increased sales of software on platforms for which the Company does not
supply hardware. Several years ago, the Company decided to reduce, over time,
its sales of commodity-priced hardware products and those which require specific
expertise beyond the scope of the Company's product focus. As an alternative,
the Company has developed relationships with various system integrators which
sell the hardware and provide these value-added hardware services.
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
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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 29.3%
for the second quarter of fiscal 1999, a decrease from 31.6% for the
corresponding period of 1998. The cost of software license fees as a percentage
of related revenue was 29.2% for the first half of fiscal 1999, a decrease from
32.0% for the corresponding period of 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. The Company wrote off a
substantial portion of its past investment in software development in
conjunction with its restructuring in the quarter ended May 31, 1998. Software
amortization decreased $ 277,000 in the second quarter of fiscal 1999 and
decreased $756,000 in the first half of 1999 as compared to the same periods of
1998 mainly 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.
Cost of Services
The cost of services as a percentage of related revenue increased to 85.1% for
the three months ended May 31, 1999, as compared with 74.5% for the same quarter
in the previous year. The cost of services as a percentage of related revenue
increased to 89.7% for the six months ended May 31, 1999, as compared with 75.2%
for the same period in the previous year. The increase was mainly due to
additional compensation for current personnel, lower levels of productivity for
new personnel, higher costs of outside-sourced labor, and additional warranty
work associated with new versions of the Company's software. The Company has
also organized a group dedicated to the implementation of the Baan software,
which activity has raised the level of training costs and other initial
non-billable matters. In addition, the Company has been implementing a new call
management system for the hot line telephone support area which has also
temporarily raised costs. The Company has raised the billing rates for its
services in line with industry practice, but the effects will not be fully
realized until the third quarter of the 1999 fiscal year.
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Cost of Hardware
The cost of hardware as a percentage of related revenue decreased to 77.6% in
the second quarter of fiscal 1999 from 79.5% in the second quarter of fiscal
1998. The cost of hardware as a percentage of related revenue increased to 82.6%
in the first half of fiscal 1999 from 78.8% in the first half of fiscal 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.
Selling and Marketing Expenses
Selling and marketing expenses decreased $421,000, or 12.4%, from $3,401,000 in
the second quarter of fiscal 1998 to $2,980,000 in the second quarter of fiscal
1999. Selling and marketing expenses decreased $1,225,000, or 17.4%, from
$7,026,000 in the first half of fiscal 1998, to $5,801,000 in the first half of
fiscal 1999. This decrease in selling and marketing expense was mainly due to
reduced levels of personnel through attrition, and reduced levels of expense
resulting from the Company's restructuring. As a percentage of total revenues,
selling and marketing expense was 34.6% in the second quarter of fiscal 1999
compared to 36.4% in the corresponding period of 1998. As a percentage of total
revenues, selling and marketing expense was 36.0% in the first half of fiscal
1999 compared to 35.9% in the corresponding period of 1998.
General and Administrative Expenses
General and administrative expense increased $198,000, or 19.4%, from $1,019,000
in the second quarter of fiscal 1998 to $1,217,000 in the second quarter of
fiscal 1999. The increase in general and administrative expense was mainly
related to higher levels of expense supporting the Company's efforts to secure
alternative sources of capital and an increase in the reserve for doubtful
accounts. General and administrative expense decreased $212,000, or 9.6%, from
$2,213,000 in the first half of fiscal 1998 to $2,001,000 in the first half of
fiscal 1999. The decrease in general and administrative expenses was mainly due
to reduced expense levels as a result of the Company's restructuring and
attrition. As a percentage of net revenues, general and administrative expense
was 14.1% and 10.9% in the second quarter and 12.4% and 11.3% in the first half
of fiscal 1999 and 1998, respectively. The increases were due to decreased
levels of revenues.
13
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Product Development Expense
Product development expense increased 22.5% from $684,000 in the second quarter
of fiscal 1998 to $838,000 in the second quarter of fiscal 1999. Product
development expense increased 13.0% from $1,521,000 in the first half of fiscal
1998 to $1,719,000 in the first half of fiscal 1999. This increase 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 capitalized $789,000 of product development costs in
the second quarter of fiscal 1999 compared to $979,000 in the second quarter of
fiscal 1998. The Company capitalized $1,608,000 of product development costs in
the first half of fiscal 1999 compared to $1,987,000 in the first half of fiscal
1998. As a percentage of software license fees, the total amount invested in
software development was 47.0% and 39.3% in the second quarter of fiscal 1999
and fiscal 1998, respectively, and was 49.5% and 36.4% in the first half of
fiscal 1999 and 1998, respectively. These increases as a percentage of software
license fees were mainly due to a reduced level of software revenues.
Restructuring 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
the Baan manufacturing software, and a reduction of costs focused on improving
the Company's financial performance. The full amount of the restructuring charge
has been paid or expensed as of May 31, 1999.
Other Income\Expense-Net
Other income\expense-net was $173,000 of expense for the second quarter of
fiscal 1998 compared to $178,000 of expense for the second quarter of fiscal
1999. Other income\expense-net was $316,000 of expense for the first half of
fiscal 1998 compared to $344,000 of expense for the first half of fiscal 1999.
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 facilities.
Income Tax
A tax expense of $9,000 (for state and local taxes) and no income tax benefit
was recorded for the second quarter of fiscal 1999 compared to no tax expense
for the second quarter of fiscal 1998. The tax expense for the first half of
1999 netted to $0 (for state and local taxes) and no income tax benefit was
recorded for the first half of fiscal 1999 compared to $33,000 of tax expense
for the first half of fiscal 1998. For some time, the Company,
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for book purposes, 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 May 31, 1999, the Company had cash and marketable securities aggregating
$1,000. During the first half of fiscal 1999, the Company's operating activities
provided $2,682,000 of cash compared to providing $1,193,000 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 and a
reduction of operating losses due to the restructuring in the second quarter of
1998.
