-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HluSOcE2CE48i2DfAoLRdxtfqFoggGTb7C1UpUBdg3tkNY5xKFF9qqGKvkg4f8Tt i30xmUJdVy8M+H30r5EHpw== 0000897069-98-000122.txt : 19980304 0000897069-98-000122.hdr.sgml : 19980304 ACCESSION NUMBER: 0000897069-98-000122 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980302 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFFECTIVE MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000853372 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 391292200 STATE OF INCORPORATION: WI FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23438 FILM NUMBER: 98554683 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10-K405 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 30, 1997; 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 ----------------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Title of Class Title of Class Common Stock $.01 Par Value Warrants to Purchase Common Stock 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 periods 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant at February 1, 1998 was $8,987,325. The number of common shares outstanding at February 1, 1998 was 4,079,455 DOCUMENTS INCORPORATED BY REFERENCE: Effective Management Systems, Inc. Proxy Statement for the 1998 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Registrant's fiscal year and, and upon such filing, to be incorporated by reference into Part III). EFFECTIVE MANAGEMENT SYSTEMS, INC. Index to Annual Report on Form 10-K For the Fiscal Year Ended November 30, 1997 Page Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 1. Description of Business . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 16 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 16 Item 4. Submission of Matters to a Vote of Security Holders . 16 Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 17 Item 6. Selected Financial Data (In thousands, except per share data) . . . . . . . . . . . . . . . . . . . . . 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation (for the fiscal years ended November 30, 1997, 1996, and 1995) . . . . 20 Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . 26 Item 8. Financial Statement and Supplementary Data. . . . . . 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 53 Item 10. Directors and Executive Officers of the Registrant . . 53 Item 11. Executive Compensation . . . . . . . . . . . . . . . . 53 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 53 Item 13. Certain Relationships and Related Transactions . . . . 53 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 53 Part I Item 1. Description of Business Overview Effective Management Systems, Inc. ("EMS") develops, markets and supports integrated manufacturing and business management software. EMS' Time Critical Manufacturing/TM/ ("TCMJ/TM/") software is designed with the underlying philosophy that time is a crucial element in manufacturing, and that reducing time in the manufacturing process leads directly to increased profits for the manufacturer. TCMJ software integrates technologies such as electronic data interchange ("EDI"), imaging, bar-coding, factory automation, engineering system integration, distributed numerical control ("DNC"), statistical process control ("SPC"), and fourth generation language ("4GL") tools with EMS' proprietary algorithms for scheduling and production, to optimize the customer's labor, capital and inventory utilization. Software offered by EMS functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX operating systems. EMS also provides services support for its software products and, on a selective basis, sells computer hardware. Software products offered by EMS include: TCM/R/, which is a pre-integrated enterprise resource planning, accounting and manufacturing execution system; and FACTORYnet/R/ I/S, which is an integrated Manufacturing Execution System, providing production management, shop floor scheduling, and operations support. These software products are usually integrated with a bar code data collection system or direct machine controls, and provide up-to-the-minute information to track production and business operations. This facilitates real-time decision making and enables employees throughout an organization to respond quickly to marketplace demands and unanticipated events. EMS typically focuses its sales and marketing efforts on discrete manufacturing plants. According to Advanced Manufacturing Research ("AMR") data from December 1995 there are over 24,000 discrete plant sites in the United States in the market segments EMS targets. EMS has licensed its software products to over 1,500 customer sites. EMS distributes its products in the United States through seventeen branch offices and through seven joint ventures and independent distributors. EMS also has established distribution channels through independent distributors in Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, the Company has joint ventures in Poland and China to support these distributors. EMS was incorporated in Wisconsin in 1978. EMS became a publicly held company as a result of its initial public offering which was completed in February 1994. During 1995, EMS acquired Intercim Corporation and the remaining interest in Effective Management Systems of Illinois, Inc., a joint venture subsidiary. In 1996, EMS acquired the remaining interest in Darwin Data Systems Corporation another joint venture subsidiary. For further details regarding these acquisitions, see Note 2 of Notes to EMS' Consolidated Financial Statements, which disclosure is included elsewhere in this Annual Report on Form 10-K and incorporated herein by reference. Business Risk Factors This Annual Report on Form 10-K and other information that is provided from time to time by EMS contain statements that, with the exception of historical facts, are forward-looking statements including, but not limited to, statements about: (i) EMS' strategies, uses and expectations for existing and new products, services, technologies and opportunities, (ii) the potential future profitability of EMS' operations, (iii) the demand for and acceptance of new and existing products and services, (iv) EMS' plan to reduce its cost structure, and (v) the adequacy of EMS' resources to fund its operations, including research and development. These statements are forward-looking statements that are subject to important risks and uncertainties, which could affect EMS' actual results and could cause such results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. These important risks and uncertainties include, but are not limited to, the following: Dependence on Principal Products. A significant portion of EMS' revenue is derived from license fees for TCM/R/ and FACTORYnet/R/ I/S and the sale of related support services. Accordingly, any event that could adversely affect license fees for TCM/R/ or FACTORYnet/R/ I/S, such as significant flaws or incompatibility, negative publicity or evaluation, or obsolescence of the hardware platforms on which the systems run, could have a material adverse effect on EMS' results of operations. EMS' future financial performance will depend, in part, on the continued development and introduction of new and enhanced versions of TCM/R/, FACTORYnet/R/ I/S and other products, and customer acceptance of such new and enhanced products. Dependence on Third Party Software. TCM/R/ and FACTORYnet/R/ I/S incorporate and use software technology and software products developed by other companies. There can be no assurance that all of these companies will remain in business or that their product lines will remain viable. If any of these companies cease to do business or abandon or fail to enhance a particular product line, EMS may need to seek other suppliers. This could result in EMS having to significantly alter its product lines which could have a material adverse effect on EMS' results of operations. There also can be no assurance that EMS' current suppliers will not significantly alter their pricing in a manner adverse to EMS. New Products and Technological Change. The market for EMS' products is characterized by rapid technological advances, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render EMS' existing products and products currently under development obsolete and unmarketable. EMS' future success will depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving end- user requirements and achieve market acceptance. Any failure by EMS to anticipate or respond adequately to technological developments or end-user requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness or revenues. There can be no assurance that EMS will be successful in developing and marketing new products or product enhancements on a timely basis or that EMS will not experience significant delays in the future, which could have a material adverse effect on EMS' results of operations. Variability of Quarterly Operating Results; Limited Backlog. EMS' operating results can vary substantially from quarter to quarter due to various factors, including, among others: the size and timing of customer orders; the buying patterns of manufacturers in EMS' target market; delays in the introduction of products or product enhancements by EMS or by other providers of hardware, software and components for the management information systems market; competition and pricing in the software industry; customer order deferrals in anticipation of new products; market acceptance of new products; reduction in demand for existing products; changes in operating expenses; and general economic conditions. EMS 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 dependent on orders booked and shipped during that quarter. A significant portion of EMS' operating expenses are based on anticipated revenue levels and are relatively fixed in nature. If revenue does not meet EMS' expectations in any given quarter, operating results may be adversely affected. Competition. The management information systems industry is intensely competitive and rapidly changing. A number of companies offer products similar to EMS' products. Some of EMS' existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than EMS. There can be no assurance that such competitors will not develop products that are superior to EMS' products or that achieve greater market acceptance. EMS' future success will depend, in part, upon its ability to increase software license fee revenues in its target markets. There can be no assurance that EMS will be able to compete successfully against its competitors or that the competitive pressures faced by EMS will not adversely affect its financial performance. Expansion Plans. EMS plans to expand its business through continued product development and expansion of its distribution network in the United States and internationally with the objective of increasing total net revenues and profits. There can be no assurance, however, that the efforts and funds directed to product development, and to expanding EMS' distribution network, will result in revenue and profit growth. Any future growth of EMS will also depend on, among other things, EMS' ability to gain market acceptance for its products in new geographic areas and to monitor and control the additional costs and expenses associated with expansion. No assurance can be given that EMS will be able to successfully manage these aspects of its business. Intellectual Property and Proprietary Rights. EMS regards its software products as proprietary, in that title to and ownership of its software generally reside exclusively with EMS. EMS attempts to protect ownership of its software with a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods of protection common in the industry. Despite these precautions, it may be possible for unauthorized third parties to copy or reverse-engineer certain portions of EMS' products or to obtain and use information that EMS regards as proprietary. Like many software firms, EMS presently has no patents. EMS licenses the source code for its software to some customers for customization. Although EMS' source code license contained confidentiality and nondisclosure provisions, there can be no assurances that such customers will take adequate precautions to protect such code. In addition, the laws of some foreign countries do not protect EMS' proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the mechanisms used by EMS to protect its software will be adequate or that EMS' competitors will not independently develop software products that are substantially equivalent or superior to EMS' software products. Although EMS does not believe that its products infringe on the existing proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against EMS. Dependence on Key Employees. EMS' success is dependent to a significant extent on its executive officers and other key personnel, the loss of one or more of whom could have a material adverse effect on EMS. The future success of EMS will depend in large part on its ability to attract and retain talented and qualified employees. Competition in the recruiting of highly-qualified personnel in the management information systems industry is intense. While EMS has not experienced any difficulty in attracting and retaining talented and qualified employees to date, there can be no assurance that EMS can retain its key employees or that it can attract, assimilate and retain other qualified personnel in the future. Industry Background In the early 1970's, the Material Requirements Planning ("MRP") approach was developed to enable manufacturing companies, with the aid of computers, to plan and manage their businesses more efficiently by managing the flow of materials at various stages of the manufacturing process. In the 1980's, this management approach evolved into Manufacturing Resource Planning ("MRP II"), which considers labor and equipment planning for the manufacturing process as part of an iterative materials planning approach. Concurrently with the evolution of MRP II, manufacturing companies (predominantly in Japan) developed a management technique which emphasizes the supply of component parts to "assembly- oriented" manufacturing plants on a "just-in-time" basis. This technique not only was the first to emphasize "time" in its orientation, but also had other desirable outcomes for manufacturers, including improved quality, lower costs and lower inventory levels. In the 1990's, new management approaches for manufacturing companies have emerged which focus on "time" as the critical element in the manufacturing process. In these management approaches, the manufacturer analyzes the component of time across its entire organization with the goal of correlating the expenditure of time to the addition of value to the finished product or service. Beyond the production focus of the "just-in-time" environment, this new approach focuses on time in all areas of the operation from engineering to manufacturing and from customer order processing to shipment. This new approach differs from MRP II in that it often focuses on improving business operations by treating plant capacity and labor resources as the primary scheduling items and treating material availability as a secondary consideration in manufacturing planning. The new approach emphasizes "operations decision-making" support in contrast to the planning emphasis of MRP II and more recently developed planning systems such as Enterprise Resource Planning ("ERP"). In addition, a category of information systems has been identified as Manufacturing Execution Systems which compliments ERP systems by making available real-time information from the factory floor and enhancing production performance and decision-making associated with plant operations. EMS believes that these Manufacturing Execution Systems represent a relatively new marketplace with substantial benefit potential for manufacturers. EMS believes that this "time emphasis" in manufacturing management, which is the focus of EMS' TCM/R/ and FACTORYnet/R/ I/S products, will be an essential component of the management approach for many manufacturers in the future. During 1997, the Gartner Group of Stamford, Connecticut included EMS in its evaluations for North American mid-market ERP solutions, Shop Floor Control solutions and Computerized Maintenance Management Systems. In these evaluations, EMS compared favorably relative to many of its competitors. EMS was also the only corporation within the industry to have a product offering evaluated in all three of these areas for discrete manufacturing. Management believes this reflects the fact that EMS is the only provider currently offering software for all of these dimensions of a discrete manufacturer. Strategy EMS' objective is to grow as a leading provider of integrated business software systems for discrete manufacturing plants within its target market. EMS has identified three strategic initiatives to achieve this goal. Focus on Time Critical Manufacturing. EMS believes that manufacturers are striving to become more "time competitive," and that manufacturing software which focuses solely on providing information for planning and on recording information for historical analysis will be inadequate to meet the needs and demands of manufacturers in the years to come. To be effective in the future, EMS believes that manufacturing software will be required to empower individuals at all levels of an organization to make immediate decisions regarding production processes and business activities. Since 1988, EMS has focused its resources on developing software to assist time-oriented manufacturing management. EMS' software facilitates real-time decision-making by employees enabling them to change processes proactively and react quickly to marketplace demands and unanticipated events. With few exceptions, EMS believes that the limited number of information system implementations currently in place which have this "time" focus have been developed on an individual customized basis. EMS is not aware of other major products available in its target market for discrete manufacturers which offers both planning and execution systems and has a strategy of focusing on time. Commitment to Manufacturing Execution Systems. EMS believes that discrete manufacturers can gain significant competitive advantage by implementing Manufacturing Execution Systems. These systems bring together the data and information from ERP Systems, Industrial Control Systems, and Engineering Systems as illustrated below. [FIGURE OMITTED] [Description of omitted figure: This figure illustrates the necessary integration of data and information throughout the manufacturing organization. The functional areas of engineering, manufacturing business systems, and office automation depend on information from each other to perform efficiently and with quality. Separate software solutions for each of these functional areas causes quality loss through communications errors, time loss through redundant entry of data, and incompatibilities of necessary data.] EMS offered its first Manufacturing Execution System package in 1988 and believes that it is currently a leader in this software segment. Typical business functions included in a Manufacturing Execution System are described below (see - "Time Critical Manufacturing - - EMS Software Products"). Although the people in an organization which use this software on a minute-to-minute and hour-to-hour basis are the factory operations personnel, EMS believes that the value manufacturers realize from implementing a Manufacturing Execution System extends far beyond this realm. EMS believes, based on the experience of its customers, that the major benefit of implementing a Manufacturing Execution System within an organization is improved customer service and competitiveness. These systems allow an organization to reduce non-value added elapsed time in the overall business process. EMS currently offers two Manufacturing Execution System products, one which is pre-integrated with a total software offering for the entire enterprise (TCM/R/) and the second is FACTORYnet/R/ I/S in which EMS personnel use Manufacturing Execution System software to "round out" and complete partial manufacturing execution system initiatives already undertaken by the customer. AMR reported in December 1995 that Manufacturing Execution System software packages had at that time penetrated the U.S. market by the percentages set forth below: Industry % Penetration Electronics 7% Discrete 4% Repetitive 0% Management believes Manufacturing Execution Systems provide a significant market opportunity for EMS and, correspondingly, has strategically committed EMS to enhancing its Manufacturing Execution System offerings and marketplace presence. Emphasis on Pre-Integrated Software for Discrete Manufacturing. EMS' experience in the marketplace resulted in the 1995 introduction of the first "pre-integrated" ERP/Manufacturing Execution System/Controls software offering for discrete manufacturers. This pre-integration initiative was facilitated by the acquisition of Intercim Corporation. The figure set forth below illustrates three risk and capital capacity curves which relate to the eras of "custom" software, "custom systems integrated" software, and "pre-integrated" software. [FIGURE OMITTED] [Description of omitted figure: This figure illustrates the evolution of business software and the relationship of risk/capital capacity to corporation size. "Custom" software systems and "Custom System Integrated" software systems represent the past and current eras of software development and implementation. Formerly, only large corporations could afford the cost and risk of customized software. Today, with pre-integrated software from EMS, all manufacturers can enjoy the benefits of enterprise-wide solutions without the customization risk.] The illustration depicts how, in the first era of "Custom" software, only large corporations could afford the risk and capital outlays necessary to develop such software. Results from these software investments were mixed and implementation times generally spanned from five years to infinity. During the 1980's the industry entered its second era of "Custom Systems Integrated" software. During this era, which actually spans from the mid- 1980's until the present time, systems integration organizations worked with manufacturing companies to procure software components (for example, ERP, Statistical Process Control, Plant Maintenance, etc.) and integrated them on a custom basis for a given facility or corporation. The advent of this era dramatically reduced risk and capital capacity and for the first time made such products affordable for mid-sized corporations. Implementation time frames were reduced to three to five years. This approach represents the state-of-the-art for many manufacturers today. EMS introduced the "pre-integrated" era in 1995 when it offered the first pre-integrated software package for discrete manufacturers. Software pre- integration means that a customer can buy a comprehensive set of software from EMS which has already been integrated and proven to function. The various software components may be built by EMS or suppliers to EMS. In the case where there are suppliers to EMS, EMS has generally established alliances so that it can have design influence over the software. The pre-integration package also contemplates that other software, for example, Computer Aided Design systems, may already be in place at the customer site. "Off-the-shelf interfaces" for popular Computer Aided Design systems which once again are proven in advance are available to facilitate interaction with these software products. The figure above illustrates that pre-integrated software reduces risk and cost for the manufacturing company and also allows manufacturers of varying sizes to take advantage of the features offered by the software. Implementation time frames for pre-integrated software are between nine and eighteen months. EMS plans to continue to focus on the pre-integrated software marketplace. During 1996, Version 5.3 of TCM/R/ became the first industry product to span the business functions from ERP through Manufacturing Execution Systems to Statistical Process Control (SPC) and Direct Numerical Control (DNC) as illustrated below. This was followed in 1997 by Version 6.0 of TCM/R/, which brought this functionality into a Graphical User Interface (GUI) product, which improved the software's ease of use. [FIGURE OMITTED] [Description of omitted figure: This figure illustrates the integration of ERP, MES, Controls, SPC, and actual physical devices on the shop floor. The figure shows the inter-relationships of these systems and actual physical devices on the shop floor. The figure shows the inter- relationships of these systems and the necessary feedback loops. The figure illustrates the value of integrated solutions through pre-defined communications between various software systems.] EMS believes that "pre-integration" of much of this software reduces the time and cost of system implementations and increases the business value to the manufacturer similar to the way that "suites" of desktop software have affected that marketplace as compared to custom integration of word processing, data base, and spreadsheet desktop products. Software Products EMS develops, markets and supports TCM/TM/ application software for discrete manufacturing companies. EMS currently offers licenses for two software products: (a) TCM/R/, which is a full function business and ERP software system, including a pre-integrated Manufacturing Execution System providing production management, shop floor scheduling and operations support; and b) FACTORYnet/R/ I/S, which is a Manufacturing Execution System that provides production personnel with correct revisions of drawings, specifications, procedures, and instructions to help them make a better product and make it right the first time. EMS' software products are intended to provide a set of "tactical tools" which will enable the customer to achieve its strategic goals by correlating the expenditure of time to the addition of value to the finished product or service. EMS' products are designed for discrete manufacturers, including both stand-alone manufacturing plants and autonomous divisions of large corporations. "Discrete" manufacturers assemble or fabricate parts into finished products as distinguished from "process" manufacturers which mix, separate and otherwise combine or control ingredients to create finished products. EMS' focus on discrete manufacturers includes the market segments of repetitive and electronics manufacturers which some people identify as additional market segments. Time Critical Manufacturing -- EMS Software Products EMS software provides assistance for a broad range of tasks identified in the six categories set forth below. The TCM/R/ product can include software from all of these six categories. TCM/R/ and FACTORYnet/R/ I/S provide different capabilities within the Manufacturing Execution System and Decision Support Tools categories described below. EMS has plans that over time the two Manufacturing Execution System product offerings will evolve into a single product which is more comprehensive than either of the current Manufacturing Execution System offerings.