Investing activities used cash of $1,887,000 in the first half of fiscal 1999
compared to $2,300,000 of cash in the first half of fiscal 1998. The principal
use of the cash in the first half of fiscal 1999 was $1,608,000 for capitalized
product development. The principal uses of cash in the first half of fiscal 1998
included $2,063,000 for capitalized product development.
Financing activities used $815,000 of cash in the first half of fiscal 1999
compared with providing $1,324,000 in the first half of fiscal 1998. The cash
used in fiscal 1999 mainly reflected payments on the Company's borrowing
facilities. As of May 31, 1999, the Company had $ 590,000 of 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 the Company obtained an
amendment from the lender 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 July 14, 1999, the Company also
obtained a waiver from the lender as a result of its failure to meet the
tangible net worth and EBITDA covenants. In order to meet financial covenants in
the future and to meet short term operational needs, 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 or capital which
could include the sale of assets, restructuring of the business, or other
business transactions beneficial to the capital structure. The Company is
continuing its review of alternative sources of financing and other strategic
alternatives to deal with its current financial status. Although management
believes that waivers and/or additional financing can be obtained, if needed, no
assurance can be given that waivers or such additional financing will be
available to the Company on acceptable terms. In the event that the
15
<PAGE>
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 certain 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 selling efforts to build additional
collateral that would allow for increased borrowing to meet these obligations. A
lack of success in this endeavor could substantially impact the Company's
ability to operate.
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.
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.
16
<PAGE>
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
and will submit it to the Board of Directors at the next session.
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.
Internal Systems
The Company is in the process of assessing 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 September 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 September, 1999.
17
<PAGE>
Costs
The Company estimates the historical costs to remediate the Year 2000 issues
have totaled $977,000 and future costs to remediate will be approximately
$250,000. 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 September,
1999.
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 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
18
<PAGE>
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."
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.
19
<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 and July 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 and (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. 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.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on May 4, 1999, Scott J.
Mermel and Robert E. Weisenberg were elected as directors of the Company for
terms expiring at the annual meeting in 2002. The following table sets forth
certain information with respect to the election of Messrs. Mermel and
Weisenberg as directors at the annual meeting:
Name of Nominee Shares Voted For Shares Withholding Authority
--------------- ---------------- ----------------------------
Scott J. Mermel 3,183,454 74,142
Robert E. Weisenberg 3,181,540 76,056
The following table sets forth the other directors of the Company whose terms
continued after the 1999 annual meeting:
Name of Nominee Term Expires
--------------- ------------
Thomas M. Dykstra 2000
Elliot Wassarman 2000
Helmut M. Adam 2001
Michael D. Dunham 2001
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
4.1 Waiver to Loan Agreement between Foothill Capital Corporation
and Effective Management Systems, Inc., EMS-East, Inc., and
Effective Management Systems of Illinois, Inc., dated April 13,
1999.
4.2 Fourth 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 25, 1999
4.3 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 14,
1999
10.1 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Michael D. Dunham and Effective
Management Systems, Inc. effective March 19, 1999
10.2 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Thomas M. Dykstra and Effective
Management Systems, Inc. effective March 19, 1999
10.3 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Richard W. Grelck and Effective
Management Systems, Inc. effective March 19, 1999
10.4 Letter Agreement relating to employment of Jeffrey J. Fossum,
dated May 4, 1999
27 Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
None
22
<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.
July 14, 1999 By: /s/ MICHAEL D. DUNHAM
Michael D. Dunham
President (principal executive officer)
By: /s/JEFFREY J. FOSSUM
Jeffrey J. Fossum
Chief Financial Officer and Assistant Treasurer
(principal financial and accounting officer)
23
<PAGE>
EXHIBIT INDEX
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Exhibit Number Exhibits
- -------------- -------
4.1 Waiver to Loan Agreement between Foothill Capital Corporation
and Effective Management Systems, Inc., EMS-East, Inc., and
Effective Management Systems of Illinois, Inc., dated April
13, 1999.
4.2 Fourth 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 25, 1999
4.3 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 14,
1999
10.1 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Michael D. Dunham and Effective
Management Systems, Inc. effective March 19, 1999
10.2 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Thomas M. Dykstra and Effective
Management Systems, Inc. effective March 19, 1999
10.3 Employment, Confidentiality, Non-competition, and Severance
Agreement by and between Richard W. Grelck and Effective
Management Systems, Inc. effective March 19, 1999
10.4 Letter Agreement relating to employment of Jeffrey J. Fossum,
dated May 4, 1999
27 Financial Data Schedule [EDGAR version only]
24
Exhibit 4.1
WAIVER
THIS WAIVER (this "Waiver") is entered into as of April 13, 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 February 28,
1999 is approximately negative Six Million Seven Hundred Nineteen Thousand
Dollars (-$6,719,000);
WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined
in the Loan Agreement) for the three month period ending February 28, 1999 is
approximately negative Two Million One Hundred and Seventy-Five Thousand Dollars
(-$2,175,000);
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 THERFORE, 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 Four Million
Dollars ($4,000,000) for the fiscal quarter ended February 28, 1999 and (ii)
EBITDA of Borrowers not being at least negative Five Hundred Thousand Dollars
(-$5,00,000) for the three month period
<PAGE>
ending February 28, 1999. The foregoing waiver shall not constitute a waiver of
any other Event of Default that may exist, or a waiver 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 February 28, 1999).
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 February 28, 1999 is
approximately negative Six Million Seven Hundred Nineteen Thousand Dollars
(-$6,719,000); and
(d) The EBITDA of Borrowers for the three month ending February 28, 1999
is approximately negative Two Million One Hundred and Seventy-Five Thousand
Dollars (-$2,175,000).
4. Waiver Fee. In consideration of the waiver described above, Borrowers
agree to pay Lender a waiver fee of Five Thousand Dollars ($5,000) on the date
hereof.
The remainder of the page is intentionally left blank.
<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
-------------------------------------------
-------------------------------------------
Its President
-------------------------------------------
EMS-EAST, Inc., a Massachusetts corporation
By
-------------------------------------------
-------------------------------------------
Its Treasurer
-------------------------------------------
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, an Illinois corporation
By
-------------------------------------------
-------------------------------------------
Its Secretary
-------------------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
-------------------------------------------
-------------------------------------------
Its Vice President
-------------------------------------------
Exhibit 4.2
FOURTH AMENDMENT TO
LOAN AGREEMENT
THIS FOURTH AMENDMENT (this "Amendment") is entered into as of May 25, 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) The definition of Maximum Amount" set forth in Section 1.1 of the
Loan Agreement is hereby amended and restated as follows:
"Maximum Amount" means, as of any date of determination, the sum
of (a) the Maximum Revolving Amount and (b) the then outstanding
principal balance of the Term Loan; provided, that during the period
commencing May 25, 1999 and ending July 31, 1999, the Maximum Amount
shall not exceed $9,500,000.
(b) The definition of "Maximum Revolving Amount" set forth in Section 1.1
of the Loan Agreement is hereby amended and restated as follows:
"Maximum Revolving Amount" means (a) $7,000,000 during the period
commencing May 25, 1999 and ending July 31, 1999 and (b) $5,000,000 at
all times on and after August 1, 1999.
<PAGE>
(c) 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
(z) the " Additional Availability Amount" (as defined below). The
"Additional Availability Amount" means (i) during the period commencing
on May 25, 1999 and ending on July 31, 1999 an amount equal to $750,000
and (ii) at all times on and after August 1, 1999 an amount equal to
zero.
(d) Section 2.1(c) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
(c) Foothill shall have no obligation to make Advances hereunder to the
extent they would cause (i) the outstanding Obligations (other than under the
Term Loan) to exceed the Maximum Revolving Amount or (ii) the outstanding
Obligations to exceed the Maximum Amount.
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:
<PAGE>
(a) Modification Fee. Borrower shall pay to Lender a modification fee
equal to Twenty Thousand Dollars ($20,000).
(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.
(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.
<PAGE>
(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.
<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
-------------------------------------------
-------------------------------------------
Title President
-------------------------------------------
EMS-EAST, Inc., a Massachusetts corporation
By
-------------------------------------------
-------------------------------------------
Title Treasurer
-------------------------------------------
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, an Illinois corporation
By
-------------------------------------------
-------------------------------------------
Title Secretary
-------------------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
----------------------------------------------
----------------------------------------------
Title Vice President
----------------------------------------------
Exhibit 4.3
WAIVER
THIS WAIVER (this "Waiver") is entered into as of July 14, 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 May 31, 1999 is
approximately negative Eight Million Nine Hundred Sixty-Three Thousand Dollars
(-$8,963,000);
WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined
in the Loan Agreement) for the three month period ending May 31, 1999 is
approximately negative One Million Nine Hundred Forty-One Thousand Dollars
(-$1,941,000);
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 Three Million Five
Hundred Thousand Dollars (-$3,500,000) plus the Equity Infusion Amount for the
fiscal quarter ended May 31, 1999 and (ii) EBITDA of Borrowers not being at
least Five Hundred Thousand Dollars ($500,000) for the three month period ending
May 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
<PAGE>
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 May 31, 1999).
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 May 31, 1999 is
approximately negative Eight Million Eight Hundred Eighty-Three
Thousand Dollars (-$8,963,000); and
(d) The EBITDA of Borrowers for the three month ending May 31, 1999 is
approximately negative One Million Six Hundred Forty Thousand
Dollars (-$1,941,000).
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
<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____________________________________________________
Its___________________________________________________
EMS-EAST, INC., a Massachusetts corporation
By____________________________________________________
Its___________________________________________________
EFFECTIVE MANAGEMENT SYSTEMS OF
ILLINOIS, an Illinois corporation
By____________________________________________________
Its___________________________________________________
FOOTHILL CAPITAL CORPORATION
By____________________________________________________
Its___________________________________________________
Exhibit 10.1
Employment, Confidentiality, Non-competition, and Severance Agreement
(Agreement)
1. Recitations and Date. This Agreement is entered into by and between
Effective Management Systems, Inc. (EMS) and Michael D. Dunham, its
President and Chief Executive Officer (Executive) as of the 19th day of
March, 1999. It is entered into in recognition and acknowledgement of the
significant, crucial, and continuing beneficial and valuable services
being performed by Executive at the request of EMS.
2. Employment. EMS hereby agrees to employ Executive and Executive agree to
continue his employment with EMS. The term of this Agreement shall run
from this date until the Separation Date as hereafter defined, unless the
parties mutually agree otherwise (Term).
3. Duties. During the Term, Executive shall continue to perform the duties
of the position he now has, as reasonably determined by the Board,
consistent with the level of authority and responsibility he now has
(Duties).
4. Compensation. Executive's base salary shall not, during the Term, be
reduced from its current level unless there is a corporate wide reduction
applicable to all executives of EMS, in which case his then current base
salary shall be proportionally reduced for the duration of such
reduction. Executive shall receive such bonuses and stock options as are
determined by the Compensation Committee of the Board.
5. Benefits. Executive shall continue to receive benefits equivalent to
those he presently receives, including health, dental, life, disability,
auto, and MAC membership, and such other benefits as are generally made
available to employees and executives of EMS.