Time Critical Manufacturing Software Suites I. PLANNING Master Production Scheduling Manufacturing Resource Capacity Planning Planning II Forecasting Interface II. PRODUCT DATA MANAGEMENT Product Configurator Engineering Change Control Standard Bills of Material Standard Routings Computer Aided Document Library Manufacturing ("CAM") Item Master Computer Aided Design Standard Cost Build Up ("CAD") Interface III. SUPPLY CHAIN MANAGEMENT Customer Service Inventory Control Procurement Estimate/Quote Inventory Management Requisitions Customer Maintenance Distribution Management Vendor Maintenance Customer Order Processing Purchase Orders Shipping Vendor Performance Liability & Warranty Electronic Data Interchange ("EDI") Electronic Data Interchange ("EDI")* IV. MANUFACTURING EXECUTION SYSTEM Shop Floor Management Job Cost Bar Code Factory Data Time & Attendance Collection Plant & Equipment Maintenance Shop Fllor Scheduling "As Built History" Quality Management* Electronic Traveler Machine Interface Messaging & Alarms EMS Gateway Electronic Work Instructions Distributed Numerical Control ("DNC") V. FINANCE, ACCOUNTING AND ADMINISTRATION Accounts Receivable General Ledger Fixed Assets* Accounts Payable Human Resources* Standard Cost Payroll* VI. DECISION SUPPORT TOOLS Executive Information System Document Library Report Writer E-Mail Database Internet Notification Services ODBC Access * These Products Are Provided Based On Third Party Sublicensing Alliances.
I. Planning. The planning modules provide master production scheduling capability integrated with rough cut capacity planning to assist production organizations in planning materials requirements and manufacturing resource levels for the manufacturing facility. II. Product Data Management ("PDM"). PDM modules allow for product definition and control of engineering changes and relationships among component parts. These modules include software which interface with industry popular Computer Aided Design ("CAD") systems and offer Computer Aided Manufacturing ("CAM") software. III. Supply Chain Management. Customer Service. Modules provide control over the customer order cycle, including quotations, order entry, acknowledgment printing, pick ticket printing, shipping and invoicing. These modules allow for flexible pricing tables and multiple order types, including telephone orders, blanket orders and releases, over-the-counter orders and credit memos. EMS believes that its software for EDI, which facilitates electronic order entry and advance shipping notification, is particularly useful in meeting the needs of the automotive and retail supply industries. Inventory Management. The Inventory Management modules provide engineering data control and offer inventory recordkeeping, availability projections and replenishment planning. These modules provide bin, lot and serial number control, multi- location support, cycle counting and physical inventory control. Procurement. The Procurement modules provide control of the purchasing cycle, including authorized vendor price quotations, purchase order entry and printing, receipts entry and vendor performance analysis. These modules coordinate blanket orders and releases, one-time purchase orders, orders for non- productive materials and electronic mail notification upon receipt. IV. Manufacturing Execution System. The TCM/R/ and FACTORYnet/R/ I/S software products offer integrated Manufacturing Execution Systems which (i) provide production management, shop floor scheduling, distribution of "electronic drawings" as well as textual information on factory floor computer workstations, (ii) collect information from bar coding systems and (iii) facilitate the establishment of direct connections for virtually any NC/CNC machine tool and/or CAD systems. The products also include quality systems integration for statistical process control ("SPC") analysis. These Manufacturing Execution Systems may operate as stand-alone systems or be integrated into existing customer systems, and are pre- integrated with the remainder of the EMS software. V. Finance, Accounting and Administration. These modules provide general accounting and financial assistance in tracking and estimating planned and actual work-in-process costs. Any information from the finance and accounting database may be readily pulled into personal computer spreadsheet systems for further analysis and reporting. These modules also interface with third party human resource, fixed assets, and payroll software products sold by EMS. VI. Decision Support Tools. These software modules are a combination of internally developed and third party software sold by EMS which facilitate easy data management, analysis, customization, communication, etc., with and between the EMS software and other software in the customer's computing environment. EMS software modules may be licensed individually or in combination to allow companies with differing business needs and schedules to have flexibility in the implementation of the software system. Customers generally license between $30,000 and $1,000,000 of software per plant, with the total license fees per plant based on the modules licensed and a per seat license fee. Software Technology EMS invests in a wide range of software technologies which are important not only for the EMS end user customer but also for EMS' internal software development and distribution. In appropriate circumstances, EMS has licensed software developed by others and integrated various features of that software into its own software products. For example, EMS' software products incorporate imaging technology, which enables the user to store and interactively display images such as photographs of steps in a particular production process, diagrams of manufacturing sub- assemblies or motion video depicting the proper operation of a machine. This imaging capability facilitates manufacturing and production set-up and also assists users in satisfying ISO 9000 certification criteria (a set of international quality standards). EMS' products also include EDI, which facilitates electronic order entry and advance shipping notification. For internal software development, EMS employs 4GL sets of development tools which EMS believes are instrumental in achieving software productivity improvements and allow end users flexibility to customize their software systems. EMS has also developed proprietary software which facilitates the conversion of EMS' software products into various foreign languages, including complex Asian languages. EMS believes that this technology is useful not only in penetrating foreign software markets, but also in assisting customers which use EMS' software products on a multi- national basis. For a further discussion of EMS' ongoing efforts to develop new software technologies, see "- Product Development." Customer Services EMS offers comprehensive services for customers. Services provided by EMS include a telephone support program, system integration, custom software development, implementation consulting, and formal classroom and on-site training. At the customer's option, these services, which are available for both of EMS' software products, can be provided entirely by EMS or may be supplied in part by the customer or another third party such as a systems integrator or consulting firm. These services, which provide a recurring stream of revenue for EMS, are offered on an unbundled basis for either an annual or a multi-year subscription period. All of the services offered by EMS are optional, except that EMS requires first-time licensees of its software to subscribe for at least two years of telephone support. EMS believes that the availability of effective customer services is critical for customer satisfaction and to increase software license fee revenues. EMS further believes that services can provide a continuing and more predictable source of revenue as compared to software license fee revenues. For the years ended November 30, 1995, 1996 and 1997, services revenues accounted for 37.8%, 37.4%, and 39.4% of EMS' total net revenues, respectively. The following is a brief description of the various services provided by EMS: Telephone Support Program. EMS' telephone support program is a comprehensive, fee-based program designed to help customers obtain the maximum benefit from EMS' business management software. The telephone support program is handled out of EMS' Minnesota, Illinois, and Wisconsin offices and is staffed by thirty trained professionals. The program includes, among other services, answering technical questions regarding standard software, and diagnosing and resolving equipment and software problems. System Integration and Custom Software Development. EMS offers system integration and custom software development services, on a fee basis, to meet specific customer requirements and to integrate its software with a customer's existing computer system. EMS has developed a Time Critical Implementation Methodology ("TCIMJ"), which is a proprietary implementation methodology intended to facilitate integration and efficient implementation of EMS' products at customer sites. This approach is designed to allow the customer to obtain business benefits sooner than with less structured methodologies. Ongoing technical support is also available from EMS to all customers who elect to purchase custom software development services. Implementation Consulting. EMS provides consulting services, on a fee basis, to assist customers in implementing EMS' software systems using the TCIMJ approach. These services include value-added implementation planning, project management and specialized customer training. EMS employs a full-time professional services staff to provide these and other services. Training. EMS offers customers a series of both classroom and on-site training options. Training includes classroom and personal instruction at a number of EMS' locations or at the customer's plant site. Standardized training is offered for a fixed fee per class. Hardware Products EMS sells computer hardware and data collection equipment in order to facilitate sales of its software products to customers requiring a complete management information system. EMS sells, among other hardware, factory data collection equipment, CAMates/R/ (a small specialized computer allowing users to monitor and collect data from production machines), bar coding systems, networking and communication equipment, and occasionally server and client computer hardware. The factory data collection and bar coding hardware is purchased from the original manufacturers and resold on a project basis. This equipment ranges from fixed mount bar code scanners and printers to portable units and radio frequency network units. EMS also offers its customers networking and communication hardware and server and client computing hardware which EMS purchases from original manufacturers, including Intermec Corporation, plus two distributors, Keylink SystemsSM and Ingram Micro, Inc. During the past several years, EMS has focused its efforts on generating an increasing percentage of its net revenues from software license fees, which have a higher margin than hardware revenues. Markets and Customers EMS targets companies operating discrete manufacturing plants in the United States, Canada, the Pacific Rim, and Europe. These plants may be owned by privately held companies or by large, multi-national public corporations. EMS' customers include, among others, capital equipment manufacturers, job shops, high volume manufacturers, automotive suppliers, consumer product manufacturers, and aerospace equipment manufacturers. Based on December 1995 data compiled by AMR, there are approximately 24,000 discrete manufacturing plants in the United States. EMS believes that there are at least as many discrete manufacturers within this section of the market outside of the United States. During each of the past three fiscal years, no one customer has accounted for more than 10% of EMS' total net revenues. Sales and Marketing In the United States and Canada, EMS licenses its products and offers services through a direct branch office sales force, joint ventures and independent distributors as reflected in the table below: Branch Office Locations -Austin, TX -Baltimore, MD -Boston, MA -Chicago, IL -Cincinnati, OH -Detroit, MI -Green Bay, WI -Houston, TX -Indianapolis, IN -Los Angeles, CA -Milwaukee, WI -Minneapolis, MN -Norwalk, CN -Philadelphia, PA -Port St. Lucie, FL -Rockford, IL -San Jose, CA Independent Distributor Territories -Camarillo, CA -Miller Place, NY -Menominee, MI -Pittsburgh, PA -Wausau, WI -West Des Moines, IA Joint Venture Location -Cleveland, OH EMS owns 50% of the joint venture operating in Cleveland. EMS obtained its interest in this joint venture primarily in exchange for technical knowledge and management expertise. EMS has no obligation to fund any losses that may be incurred by the joint venture. EMS' direct sales personnel are compensated on a salary plus commission basis. EMS' joint venture and independent distributor agreements generally provide that sales will be made by authorized resellers from offices within a designated territory. The agreements obligate EMS to license the reseller at specified prices and to provide training to each reseller. Resellers are normally obligated to sell a specified minimum amount of EMS' software to keep the agreements in effect. EMS also maintains a staff of systems consultants who offer pre- and post-sales support to the sales and distribution network. EMS markets its products through advertising campaigns in national trade periodicals and through direct mailings. These efforts are supplemented by listings in relevant directories and trade show and conference appearances. EMS is also given leads regarding potential customers by its hardware and services vendors, existing customers and various accounting and consulting firms. Sales cycles for EMS' products vary substantially based on the degree of integration, consulting and training required and also on the status of the customer's hardware system implementation. A sales cycle is usually three to twelve months from the time an initial sales presentation is made until the time a signed license agreement is entered into with a customer. In addition to its domestic markets, EMS over the last several years has begun efforts to develop a market for its products in the Pacific Rim and Europe. EMS has established independent distributor relationships in Japan, South Korea, The Peoples Republic of China, the United Kingdom, Belgium, and Poland. In each of these countries, EMS' software products have been or are in the process of being converted to the local language. EMS has an office in Hong Kong to support its Asian distributors. Strategic Arrangements A facet of EMS' strategy is to establish arrangements with suppliers of state of the art information systems technology. EMS over the last five years has worked to expand the number of its strategic relationships. EMS has distributor relationships with Keylink SystemsSM, a subsidiary of Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which supply computers, associated peripherals and third party software. EMS has arrangements with Intermec Corporation relating to bar code data collection systems which are integrated on an "off-the-shelf" basis into EMS' software products. EMS' software has been integrated with other bar coding systems on a customized basis. EMS also has a relationship with the Datamyte Division of Rockwell Automation for its Quantum quality control software product line. In addition to its relationships with equipment providers, EMS has relationships with numerous software product suppliers. These companies provide software which EMS uses within its TCM/R/ and FACTORYnet/R/ I/S software. Synergex International Corporation has provided the Synergy 4GL Applications Development Environment since 1990. EMS purchases EDI software from Supply Tech and Radley Corporation. EMS' relationship with the equipment and software product suppliers described above is basically that of a reseller of such suppliers' products. As such, EMS is entitled to volume discounts on products which it purchases and is generally entitled to the benefits of cooperative marketing programs. Product Development EMS believes it must continue to enhance, broaden and modify its existing line of software products to meet the constantly evolving needs of discrete manufacturers within its target market. EMS has relied on internal development and development related to customized projects implemented at field sites to extend, enhance and support its software products, and develop and integrate new capabilities. In general, EMS has historically made one new product release each year. These formal releases are supplemented by periodic releases for its EDI software to respond to ongoing changes in trading partner requirements. During the fiscal years ended November 30, 1995, 1996 and 1997, EMS' total software investment (consisting of product development expenses and capitalized software development costs) was $3.4 million, $5.6 million and $6.9 million, respectively. Product development expenditures which were expensed and not capitalized during those three fiscal years totaled $1.1 million, $2.2 million and $2.4 million, respectively. Software development efforts currently in progress include the development of product enhancements such as additional object orientation features within EMS' products, enhanced client-server network operations on various operating systems, extended operation on various relational database products, and enhanced functional capability. There can be no assurance, however, that these development efforts will result in product enhancements that EMS will be able to market successfully. Certain of these enhancements are dependent upon the development efforts of third party suppliers over whom EMS has no control. In the event the development efforts of the third party suppliers are delayed or are unsuccessful, the software developments of EMS would be similarly delayed. Software development is, however, an evolutionary process and EMS management believes it could eventually find other suppliers or, if unsuccessful in its search, that it could successfully re-engineer existing products to fulfill its requirements. Competition The manufacturing software industry is intensely competitive and rapidly changing. A number of companies offer products similar to EMS' products. Some of EMS' existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than EMS. EMS believes that its employees' understanding of diverse manufacturing operations and processes and the potential business benefits of the TCMJ management approach to such operations allow EMS to differentiate itself from competitors. Other competitive factors include software product features and functions, product architecture, the ability to function on a variety of operating systems, technical support and other related services, ease of product integration with third party application software, price, and performance. In December 1997, Gartner Group identified twenty-four competitors of EMS in the North American mid-market Enterprise Resource Planning area for discrete manufacturers. Additionally, that firm identified eight competitors in the Manufacturing Execution Systems market as of June, 1997. Although Gartner Group identified a limited number of competitors in its Manufacturing Execution Systems study, EMS generally does not encounter these competitors in the marketplace. EMS believes that its primary competition for its Manufacturing Execution System products are customized software products developed by internal data processing staffs or by third party customized software developers. None of the competitors identified by Gartner Group had product offerings for both ERP and Manufacturing Execution System discrete manufacturers. Intellectual Property EMS has registered or has applied for registration of its "EMS/TM/" and "TCMJ" trademarks for software services and products with the United States Patent and Trademark Office and with the equivalent offices of most foreign countries in which EMS currently does business. Among others, EMS has also received or applied for trademarks for products marketed under the names FACTORYnet/R/ I/S and CAMate/R/. EMS regards its software products as proprietary in that title to and ownership of its software reside exclusively with EMS. EMS attempts to protect its rights with a combination of trademark, copyright and employee and third-party nondisclosure agreements. Despite these precautions, it may be possible for unauthorized parties to copy or reverse-engineer portions of EMS' software products. While EMS' competitive position could conceivably be threatened by its inability to protect its proprietary information, EMS believes that copyright and trademark protection are less important to EMS' success than other factors such as the knowledge, ability and experience of EMS' personnel, name recognition and ongoing product development and support. Employees As of November 30, 1997, EMS had 349 full-time employees, of whom 79 were engaged in sales and marketing; 78 in product development; 153 in customer service; and 39 in management, finance and administration. EMS employees are not represented by any collective bargaining organization and EMS has never experienced a work stoppage. EMS considers its employee relations to be good. Item 2. Properties EMS' Corporate headquarters are located in Milwaukee, Wisconsin, in a leased office consisting of approximately 42,000 square feet under a lease expiring November 30, 2003. EMS leases additional facilities domestically in Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati, Ohio; Detroit, Michigan; Hartford, Connecticut; Houston, Texas; Indianapolis, Indiana; Minneapolis, Minnesota; Philadelphia, Pennsylvania; Port St. Lucie, Florida; Rockford, Illinois and San Jose, California. EMS leases office space internationally in Hong Kong, and China. Additional space may be required within the next twelve months, but EMS believes that suitable additional space will be available as required. See Note 7 of the Notes to Consolidated Financial Statements for information regarding EMS total lease obligations. Item 3. Legal Proceedings As of the date of this filing, neither EMS nor any of its subsidiaries is a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material effect on EMS' results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended November 30, 1997. Part II Item 5. Market for Common Equity and Related Stockholder Matters The common stock and common stock warrants of EMS are traded on The Nasdaq Stock Market under the symbols EMSI and EMSIW, respectively. The table below represents the high and low sales prices for the EMS common stock and warrants as reported on The Nasdaq Stock Market for fiscal 1996 and 1997: Common Stock Warrants 1996 High Low High Low First Quarter $ 5-3/4 $ 4-1/4 $ 2-1/8 $ 1-1/4 Second Quarter $ 7-3/4 $ 4-1/4 $ 3 $ 1-1/4 Third Quarter $ 8 $ 5-1/4 $ 3-1/8 $ 2-1/2 Fourth Quarter $ 8-1/4 $ 5-1/4 $ 3-1/4 $ 2-1/2 1997 High Low High Low First Quarter $ 7-3/4 $ 5-1/2 $ 3-3/16 $ 2-1/2 Second Quarter $ 7-1/2 $ 6-1/2 $ 2-1/2 $ 3/4 Third Quarter $ 6-1/8 $ 4 $ 1-1/2 $ 1 Fourth Quarter $ 6-1/2 $ 4 $ 2 $ 1-1/2 As of February 1, 1998, there were 446 shareholders of record of EMS's common stock and 306 holders of record of the warrants. EMS has not declared or paid cash dividends on its common stock in the past, and currently intends to retain any earnings for use in its business. Therefore, EMS does not anticipate paying any cash dividends in the foreseeable future. EMS's credit facility also contains provisions limiting its ability to pay cash dividends. Item 6. Selected Financial Data (In thousands, except per share data)
Year ended November 30 1993 1994 1995(4) 1996 1997 STATEMENTS OF OPERATIONS DATA: Net revenues: Software license fees $ 7,146 $10,163 $11,534 $19,094 $21,752 Services $ 5,928 $ 7,256 $10,962 $15,412 $16,781 Hardware $ 6,220 $ 5,245 $ 6,528 $ 6,751 $ 4,112 ======== ======= ======== ======= ======= Total net revenues $19,294 $22,664 $29,024 $41,257 $42,645 Cost of products and services: Cost of third party software license fees $ 405 $ 797 $ 1,419 $ 2,484 $ 3,065 Software development amortization $ 342 $ 515 $ 879 $ 1,591 $ 2,535 Cost of services $ 3,898 $ 4,467 $ 7,884 $ 12,109 $ 14,000 Cost of hardware $ 4,752 $ 4,146 $ 5,118 $ 4,979 $ 3,260 ======== ========= ======== ======== ======== Total cost of products/services $ 9,397 $ 9,925 $15,300 $21,163 $22,860 Gross Margin $ 9,897 $12,739 $13,724 $20,094 $19,785 ======== ======= ======= ======= ======= Selling and marketing expenses $ 5,546 $ 7,407 $ 9,479 $14,060 $15,957 General and administrative expenses $ 2,038 $ 2,227 $ 3,029 $ 3,416 $ 3,838 Software development expenses (1) $ 621 $ 752 $ 1,086 $ 2,235 $ 2,391 ======== ======== ======== ======== ======== Total Operating Expenses $ 8,205 $10,386 $13,594 $19,711 $22,186 Operating income (loss) $ 1,692 $ 2,353 $ 130 $ 383 $ (2,401) Other income (expense) $ (32) $ 342 $ 80 $ (118) $ (377) Income (loss) before income taxes $ 1,660 $ 2,695 $ 210 $ 265 $ (2,778) Income tax expense (benefit) $ 650 $ 975 $ 79 $ 112 $ (618) ======== ======== ========= ========= ======== Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) Net income per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ (0.53) ======== ======== ========= ========= ======== Weighed average common and common equivalent share outstanding (2) 2,574 3,268 3,669 3,965 4,048 Other Statistical Data: Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 Software investment as a percentage of software license fees 18.4% 18.3% 29.5% 29.4% 31.6% Balance Sheet Data: Working Capital $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 Capitalized software development costs, net $ 1,271 $ 1,861 $ 4,000 $ 5,781 $ 7,717 ======== ======== ======== ======== ======== Total assets $ 8,043 $17,903 $24,332 $27,446 $28,797 Long-term obligations $ 580 $ 50 $ 21 $ 2,123 $ 3,966 Stockholder's equity $ 1,541 $ 10,354 $ 14,177 $ 14,597 $ 12,573 (1) Does not include capitalized software development costs of $691, $1,105, $2,321, $3,372, and $4,471 recorded for the years ended November 1993, 1994, 1995, 1996, and 1997, respectively. (2) Weighed average common and common equivalent shares outstanding for the periods shown include the effect of common stock equivalents, if dilutive. (3) Software investment consists of product development expense and capitalized software development costs. (4) Includes results of Effective Management Systems of Illinois, Inc. and Intercim Corporation since being acquired effective March 31, 1995 and September 6, 1995, respectively.