6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive
acknowledges the ongoing obligation he has to EMS to disclose and assign
inventions as well as maintain the confidentiality of proprietary and
sensitive business information pursuant to the agreement presently in
effect between the parties dated 2/12/81, a copy of which is attached
hereto for reference purposes.
7. No Prior Agreements. Except as set forth in paragraph 6, the parties
acknowledge that this is the sole agreement between them with respect to
these subject matters and, to the extent any such prior agreements exist,
whether verbal or written, they are hereby revoked.
<PAGE>
8. Non-Solicitation of Employees. For a period equal to the longer of one
year from the Separation Date, regardless of cause or initiating party,
or the length of the Severance period thereafter, Executive shall not,
directly or indirectly, induce or attempt to induce any employee of EMS,
including its presently existing Affiliates (at least 50% of the voting
stock owned by EMS), to leave the employ of EMS.
9. Non-competition Period. During the Term of this Agreement, and for a
period equal to the length of any Severance period thereafter, Executive
shall not directly or indirectly, own any interest in (other than not
more than 5% passive stock ownership in a publicly traded company),
participate in, consult with, or render any services for any business
which is planning, considering, or does develop, market, or service ERP
software anywhere in the world in the mid-market segment (businesses with
up to $100 million in annual revenue).
10. Separation Date. Separation Date is the date either party elects to
terminate this Agreement. the consequences of such termination depend on
the party initiating the termination and the circumstances associated
with such termination.
a. If Executive quits for a non Event reason or is terminated for
Cause, there shall be no Severance (each term as hereafter
defined) and Executive shall receive only such benefits and
compensation as any terminating employee would be entitled to such
as accrued vacation pay and earned but not yet paid compensation.
b. If EMS terminates Executive without Cause at any time hereafter,
Executive shall be entitled to receive Severance for a period of
time depending on whether the termination i) preceded a Change in
Control, ii) followed an Asset Change in Control, or iii) followed
a Shareholder Change in Control. If circumstance i) applies, the
Severance period shall be 12 months, if ii), the Severance period
shall be 18 months, and if iii), the Severance period shall be 15
months.
c. If EMS materially changes the Duties of Executive at any time
after the date of this Agreement (an Event), Executive may elect
to treat such action as a termination under b) above and the
appropriate Severance shall apply depending on whether
circumstance i), ii), or iii) is present, except that, in the
event of an Asset Change in Control, the consequent change in
authority and responsibility solely resulting from such reduction
in business operations, shall not be deemed an Event without the
requisite Board change.
11. Definitions.
a. Cause shall mean i) a final non-appealable felony conviction which
substantially impairs employee's ability to perform his duties or
ii) intentional bad faith conduct which causes demonstrable
serious financial injury to EMS evidenced by a binding final
judgement, order, or decree.
b. Change in Control shall mean the acquisition by any corporation or
group of associated persons acting in concert, excluding
Affiliates, if any, of EMS as of
<PAGE>
this date, of an aggregate of more than i) 25% of the outstanding
shares of voting stock of EMS coupled with or followed by the
election as directors of EMS of persons who were not directors at
the time of such acquisition and such persons shall become a
majority of the Board (Shareholder Change in Control) or ii) 50%
of the assets of EMS (as reasonably determined by EMS' auditors
according to generally acceptable accounting principles) coupled
with the same director change as in i) (Asset Change in Control).
c. Severance shall mean the making in advance of payments to
Executive (without any withholdings), equivalent to his gross
monthly base salary amount, for 9 months with a lump sum payment
of any remaining salary equivalent payments due for the duration
of Severance at the 10th month. Severance shall also include
continuation for the entire Severance period of health, dental,
group life, and disability as then in effect but not less than in
effect as of this date. Severance shall also include, regardless
of Severance period duration, 6 months continuing use of his
company car, car phone, lap top, company voice and email, and MAC
membership and six months (6) executive outplacement with R I
Thompson or equivalent. Severance shall also effect an amendment
to any outstanding option grants immediately accelerating the
vesting of all then unvested options and extending the time to
exercise all vested options to 12 months from such date.
12. Legal Interpretation. If any provision of this Agreement is found to be
in conflict with provisions of any applicable law, the parties desire
that such conflict not invalidate the entire Agreement and that it be
construed to invalidate only the conflicting provisions and, where
possible, to reduce the duration or scope of a conflicting provision to
the maximum permitted by law. This Agreement shall be governed by the
laws of the State of Wisconsin without giving effect to any choice of law
or conflict of law rules or provisions.
13. Other Terms. Both parties agree that any public announcement of any
separation, except for Cause, shall require their mutual consent as to
the content, subject only to SEC or equivalent requirements. The parties
also agree not to, at any time, make any comments concerning the other to
media, prospective or actual employers, employees, customers, or
prospects which could be reasonably construed as being in any way
derogatory or negative of the other.
14. Costs of Enforcement. In an enforcement action relating to this
Agreement, the prevailing party, whether claimant or respondent,
following a final non-appealable decision, shall be immediately
reimbursed by the other party for all its reasonable out-of-pocket costs
incurred during such action including attorneys' fees.
15. Successors. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns, heirs, executors, and administrators of
the parties except that Executive may not assign or delegate his duties
hereunder.
<PAGE>
16. Termination. This Agreement may be terminated only upon mutual written
agreement of the parties.
Signed at Milwaukee, WI upon the date set forth above.
Effective Management Systems, Inc. Executive
By: _________________________ By: ___________________________
Title an individual
Witness: ___________________ Witness: ______________________
Exhibit 10.2
Employment, Confidentiality, Non-competition, and Severance Agreement
(Agreement)
1. Recitations and Date. This Agreement is entered into by and between
Effective Management Systems, Inc. (EMS) and Thomas M. Dykstra, its Vice
President, Secretary, and Treasurer (Executive) as of the 19th day of
March, 1999. It is entered into in recognition and acknowledgement of the
significant, crucial, and continuing beneficial and valuable services
being performed by Executive at the request of EMS.
2. Employment. EMS hereby agrees to employ Executive and Executive agree to
continue his employment with EMS. The term of this Agreement shall run
from this date until the Separation Date as hereafter defined, unless the
parties mutually agree otherwise (Term).
3. Duties. During the Term, Executive shall continue to perform the duties
of the position he now has, as reasonably determined by the Board,
consistent with the level of authority and responsibility he now has
(Duties).
4. Compensation. Executive's base salary shall not, during the Term, be
reduced from its current level unless there is a corporate wide reduction
applicable to all executives of EMS, in which case his then current base
salary shall be proportionally reduced for the duration of such
reduction. Executive shall receive such bonuses and stock options as are
determined by the Compensation Committee of the Board.
5. Benefits. Executive shall continue to receive benefits equivalent to
those he presently receives, including health, dental, life, disability,
and auto, and such other benefits as are generally made available to
employees and executives of EMS.
6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive
acknowledges the ongoing obligation he has to EMS to disclose and assign
inventions as well as maintain the confidentiality of proprietary and
sensitive business information pursuant to the agreement presently in
effect between the parties dated February 12, 1981, a copy of which is
attached hereto for reference purposes.
7. No Prior Agreements. Except as set forth in paragraph 6, the parties
acknowledge that this is the sole agreement between them with respect to
these subject matters and, to the extent any such prior agreements exist,
whether verbal or written, they are hereby revoked.
<PAGE>
8. Non-Solicitation of Employees. For one year from the Separation Date,
regardless of cause or initiating party, Executive shall not, directly or
indirectly, induce or attempt to induce any employee of EMS, including
its presently existing Affiliates (at least 50% of the voting stock owned
by EMS), to leave the employ of EMS.
9. Noncompetition. During the Term of this Agreement and for a period equal
to the length of any Severance period thereafter, Executive shall not
directly or indirectly, own any interest in (other than not more than 5%
passive stock ownership in a publicly traded company), participate in,
consult with, or render any services for any business which is planning,
considering, or does develop, market, or service ERP software anywhere in
the United States in the mid-market segment (businesses with up to $100
million in annual revenue). Notwithstanding the above, this restriction
shall not apply to Executive becoming employed by the Synergex
Corporation after an Asset Change in Control involving the Synergex
Corporation.
10. Separation Date. Separation Date is the date either party elects to
terminate this Agreement. the consequences of such termination depend on
the party initiating the termination and the circumstances associated
with such termination.
a. If Executive quits for a non Event reason or is terminated for
Cause, there shall be no Severance (each term as hereafter
defined) and Executive shall receive only such benefits and
compensation as any terminating employee would be entitled to such
as accrued vacation pay and earned but not yet paid compensation.
b. If EMS terminates Executive without Cause at any time hereafter,
Executive shall be entitled to receive Severance for a period of 9
months, whether the termination i) preceded a Change in Control,
ii) followed an Asset Change in Control, or iii) followed a
Shareholder Change in Control.
c. If EMS materially changes the Duties of Executive at any time
after the date of this Agreement (an Event), Executive may elect
to treat such action as a termination under b) above and the
appropriate Severance shall apply depending on whether
circumstance i), ii), or iii) is present, except that in the event
of an Asset Change in Control, the consequent change in authority
and responsibility solely resulting from such reduction in
business operations, shall not be deemed an Event without the
requisite Board change.
11. Definitions.
a. Cause shall mean i) a final non-appealable felony conviction which
substantially impairs employee's ability to perform his duties or
ii) intentional bad faith conduct which causes demonstrable
serious financial injury to EMS evidenced by a binding final
judgement, order, or decree.
b. Change in Control shall mean the acquisition by any corporation or
group of associated persons acting in concert, excluding
Affiliates, if any, of EMS as of this date, of an aggregate of
more than i) 25% of the outstanding shares of
<PAGE>
voting stock of EMS coupled with or followed by the election as
directors of EMS of persons who were not directors at the time of
such acquisition and such persons shall become a majority of the
Board (Shareholder Change in Control) or ii) 50% of the assets of
EMS (as reasonably determined by EMS' auditors according to
generally accepted accounting principles) coupled with the same
director change as in i) (Asset Change in Control) except that a
sale of EMS' installed base assets to Synergex Corporation,
whether or not 50% of the assets and with or without the director
change, shall be deemed an Asset Change in Control.
c. Severance shall mean the making in advance of payments to
Executive (without any withholdings), equivalent to his gross
monthly base salary amount, for 9 months with a lump sum payment
of any remaining payments due for the duration of Severance at the
10th month. Severance shall also include continuation for the
entire Severance period of health, dental, group life, and
disability as then in effect but not less than in effect as of
this date. Severance shall also include, regardless of Severance
period duration, 6 months continuing use of his company car, car
phone, lap top, and company voice and email, and 6 months
executive outplacement with R I Thompson or equivalent. Severance
shall also effect an amendment to any outstanding option grants
immediately accelerating the vesting of all then unvested options
and extending the time to exercise all vested options to 12 months
from such date. In the case of a Synergex Asset Change in Control,
the severance payments period shall be 8 months and include a
payment equivalent to the forgiveness of Executive's personal debt
to EMS of approximately $35,000 plus payment of the difference, as
reasonably determined by EMS, to gross up the total to cover
applicable state and federal taxes from the forgiveness, which
forgiveness shall occur and gross up payment shall be made at the
closing date of such transaction.