CONDENSED QUARTERLY RESULTS (UNAUDITED) (In thousands, except per share data) The following table sets forth certain unaudited condensed operating results for each of the eight quarters in the two-year period ended November 30, 1997. This information has been prepared by EMS on the same basis as the Consolidated Financial Statements appearing elsewhere in this report and includes, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein. EMS's operating results for any one quarter are not necessarily indicative of results for any future period. Three Months Ended
Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 1996 1996 1996 1996 1997 1997 1997 1997 Statements of Operations Data: Net Revenues: Software license fees $ 3,675 $ 4,255 $ 4,040 $ 7,124 $ 4,211 $ 5,317 $ 4,963 $ 7,261 Services $ 3,617 $ 3,780 $ 3,755 $ 4,260 $ 4,246 $ 4,020 $ 4,095 $ 4,420 Hardware $ 2,351 $ 1,668 $ 1,278 $ 1,454 $ 1,018 $ 1,045 $ 624 $ 1,425 ======== ======== ======== ======== ======== ======== ======== ======== Total Net Revenues $ 9,643 $ 9,703 $ 9,073 $12,838 $ 9,475 $10,382 $ 9,682 $13,106 Cost of Products & Total Operating Expenses $ 9,818 $ 9,861 $ 9,616 $11,579 $10,910 $10,957 $10,687 $12,492 ======== ======== ======== ======= ======= ======= ======= ======= Operating income (loss) $ (175) $ (158) $ (543) $ 1,259 $ (1,435) $ (575) $ (1,005) $ 614 Net income (loss) $ (91) $ (87) $ (333) $ 664 $ (883) $ (381) $ (1,044) $ 148 Net income per share $ (.02) $ (.02) $ (.08) $ 0.17 $ (0.22) $ (0.09) $ (0.26) $ 0.04 Weighed average common and equivalent shares outstanding 3,932 3,950 3,973 4,006 4,025 4,041 4,054 4,048 -------- ------- ------- ------- -------- -------- -------- --------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation (for the fiscal years ended November 30, 1997, 1996, and 1995) Overview Effective Management Systems, Inc.("EMS" or the "Company") recorded a loss of approximately $2.2 million in fiscal 1997 as compared with net income of $153,000 in fiscal 1996. The decline in results of operation was due in part to the delayed introduction of version 6.0 of the Company's TCM software product as well as increased service costs associated with the implementation of new products and technologies. On November 26, 1997, the Company released version 6.0 of its TCM product which management believes will positively impact the Company's position in the market. TCM version 6.0 of the Company's product basically completed the application of a Windows compliant interface, the lack of which had negatively impacted software sales in the past. Also in fiscal 1997, the Company initiated a cost reduction program (the "1997 Cost Reduction") with the goal of reducing costs by $2 million per annum. The Company also announced a restructuring of executive management, which included the departure of two executives. The results of both these cost reductions are expected to be fully realized as fiscal 1998 progresses. The Company recorded a small increase in net income for fiscal 1996 compared with fiscal 1995. The increase was mainly the result of the introduction of new products and technologies along with the expansion of new market channels. During fiscal 1996, the Company became the first pre-integrated supplier of manufacturing software to fully integrate customer service, engineering, production control, dispatching, quality control and machine tool communication. Effective March 31,1995, the Company acquired the remaining 50% interest (in addition to the 50% interest previously owned) in Effective Management System of Illinois, Inc. ("EMS-ILL") for a cost of approximately $793,000 in Company common stock, cash, and related direct acquisition costs. The acquisition was accounted for as a purchase and resulted in the Company recording $395,000 of goodwill, which is being amortized over a twenty- year period. On September 6, 1995, the Company acquired all of the common stock of Intercim Corporation ("Intercim") for a cost of approximately $3,355,000 in Company common stock , warrants and related direct acquisition costs. The warrants have a ten-year term and an exercise price of $6.75. The acquisition was accounted for as a purchase. Goodwill of $1,437,000 resulted from the transaction, which is being amortized over a twelve-year period. The acquisitions of EMS-ILL and Intercim are herein referred to as the "1995 Acquisitions". Results of Operations Total Revenue Total revenue for fiscal 1997 increased 3.4% to $42,645,000 from $41,257,000 in fiscal 1996 and grew 42.2% from $29,024,000 in fiscal 1995 to fiscal 1996. The mix of software, services, and hardware revenues was 51.0%, 39.4%, and 9.6%, respectively, in fiscal 1997 as compared to 46.3%, 37.4%, and 16.3%, respectively, in 1996, and 39.7%, 37.8%, and 22.5%, respectively, in 1995. The growth in software and service revenues as a percentage of total revenues during these years was the result of a strategic decision by the Company to focus its marketing and selling efforts on generating an increased percentage of its revenues from higher margin software and services as opposed to lower margin hardware sales. International revenues represented less than 10% of total revenues for all periods presented. Software License Fee Revenues Software license fee revenues are customer charges for the right to use the Company's software products. These revenues increased 13.9% to $21,752,000 in fiscal 1997 from $19,094,000 in fiscal 1996. The main reason for this increase was the additional sales made to new customers during fiscal 1997. Software license fee revenues increased to $19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995 Acquisitions accounted for $4,623,000 of the fiscal 1996 increase in revenues. Exclusive of the revenues from the 1995 Acquisitions, the increase in software license fees during fiscal 1996 was mainly the result of new sales from a marketing relationship with International Business Machines Corporation, the hiring of additional sales personnel, and increased productivity of existing sales personnel. Service Revenues The Company offers both mandatory and optional services to its customers. Services provided include a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues increased 8.9% to $16,781,000 in fiscal 1997 from $15,412,000 in fiscal 1996. Service revenues increased 40.6% to $15,412,000 from $10,962,000 in fiscal 1995. These increases were primarily due to growth in the customer base and normal price increases. Of the increase in fiscal 1996, $4,496,000 was attributable to the 1995 Acquisitions. Hardware Revenues As an option, the Company sells computer hardware manufactured by others, along with the Company's software and services, to provide its customers "integrated" solutions to their management information system needs. Hardware revenues decreased 39.1% to $4,112,000 in fiscal 1997 from $6,751,000 in fiscal 1996. The decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware. The Company has decided to reduce its sales of commodity priced hardware products and those which require specific expertise beyond the scope of the Company's product focus. The Company has developed relationships with various system integrators which sell the hardware and provide these value-added hardware services. Hardware revenues increased 3.4% to $6,751,000 in fiscal 1996 from $6,528,000 in fiscal 1995. This increase was primarily attributable to the 1995 Acquisitions. Cost of Third-Party Software License Fees Most of the Company's system sales also include the sale of a report writer, a word processor, and/or other software components provided by outside suppliers. The integration of these products into the Company's software products generally requires that the Company pay royalties to these suppliers. Cost of third-party software license fees increased to $3,065,000 in fiscal 1997 from $2,484,000 in fiscal 1996, and from $1,419,000 in fiscal 1995. Since these third-party software products are generally sold in conjunction with the Company's software license, the increase was primarily attributable to a rise in the level of the Company's software license fees. In fiscal 1996, the 1995 Acquisitions added $470,000 to the cost of third-party software license fees. Software Development Amortization Software development amortization represents the amortization of past investments made by the Company in product development. Software development amortization increased from $879,000 in fiscal 1995 to $1,591,000 in fiscal 1996, and to $2,535,000 in fiscal 1997. In 1994, the Company made a decision to significantly advance software products and technologies. This strategic decision resulted in a substantial increase in the Company's investment in software product development. During the three-year period ended November 30, 1997 and prior to the final completion of the software products, growth in software development amortization exceeded the growth of software license fees. Cost of Services Cost of services as a percentage of related revenues increased to 83.4% in 1997 from 78.6% in 1996. The main reasons for the increases include allocation of resources to assist in developing new product, educational costs related to new products and technologies, training costs associated with new personnel, increased costs related to warranty work, and the costs of establishing a sales and service presence in China ($245,000). The 1997 Cost Reduction reduced fiscal 1997 cost of services by $264,000 through a work force reduction and a decrease of indirect activities. Cost of services as a percentage of related revenues increased to 78.6% in fiscal 1996 from 71.9% in fiscal 1995. The increase was attributable to a rising cost of labor; additional management expense relating to expanding the service organization; additional expenses to further develop a worldwide learning initiative related to new selling relationships (3.5% of related revenues in fiscal 1996); and the training expense related to newly-hired employees. Cost of Hardware Cost of hardware as a percentage of related revenues increased to 79.3% in fiscal 1997 compared to 73.8% in fiscal 1996. Cost of hardware as a percentage of hardware revenues decreased to 73.8% in 1996 from 78.4% in fiscal 1995. Cost of hardware as a percentage of related revenues varies with the amount of price discounting, the proportion of high margin hardware sales where the Company brings technical expertise to the process, and the proportion of customers who purchase low margin hardware from the Company. Cost of hardware as a percentage of related revenues can rise or fall depending on the mix of these factors. Additionally, the cost of hardware as a percentage of hardware revenues can vary due to the proportion of lower-margin sales (cost plus 11%) made to the Company's joint ventures and affiliates, which were $534,000, $1,264,000, and $1,091,000 in fiscal 1997, 1996, and 1995, respectively. Commencing January 1, 1996, the Company began charging 11% over cost on hardware sales (previously sold at cost) to EMS Solutions, Inc., an affiliated entity owned by certain officers of the Company, to match similar terms offered to the Company's joint ventures. In June, 1997, EMS Solutions, Inc. ceased the purchase of hardware from the Company and began sourcing the hardware through non-affliated outside vendors. Sales of hardware to EMS Solutions, Inc. were $331,000 in fiscal 1997, $851,000 in fiscal 1996 and $926,000 in fiscal 1995. Net Product Development Expenses Product development expenses, net of amounts capitalized, increased from $1,086,000 in fiscal 1995 to $2,235,000 in fiscal 1996 and to $2,391,000 in fiscal 1997. These increases were mainly the result of the Company's strategic initiative to increase investment in the development of future products, including the incorporation of various new technologies into the Company's software products. The 1997 Cost Reduction lowered new product development expense by $876,000 through reduction of the use of third- party consultants and a work force reduction. Management does not expect the reductions to impair the Company's research and development since such cost reductions represent a reduction in a temporary ramp-up to speed delivery of version 6.0 of the Company's software and a reduction in the number of consultants retained in respect to a customer project which was subsequently discontinued by the customer. In fiscal 1996, the 1995 Acquisitions added $659,000 to product expense, excluding $1,329,000 which was capitalized in accordance with Statement of Financial Standards (SFAS) No. 86. Management expects product development expense to stabilize in 1998 as efforts relating to the incorporation of certain new technologies concludes. Total development expense (defined as net development expense plus amounts capitalized) increased to $6,862,000 in fiscal 1997 from $5,607,000 in fiscal 1996 and from $3,407,000 in fiscal 1995. These expenses expressed as a percent of related software revenues were 31.6%, 29.4% and 29.5% in fiscal 1997, 1996 and 1995, respectively. Selling and Marketing Expenses Selling and marketing expenses increased to $15,957,000 in fiscal 1997 from $14,060,000 in fiscal 1996 and $9,479,000 in fiscal 1995. As a percent of gross margin (total net revenues minus total costs of products and services), selling and marketing expense increased from 70.0% to 80.7% between fiscal 1996 and fiscal 1997, and from 69.1% to 70.0% between fiscal 1995 and fiscal 1996, respectively. The increase in selling and marketing expense as a percent of gross margin between fiscal 1997 and fiscal 1996 was due to: 1) lower margin due to higher costs of software license fees (see above) and higher costs of services (see above); 2) increased expenses from developing international markets ($134,000) and lower productivity of new personnel; and 3) concern of prospective customers regarding the Company's negative operational results for fiscal 1997. The 1997 Cost Reduction lowered selling and marketing expense by $730,000 in fiscal 1997, mainly through a decrease in international market expansion, a focusing of market communications, and work force reduction. The 1995 Acquisitions accounted for $1,756,000 of the increase in the selling and marketing expenses in fiscal 1996. General and Administrative Expenses For fiscal 1997, general and administrative expense increased to $3,838,000 from $3,416,000 in fiscal 1996 and from $3,029,000 in fiscal 1995. As a percent of gross margin (total net revenues minus total costs of products and services), these expenses were 22.0%, 17.0% and 19.4% in fiscal 1995, 1996 and 1997, respectively. The increase in general and administrative expense as a percent of gross margin from fiscal 1996 to fiscal 1997 was mainly due to an increase in the provision for bad debts (2.5%). The 1997 Cost Reduction lowered general and administrative expense by $303,000 in fiscal 1997 mainly through a work force reduction. The 1995 Acquisitions increased general and administrative expense by $1,009,000 in fiscal 1996. Other primary reasons for the increase in fiscal 1996 compared to fiscal 1995 include additional depreciation from rising levels of capital purchases ($161,000); added support personnel for system and facilities needs ($71,000); and additional administrative costs attributable to the growth in hardware and service revenues. Other Income/Expense Other income/expense provided $377,000 of expense for fiscal 1997 compared with $118,000 of expense for fiscal 1996 and $80,000 of income for fiscal 1995. Equity losses from affiliates were $25,000 in fiscal 1997 compared with $25,000 of income for fiscal 1996 and $31,000 of losses in fiscal 1995. The equity earnings for fiscal 1995 declined , in part, due to the merger with EMS-ILL, which resulted in reduced equity earnings from this former joint venture. Interest expense and interest income were $399,000 and $47,000, respectively, in fiscal 1997; $145,000 and $89,000, respectively, in fiscal 1996; and $52,000 and $176,000, respectively, in fiscal 1995. The decrease in interest income and the simultaneous rise in interest expense were mainly due to the Company's reduction in cash and short-term assets to fund investments in products, distribution channels, and service infrastructure. The Company anticipates that interest expense will continue to rise in the short-term with continued application of cash for operating and capital expenditure purposes. Income Tax Expense The effective income tax benefit rate was 22.2% for fiscal 1997 versus an effective income tax rate of 42.3% for fiscal 1996 and 37.6% for fiscal 1995. In fiscal 1997, the Company recorded a valuation allowance equal to 100% of the net deferred tax assets based on uncertainty regarding realization of such assets and thereby reduced the amount of tax benefit recorded by $329,000. In fiscal 1996, the effective income tax rate was higher than in fiscal 1995 due to reduced tax-exempt interest income and non-deductible meals and entertainment expenses. Liquidity and Capital Resources Cash provided by operations was $1,733,000 in fiscal 1997, $2,906,000 in fiscal 1996 and $1,915,000 in fiscal 1995. Non-cash expenditures, including both depreciation relating to capital expenditures and amortization associated with software product development, contributed to the cash provided. Investment activities used cash of $5,363,000 in fiscal 1997 compared to $4,163,000 of cash in fiscal 1996 and $1,850,000 of cash in fiscal 1995. The cash was used to fund capital expenditures of $1,177,000, $1,424,000, and $1,430,000 in fiscal 1997, 1996, and 1995, respectively, and to fund investment in capitalized software product development of $4,471,000, $3,372,000 and $2,321,000 in fiscal 1997, 1996, and 1995, respectively. The Company sold $505,000 of available-for-sale securities in fiscal 1997, $1,247,000 of available-for-sale securities in fiscal 1996, and $1,584,000 of available-for-sale securities and $743,000 hold-to-maturity securities in fiscal 1995, which funded, in part, the capital expenditures and capitalized product development. For fiscal 1998, the Company estimates that capital expenditures will approximate $1,000,000 and capitalized software product development will approximate $4,000,000. Financing activities provided $2,778,000 of cash in fiscal 1997, $1,788,000 of cash in fiscal 1996, and used $10,000 of cash in fiscal 1995. As of November 30, 1997, the Company had $ 2,538,000 of availability under its then existing $6,300,000 revolving line of credit based on the level of the Company's eligible accounts receivable. On December 31, 1997, the Company entered into a new borrowing agreement with Foothill Capital Corporation to replace its prior facility. The new facility includes a $6,000,000 revolving line of credit and a three-year term note for $3,112,500. Interest on the revolver is payable monthly based on the bank's base rate plus .75% (9.25% on December 31, 1997); the term note bears interest at 13.5% per year. The new agreement does contain certain restrictive covenants relating to income (EBITDA) , tangible net worth and level of capital expenditures. In order to meet these covenants, the Company will need positive operational results in fiscal 1998. As of December 31, 1997, the Company had $3,751,000 of availability under the new revolving line of credit. The Company believes its cash flows from operations and funds available under its line of credit will be adequate to finance capital expenditures and working capital requirements for at least the next twelve months. The Company utilizes a combination of its own software and custom written systems for running its own operations. Based on its own evaluation, the Company believes that there will be no significant costs associated with ensuring year 2000 compliance of its internal systems. Since the release of version 5.1.2 of the Company's software product, the Company's software product has been year 2000 compliant. American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was issued in October 1997. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. Therefore, SOP 97-2 will effect transactions entered into by the Company beginning December 1, 1998. SOP 97-2 addresses various aspects of the recognition of revenue on software transactions and supersedes SOP 91-1, the policy currently followed by the Company. SOP 97-2 provides guidance on software arrangements consisting of multiple elements, evidence of fair value, delivery of elements, accounting for service elements, and software arrangements requiring significant production, modification, or customization of software. The Company is currently evaluating the impact SOP 97-2 will have on the Company's consolidated financial statements. Note Regarding Forward-Looking Statements Certain matters discussed in Management's Discussion and Analysis (as well as elsewhere in the Company's Annual Report) are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. In addition to the factors set forth in Item 1 of Part I of this Annual Report on Form 10-K (See "Business- Business Risk Factors"), risks and uncertainties include customer acceptance of version 6.0 of the Company's software product, the Company's ability to implement successfully its cost reduction initiatives, generation of adequate cash to fund on-going research and development needs and requirements, and maintenance of an experienced level of sales and service personnel. Shareholders, potential investors, and other parties are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable Item 8. Financial Statements and Supplementary Data Effective Management Systems, Inc. Consolidated Financial Statements Years ended November 30, 1997, 1996 and 1995 Contents Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . 28 Consolidated Financial Statements Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . 31 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . 32 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 33 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Effective Management Systems, Inc. We have audited the accompanying consolidated balance sheets of Effective Management Systems, Inc. (the Company) and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1997. Our audits also included the financial Statement Schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at November 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young Ernst & Young Milwaukee, Wisconsin January 16, 1998 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Balance Sheets (Dollars in Thousands) November 30 Assets 1997 1996 Current Assets: Cash and cash equivalents $ 14 $ 866 Investment in available-for-sale securities (Note 3) - 505 Accounts receivable: Trade, less allowance for doubtful accounts of $462-1997; $346-1996 12,370 11,146 Related parties 604 693 ------ ------ 12,988 11,839 Refundable income taxes 312 159 Inventories 280 391 Deferred income taxes (Note 10) - 175 Prepaid expenses and other current assets 146 174 ------ ------ Total current assets 13,726 14,109 Software development costs, net 7,717 5,781 Investments in and advances to unconsolidated joint ventures 182 199 Equipment and leasehold improvements, net (Note 4) 3,917 3,961 Intangible assets, net (Note 5) 2,444 2,690 Other assets 811 706 ------ ------- Total assets $28,797 $27,446 ====== ======= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,272 $ 2,026 Accrued liabilities 2,773 2,846 Deferred revenue 5,887 4,605 Customer deposits 63 109 Current portion of long-term obligations 946 127 (Note 7) ------- ------- Total current liabilities 11,941 9,713 Deferred revenue and other long-term liabilities 317 453 Long-term obligations (Note 7) 3,966 2,123 Deferred income taxes (Note 10) - 560 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, $.01 par value; authorized 3,000,000 shares, none issued or outstanding - - Common stock, $.01 par value; authorized 20,000,000 shares, issued 4,067,310 and 4,011,018 shares; outstanding 4,054,685 and 4,008,393 shares 41 41 Common stock warrants 4 4 Additional paid-in capital 11,328 11,137 Retained earnings 1,260 3,420 Cost of common stock in treasury (12,625 and 2,625 shares) (60) (5) ------- ------- 12,573 14,597 ------- ------- Total liabilities and stockholders' equity $28,797 $27,446 ======= ======= See accompanying notes. EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Operations (In Thousands, except per share amounts)
Year Ended November 30 1997 1996 1995 Net revenues: Software license fees $21,752 $19,094 $11,534 Services 16,781 15,412 10,962 Hardware 4,112 6,751 6,528 -------- -------- -------- 42,645 41,257 29,024 Costs of products and services: Cost of third-party software license fees 3,065 2,484 1,419 Software development amortization 2,535 1,591 879 Cost of services 14,000 12,109 7,884 Cost of hardware 3,260 4,979 5,118 -------- -------- -------- 22,860 21,163 15,300 Selling and marketing expenses 15,957 14,060 9,479 General and administrative expenses 3,838 3,416 3,029 Software development expenses 2,391 2,235 1,086 -------- -------- -------- 45,046 40,874 28,894 Income (loss) from operations (2,401) 383 130 Other income (expense): Equity in earnings (losses) of unconsolidated joint ventures (25) 25 (31) Interest income 47 89 176 Interest expense (399) (145) (52) Other - (87) (13) -------- -------- ------- (377) (118) 80 Income (loss) before income taxes (2,778) 265 210 Income tax benefit (expense) 618 (112) (79) -------- -------- ------- Net income (loss) $(2,160) $ 153 $ 131 ======= ======== ======= Net income (loss) per common share - Primary and fully diluted $(.53) $ .04 $ .04 ======= ======= ====== Weighted average common and common equivalent shares - Primary and fully diluted 4,048 3,965 3,669 ======== ======== ======= See accompanying notes
EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Stockholders' Equity (Dollars in Thousands)
Common Stock and Common Warrants Common Stock to be Paid-in Retained Treasury Shares Stock Warrants Issued Capital Earnings Stock Total Balance, November 30, 1994 3,545,215 $36 $- $- $7,187 $3,136 $(5) $10,354 Issuance of common stock: Acquisitions 328,393 3 - - 2,338 - - 2,341 Stock options 30,002 - - - 71 - - 71 Employee stock purchase plan 18,671 - - - 96 - - 96 Issuance of common stock warrants for acquisitions - - 3 - 970 - - 9763 Common stock and warrants to be issued to complete Intercim transaction - - - 211 - - - 211 Net income - - - - - 131 - 131 --------- ----- ---- ----- ------ ----- ----- ------ Balance, November 30, 1995 3,922,281 39 3 211 10,662 3,267 (5) 14,177 Issuance of common stock: Acquisitions 24,000 - - - 132 - - 132 Stock options 35,000 1 - - 60 - - 61 Employee stock purchase plan 29,718 - - - 113 - - 113 Warrants 19 - - - - - - - Issuance of additional common stock and warrants to complete Intercim transaction - 1 1 (172) 170 - - - Purchase of shares from dissenting former Intercim shareholder - - - (39) - - - (39) Net income - - - - - 153 - 153 --------- ----- ---- ---- ------ ----- ---- ------ Balance, November 30, 1996 4,011,018 41 4 - 11,137 3,420 (5) 14,597 Issuance of common stock: Stock options 39,500 - - - 68 - - 68 Employee stock purchase plan 26,792 - - - 123 - - 123 Purchase of treasury shares (10,000) - - - - - (55) (55) Net loss - - - - - (2,160) - (2,160) --------- ----- ---- ---- ------- ------- ----- ------- Balance, November 30, 1997 4,067,310 $41 $4 $ - $11,328 $ 1,260 $(60) $12,573 ========= ===== ==== ==== ======= ======= ===== ======= See accompanying notes.
EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Cash Flows (Dollars in Thousands)
Year ended November 30 1997 1996 1995 Operating activities Net income (loss) $(2,160) $ 153 $ 131 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,234 1,037 730 Amortization, other 246 189 82 Amortization of capitalized computer software development costs 2,535 1,591 879 Equity in losses (earnings) of joint ventures 25 (25) 31 (Gain) loss on disposal of equipment and leasehold improvements - (24) 4 Deferred income taxes (385) 202 554 Changes in operating assets and liabilities: Accounts receivable (1,135) (1,770) (297) Inventories and other current assets 100 341 265 Accounts payable and other liabilities 1,273 1,212 (464) -------- -------- -------- Total adjustments 3,893 2,753 1,784 -------- -------- -------- Net cash provided by operating activities 1,733 2,906 1,915 Investing Activities Acquisition of Darwin Data Systems, net of cash received of $19 - (51) - Acquisition of EMS-Illinois, net of cash received of $160 - - (238) Acquisition of Intercim - - (225) Additions to equipment and leasehold improvements (1,177) (1,424) (1,430) Purchases of available-for-sale securities - (495) - Proceeds from sales of available-for-sale securities 505 1,247 1,584 Proceeds from sales of held-to-maturity securities - - 743 Proceeds from sale of equipment and leasehold improvements 7 68 39 Increase in cash surrender value of life insurance (25) (25) (31) Software development costs capitalized (4,471) (3,372) (2,321) Other (202) (111) 29 ------- -------- ------- Net cash used in investing activities (5,363) (4,163) (1,850) Financing activities Proceeds from issuance of stock to employees 191 174 167 Proceeds from increase in debt 2,797 1,864 - Payments on long-term debt and capital lease obligations (155) (250) (177) Purchase of treasury stock (55) - - Net cash provided by (used in) financing activities 2,778 1,788 (10) ------- -------- ------ Net increase (decrease) in cash (852) 531 55 Cash: Beginning of year 866 335 280 End of year $ 14 $ 866 $ 335 ======= ======== ======= Supplemental cash flow information: Interest paid $ 399 $ 133 $ 52 Income taxes paid (refunded), net (172) (464) 357 Noncash transactions: Equipment recorded under capital lease obligations 20 371 - Issuance of common stock and warrants for acquisitions - 132 3,525 See accompanying notes.
Effective Management Systems, Inc. Notes to Consolidated Financial Statements November 30, 1997 (Dollars in thousands, except per share amounts) 1. Basis of Presentation and Significant Accounting Policies Consolidation The accompanying consolidated financial statements include the accounts of Effective Management Systems, Inc. (the Company) and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Business and Concentration of Credit Risk The Company develops, sells, and services computer software and related hardware throughout the United States and certain foreign countries that meet the Company's credit policies. The Company performs periodic credit evaluations of its customers' financial condition and generally follows a policy to obtain deposits for sales to new customers. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue is recognized in accordance with the provisions of AICPA Statement of Position (SOP) 91-1, "Software Revenue Recognition," as follows: Software and Hardware Sales Revenue is recognized when the product is delivered. Professional Fees and Services Revenue is recognized as time and material costs are incurred. Software Support Fees Revenue is recognized ratably over the terms of the nonrefundable support contract. Annual Upgrade Fees Revenue is recognized ratably over the nonrefundable annual upgrade contract period. In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition," which changes the requirements for revenue recognition and supersedes SOP 91-1 effective for transactions that the Company will enter into beginning December 1, 1998. The Company intends to review the provisions of its software license contracts and make the changes necessary to have them meet the standards of the new SOP. Investments Debt securities are classified as available-for-sale and are carried at fair value, which approximates cost. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. Inventory Valuation Inventories are carried at the lower of cost or market with cost determined on a first-in, first-out (FIFO) basis. Software Development Costs In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," the Company capitalizes internal costs in developing software products upon determination that technological feasibility has been established for the product, whereas costs incurred prior to the establishment of technological feasibility are charged to product development expense. When the product is available for general release to customers, capitalization ceases and such costs are amortized on a product-by-product basis based on current and future revenue with an annual minimum equal to the straight-line amortization over the remaining estimated economic useful life of the product. Capitalized software development costs, stated at the lower of cost or net realizable value, were $7,717 and $5,781 at November 30, 1997 and 1996, respectively, which is net of accumulated amortization of $7,877 and $5,342, respectively. Investment in Unconsolidated Joint Ventures Investments in unconsolidated joint ventures are accounted for on the equity method wherein the Company's share of the joint ventures' net earnings or losses is recorded as an adjustment to the investment. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost and are depreciated using the straight-line method for financial reporting purposes. The estimated useful lives used to calculate depreciation are as follows: Years Leasehold improvements 5 Furniture and fixtures 10 Equipment 5 Assets under capital leases are amortized on a straight-line basis over their useful lives. Intangible Assets Intangible assets are amortized using the straight-line method for financial reporting purposes over the following estimated lives: Years Customer list 15 Goodwill 12-20 Other intangibles 6-40 Income Taxes Deferred income taxes are provided for temporary differences between financial reporting and income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Net Income (Loss) Per Common Share Net income (loss) per common share is computed based on the weighted average number of common shares outstanding for the periods presented. Net income per common share includes the dilutive effect of stock options and warrants calculated using the "treasury stock" method. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is required to be adopted for periods ending after December 15, 1997. In the first quarter of fiscal 1998, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, basic earnings per share will exclude the dilutive effect of stock options and warrants. Basic earnings per share for the year ended November 30, 1997 and 1996 would have been the same as previously reported primary earnings per share. The impact of Statement No. 128 on the calculation of fully diluted earnings per share is not expected to be material. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, related-party receivables, trade payables and debt instruments. The book values of cash and cash equivalents, marketable securities, trade receivables, related- party receivables and trade payables are considered to be representative of their respective fair values. None of the Company's debt instruments that are outstanding as of November 30, 1997, have readily ascertainable market values; however, the carrying values are considered to approximate their respective fair values. See Note 8 for the terms and carrying values of the Company's various debt instruments. Stock Compensation As is permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts for employee stock compensation (e.g., stock options) in accordance with APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25, the total compensation expense recognized is equal to the difference between the award's exercise price and the underlying stock's market price (referred to as "intrinsic value") at the measurement date, which is the first date that both the exercise price and number of shares to be issued is known. See Note 9. New Pronouncements The Company will be required to adopt SFAS No. 130, "Reporting Comprehensive Income," for years beginning after December 15, 1997. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Since this standard applies only to the presentation of comprehensive income, it will not have any impact on the Company's results of operations, financial position or cash flows. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for years beginning after December 15, 1997. This statement changes the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. Management has not completed its review of SFAS No. 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. 2. Acquisitions Effective April 15, 1996, the Company completed the purchase of the remaining 75% of Darwin Data Systems (Darwin). Consideration for this acquisition was $303, consisting of $101 in notes payable, 24,000 shares of the Company's common stock valued at $132 and $70 of acquisition costs. Effective March 31, 1995, the Company completed the purchase for $793 of the remaining 50% of the capital stock of EMS-Illinois not then owned by the Company. The purchase price consisted of 50,200 shares of the Company's common stock valued at $395, $380 in cash and $18 of acquisition costs. On September 6, 1995, the Company acquired all of the common stock of Intercim for approximately $3,355, composed of 278,193 shares of the Company's common stock valued at $7.50 per share and 278,193 of the Company's warrants valued at $3.75 per share, and direct acquisition costs of $225. Because the average trading price (Price) of the warrants for the 15 trading days prior to April 18, 1996, was less than $3.8075, the Company was required to issue 123,719 additional warrants, which was equal to the difference between the number of warrants originally issued and the warrants which should have been issued at the Price above, had the Price been known at September 6, 1995. The acquisitions have been accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of such companies have been adjusted to their estimated fair values. The excess of cost over the net assets acquired has been allocated to goodwill. The results of operations for Darwin, EMS-Illinois and Intercim have been included in the Company's consolidated financial statements from their respective acquisition dates. The unaudited pro forma results of operations below for EMS-Illinois and Intercim assume that the acquisitions had occurred at the beginning of the period. In addition to combining the historical results of all the entities, the pro forma calculations include adjustments for amortization of various intangibles acquired in conjunction with the acquisition and elimination of intercompany transactions with EMS-Illinois. However, no adjustments have been reflected for nonrecurring expenses as a result of the combination of the entities. Year ended November 30, 1995 (Unaudited): Total net revenue $ 34,174 Net income (loss) (505) Earnings per share (.13) Pro forma results have not been included for 1996 for the Darwin acquisition because the impact was not significant. 3. Investments The following is a summary of investment securities at November 30, 1996: Available-for-Sale Securities Gross Unrealized Estimate Gains d Fair Cost (Losses) Value Obligations of states and political subdivisions $505 $ - $505 All of the above securities were due in one year or less. During the years ended November 30, 1997 and 1996, debt available-for-sale and certain debt held-to-maturity securities with fair market value of $505 and $1,247, respectively, were sold, with proceeds received approximating cost. The sales were made to provide funding for certain acquisitions, software development and normal operations. No unrealized holding gains (losses) on available-for-sale securities, which would be included as a separate component of shareholders' equity, have been recorded as cost approximated estimated fair value as of November 30, 1996. 4. Equipment and Leasehold Improvements Equipment and leasehold improvements consisted of the following at November 30: 1997 1996 Equipment $7,119 $6,090 Furniture and fixtures 1,346 1,199 Leasehold improvements 478 426 Equipment under capital leases 416 454 -------- ------- 9,359 8,169 Less accumulated depreciation and amortization (5,442) (4,208) -------- ------- Equipment and leasehold improvements, net $3,917 $3,961 ======== ======= 5. Intangible Assets Intangible assets consisted of the following at November 30: 1997 1996 Goodwill $1,445 $1,445 Customer list 1,400 1,400 Other 200 200 ------- ------ 3,045 3,045 Less accumulated amortization (601) (355) ------- ------ Intangible asset, net $2,444 $2,690 ======= ====== 6. Affiliated Company Certain of the Company's stockholders also own all of the common stock of an affiliated company, EMS Solutions, Inc. (Solutions), which develops and sells computer software and related hardware to the food vending and food distribution industry. The Company has provided certain services to Solutions for which the Company received fees of $122, $269 and $321 in 1997, 1996 and 1995, respectively, that are recorded as an offset to general and administrative expense. The Company also sells computer hardware to Solutions that totaled $331, $851 and $926 in 1997, 1996 and 1995, respectively. Amounts due from Solutions were $404 and $445 at November 30, 1997 and 1996, respectively. Material transactions with Solutions must be approved by a majority of the Company's external directors. On July 1, 1997, Solutions moved to new facilities and no longer utilizes office space or other material services of the Company. In addition, Solutions no longer purchases computer hardware from the Company. 7. Long-Term Debt and Lease Commitments Long-term obligations consist of the following at November 30: 1997 1996 Line of credit $3,762 $1,864 Notes payable 910 27 Capital lease obligations 240 359 -------- ------- 4,912 2,250 Less amounts due within one year (946) (127) -------- ------- $3,966 $2,123 ======== ======= On December 31, 1997, the Company entered into a loan and security agreement (Agreement) with Foothill Capital Corporation (Foothill), which includes a revolving line of credit facility (Revolver) providing for maximum borrowings of $6,000 and a three-year term note for $3,112. The term note calls for 36 monthly payments of $65 with the remaining balance of principal due December 30, 2000. Amounts outstanding have been classified as long-term based upon the stated maturity date and the Company's estimates that borrowings will not decrease during fiscal 1998. Interest on the Revolver is payable monthly based on the bank's base rate plus .75% (9.25% at December 31, 1997); the term note bears interest at 13.5% per year. Borrowings under the Agreement are secured by substantially all assets of the Company (except inventory subject to the lien of a vendor). In addition, the Agreement requires the Company to maintain compliance with various covenants, including minimum levels of tangible net worth and adjusted operating income. The Company is also required to pay a monthly commitment fee of .50% per annum on the difference between the commitment amount and balance outstanding under the Revolver in lieu of a minimum monthly interest payment. The Company leases computer and other equipment under capital leases. The Company also leases office space, automobiles, and certain other equipment under operating leases. At November 30, 1997, future payments under capital and noncancellable operating leases were as follows: Fiscal Year Ending November 30 Capital Leases Operating Leases 1998 $162 $1,198 1999 111 1,159 2000 - 1,132 2001 - 989 2002 - 713 Thereafter - 849 Total minimum lease obligations 273 $6,040 Amounts representing interest (33) Capital lease obligations $240 Amortization expense relating to assets under capital leases is included in total depreciation expense for the period. Total rent expense on all operating leases was approximately $1,663, $1,404 and $1,042 in 1997, 1996 and 1995, respectively. 8. Stockholders' Equity As of November 30, 1995, the Company had 18,801 shares of common stock and 18,801 warrants with an aggregate value of $211 that were to be issued in exchange for common stock of former Intercim stockholders. These amounts, which were classified as common stock and warrants to be issued in stockholders' equity at November 30, 1995, were substantially issued in 1996. In connection with the acquisition of Intercim (see Note 2), the Company issued common stock warrants. Each warrant entitles the holder, at any time prior to September 6, 2005, to purchase one share of the Company's common stock at $6.75 per share. 9. Stock Options and Employee Stock Purchase Plans The Company maintains the 1986 Employees' Stock Option Plan (the 1986 Plan) pursuant to which executive officers and other key employees of the Company have received options to purchase shares of the Company's common stock. Options under the 1986 Plan were granted at exercise prices equal to the fair market value of the common stock on the date of grant. Options to purchase an aggregate of 57,000 shares have previously been granted and remain outstanding at November 30, 1997. No additional options will be granted under the 1986 Plan. In December 1993, the Company's Board of Directors adopted the Effective Management Systems, Inc. 1993 Stock Option Plan (the 1993 Plan). The 1993 Plan, as amended, provides for the granting of both incentive stock options and nonqualified stock options to employees and nonqualified stock options to non-employee directors of the Company covering up to a maximum of 550,025 shares. Under the 1993 Plan, the exercise price of options granted cannot be less than 100% of the fair market value of a share of the Company's stock at the date of grant. On September 6, 1995, in conjunction with the merger of Intercim (see Note 2), the Company adopted a new stock option plan, pursuant to which the Company granted stock options to those holders who agreed to the cancellation of their Intercim stock options. The Company has also issued nonqualified stock options to certain of its executives and other nonemployee directors. These options have various vesting schedules. Information with respect to stock options granted under all plans is as follows:
Number of Exercise Price Per Weighted Average Shares Share Exercise Price Outstanding at November 30, 1994 389,424 $1.57-$8.00 Granted 518,352 6.125-7.25 Exercised (29,949) 1.57-6.25 Canceled or expired (47,399) 6.25 ------- ---------- -------- Outstanding at November 30, 1995 830,428 1.57-8.00 Granted 124,043 4.75-7.00 Exercised (35,000) 1.71 Canceled or expired (14,569) 5.75-7.50 ------- ---------- -------- Outstanding at November 30, 1996 904,902 1.71-7.50 $6.13 Granted 109,938 4.63-6.75 5.73 Exercised (39,500) 1.71-1.71 1.71 Canceled or expired (54,961) 4.75-7.50 6.63 ------- --------- -------- Outstanding at November 30, 1997 920,379 $2.29-$8.25 $6.24 ======= ========== ========
At November 30, 1997, options to purchase 513,287 shares were exercisable under all plans, at a weighted average exercisable price of $6.29 and a weighted average contractual life of 7.3 years. In determining the effect of FASB Statement No. 123, the Black-Scholes option pricing model was used with the following weighted-average assumptions for 1997: risk-free interest rates of 5.36%, dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of .92, and a weighted-average expected life of the options of 4.93 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information, as if these options had been expensed in accordance with FASB Statement No. 123, follows: 1997 1996 Pro forma net income (loss) $(2,286) $114 Pro forma earnings (loss) per share (.56) .03 In December 1993, the Board of Directors adopted the 1994 Employee Stock Purchase Plan (Stock Purchase Plan), which permits employees to purchase shares of the Company's common stock during six-month periods beginning on June 1 and December 1 of each year. The purchase price of such shares will be equal to the lesser of 85% of the fair market value of the stock at the beginning or end of each six-month offering period. During fiscal 1997 and 1996, 26,792 and 29,718 shares, respectively, were purchased under the Stock Purchase Plan. The maximum cumulative number of shares that may be purchased under the Stock Purchase Plan is 100,240. The Company has reserved 1,508,813 shares of its common stock for potential conversion of common stock warrants and issuance under the stock option and purchase plans described above. 10. Income Taxes Income tax expense (credit) in the consolidated statement of operations consists of the following: Year ended November 30 1997 1996 1995 Current: Federal $(233) $(170) $(485) State - 80 10 ------- ------- -------- (233) (90) (475) Deferred (385) 202 554 ------- ------- -------- $(618) $112 $ 79 ======= ======= ======== The reconciliation of income tax expense (benefit) computed at the U.S. federal statutory rate to income tax expense (benefit) is:
Year ended November 30 1997 1996 1995 Tax at U.S. statutory rate of 34% $(945) $ 90 $ 71 State income taxes, net of federal benefit - 14 7 Nondeductible items - 112 82 Tax-exempt investment income - (13) (32) General business credits - (98) (69) Change in valuation allowance 329 - 22 Other (2) 7 (2) ------ ------- ------- $(618) $112 $ 79 ====== ======= =======
The significant components of the deferred tax accounts recognized for financial reporting purposes at November 30 were as follows: 1997 1996 Deferred tax liabilities: Capitalized computer software costs $3,087 $2,341 Depreciation 342 328 Other, net 16 15 ------- ------- Total deferred tax liabilities 3,445 2,684 Deferred tax assets: Net operating loss carryforwards 2,902 1,578 Allowance for doubtful accounts 185 108 Deferred revenue 127 72 Inventory 30 40 General business credit 442 448 carryforwards Other, net 88 53 ------- ------- Total deferred tax assets 3,774 2,299 Valuation allowance (329) - Net deferred tax liabilities $ - $ 385 ======= ======== At November 30, 1997, the Company had net federal and state operating loss carryforwards (NOLs) of approximately $6.8 million and $8.3 million, respectively, available to offset future federal and state taxable income. The utilization of $2,730,000 of the NOLs is subject to an annual limitation of approximately $182,000 annually and expires in the year 2010. The carryforwards resulted from the Company's acquisition of Intercim Corp. (Intercim) in 1995 and net operating losses. In addition, the Company has general business credits totaling $442,000 which can be used to reduce federal taxable income through 2011. In 1997, a valuation allowance equal to 100% of the net deferred tax assets has been recognized based on uncertainty regarding realization of such assets. 11. Savings Plan The Company has a defined contribution 401(k) savings plans that covers substantially all employees meeting certain minimum eligibility requirements. Participating employees can elect to defer a portion of their compensation and contribute it to the plan on a pretax basis. The Company also matches certain amounts and/or provides additional discretionary contributions, as defined. The Company's contributions to the various plans were $310, $345 and $246 for 1997, 1996 and 1995, respectively. Schedule II Valuation and qualifying accounts