12. Legal Interpretation. If any provision of this Agreement is found to be
in conflict with provisions of any applicable law, the parties desire
that such conflict not invalidate the entire Agreement and that it be
construed to invalidate only the conflicting provisions and where
possible to reduce the duration or scope of a conflicting provision to
the maximum permitted by law. This Agreement shall be governed by the
laws of the State of Wisconsin without giving effect to any choice of law
or conflict of law rules or provisions.
13. Other Terms. Both parties agree that any public announcement of any
separation, except for Cause, shall require their mutual consent as to
the content, subject only to SEC or equivalent requirements. The parties
also agree not to, at any time, make any comments concerning the other to
media, prospective or actual employers, employees, customers, or
prospects which could be reasonably construed as being in any way
derogatory or negative of the other.
14. Costs of Enforcement In an enforcement action relating to this Agreement,
the prevailing party, whether claimant or respondent, following a final
non-appealable
<PAGE>
decision, shall be immediately reimbursed by the other party for all its
reasonable out-of-pocket costs incurred during such action including
attorneys' fees.
15. Successors. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns, heirs, executors, and administrators of
the parties except that Executive may not assign or delegate his duties
hereunder.
16. Termination. This Agreement may be terminated only upon mutual written
agreement of the parties.
Signed at Milwaukee, WI upon the date set forth above.
Effective Management Systems, Inc. Executive
By: _________________________ By: ___________________________
Title an individual
Witness: ___________________ Witness: ______________________
Exhibit 10.3
Employment, Confidentiality, Non-competition, and Severance Agreement
(Agreement)
1. Recitations and Date. This Agreement is entered into by and between
Effective Management Systems, Inc. (EMS) and Richard W. Grelck, its Chief
Operating Officer (Executive) as of the 19th day of March, 1999. It is
entered into in recognition and acknowledgement of the significant,
crucial and continuing beneficial and valuable services being performed
by Executive at the request of EMS.
2. Employment. EMS hereby agrees to employ Executive and Executive agree to
continue his employment with EMS. The term of this Agreement shall run
from this date until the Separation Date as hereafter defined, unless the
parties mutually agree otherwise (Term).
3. Duties. During the Term, Executive shall continue to perform the duties
of the position he now has, as reasonably determined by the Board,
consistent with the level of authority and responsibility he now has
(Duties).
4. Compensation. Executive's base salary shall not, during the Term, be
reduced from its current level unless there is a corporate wide reduction
applicable to all executives of EMS, in which case his then current base
salary shall be proportionally reduced for the duration of such
reduction. Executive shall receive such bonuses and stock options as are
determined by the Compensation Committee of the Board.
5. Benefits. Executive shall continue to receive benefits equivalent to
those he presently receives, including health, dental, life, disability,
and auto, and such other benefits as are generally made available to
employees and executives of EMS.
6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive
acknowledges the ongoing obligation he has to EMS to disclose and assign
inventions as well as maintain the confidentiality of proprietary and
sensitive business information pursuant to the agreement presently in
effect between the parties dated 7/2/87, a copy of which is attached
hereto for reference purposes.
7. No Prior Agreements. Except as set forth in paragraph 6, the parties
acknowledge that this is the sole agreement between them with respect to
these subject matters and, to the extent any such prior agreements exist,
whether verbal or written, they are hereby revoked.
8. Non-Solicitation of Employees. For one year from the Separation Date,
regardless of cause or initiating party, Executive shall not, directly or
indirectly, induce or
<PAGE>
attempt to induce any employee of EMS, including its presently existing
Affiliates (at least 50% of the voting stock owned by EMS), to leave the
employ of EMS.
9. Noncompetition. During the Term of this Agreement, and for a period equal
to the length of any Severance period thereafter, Executive shall not
directly or indirectly, own any interest in (other than not more than 5%
passive stock ownership in a publicly traded company), participate in,
consult with, or render any services for any business which is planning,
considering, or does develop, market, or service ERP software anywhere in
the United States in the mid-market segment (businesses with up to $100
million in annual revenue).
10. Separation Date. Separation Date is the date either party elects to
terminate this Agreement. the consequences of such termination depend on
the party initiating the termination and the circumstances associated
with such termination.
a. If Executive quits for a non Event reason or is terminated for
Cause, there shall be no Severance (each term as hereafter
defined) and Executive shall receive only such benefits and
compensation as any terminating employee would be entitled to such
as accrued vacation pay and earned but not yet paid compensation.
b. If EMS terminates Executive without Cause at any time hereafter,
Executive shall be entitled to receive Severance for a period of
time depending on whether the termination i) preceded a Change in
Control, ii) followed an Asset Change in Control, or iii) followed
a Shareholder Change in Control. If circumstance i) applies, the
Severance period shall be 9 months, and if ii) or iii), the
Severance period shall be 12 months.
c. If EMS materially changes the Duties of Executive at any time
after the date of this Agreement (an Event), Executive may elect
to treat such action as a termination under b) above and the
appropriate Severance shall apply depending on whether
circumstance i), ii), or iii) is present except that, in the event
of an Asset Change in Control, the consequent change in authority
and responsibility solely resulting from such reduction in
business operations, shall not be deemed an Event without
requisite Board change.
11. Definitions.
a. Cause shall mean i) a final non-appealable felony conviction which
substantially impairs employee's ability to perform his duties or
ii) intentional bad faith conduct which causes demonstrable
serious financial injury to EMS evidenced by a binding final
judgement, order, or decree.
b. Change in Control shall mean the acquisition by any corporation or
group of associated persons acting in concert, excluding
Affiliates, if any, of EMS as of this date, of an aggregate of
more than i) 25% of the outstanding shares of voting stock of EMS
coupled with or followed by the election as directors of EMS of
persons who were not directors at the time of such acquisition and
such
<PAGE>
persons shall become a majority of the Board (Shareholder Change
in Control) or ii) 50% of the assets of EMS (as reasonably
determined by EMS' auditors according to generally accepted
accounting principles) coupled with the same director change as in
i) (Asset Change in Control).
c. Severance shall mean the making in advance of payments to
Executive (without any withholdings), equivalent to his gross
monthly base salary amount, for 9 months with a lump sum payment
of any remaining payments due for the duration of Severance at the
10th month. Severance shall also include continuation for the
entire Severance period of health, dental, group life, and
disability as then in effect but not less than in effect as of
this date. Severance shall also include, regardless of Severance
period duration, 6 months continuing use of his company car, car
phone, lap top, and company voice and email, and six (6) months
executive outplacement with R I Thompson or equivalent. Severance
shall also effect an amendment to any outstanding option grants
immediately accelerating the vesting of all then unvested options
and extending the time to exercise all vested options to 12 months
from such date.
12. Legal Interpretation. If any provision of this Agreement is found to be
in conflict with provisions of any applicable law, the parties desire
that such conflict not invalidate the entire Agreement and that it be
construed to invalidate only the conflicting provisions and, where
possible, to reduce the duration or scope of a conflicting provision to
the maximum permitted by law. This Agreement shall be governed by the
laws of the State of Wisconsin without giving effect to any choice of law
or conflict of law rules or provisions.
13. Other Terms. Both parties agree that any public announcement of any
separation, except for Cause, shall require their mutual consent as to
the content, subject only to SEC or equivalent requirements. The parties
also agree not to, at any time, make any comments concerning the other to
media, prospective or actual employers, employees, customers, or
prospects which could be reasonably construed as being in any way
derogatory or negative of the other.
14. Costs of Enforcement. In an enforcement action relating to this
Agreement, the prevailing party, whether claimant or respondent,
following a final non-appealable decision, shall be immediately
reimbursed by the other party for all its reasonable out-of-pocket costs
incurred during such action including attorneys' fees.
15. Successors. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns, heirs, executors, and administrators of
the parties except that Executive may not assign or delegate his duties
hereunder.
16. Termination. This Agreement may be terminated only upon mutual written
agreement of the parties.
<PAGE>
Signed at Milwaukee, WI upon the date set forth above.
Effective Management Systems, Inc. Executive
Effective Management Systems, Inc. Executive
By: _________________________ By: ___________________________
Title an individual
Witness: ___________________ Witness: ______________________
Exhibit 10.4
May 4, 1999
Jeff Fossum
Effective Management Systems, Inc.
12000 W. Park Place
Milwaukee, WI 53224
Dear Jeff:
This letter outlines the agreement we have reached concerning your employment at
EMS during the next two years. This agreement replaces in total the Special
Compensation and Separation Agreement between you and EMS dated January 1, 1998.
o Your employment will not be terminated by EMS, except for gross
misconduct, during the period of March 1, 1999 through February 28, 2001,
providing you lend your best efforts to achieve the following two
assignments:
1) Support an orderly transition as you phase out of your current
position as CFO into your new position as a pre-sales consultant
in the Baan Sales & Marketing Group.
a) The transition period will begin on April 15, 1999 and
continue through July 15th 1999. The approximate time
dedicated to your CFO duties is as follows:
i) April 15th through April 30th: 8 work days
ii) May 1st through May 31st: 14 days
iii) June 1st through June 30th: 8 days
iv) July1st through July 15th: 5 days
You will make schedule provisions to assist at monthly and
quarterly closings and be available to lead the preparation
of the 10Q report due on July 15, 1999. You also may be
called upon to assist in merger or sale of product line
negotiations during this period. During this period, this
will take precedence over the above schedule at the
discretion of the President. Aside from this, your major
assignment in this period is to assist the COO in
reorganizing the corporate finance and accounting functions
to:
o Create a corporate headquarters function at the Naperville office.
o Retain a stable accounting group at the Milwaukee office to support TCM
operations
o Assist in revising our banking and auditing relationships as appropriate
to the requirements of any corporate restructuring ensuing from merger or
sale of a product line.
<PAGE>
2) Lend your best efforts to perform as a pre-sales consultant in the
Baan Sales & Marketing Group according to the EMS Pre-Sales
Consultant 1999 Compensation Plan attached as exhibit A.
o Your base salary will be increased to $110,000 per annum effective
November 1, 1998. Retroactive pay will be made on March 15, 1998 for the
period of November 1, 1998 through February 28, 1999.
o Your base salary will be adjusted to $60,000 for the period of July 16,
1999 through July 15, 2000 when you have fully transitioned to the
position of pre-sales consultant.
o Your base will be increased to $110,000 on July 16, 2000.
o You will receive a payment for your accrued 1998 vacation of 3 weeks
minus 2-1/2 days on March 31, 1999.
o Beginning on July 16, 1999, you will be entitled to Gross Margin
Commission Payments according to the EMS Pre-Sales Consultant 1999
Compensation Plan attached as exhibit A. You will be offered
opportunities to earn commissions on an equal basis to other pre-sales
consultants.
o You were granted 25,000 options to purchase EMS common stock. The options
have a 10 year term. They vest as follows: 30% immediately, 60% at the
end of the first year and 100% at the end of the second year. The options
were issued April 8, 1999 at the then current market value of a share of
EMS common stock.