COL. A COL. B COL. C COL. D COL. E Additions (1) (2) Charged to Charged to Balance at costs and other accounts- Deductions- Balance at end Description beginning of period expenses describe describe of period Years ended November 30, 1997 Deducted from Asset Accounts: Allowance for doubtful accounts $346.00 0 $120.00 $4.00 $462.00 Years ended November 30, 1996 Deducted from Asset Accounts: Allowance for doubtful accounts $262.00 0 $187.00 $103.00 $346.00 Years ended November 30, 1995 Deducted from Asset Accounts: Allowance for doubtful accounts $228.00 $44.00 $25.00 $35.00 $262.00 Years ended November 30, 1994 Deducted from Asset Accounts: Allowance for doubtful accounts $115.00 0 $178.00 $65.00 $228.00
Part III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable Item 10. Directors and Executive Officers of the Registrant Pursuant to Instruction G, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1998 annual meeting of shareholders under the captions "Election of Directors", "Executive Officers" and "Miscellaneous-Other Matters". The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 11. Executive Compensation Pursuant to Instruction G, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1998 annual meeting of shareholders under the caption "Board of Directors-Director Compensation" and "Executive Compensation"; provided, however, that the subsection entitled "Executive Compensation-Report on Executive Compensation" shall not be deemed to be incorporated herein by reference. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Pursuant to Instruction G, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1998 annual meeting of shareholders under the caption "Principal Shareholders". The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 13. Certain Relationships and Related Transactions Pursuant to Instruction G, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1998 annual meeting of shareholders under the caption "Related Party Transactions". The definitive proxy statement will be filed with the Securities and Exchange Commission with 120 days after the end of the Company's fiscal year. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 1. Exhibits Reference is made to the separate exhibit index contained on pages E- 1 through E-5 hereof. 2. Financial Statements and Financial Statement Schedules Reference is made to the separate index in Item 8 of this Annual Report on Form 10-K with respect to the financial statements and schedule filed herewith. 3. Reports on Form 8-K No Current Reports on Form 8-K were filed during the fourth quarter of the Company's fiscal year ended November 30, 1997. SIGNATURES In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 23, 1998. EFFECTIVE MANAGEMENT SYSTEMS, INC. By: /s/ Michael D. Dunham Michael D. Dunham President In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 23, 1998. Signature Title /s/ Michael D. Dunham President and Director Michael D. Dunham (Principal executive Officer) /s/ Jeffrey J. Fossum Chief Financial Officer and Assistant Jeffrey J. Fossum Treasurer (Principal Financial and Accounting Officer) /s/ Helmut M. Adam Director Helmut M. Adam /s/ Thomas M. Dykstra Director Thomas M. Dykstra /s/ Scott J. Mermel Director Scott J. Mermel /s/ Robert E. Weisenberg Director Robert E. Weisenberg INDEX TO EXHIBITS Exhibit Exhibit Description No. 2.1 Agreement and Plan of Merger, dated as of February 17, 1995 among Effective Management Systems, Inc., EMS Acquisition Corp. and Intercim Corporation [Incorporated by reference to Exhibit 2.1 to Effective Management Systems, Inc.'s Registration Statement on Form S-4 (Registration No. 33-95338)] 2.2 Amendment No. 1 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of June 30, 1995 [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc. Registration Statement on Form S-4 (Registration No. 33-95338)] 2.3 Amendment No. 2 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of July 31, 1995 [Incorporated by reference to Exhibit 2.3 to Effective management Systems, Inc.'s Registration Statement on Form S-4 (Registration No. 33-95338)] 2.4 Agreement of Merger, dated as of March 22, 1995, among Effective Management Systems, Inc., EMS Illinois Acquisition Corp., Effective Management Systems of Illinois, Inc., Richard W. Grelck and Daniel E. Long [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10- QSB for the quarter ended February 28, 1995] 3.1 Restated Articles of Incorporation of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.1 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 3.2 By-laws of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.1 Article 4 of the Restated Articles of Incorporation of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.1 of Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.2 Loan and Security Agreement, dated November 9, 1992, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliated [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.3 First Amendment to Loan and Security Agreement, dated April 23, 1993, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.3 to Effective Management Systems, Inc.'s Registration Statement on Forms SB-2 (Registration No. 33-73354)] 4.4 Second Amendment to Loan and Security Agreement, dated February 8, 1994, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.4 to Effective Management Systems, Inc.'s Registration Statement on Forms SB-2 (Registration No. 33-73354)] 4.5 Third Amendment to Loan and Security Agreement, dated May 11, 1995, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.1 to Effective Management systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 29, 1996] 4.6 Fourth Amendment to Loan and Security Agreement dated August 31, 1995, by and between Bank One, Milwaukee, National Association, and Effective Management systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 29, 1996] 4.7 Fifth Amendment to Loan and Security Agreement, dated August 31, 1995, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc., and certain affiliates. [Incorporated by reference to Form 10-KSB for the year ended November 30, 1996] 4.8 Sixth Amendment to Loan and Security Agreement, dated October 31, 1996, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc., and certain affiliates. [Incorporated by reference to Form 10-KSB for the year ended November 30, 1996] 4.9 Seventh Amendment to Loan and Security Agreement, dated February 27, 1997 by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc., and certain affiliates [Incorporated by reference to Exhibit 4.1 to Effective Management systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1997] 4.10 Eighth Amendment to Loan and Security Agreement dated July 11, 1997, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc., and certain affiliates [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1997] 4.11 Ninth Amendment to Loan and Security Agreement dated September 9, 1997 by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1997] 4.12 Tenth Amendment to Loan and Security Agreement dated September 30, 1997 by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1997] 4.13 Warrant Agreement between Effective Management Systems, Inc. and American Stock Transfer & Trust company, dated as of September 6, 1995 [Incorporated by reference to Exhibit 4.2 to Effective management Systems, Inc.'s Current Report on Form 8-K, dated September 6, 1995] 4.14 Loan and Security Agreement by and between Foothill Capital corporation and Effective Management Systems, Inc; EMS-East, Inc.; and Effective Management Systems of Illinois, Inc. dated December 31, 1997 10.1 Business Agreement by and between Digital Equipment Corporation and Effective Management Systems, Inc., effective as of February 8, 1994 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.2 Addendum to Business Agreement by and between Digital Equipment Corporation and Effective Management Systems, Inc., effective as of February 8, 1994 [Incorporated by reference to Exhibit 10.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.3 Value Added Reseller Agreement by and between Digital Information Systems corporation and Effective Management Systems, Inc., effective as of November 9, 1992 [Incorporated by reference to Exhibit 10.3 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 registration No. 33-73354)] 10.4 Domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of March 4, 1991 [Incorporated by reference to Exhibit 10.4 to Effective Management system, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.5 Amendment No. 1 to domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of October 29, 1991 [Incorporated by reference to Exhibit 10.5 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.6 Amendment No. 2 to Domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of June 11, 1993 [Incorporated by reference to Exhibit 10.6 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.7 Software Supplier Agreement dated August 6, 1994, by and between Effective Management Systems, Inc. and Hewlett Packard Company [Incorporated by reference to Exhibit 10.7 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.8 Joint Venture Agreement, dated September 15, 1985, by and between Effective Management Systems, Inc. and Joseph H. Schlanser, Aurinee M. Schansler and Barton R. Benjamin [Incorporated by reference to Exhibit 10.9 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.9 International Marketing Agreement, dated July 5, 1994, by and between Effective Management Systems, Inc. Systems, Inc. and Systems Technology Management Corporation [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.10 Lease by and between Effective Management Systems, Inc. and Milwaukee Park Place Limited Partnership, as amended [Incorporated by reference to Exhibit 10.10 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.11 Effective Management Systems, Inc. 1986 Employee's Stock Option Plan [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.12 Effective Management Systems, Inc. 1993 Stock Option Plan, as amended [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended May 31, 1996] 10.13 Stock Option Agreement by and between Helmut M. Adam and Effective Management Systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.13 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.14 Stock Option Agreement by and between Scott J. Mermel and Effective Management systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.14 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.15 Bonus Arrangement by and between Thomas G. Allen and Effective Management Systems, Inc. [Incorporated by reference to Exhibit 10.16 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.16 IBM Business Partner Agreement between International Business Machines Corporation and Effective Management Systems, Inc., dated as of March 3, 1995 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 28, 1995] 10.17 Software Reseller Agreement between International Business Machines corporation and Effective Management Systems, Inc., dated as of September 6, 1995 [Incorporated by reference to Exhibit 10.18 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1995] 10.18 Distributor Agreement with Pioneer Standard Electronics, Inc. [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1997] 10.19 IBM Market Development Program Agreement dated September 3, 1997 [Incorporated by reference to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1997] 10.20 Relationship Agreement with CIMX, an Ohio Limited Liability Company and Effective Management Systems, Inc. dated December 31, 1997 21 List of subsidiaries of Effective Management Systems, Inc. 23 Consent of Ernst & Young, LLP 27 Financial Data Schedule 99 Proxy Statement for 1998 Annual Meeting of Shareholders The Proxy Statement for the 1998 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Company's fiscal year; except to the extent incorporated by reference, the Proxy statement for the 1998 Annual Meeting of Shareholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K EX-4.14 2 LOAN AND SECURITY AGREEMENT by and among EFFECTIVE MANAGEMENT SYSTEMS, INC., EMS-EAST, INC., EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, INC. and FOOTHILL CAPITAL CORPORATION DATED AS OF DECEMBER 30, 1997 TABLE OF CONTENTS Page 1. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . 1 1.1. Definitions. . . . . . . . . . . . . . . . . . . . . 1 1.2. Accounting Terms. . . . . . . . . . . . . . . . . . . 13 1.3. Code. . . . . . . . . . . . . . . . . . . . . . 13 1.4. Construction. . . . . . . . . . . . . . . . . . . . . 13 1.5. Schedules and Exhibits. . . . . . . . . . . . . . . . 13 2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . 14 2.1. Revolving Advances. . . . . . . . . . . . . . . . . . 14 2.2. Letters of Credit. . . . . . . . . . . . . . . . . . 15 2.3. Term Loan. . . . . . . . . . . . . . . . . . . . . . 17 2.4. Intentionally Omitted. . . . . . . . . . . . . . . . 17 2.5. Overadvances. . . . . . . . . . . . . . . . . . . . . 17 2.6. Interest and Letter of Credit Fees: Rates, Payments, and Calculations. . . . . . . . . . . . . 17 2.7. Collection of Accounts. . . . . . . . . . . . . . . . 19 2.8. Crediting Payments; Application of Collections. . . . 19 2.9. Designated Account. . . . . . . . . . . . . . . . . . 20 2.10. Maintenance of Loan Account; Statements of Obligations. . . . . . . . . . . . . . . . . . . . . 20 2.11. Fees . . . . . . . . . . . . . . . . . . . . . . . . 20 3. CONDITIONS; TERM OF AGREEMENT. . . . . . . . . . . . . . . . 21 3.1. Conditions Precedent to the Initial Advance, Letter of Credit, the Term Loan, and the Initial Capital Expenditure Loan. . . . . . . . . . . . . . 21 3.2. Conditions Precedent to all Advances, all Letters of Credit and the Term Loan. . . . . . . . . . . . . 23 3.3. Condition Subsequent. . . . . . . . . . . . . . . . . 23 3.4. Term; Automatic Renewal. . . . . . . . . . . . . . . 24 3.5. Effect of Termination. . . . . . . . . . . . . . . . 24 3.6. Early Termination by Borrower. . . . . . . . . . . . 25 3.7. Termination Upon Event of Default. . . . . . . . . . 25 4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . 25 4.1. Grant of Security Interest. . . . . . . . . . . . . . 25 4.2. Negotiable Collateral. . . . . . . . . . . . . . . . 26 4.3. Collection of Accounts, General Intangibles, and Negotiable Collateral. . . . . . . . . . . . . . . . 26 4.4. Delivery of Additional Documentation Required. . . . 26 4.5. Power of Attorney. . . . . . . . . . . . . . . . . . 26 4.6. Right to Inspect. . . . . . . . . . . . . . . . . . . 27 5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . 27 5.1. No Encumbrances. . . . . . . . . . . . . . . . . . . 27 5.2. Eligible Accounts. . . . . . . . . . . . . . . . . . 27 5.3. Intentionally Omitted. . . . . . . . . . . . . . . . 27 5.4. Equipment. . . . . . . . . . . . . . . . . . . . . . 28 5.5. Location of Inventory and Equipment. . . . . . . . . 28 5.6. Inventory Records. . . . . . . . . . . . . . . . . . 28 5.7. Location of Chief Executive Office; FEIN. . . . . . . 28 5.8. Due Organization and Qualification; Subsidiaries. . . 28 5.9. Due Authorization; No Conflict. . . . . . . . . . . . 29 5.10. Litigation. . . . . . . . . . . . . . . . . . . . . 29 5.11. No Material Adverse Change. . . . . . . . . . . . . 30 5.12. Solvency. . . . . . . . . . . . . . . . . . . . . . 30 5.13. Employee Benefits. . . . . . . . . . . . . . . . . . 30 5.14. Environmental Condition. . . . . . . . . . . . . . . 30 5.15. Copyrights. . . . . . . . . . . . . . . . . . . . . 31 6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 31 6.1. Accounting System. . . . . . . . . . . . . . . . . . 31 6.2. Collateral Reporting. . . . . . . . . . . . . . . . . 31 6.3. Financial Statements, Reports, Certificates. . . . . 32 6.4. Tax Returns. . . . . . . . . . . . . . . . . . . . . 33 6.5. Guarantor Reports. . . . . . . . . . . . . . . . . . 33 6.6. Returns . . . . . . . . . . . . . . . . . . . . . . . 33 6.7. Title to Equipment. . . . . . . . . . . . . . . . . . 33 6.8. Maintenance of Equipment. . . . . . . . . . . . . . . 34 6.9. Taxes. . . . . . . . . . . . . . . . . . . . . . . . 34 6.10. Insurance. . . . . . . . . . . . . . . . . . . . . . 34 6.11. No Setoffs or Counterclaims. . . . . . . . . . . . . 35 6.12. Location of Inventory and Equipment. . . . . . . . . 35 6.13. Compliance with Laws. . . . . . . . . . . . . . . . 36 6.14. Employee Benefits. . . . . . . . . . . . . . . . . . 36 6.15. Leases. . . . . . . . . . . . . . . . . . . . . . . 37 6.16. Copyrights. . . . . . . . . . . . . . . . . . . . . 37 7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . 37 7.1. Indebtedness. . . . . . . . . . . . . . . . . . . . . 37 7.2. Liens . . . . . . . . . . . . . . . . . . . . . . . . 38 7.3. Restrictions on Fundamental Changes. . . . . . . . . 38 7.4. Disposal of Assets. . . . . . . . . . . . . . . . . . 38 7.5. Change Name. . . . . . . . . . . . . . . . . . . . . 38 7.6. Guarantee. . . . . . . . . . . . . . . . . . . . . . 38 7.7. Nature of Business. . . . . . . . . . . . . . . . . . 38 7.8. Prepayments and Amendments. . . . . . . . . . . . . . 39 7.9. Change of Control. . . . . . . . . . . . . . . . . . 39 7.10. Consignments. . . . . . . . . . . . . . . . . . . . 39 7.11. Distributions. . . . . . . . . . . . . . . . . . . . 39 7.12. Accounting Methods. . . . . . . . . . . . . . . . . 39 7.13. Investments. . . . . . . . . . . . . . . . . . . . . 39 7.14. Transactions with Affiliates. . . . . . . . . . . . 40 7.15. Suspension. . . . . . . . . . . . . . . . . . . . . 40 7.16. Compensation. . . . . . . . . . . . . . . . . . . . 40 7.17. Use of Proceeds. . . . . . . . . . . . . . . . . . . 40 7.18. Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. . . . . . . . 40 7.19. No Prohibited Transactions Under ERISA. . . . . . . 40 7.20. Financial Covenants. . . . . . . . . . . . . . . . . 41 7.21. Capital Expenditures. . . . . . . . . . . . . . . . 42 8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . 42 9. FOOTHILL'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . 44 9.1. Rights and Remedies. . . . . . . . . . . . . . . . . 44 9.2. Remedies Cumulative. . . . . . . . . . . . . . . . . 46 10. TAXES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . 46 11. WAIVERS; INDEMNIFICATION. . . . . . . . . . . . . . . . . . 47 11.1. Demand; Protest; etc. . . . . . . . . . . . . . . . 47 11.2. Foothill's Liability for Collateral. . . . . . . . . 47 11.3. Indemnification. . . . . . . . . . . . . . . . . . . 47 12. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . 48 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . . 49 14. DESTRUCTION OF BORROWERS' DOCUMENTS. . . . . . . . . . . . 49 15. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . 50 15.1. Effectiveness. . . . . . . . . . . . . . . . . . . . 50 15.2. Successors and Assigns. . . . . . . . . . . . . . . 50 15.3. Section Headings. . . . . . . . . . . . . . . . . . 50 15.4. Interpretation. . . . . . . . . . . . . . . . . . . 50 15.5. Severability of Provisions. . . . . . . . . . . . . 50 15.6. Amendments in Writing. . . . . . . . . . . . . . . . 51 15.7. Counterparts; Facsimile Execution. . . . . . . . . . 51 15.8. Revival and Reinstatement of Obligations. . . . . . 51 15.9. Integration. . . . . . . . . . . . . . . . . . . . . 51 15.10. Joint and Several Liability. . . . . . . . . . . . 51 SCHEDULES AND EXHIBITS Schedule P-1 Permitted Liens Schedule T-1 Calculation of Tangible Net Worth Schedule 5.7 Chief Executive Office and FEIN Schedule 5.8 Subsidiaries Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 6.12 Location of Inventory and Equipment Schedule 7.1 Indebtedness Schedule 7.14 Affiliate Transactions Exhibit C-1 Form of Compliance Certificate LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of December 30, 1997, among FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025- 3333 and EFFECTIVE MANAGEMENT SYSTEMS, INC. ("EMS"), a Wisconsin corporation, EMS-EAST, INC. ("EMS-East"), a Massachusetts corporation, and 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"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1. Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "Accounts" means, with respect to a Borrower, all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to such Borrower arising out of the sale or lease of goods or the rendition of services by such Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "AccuVal Appraisal" means that certain appraisal dated on or about November 19, 1997 prepared by AccuVal Associates, Incorporated with respect to Borrowers' Equipment. "Advances" has the meaning set forth in Section 2.1(a). "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 5% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agreement" has the meaning set forth in the preamble hereto. "Applicable Maintenance Revenue Amount" means, at any time, (i) during the period commencing on the Closing Date and ending on December 31, 1998, an amount equal to the product of 50% multiplied by the maintenance and support revenue recognized (in accordance with GAAP) by Borrowers during the most recently ended 3 month period (excluding the portion of deferred maintenance revenue in excess of one year) multiplied by 4, (ii) at any time during the period commencing on January 1, 1999 and ending on December 31, 1999, an amount equal to the product of 42.5% multiplied by the maintenance and support revenue recognized (in accordance with GAAP) by Borrowers during the most recently ended 3 month period (excluding the portion of deferred maintenance revenue in excess of one year) multiplied by 4, and (iii) at any time after December 31, 1999, an amount equal to the product of 35% multiplied by the maintenance and support revenue recognized (in accordance with GAAP) by Borrowers during the most recently ended 3 month period (excluding the portion of deferred maintenance revenue in excess of one year) multiplied by 4. "Authorized Person" means any officer or other employee of any Borrower. "Average Unused Portion of Maximum Revolving Amount" means, as of any date of determination, (a) the Maximum Revolving Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended, and any successor statute. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which any Borrower, any Subsidiary of any Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower's Books" means, with respect to a Borrower, all of such Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing such Borrower's properties or assets (including the Collateral) or liabilities; all information relating to such Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 20% of the total voting power of all classes of stock then outstanding of any Borrower entitled to vote in the election of directors. "Closing Date" means the date of the first to occur of the making of the initial Advance, the issuance of the initial Letter of Credit or the funding of the Term Loan. "Code" means the California Uniform Commercial Code. "Collateral" means, with respect to a Borrower, each of the following: such Borrower's Accounts, such Borrower's Books, such Borrower's Equipment, such Borrower's General Intangibles, such Borrower's Inventory, such Borrower's Negotiable Collateral, any money, or other assets of such Borrower that now or hereafter come into the possession, custody, or control of Foothill, and the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral of such Borrower, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgment agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance satisfactory to Foothill. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by the chief accounting officer of EMS to Foothill. "Copyright Security Agreement" means that certain Copyright Security Agreement of even date herewith between EMS and Foothill. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "deems itself insecure" means that the Person deems itself insecure in accordance with the provisions of Section 1208 of the Code. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means account number 20478851 of Borrowers maintained with Borrowers' Designated Account Bank, or such other deposit account of Borrowers (located within the United States) which has been designated, in writing and from time to time, by Borrowers to Foothill. "Designated Account Bank" means Bank One, Wisconsin, whose office is located at 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53201, and whose ABA number is 075000019. "Dilution" means, in each case based upon the experience of the immediately prior 3 months, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising, returns, promotions, credits, or other dilutive items (as determined by Foothill in its reasonable credit judgment) with respect to the Accounts of Borrowers by (b) Borrowers' Collections (excluding extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce Foothill's advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. "Disbursement Letter" means an instructional letter executed and delivered by Borrowers to Foothill regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Foothill. "Dollars or $" means United States dollars. "Early Termination Premium" has the meaning set forth in Section 3.6. "EBITDA" means, for any period, the consolidated operating income of Borrowers for such period, plus depreciation and amortization deducted in determining operating income for such period, minus amortization of capitalized software costs for such period. "Eligible Accounts" means those Accounts created by a Borrower in the ordinary course of business, that arise out of such Borrower's sale of goods or rendition of services, that strictly comply with each and all of the representations and warranties respecting Accounts made by Borrowers to Foothill in the Loan Documents, and that are and at all times continue to be acceptable to Foothill in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Foothill in Foothill's reasonable credit judgment. Eligible Accounts shall not include the following: Accounts of a Borrower that the Account Debtor has failed to pay within 90 days of invoice date or Accounts with selling terms of more than 30 days (provided, that Accounts unpaid more than 90 days of invoice date and with selling terms of greater than 30 days shall be Eligible Accounts up to an aggregate amount for all such Accounts of up to $500,000 to the extent (i) such Accounts are otherwise Eligible Accounts, (ii) such Accounts are not unpaid more than 180 days past invoice date, and (iii) such Accounts are not unpaid more than 30 days past due date; Accounts of a Borrower owed by an Account Debtor or its Affiliates where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) to Borrowers are deemed ineligible under clause (a) above; Accounts of a Borrower with respect to which the Account Debtor is an employee, Affiliate, or agent of a Borrower; Accounts of a Borrower with respect to which goods are placed on consignment, guaranteed sale (except for guaranteed sales in the ordinary course of Borrowers' business consistent with past practices that allow Account Debtors to return goods within 90 days of the date of contract for such goods), sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; Accounts of a Borrower that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Foothill (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Foothill and is directly drawable by Foothill, or (z) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill; Accounts of a Borrower with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which such Borrower has complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United States (exclusive, however, of Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); Accounts of a Borrower with respect to which the Account Debtor is a creditor of a Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account; Accounts of a Borrower with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; Accounts of a Borrower with respect to which the Account Debtor is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; Accounts of a Borrower the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; Accounts of a Borrower with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale; Accounts of a Borrower with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless such Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; Accounts of a Borrower that represent progress payments (except to the extent such progress payments relate to services and materials that have been provided to Account Debtor thereof) or other advance billings that are due prior to the completion of performance by such Borrower of the subject contract for goods or services; and Accounts of a Borrower arising under a maintenance or support contract. "Equipment" means, with respect to a Borrower, all of such Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any interest of such Borrower in any of the foregoing, and (b) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section Section 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of any Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of any Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which any Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with any Borrower and whose employees are aggregated with the employees of such Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of any Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of any Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by any Borrower or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Existing Lender" means Bank One, Wisconsin. "FEIN" means Federal Employer Identification Number. "Foothill" has the meaning set forth in the preamble to this Agreement. "Foothill Account" has the meaning set forth in Section 2.7. "Foothill Expenses" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrowers under any of the Loan Documents that are paid or incurred by Foothill; fees or charges paid or incurred by Foothill in connection with Foothill's transactions with any Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral or appraisals), real estate surveys, real estate title policies and endorsements, and environmental audits; costs and expenses incurred by Foothill in the disbursement of funds to any Borrower (by wire transfer or otherwise); charges paid or incurred by Foothill resulting from the dishonor of checks; costs and expenses paid or incurred by Foothill to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Foothill in examining any Borrower's Books; costs and expenses of third party claims or any other suit paid or incurred by Foothill in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Foothill's relationship with any Borrower or any guarantor; and Foothill's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning any Borrower or any guarantor of the Obligations), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means, with respect to a Borrower, all of such Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Indebtedness" means: (a) all obligations of a Borrower for borrowed money, (b) all obligations of a Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of a Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of a Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to such Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Inventory" means, with respect to a Borrower, all present and future inventory in which such Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of such Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "L/C" has the meaning set forth in Section 2.2(a). "L/C Guaranty" has the meaning set forth in Section 2.2(a). "Letter of Credit" means an L/C or an L/C Guaranty, as the context requires. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting real property. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the Copyright Security Agreement, the Trademark Security Agreement, the Stock Pledge Agreement, any note or notes executed by any Borrower and payable to Foothill, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean a depository account established pursuant to one of the Lockbox Agreements. "Lockbox Agreements" means those certain Lockbox Operating Procedural Agreements and those certain Depository Account Agreements, in form and substance satisfactory to Foothill, each of which is among Borrowers, Foothill, and one of the Lockbox Banks. "Lockbox Banks" means Bank One, Wisconsin. "Lockboxes" has the meaning set forth in Section 2.7. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of any Borrower, (b) the material impairment of any Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Foothill to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that Foothill would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment of the priority of Foothill's Liens with respect to the Collateral. "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. "Maximum Revolving Amount" means $9,000,000 less the then outstanding principal balance of the Term Loan. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which any Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means, with respect to a Borrower, all of such Borrower's present and future letters of credit, notes, drafts, instruments, investment property, security entitlements, securities (including the shares of stock of Subsidiaries of such Borrower), documents, personal property leases (wherein such Borrower is the lessor), chattel paper, and such Borrower's Books relating to any of the foregoing. "Obligations" means all loans (including, without limitation, the Term Loan), Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations under any outstanding Letters of Credit, premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by any Borrower to Foothill of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between Foothill and any Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from any Borrower to others that Foothill may have obtained by assignment or otherwise, and further including all interest not paid when due and all Foothill Expenses that any Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Overadvance" has the meaning set forth in Section 2.5. "Pay-Off Letter" means a letter, in form and substance reasonably satisfactory to Foothill, from Existing Lender respecting the amount necessary to repay in full all of the obligations of Borrowers owing to Existing Lender and obtain a termination or release of all of the Liens existing in favor of Existing Lender in and to the properties or assets of each Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Liens" means (a) Liens held by Foothill, (b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases and purchase money Liens of lessors under capital leases to the extent that the acquisition or lease of the underlying asset occurs after the Closing Date and is permitted under Section 7.21 and so long as the Lien only attaches to the asset purchased or acquired and only secures the purchase price of the asset, (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of any Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of a Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of a Borrower, and (i) Liens of or resulting from any judgment or award that would not have a Material Adverse Effect and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which a Borrower is in good faith prosecuting an appeal or proceeding for a review, and in respect of which a stay of execution pending such appeal or proceeding for review has been secured. "Permitted Protest" means the right of a Borrower to protest any Lien other than any such Lien that secures the Obligations, tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of such Borrower in an amount that is reasonably satisfactory to Foothill, (b) any such protest is instituted and diligently prosecuted by such Borrower in good faith, and (c) Foothill is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Foothill in and to the Collateral. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by any Borrower or with respect to which it may incur liability. "Reference Rate" means the variable rate of interest, per annum, most recently announced by Norwest Bank Minnesota, National Association, or any successor thereto, as its "base rate," irrespective of whether such announced rate is the best rate available from such financial institution. "Renewal Date" has the meaning set forth in Section 3.4. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Stock Pledge Agreement" means that certain Stock Pledge Agreement of even date herewith between EMS and Foothill. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Tangible Net Worth" means, as of any date of determination, the difference of (a) total stockholder's equity of Borrowers on a consolidated basis (exclusive of Total Management Systems, Inc., EMS-Asia Pacific Ltd., EMS of China Limited, EMS-Virgin Islands and EMS-Polska), minus (b) the sum of: (i) all Intangible Assets of Borrowers, (ii) all of Borrowers' prepaid expenses, and (iii) all amounts due to Borrowers from Affiliates. Schedule T-1 sets forth an example of the calculation of Tangible Net Worth based on Borrowers' projections for February 28, 1998. "Term Loan" has the meaning set forth in Section 2.3. "Trademark Security Agreement" means that certain Trademark Security Agreement of even date herewith between EMS and Foothill. "Voidable Transfer" has the meaning set forth in Section 15.8. 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrowers on a consolidated basis unless the context clearly requires otherwise. 1.3. Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Foothill. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. 1.5. Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1. Revolving Advances. (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 (z) the aggregate amount of reserves, if any, established by Foothill under Section 2.1(b). (b) Anything to the contrary in Section 2.1(a) above notwithstanding, Foothill may create reserves against the Borrowing Base or reduce its advance rates based upon Eligible Accounts without declaring an Event of Default (i) for any amount subject to a Permitted Protest, (ii) for amounts owing to landlords or similar Persons that could assert a statutory lien in respect of any of the Collateral, (iii) if in Foothill's reasonable determination any of the equipment listed in the Leasetec Letter or in the Hewlett-Packard Letter is listed in the AccuVal Appraisal, and/or (iii) if it determines in its reasonable credit judgment that there has occurred a Material Adverse Change. In addition to the foregoing reserves, Foothill shall establish an additional reserve of $1,500,000; provided, that upon satisfaction of the conditions subsequent set forth in Sections 3.3 (e), (f), (g) and (h), such reserve shall be reduced to $500,000, and upon satisfaction of the conditions set forth in Section 3.3(b) and (d), such reserve shall be reduced to zero. Notwithstanding the additional reserve described in the preceding sentence, the failure of Borrowers to satisfy any of the conditions subsequent set forth in Section 3.3 within the time constraints set forth therein shall constitute an Event of Default as set forth therein, and Foothill reserves the right to take such action as a result of any such Event of Default as Foothill is permitted under the terms of the Loan Documents. (c) Foothill shall have no obligation to make Advances hereunder to the extent they would cause the outstanding Obligations (other than under the Term Loan) to exceed the Maximum Revolving Amount. (d) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2. Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue letters of credit for the account of a Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty") with respect to letters of credit issued by an issuing bank for the account of a Borrower. Foothill shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the aggregate amount of all undrawn and unreimbursed Letters of Credit, would exceed the Borrowing Base less the amount of outstanding Advances; or (ii) the aggregate amount of all undrawn or unreimbursed Letters of Credit would exceed the lower of: (x) the Maximum Revolving Amount less the amount of outstanding Advances; or (y) $1,000,000; or (iii) the outstanding Obligations (other than under the Term Loan) would exceed the Maximum Revolving Amount. Each Borrower expressly understands and agrees that Foothill shall have no obligation to arrange for the issuance by issuing banks of the letters of credit that are to be the subject of L/C Guarantees. Each Borrower and Foothill acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall have an expiration date no later than 60 days prior to the date on which this Agreement is scheduled to terminate under Section 3.4 (without regard to any potential renewal term) and all such Letters of Credit shall be in form and substance acceptable to Foothill in its sole discretion. If Foothill is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such amount to Foothill and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances under Section 2.6. (b) Each Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill arising out of or in connection with any Letter of Credit. Each Borrower agrees to be bound by the issuing bank's regulations and interpretations of any Letters of Credit guarantied by Foothill and opened to or for a Borrower's account or by Foothill's interpretations of any L/C issued by Foothill to or for a Borrower's account, even though this interpretation may be different from such Borrower's own, and each Borrower understands and agrees that Foothill shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following any Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Each Borrower understands that the L/C Guarantees may require Foothill to indemnify the issuing bank for certain costs or liabilities arising out of claims by such Borrower against such issuing bank. Each Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by Foothill under any L/C Guaranty as a result of Foothill's indemnification of any such issuing bank. (c) Each Borrower hereby authorizes and directs any bank that issues a letter of credit guaranteed by Foothill to deliver to Foothill all instruments, documents, and other writings and property received by the issuing bank pursuant to such letter of credit, and to accept and rely upon Foothill's instructions and agreements with respect to all matters arising in connection with such letter of credit and the related application. Such Borrower may or may not be the "applicant" or "account party" with respect to such letter of credit. (d) Any and all charges, commissions, fees, and costs incurred by Foothill relating to the letters of credit guaranteed by Foothill shall be considered Foothill Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Foothill. (e) Immediately upon the termination of this Agreement, Borrowers agree to either (i) provide cash collateral to be held by Foothill in an amount equal to 102% of the maximum amount of Foothill's obligations under Letters of Credit, or (ii) cause to be delivered to Foothill releases of all of Foothill's obligations under outstanding Letters of Credit. At Foothill's discretion, any proceeds of Collateral of Borrowers received by Foothill after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.2(e). (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any governmental authority of any such applicable law, treaty, rule, or regulation, or (ii) compliance by the issuing bank or Foothill with any direction, request, or requirement (irrespective of whether having the force of law) of any governmental authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): (A) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letters of Credit issued hereunder, or (B) there shall be imposed on the issuing bank or Foothill any other condition regarding any letter of credit, or Letter of Credit, as applicable, issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining any letter of credit, or Letter of Credit, as applicable, or to reduce the amount receivable in respect thereof by such issuing bank or Foothill, then, and in any such case, Foothill may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrowers, and Borrowers shall pay on demand such amounts as the issuing bank or Foothill may specify to be necessary to compensate the issuing bank or Foothill for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate set forth in Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing bank or Foothill, as the case may be, of any amount due pursuant to this Section 2.2(f), as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.3. Term Loan. Foothill has agreed to make a term loan (the "Term Loan") to Borrowers in the original principal amount of $3,112,500, consisting of an advance of $3,000,000 and the closing fee of $112,500 described in Section 2.11(b). The Term Loan shall be repaid in 36 installments of principal each in the amount of $64,843.75 (except for the last such installment which shall be in the amount of the unpaid principal balance of the Term Loan). Each such installment shall be due and payable on the tenth day of each month commencing on the tenth day of February, 1998 and continuing on the tenth day of each succeeding month, and the final payment shall be on the third anniversary of the Closing Date. In addition to the foregoing, Borrowers shall make prepayments of principal of the Term Loan such that at all times the outstanding principal balance of the Term Loan is less than the Applicable Maintenance Revenue Amount. The outstanding principal balance and all accrued and unpaid interest under the Term Loan shall be due and payable upon the termination of this Agreement, whether by its terms, by prepayment, by acceleration, or otherwise. The unpaid principal balance of the Term Loan may be prepaid in whole or in part without penalty or premium at any time during the term of this Agreement upon 30 days prior written notice by Borrowers to Foothill. All prepayments of principal of the Term Loan shall be applied to the installments due on the Term Loan in the inverse order of their maturity. All amounts outstanding under the Term Loan shall constitute Obligations. 2.4. Intentionally Omitted. 2.5. Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrowers to Foothill pursuant to Sections 2.1 and 2.2 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 and 2.2 (an "Overadvance"), Borrowers immediately shall pay to Foothill, in cash, the amount of such excess to be used by Foothill first, to repay Advances outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash collateral to secure Borrowers' obligation to repay Foothill for all amounts paid pursuant to Letters of Credit. 2.6. Interest and Letter of Credit Fees: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in clause (b) below, (i) all Obligations (except for undrawn Letters of Credit and the Term Loan) shall bear interest at a per annum rate of 0.75 percentage points above the Reference Rate and (ii) the Term Loan shall bear interest at a per annum fixed rate of 13.5%. (b) Letter of Credit Fee. Borrowers shall pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.2(d)) equal to 1.00% per annum times the aggregate undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit and the Term Loan) shall bear interest at a per annum rate equal to 4.75% above the Reference Rate, (ii) the Term Loan shall bear interest at a per annum fixed rate equal to 17.5%, and (iii) the Letter of Credit fee provided in Section 2.6(b) shall be increased to 5% per annum times the amount of the undrawn Letters of Credit that were outstanding during the immediately preceding month. (d) Minimum Interest. In no event shall the rate of interest chargeable hereunder for any day be less than 7% per annum. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. To the extent that interest accrued hereunder at the rate set forth herein (including the minimum interest rate) would yield less than the foregoing minimum amount, the interest rate chargeable hereunder for the period in question automatically shall be deemed increased to that rate that would result in the minimum amount of interest being accrued and payable hereunder. (e) Payments. Interest and Letter of Credit fees payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Each Borrower hereby authorizes Foothill, at its option, without prior notice to any Borrower, to charge such interest and Letter of Credit fees, all Foothill Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued or incurred), the fees and charges provided for in Section 2.11 (as and when accrued or incurred), and all installments or other payments due under the Term Loan, or any Loan Document to Borrowers' Loan Account, which amounts thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (f) Computation. The Reference Rate as of the date of this Agreement is 8.5% per annum. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Each Borrower and Foothill, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from any Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7. Collection of Accounts. Borrowers shall at all times maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall instruct all Account Debtors with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrowers to remit all Collections in respect thereof to such Lockboxes. Borrowers, Foothill, and the Lockbox Banks shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrowers agree that all Collections and other amounts received by any Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall be modified by any Borrower without the prior written consent of Foothill. Upon the terms and subject to the conditions set forth in the Lockbox Agreements, all amounts received in each Lockbox Account shall be wired each Business Day into an account (the "Foothill Account") maintained by Foothill at a depository selected by Foothill. 2.8. Crediting Payments; Application of Collections. The receipt of any Collections by Foothill (whether from transfers to Foothill by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under Section 2.1, but shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Foothill Account or unless and until such Collection item is honored when presented for payment. From and after the Closing Date, Foothill shall be entitled to charge Borrowers for 2 Business Days of `clearance' or `float' at the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on all Collections that are received by Foothill (regardless of whether forwarded by the Lockbox Banks to Foothill, whether provisionally applied to reduce the Obligations under Section 2.1, or otherwise). This across-the-board 2 Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of Foothill's financing of Borrowers, and shall apply irrespective of the characterization of whether receipts are owned by any Borrower or Foothill, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging 2 Business Days of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Foothill only if it is received into the Foothill Account on a Business Day on or before 11:00 a.m. California time. If any Collection item is received into the Foothill Account on a non-Business Day or after 11:00 a.m. California time on a Business Day, it shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. 