Sincerely,
Richard W. Grelck
COO
<PAGE>
Memorandum
To: Pre-Sales Consultant
From: Manager
CC: Human resources
Date:
re: Your EMS Pre-Sales Consultant 1999 Compensation Plan
Pre-Sales Consulting Role
As an EMS Pre-Sales Consultant, you, together with each Sales
Representative, play a vital role in generating significant sales revenue
and gross margin for EMS. During the sales process with prospects and
customers, your responsibilities are to assess the degree of application
fit, to help set good customer expectations, to present application
software in the context of needs of the prospect, and to convey how the
application will benefit the customer. Working as a team with the Sales
Representatives and Managers, you play a key role in bringing in good,
profitable business for EMS.
Pre-Sales Consulting Tasks
Generating significant sales revenue and gross margin is facilitated
through sales consulting activities including:
Conducting prospect surveys to identify key business issues
Relating key business issues to Baan functionality
Preparing and presenting compelling "Proof of Concept" product
demonstrations
Assisting the Sales Representatives in developing Sales Strategy
Conducting prospect seminars
Innovating and applying new approaches and techniques
A strong desire to work as a team with Sales Representatives
andother Consultants
Continually embracing new functional and technological products
Pre-Sales Consulting Compensation
At plan, your annual compensation is $ . The fixed portion consists of an
annual salary of $ paid semi-monthly and effective . The variable
portion, a commission based entirely upon the gross margin you generate,
is targeted at $60,000 annually, paid on a monthly basis in the month
following shipment, with commission credit beginning as of December 1,
1998.
<PAGE>
Because of your proven sales consulting abilities, you are entitled to
use of a company car, assuming you maintain a satisfactory driving
record. When you elect to acquire a company car, the company will cover
up to the standard lease allowance, currently at $425/month. If the car
you select costs more, then you must pay the difference. If the car you
select costs less, then the company will only pay the amount of the lease
payment.
Given you recently signed a private lease agreement for a car, until you
decide to acquire a company car, EMS will reimburse you for your existing
lease cost up to the rate of $425/month (submitted on monthly expenses).
You are also entitled to reimbursement for routine maintenance not
covered under warrantee. With your own car, you will remain responsible
for all other operating expenses and insurance. EMS will reimburse you
for all gasoline, less the standard deduction for personal use, currently
at $60.00/month. (This, of course, means that you may no longer expense
EMS for mileage.) We do recommend that you keep track of business use for
tax records, if needed.
You will be reimbursed for routine business expenses subject to EMS
prevailing policies. You are eligible for EMS profit sharing and employee
benefits, as defined by the prevailing EMS policies.
Leveraged Commission Rates
Your monthly gross margin objective is $ , or $ for the fiscal year. You
are paid a commission rate of 5% for all gross margin earned up to $ . As
an added reward, you will be paid at a higher, 7% rate for all gross
margin generated over $ for the fiscal year.
Gross Margin Commission Payment Rules
Commissions are payable to you in the month following shipment to a
customer in whose sale you contributed toward. Commissions are calculated
for all gross margin generated by you, as credited to the EMS Baan
Division, for all software and hardware, at net price less actual cost.
Commissions are calculated for the first year of upgrade and support
plans at price less 35% of list price. Because shipments are sometimes
staggered, commission payment is calculated for any shipments of these
types of products for that customer, for the first 6 months after the
date of the first shipment. Subject to management review, credit will
also be provided for additional users/phases that were identified on the
original contract, but shipped later without the need for additional
pre-sales effort. Commissions already paid on an order which later
becomes uncollectable is credited back on the commission statement at the
end of the month in which the charge-back occurred.
Gross Margin Splits
When you work the deal alone, you earn commission based upon 100% of the
gross
<PAGE>
margin. When multiple consultants are involved in performing the demo,
then a gross margin split percentage is determined, with the total credit
application being 120%.
For example, when you work the deal alone, but others assisted with net
meeting demos, you still receive 100%. When you contribute with a
netmeeting demo on someone else's deal, you receive 20% gross margin
credit. When you lead the deal, and another assisted on-site, then a
gross margin split is mutually determined. It may be a 80%/40% split. If
both contributed equally, it would be a 60%/60% split. Note that helping
others to prepare, training others, and completing RFP's are tasks
expected of everyone, and commission credit is not applied.
Payments After Termination
If employment termination is initiated by either party, an immediate
freeze on commission payments will be placed by the Accounting
Department. Sixty days after the date of termination, a calculation of
commissions due the employee or owed to the company will be made as
follows:
+ Commissions Earned, but Unpaid
- Commissions Unearned, but Paid
-------------------------------------------------------------------------
= Commission Amount Due or Owed Back
I look forward to an exciting and productive year of working together to
achieve our goals and help EMS succeed in its sales mission.
Acceptance
Each party has read this plan, understands its contents and agrees to be
bound by it. This plan must be signed in order to receive commission
payments. EMS reserves the right to change this plan at any time.
Signature__________________________ Signature ________________________
Date __________________________ Date ________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF AND FOR THE THREE MONTHS
ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> NOV-30-1998
<PERIOD-END> MAY-31-1999
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 6,841
<ALLOWANCES> (147)
<INVENTORY> 278
<CURRENT-ASSETS> 7,725
<PP&E> 10,163
<DEPRECIATION> (7,400)
<TOTAL-ASSETS> 18,184
<CURRENT-LIABILITIES> 17,784
<BONDS> 0
0
1,370
<COMMON> 41
<OTHER-SE> (1,927)
<TOTAL-LIABILITY-AND-EQUITY> 18,184
<SALES> 558
<TOTAL-REVENUES> 16,096
<CGS> 461
<TOTAL-COSTS> 19,922
<OTHER-EXPENSES> 344
<LOSS-PROVISION> 244
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> (4,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,170)
<EPS-BASIC> (1.01)
<EPS-DILUTED> 0 <F1>
<FN>
<F1> Not required to be calculated in accordance with generally accepted
accounting principles.
</FN>
</TABLE>