2.9. Designated Account. Foothill is authorized to make the Advances, the Letters of Credit and the Term Loan under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Borrowers agree to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by any Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and Borrowers, any Advance requested by any Borrower and made by Foothill hereunder shall be made to the Designated Account. 2.10. Maintenance of Loan Account; Statements of Obligations. Foothill shall maintain an account on its books in the name of Borrowers (the "Loan Account") on which Borrowers will be charged with all Advances made by Foothill to any Borrower or for Borrowers' account, including, accrued interest, Foothill Expenses, and any other payment Obligations of any Borrower. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Foothill from any Borrower or for Borrowers' account, including all amounts received in the Foothill Account from any Lockbox Bank. Foothill shall render statements regarding the Loan Account to Borrowers, including principal, interest, fees, and including an itemization of all charges and expenses constituting Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and Foothill unless, within 30 days after receipt thereof by Borrowers, Borrowers shall deliver to Foothill written objection thereto describing the error or errors contained in any such statements. 2.11. Fees. Borrowers shall pay to Foothill the following fees: (a) Closing Fee. A closing fee of $112,500 (which amount has been added to the Term Loan and will be paid as part of the amortization of the Term Loan); (b) Unused Line Fee. On the first day of each month during the term of this Agreement, an unused line fee in an amount equal to 0.50% per annum times the Average Unused Portion of the Maximum Revolving Amount. (c) Financial Examination, Documentation, and Appraisal Fees. Foothill's customary fee of $650 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrowers performed by personnel employed by Foothill; provided, that so long as no Event of Default exists, Borrowers shall not be liable for more than 20 days of examination fees in any fiscal year; Foothill's customary appraisal fee of $1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by personnel employed by Foothill (provided, that so long as no Event of Default exists, Borrowers shall not be liable for any appraisal fees incurred by Foothill after the date hereof); and, the actual charges paid or incurred by Foothill if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrowers or to appraise the Collateral; and, on each anniversary of the Closing Date, Foothill's customary fee of $1,000 per year for its loan documentation review; and (d) Servicing Fee. On the first day of each month during the term of this Agreement, and thereafter so long as any Obligations are outstanding, a servicing fee in an amount equal to $2,000 per month. 3. CONDITIONS; TERM OF AGREEMENT. 3.1. Conditions Precedent to the Initial Advance, Letter of Credit, the Term Loan, and the Initial Capital Expenditure Loan. The obligation of Foothill to make the initial Advance, to issue the initial Letter of Credit or to make the Term Loan is subject to the fulfillment, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before December 30, 1997; (b) Foothill shall have received searches reflecting the filing of its financing statements and fixture filings and each Borrower; (c) Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Lockbox Agreements; (ii) the Disbursement Letter; (iii) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination by Existing Lender of its Liens in and to the properties and assets of all Borrowers; and (iv) the Copyright Security Agreement, the Trademark Security Agreement and the Stock Pledge Agreement. (d) Foothill shall have received a certificate from the Secretary of each Borrower attesting to the resolutions of such Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Foothill shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Foothill shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Foothill shall have received certificates of status with respect to each Borrower, each dated within 15 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; (h) Foothill shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to Foothill and its counsel; (i) Foothill shall have received duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; (j) Foothill shall have received such Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Foothill may require; (k) Foothill shall have received an opinion of Borrowers' counsel in form and substance satisfactory to Foothill in its sole discretion; (l) Borrowers shall have registered all material copyrights and other intellectual property with the appropriate federal filing office; (m) Foothill shall have received background searches of the officers of Borrowers and be satisfied with the results thereof; (n) Foothill shall have received satisfactory evidence that all tax returns required to be filed by each Borrower have been timely filed and all taxes upon each Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; and (o) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 3.2. Conditions Precedent to all Advances, all Letters of Credit and the Term Loan. The following shall be conditions precedent to all Advances, all Letters of Credit and the Term Loan hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against any Borrower, Foothill, or any of their Affiliates. 3.3. Condition Subsequent. As a condition subsequent to initial closing hereunder, Borrowers shall perform or cause to be performed the following (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default): (a) within 30 days of the Closing Date, deliver to Foothill the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to Foothill and its counsel; (b) within 10 days of the Closing Date, deliver to Foothill a landlord waiver, in form and substance satisfactory to Foothill, executed by the landlord of the leased premises commonly known as 12000 West Park Place, Milwaukee, Wisconsin, and within 30 days of the Closing Date, deliver to Foothill landlord waivers in form and substance satisfactory to Foothill, executed by the landlords of the leased premises commonly known as 100 Foxborough Boulevard, Suite 230, Foxborough, Massachusetts, 1771 West Diehl Road, Suite 120, Naperville, Illinois and 501 East Highway 12, Burnsville, Minnesota; (c) within 15 days of the Closing Date, either deliver to Foothill a lockbox agreement in form and substance satisfactory to Foothill, executed by Old Second Bank of Aurora or replace the existing lockbox arrangement with Old Second Bank of Aurora with a lockbox arrangement satisfactory to Foothill; (d) within 10 days of the Closing Date, deliver to Foothill all of the original stock certificates of Total Management Systems, Inc. evidencing EMS's ownership thereof; (e) within 20 days of the Closing Date, deliver to Foothill UCC termination statements executed by each of International Business Machines Corporation and Digital Equipment Corporation with respect to UCC financing statement number 1502166 (dated April 19, 1995) filed with the Secretary of State of Wisconsin and UCC financing statement number 1380462 (dated September 20, 1993) filed with the Secretary of State of Wisconsin, respectively; (f) within 20 days of the Closing Date, deliver a letter (the "Leasetec Letter") executed by Leasetec Corporation, certifying that its security interest in any of the property of Borrowers is limited to the equipment specified in such letter; (g) within 20 days of the Closing Date, deliver a letter (the "Hewlett-Packard Letter") executed by Hewlett-Packard Company, certifying that its security interest in any of the property of Borrowers is limited to the equipment specified in such letter; and (h) within 30 days of the Closing Date, registration numbers for the TCM and FactoryNet copyrights filed by EMS with the Copyright Office. 3.4. Term; Automatic Renewal. This Agreement shall become effective upon the execution and delivery hereof by Borrowers and Foothill and shall continue in full force and effect for a term ending on the date (the "Renewal Date") that is three years from the Closing Date and automatically shall be renewed for successive one year periods thereafter, unless sooner terminated pursuant to the terms hereof. Either Borrowers or Foothill may terminate this Agreement effective on the Renewal Date or on any one year anniversary of the Renewal Date by giving the other parties at least 90 days prior written notice. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5. Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrowers of their duties, Obligations, or covenants hereunder, and Foothill's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Foothill's obligation to provide additional credit hereunder is terminated. If any Borrower has sent a notice of termination pursuant to the provisions of Section 3.4, but Borrowers fail to pay the Obligations in full on the date set forth in said notice, then Foothill may, but shall not be required to, renew this Agreement for an additional term of one year. 3.6. Early Termination by Borrower. The provisions of Section 3.4 that allow termination of this Agreement by Borrowers only on the Renewal Date and certain anniversaries thereof notwithstanding, Borrowers have the option, at any time upon 90 days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations (including an amount equal to 102% of the undrawn amount of the Letters of Credit), in full, together with a premium (the "Early Termination Premium") equal to (a) 3% of the Maximum Amount if such termination occurs on or before the first anniversary of the date hereof, (b) 2% of the Maximum Amount if such termination occurs after the first anniversary of the date hereof but on or before the second anniversary of the date hereof and (c) 1% of the Maximum Amount if such termination occurs after the second anniversary of the date hereof but before the third anniversary of the date hereof; provided, that if Borrowers refinance the facility provided for under this Agreement after the eighteen month anniversary of the date hereof with Norwest Bank, N.A. or any of its subsidiaries, the Early Termination Premium will be waived by Foothill. 3.7. Termination Upon Event of Default. If Foothill terminates this Agreement upon the occurrence of an Event of Default, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Foothill's lost profits as a result thereof, Borrowers shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrowers agree that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this Section 3.7 shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1. Grant of Security Interest. Each Borrower hereby grants to Foothill a continuing security interest in all currently existing and hereafter acquired or arising Collateral of such Borrower in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by each Borrower of each of its covenants and duties under the Loan Documents. Foothill's security interests in the Collateral shall attach to all Collateral without further act on the part of Foothill or any Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business and as permitted under Section 7.4, no Borrower has any authority, express or implied, to dispose of any item or portion of the Collateral. 4.2. Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrowers, immediately upon the request of Foothill, shall endorse and deliver physical possession of such Negotiable Collateral to Foothill. 4.3. Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time, Foothill or Foothill's designee may after the occurrence of an Event of Default, (a) notify customers or Account Debtors of a Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein, and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. Each Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any Collections that it receives and immediately will deliver said Collections to Foothill in their original form as received by such Borrower. 4.4. Delivery of Additional Documentation Required. At any time upon the request of Foothill, each Borrower shall execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Foothill reasonably may request, in form satisfactory to Foothill, to perfect and continue perfected Foothill's security interests in the Collateral, and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. 4.5. Power of Attorney. Each Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as such Borrower's true and lawful attorney, with power to (a) if any Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of such Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure in its reasonable credit judgment, sign such Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse such Borrower's name on any Collection item that may come into Foothill's possession, (e) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure in its reasonable credit judgment, notify the post office authorities to change the address for delivery of such Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to such Borrower, and to retain all mail relating to the Collateral and forward all other mail to such Borrower, (f) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure in its reasonable credit judgment, make, settle, and adjust all claims under such Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure in its reasonable credit judgment, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Foothill determines to be reasonable, and Foothill may cause to be executed and delivered any documents and releases that Foothill determines to be necessary. The appointment of Foothill as each Borrower's attorney, and each and every one of Foothill's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Foothill's obligation to extend credit hereunder is terminated. 4.6. Right to Inspect. Foothill (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect each Borrower's Books and to check, test, and appraise the Collateral in order to verify each Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Foothill to enter into this Agreement, each Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance, Letter of Credit or Term Loan made thereafter, as though made on and as of the date of such Advance, Letter of Credit or Term Loan (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1. No Encumbrances. Each Borrower has good and indefeasible title to its respective Collateral, free and clear of Liens except for Permitted Liens. 5.2. Eligible Accounts. The Eligible Accounts of each Borrower are bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of such Borrower's business, unconditionally owed to such Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor. No Borrower has received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any Account Debtor regarding any Eligible Account. 5.3. Intentionally Omitted. 5.4. Equipment. All of the Equipment of each Borrower is used or held for use in such Borrower's respective business and is fit for such purposes. 5.5. Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule 6.12 or otherwise permitted by Section 6.12. 5.6. Inventory Records. Each Borrower keeps correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and such Borrower's cost therefor. 5.7. Location of Chief Executive Office; FEIN. The address of each Borrower 's chief executive office and FEIN is as set forth on Schedule 5.7. 5.8. Due Organization and Qualification; Subsidiaries. (a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8, is a complete and accurate list of each Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by such Borrower. All of the outstanding capital stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (c) Except as set forth on Schedule 5.8, no capital stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock) of any direct or indirect Subsidiary of any Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. 5.9. Due Authorization; No Conflict. (a) The execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations G, T, U, and X of the Federal Reserve Board) applicable to such Borrower, the Governing Documents of such Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on such Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of such Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of such Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and mortgages, the execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the Loan Documents to which each Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by each Borrower to Foothill in and to its properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10. Litigation. There are no actions or proceedings pending by or against any Borrower before any court or administrative agency and none of the Borrowers has knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving any Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which any Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after the date hereof that, if decided adversely to any Borrower, would not have a Material Adverse Change. 5.11. No Material Adverse Change. All financial statements relating to each Borrower or any guarantor of the Obligations that have been delivered by such Borrower to Foothill have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present such Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and such Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to any Borrower (or such guarantor, as applicable) since the date of the latest financial statements submitted to Foothill on or before the Closing Date. 5.12. Solvency. Each Borrower is Solvent. No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of any Borrower. 5.13. Employee Benefits. No Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 5.13. Each Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. No Borrower or its Subsidiaries, any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. No Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 5.14. Environmental Condition. No Borrower's properties or assets has ever been used by such Borrower or, to the best of Borrowers' knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials. No Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by any Borrower. No Borrower has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by any Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15. Copyrights. Each Borrower has registered with the applicable federal filing office all copyrights and all works protectable by copyrights that account for more than 2% of its revenues or are otherwise material to its business. 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Foothill shall otherwise consent in writing, each Borrower shall do all of the following: 6.1. Accounting System. Maintain a standard and modern system of accounting that enables each Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Foothill. Each Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2. Collateral Reporting. Provide Foothill with the following documents at the following times in form satisfactory to Foothill: (a) on a weekly basis, a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, (b) on a monthly basis and, in any event, by no later than the 10th day of each month during the term of this Agreement (except for a month following the end of a fiscal quarter in which case no later than the 15th day of such month), (i) a detailed calculation of the Borrowing Base, and (ii) a detailed aging, by total, of the Accounts of each Borrower, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Foothill, and (iii) a detailed calculation of the Applicable Maintenance Revenue Amount as of the end of such month, (c) on a monthly basis and, in any event, by no later than the 10th day of each month during the term of this Agreement, a summary aging, by vendor, of each Borrower's accounts payable and any book overdraft, (d) on a weekly basis, notice of all returns, disputes, or claims, (e) upon request, copies of invoices in connection with the Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by each Borrower, purchase orders and invoices, (f) on a quarterly basis, a detailed list of each Borrower's customers, (g) on a monthly basis, a calculation of the Dilution for the prior month; and (h) such other reports as to the Collateral or the financial condition of each Borrower as Foothill may request from time to time. Original sales invoices evidencing daily sales shall be mailed by each Borrower to each Account Debtor and, at Foothill's direction after the occurrence of an Event of Default, the invoices shall indicate on their face that the Account has been assigned to Foothill and that all payments are to be made directly to Foothill. 6.3. Financial Statements, Reports, Certificates. Deliver to Foothill: (a) as soon as available, but in any event within 30 days after the end of each month during each of each Borrower's fiscal years, a company an internally prepared balance sheet, income statement, and statement of cash flow covering each Borrower's operations during such period; and (b) as soon as available, but in any event within 90 days after the end of each of each Borrower's fiscal years, financial statements of each Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Foothill and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together with a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. If a Borrower is a parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, such Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present such Borrower and each such related entity separately, and on a consolidated basis. Together with the above, each Borrower also shall deliver to Foothill such Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by such Borrower with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by such Borrower to its shareholders, and any other report reasonably requested by Foothill relating to the financial condition of such Borrower. Each month, together with the financial statements provided pursuant to Section 6.3(a), EMS shall deliver to Foothill a certificate signed by its chief financial officer to the effect that: (i) all financial statements delivered or caused to be delivered to Foothill hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition of each Borrower, (ii) the representations and warranties of each Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) for each month that also is the date on which a financial covenant in Sections 7.20 and 7.21 is to be tested, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Sections 7.20 and 7.21, and (iv) on the date of delivery of such certificate to Foothill there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any non-compliance, describing such non- compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto). Each Borrower shall have issued written instructions to its independent certified public accountants authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning such Borrower that Foothill may request. Such Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Foothill, at such Borrower's expense, copies of such Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information they may have regarding such Borrower's business affairs and financial conditions. 6.4. Tax Returns. Deliver to Foothill copies of each of each Borrower's future federal income tax returns, and any amendments thereto, within 30 days of the filing thereof with the Internal Revenue Service. 6.5. Guarantor Reports. Cause any guarantor of any of the Obligations to deliver its annual financial statements at the time when each Borrower provides its audited financial statements to Foothill and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.6. Returns. Cause returns and allowances, if any, as between each Borrower and its Account Debtors to be on the same basis and in accordance with the usual customary practices of such Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to a Borrower, such Borrower promptly shall determine the reason for such return and, if such Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to such Borrower, such Borrower promptly shall determine the reason for such return and, if Foothill consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. 6.7. Title to Equipment. Upon Foothill's request, each Borrower immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.8. Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Closing Date, no Borrower shall permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.9. Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against any Borrower or any of its property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. To the extent that a Borrower fails timely to make payment of such taxes or assessments, Foothill shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. Each Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Each Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that such Borrower has made such payments or deposits. 6.10. Insurance. (a) At its expense, keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Each Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to such Borrower's ownership and use of the Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Foothill. All insurance required herein shall be written by companies which are authorized to do insurance business in the State of California. All hazard insurance and such other insurance as Foothill shall specify, shall contain a California Form 438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.10 shall contain an agreement by the insurer that it will not cancel such policy except after 30 days prior written notice to Foothill and that any loss payable thereunder shall be payable notwithstanding any act or negligence of any Borrower or Foothill which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment. Borrowers shall deliver to Foothill certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (c) Original policies or certificates thereof satisfactory to Foothill evidencing such insurance shall be delivered to Foothill at least 30 days prior to the expiration of the existing or preceding policies. Each Borrower shall give Foothill prompt notice of any loss covered by such insurance, and Foothill shall have the right to adjust any loss. Foothill shall have the exclusive right to adjust all losses payable under any such insurance policies without any liability to any Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy including the insurance policies mentioned above, shall be paid over to Foothill to be applied at the option of Foothill either to the prepayment of the Obligations without premium, in such order or manner as Foothill may elect, or shall be disbursed to Borrowers under stage payment terms satisfactory to Foothill for application to the cost of repairs, replacements, or restorations. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default, Foothill shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Foothill shall determine. (d) No Borrower shall take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.10, unless Foothill is included thereon as named insured with the loss payable to Foothill under a standard California 438BFU (NS) Mortgagee endorsement, or its local equivalent. Each Borrower immediately shall notify Foothill whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Foothill. 6.11. No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of each Borrower without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.12. Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 6.12; provided, however, that Borrowers may amend Schedule 6.12 to add a new location so long as such amendment occurs by written notice to Foothill not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrowers provide any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provide to Foothill a Collateral Access Agreement. 6.13. Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a Material Adverse Change. 6.14. Employee Benefits. (a) Promptly, and in any event within 10 Business Days after any Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of the chief financial officer of such Borrower describing such ERISA Event and any action that is being taken with respect thereto by such Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Such Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within 3 Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by such Borrower, any of its Subsidiaries or, to the knowledge of Borrowers, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within 3 Business Days after receipt by such Borrower, any of its Subsidiaries or, to the knowledge of Borrowers, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Foothill, upon Foothill's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of any Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by any Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to any Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of any Borrower or its Subsidiaries under any Retiree Health Plan. 6.15. Leases. Pay when due all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that any Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Foothill shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. 6.16. Copyrights. Each Borrower will promptly register with the applicable federal filing office (a) all copyrights and all works protectable by copyrights that account for more than 2% of its revenues or are otherwise material to its business, (b) any material changes to copyrights that have already been registered by such Borrower with the applicable federal filing office, and (c) on an annual basis any changes to copyrights that have already been registered by such Borrower with the applicable federal filing office. 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, no Borrower will do any of the following without Foothill's prior written consent: 7.1. Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement, together with Indebtedness to issuers of letters of credit that are the subject of L/C Guarantees; (b) Indebtedness set forth on Schedule 7.1; (c) Indebtedness secured by Permitted Liens; and (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by any Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Foothill as those applicable to the refinanced Indebtedness. 7.2. Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(d) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3. Restrictions on Fundamental Changes. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 7.4. Disposal of Assets. Sell, lease, assign, transfer, or otherwise dispose of any of any Borrower's properties or assets other than sales of Inventory to buyers in the ordinary course of such Borrower's business as currently conducted; provided, that so long as no Event of Default exists, Borrowers' may dispose of obsolete or unuseful Equipment with a book value of up to $25,000 in any fiscal year to the extent the proceeds thereof are remitted to Foothill and applied to the Obligations in such order and manner as Foothill shall determine. 7.5. Change Name. Change any Borrower's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code), or identity, or add any new fictitious name. 7.6. Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of a Borrower or which are transmitted or turned over to Foothill. 7.7. Nature of Business. Make any change in the principal nature of any Borrower's business. 7.8. Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c) or (d). 7.9. Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10. Consignments. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.11. Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of any Borrower's capital stock, of any class, whether now or hereafter outstanding, except that each of EMS-East and EMS-Illinois may pay dividends to EMS. 7.12. Accounting Methods. Modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of any Borrower's accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or such Borrower's financial condition. Each Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13. Investments. Directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person. 7.14. Transactions with Affiliates. Except as described on Schedule 7.14, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of any Borrower except for transactions that are in the ordinary course of such Borrower's business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to such Borrower than would be obtained in an arm's length transaction with a non- Affiliate. 7.15. Suspension. Suspend or go out of a substantial portion of its business. 7.16. Compensation. Increase the annual fee or per-meeting fees paid to directors of Borrowers during any year by more than 15% over the prior year; pay or accrue total cash compensation, during any year, to officers and senior management employees of Borrowers in an aggregate amount in excess of 115% of that paid or accrued in the prior year. 7.17. Use of Proceeds. Use the proceeds of the Advances and the Term Loan made hereunder for any purpose other than (i) on the Closing Date, (y) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (z) to pay transactional costs and expenses incurred in connection with this Agreement, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18. Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Foothill and so long as, at the time of such written notification, Borrowers provide any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests and also provides to Foothill a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.19. No Prohibited Transactions Under ERISA. Directly or indirectly: (a) engage, or permit any Subsidiary of any Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of any Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate, or permit any Subsidiary of any Borrower to terminate, any Benefit Plan where such event would result in any liability of such Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of any Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of any Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of any Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that any Borrower, any Subsidiary of any Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of any Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of any Borrower, any of its Subsidiaries or any ERISA Affiliate in excess of $100,000. 7.20. Financial Covenants. Fail to maintain: (a) Tangible Net Worth. Tangible Net Worth as of the last day of any fiscal quarter set forth below of at least the amount set forth below opposite such fiscal quarter: Fiscal Quarter Amount February 28, 1998, May 31, $250,000 1998 and August 31, 1998 November 30, 1998, $500,000 February 28, 1999 and May 31, 1999 August 31, 1999 and the $750,000 last day of each fiscal quarter thereafter (b) EBITDA. EBITDA for any period set forth below of at least the amount set forth below opposite such period: Period Amount 3 month period ending ($500,000) February 28, 1998 6 month period ending May 0 31, 1998 9 month period ending 0 August 31, 1998 12 month period ending $1,000,000 November 30, 1998 and 12 month period ending February 28, 1999 12 month period ending May $1,500,000 31, 1999 and 12 month period ending on the last day of each fiscal quarter thereafter 7.21. Capital Expenditures. Make capital expenditures in any fiscal year set forth below in excess of the amount set forth opposite such fiscal year: Period Amount Fiscal year ending November $1,500,000 30, 1998 Fiscal year ending November $1,750,000 30, 1999 Fiscal year ending November $2,000,000 30, 2000 and each fiscal year thereafter 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1. If any Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Foothill, reimbursement of Foothill Expenses, or other amounts constituting Obligations); 8.2. If any Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between such Borrower and Foothill and such failure continues for 5 days; provided, that such 5 day period shall not apply in the case of (A) any failure to observe any such term, provision, condition, covenant or agreement which is not capable of being cured or which has been the subject of a prior failure within a 6 month period or (B) an intentional breach by a Borrower of any such term, provision, condition, covenant or agreement, or (C) the failure to observe or perform any of the covenants or provisions contained in Section 2.7, 6.10 or Section 7 of this Agreement or any covenants or agreements covering substantially the same matter as such sections in any of the other Loan Documents; 8.3. If there is a Material Adverse Change; 8.4. If any material portion of any Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5. If an Insolvency Proceeding is commenced by any Borrower; 8.6. If an Insolvency Proceeding is commenced against any Borrower and any of the following events occur: (a) any Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Foothill shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7. If any Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.8. If a notice of Lien, levy, or assessment is filed of record with respect to any of any Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of any Borrower's properties or assets and the same is not paid on the payment date thereof; provided, however, that such notice of Lien, levy or assessment shall not constitute an Event of Default under this Section 8.8 if such notice of Lien, levy or assessment is subject to a Permitted Protest and involves less than $25,000; 8.9. If a judgment or other claim becomes a Lien or encumbrance upon any material portion of any Borrower's properties or assets; 8.10. If there is a default in any material agreement to which any Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of any Borrower's obligations thereunder; 8.11. If any Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.12. If any warranty, representation, statement, or report made to Foothill by any Borrower or any officer, employee, agent, or director of any Borrower, is untrue or misleading in any material respect when made, or if any such warranty or representation is withdrawn; or 8.13. If the obligation of any guarantor under its guaranty or other third Person under any Loan Document is limited or terminated by operation of law or by the guarantor or other third Person thereunder, or any such guarantor or other third Person becomes the subject of an Insolvency Proceeding. 9. FOOTHILL'S RIGHTS AND REMEDIES. 9.1. Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default Foothill may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between any Borrower and Foothill; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Foothill, but without affecting Foothill's rights and security interests in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Foothill considers advisable, and in such cases, Foothill will credit Borrowers' Loan Account with only the net amounts received by Foothill in payment of such disputed Accounts after deducting all Foothill Expenses incurred or expended in connection therewith; (e) Cause each Borrower to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of such Borrower or in such Borrower's possession and conspicuously label said returned Inventory as the property of Foothill; (f) Without notice to or demand upon any Borrower or any guarantor, make such payments and do such acts as Foothill considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Collateral if Foothill so requires, and to make the Collateral available to Foothill as Foothill may designate. Each Borrower authorizes Foothill to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Foothill's determination appears to conflict with its security interests and to pay all expenses incurred in connection therewith. With respect to any of each Borrower's owned or leased premises, each Borrower hereby grants Foothill a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Foothill's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of any Borrower held by Foothill (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of Borrowers held by Foothill; (h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Foothill is hereby granted a license or other right to use, without charge, each Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and any Borrower's rights under all licenses and all franchise agreements shall inure to Foothill's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including any Borrower's premises) as Foothill determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Foothill shall give notice of the disposition of the Collateral as follows: (i) Foothill shall give Borrowers and each holder of a security interest in the Collateral who has filed with Foothill a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrowers as provided in Section 12, at least 10 days before the date fixed for the sale, or at least 10 days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrowers claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Foothill; (iii) If the sale is to be a public sale, Foothill also shall give notice of the time and place by publishing a notice one time at least 10 days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Foothill may credit bid and purchase at any public sale; and (m) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Borrowers. 9.2. Remedies Cumulative. Foothill's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Foothill shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Foothill of one right or remedy shall be deemed an election, and no waiver by Foothill of any Event of Default shall be deemed a continuing waiver. No delay by Foothill shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Foothill determines that such failure by such Borrower could result in a Material Adverse Change, in its discretion and without prior notice to any Borrower, Foothill may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrowers' Loan Account as Foothill deems necessary to protect Foothill from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Foothill deems prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses. Any such payments made by Foothill shall not constitute an agreement by Foothill to make similar payments in the future or a waiver by Foothill of any Event of Default under this Agreement. Foothill need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1. Demand; Protest; etc. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Foothill on which such Borrower may in any way be liable. 11.2. Foothill's Liability for Collateral. So long as Foothill complies with its obligations, if any, under Section 9207 of the Code, Foothill shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers. 11.3. Indemnification. Each Borrower shall pay, indemnify, defend, and hold Foothill and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). No Borrower shall have any obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or facsimile to Borrowers or to Foothill, as the case may be, at its address set forth below: If to Borrowers: c/o Effective Management Systems, Inc. 12000 West Park Place Milwaukee, Wisconsin 53224 Attn: Jeffrey Fossum Fax No. (414) 359-9011 with copies to: c/o Effective Management Systems, Inc. 12000 West Park Place Milwaukee, Wisconsin 53224 Attn: Richard Koenings, Esq. Fax No. (414) 359-9011 If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Business Finance Division Manager Fax No. (310) 478-9788 with copies to: GOLDBERG, KOHN, BELL, BLACK, ROSENBLOOM & MORITZ, LTD. 55 East Monroe Street Suite 3700 Chicago, Illinois 60603 Attn: Gary Zussman, Esq. Fax No. (312) 332-2196 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 12, other than notices by Foothill in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 days after the deposit thereof in the mail. Each Borrower acknowledges and agrees that notices sent by Foothill in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted facsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF EACH BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. EACH OF EACH BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF EACH BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWERS' DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill 4 months after they are delivered to or received by Foothill, unless a Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at such Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1. Effectiveness. This Agreement shall be binding and deemed effective when executed by each Borrower and Foothill. 15.2. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that no Borrower may assign this Agreement or any rights or duties hereunder without Foothill's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Foothill shall release any Borrower from its Obligations. Foothill may assign this Agreement and its rights and duties hereunder and no consent or approval by any Borrower is required in connection with any such assignment. Foothill reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Foothill's rights and benefits hereunder. In connection with any such assignment or participation, Foothill may disclose all documents and information which Foothill now or hereafter may have relating to any Borrower or any Borrower's business. To the extent that Foothill assigns its rights and obligations hereunder to a third Person, Foothill thereafter shall be released from such assigned obligations to Borrowers. 15.3. Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 15.4. Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Foothill or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 15.5. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 15.6. Amendments in Writing. This Agreement can only be amended by a writing signed by both Foothill and Borrowers. 15.7. Counterparts; Facsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by facsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by facsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 15.8. Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrowers or any guarantor of the Obligations or the transfer by either or both of such parties to Foothill of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Foothill is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Foothill is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Foothill related thereto, the liability of Borrowers or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 15.9. Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 15.10. Joint and Several Liability. (a) The obligation of the Borrowers hereunder and under the other Loan Documents are joint and several. (b) The liability of each Borrower hereunder and under the Loan Documents shall be absolute, unconditional and irrevocable irrespective of: (i) any lack of validity, legality or enforceability of this Agreement, or any other Loan Document as to any Borrower; (ii) the failure of Foothill (A) to enforce any right or remedy against any Borrower or any other Person (including any guarantor or any Borrower) under the provisions of this Agreement, any other Loan Documents or otherwise, or (B) to exercise any right or remedy against any guarantor of, or collateral security any Obligations; (iii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or other extension, compromise or renewal of any Obligations; (iv) any reduction, limitation, impairment or termination of any Obligations with respect to any Borrower for any reason including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and each Borrower hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations with respect to any Borrower; (v) any addition, exchange, release, surrender or nonperfection of any Collateral, or any amendment to or waiver or release or addition of, or consent to departure from any guaranty, held by any Foothill securing any of the Obligations; or (vi) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, any Borrower, any surety or any guarantor. Each Borrower agrees if such Borrower's joint and several liability hereunder, or if any liens securing such joint and several liability, would, but for the application of this sentence, be unenforceable under applicable law, such joint and several liability and each such lien shall be valid and enforceable to the maximum extent that would not cause such joint and several liability or such lien to be enforceable under applicable law, and such joint and several liability and such lien shall be deemed to have been automatically amended accordingly at all relevant times. To the maximum extent permitted by law, each Borrower hereby waives any defense arising by reason of any claim or defense based upon an election of remedies by Foothill including any defense based upon an election of remedies by Foothill under the provisions of Sections 580d and 726 of the California Code of Civil Procedure, or any similar law of California or any other jurisdiction. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH BORROWER HEREBY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By Title EMS-EAST, INC., a Massachusetts corporation By Title EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, INC., an Illinois corporation By Title FOOTHILL CAPITAL CORPORATION, a California corporation By Title EX-10.20 3 Exhibit 10.20 Relationship Agreement This Relationship Agreement (Agreement) is made and entered into as of the 31st day of December, 1997 by and between Effective Management Systems, Inc., a Wisconsin corporation, through its Intercim division with offices at 501 East Highway 13, Burnsville, MN 55337 (Intercim) and CIMx, an Ohio Liability Company with offices at 400 TechneCenter Drive, Cincinnati, OH 45150(Cimx). Recitals: Intercim and Cimx desire to enter into a relationship that leverages their respective products and services in such a way as to provide superior solutions to the manufacturing marketplace. Both parties have a operating philosophy that i) makes customer satisfaction their highest priority, ii) maintains the highest levels of integrity, and iii) pursues excellence in products and services. Cimx is engineering centric' with a focus and domain expertise on the manufacturing engineer while Intercim is manufacturing centric' with a focus and domain expertise on the production manager. Definitions. The following terms, when used in this Agreement shall have the following meanings "Products" means the application software, in object code form only, as updated from time to time and released for general use, including the official user documentation, in whatever media, released for general use with the application software, all as more particularly set forth on the attached Exhibit A, which is incorporated herein by this reference. "Support" means the support assistance provided relating to the Product on an annual basis, such as telephone support and updates, including corrections. "Services" means the services provided on a time and materials, project by project basis, relating to the Products, such as installation, consulting, training, and modifications. Authorizations. Cross Licensing. Each party hereby grants the other the non-exclusive, non-assignable, right to market the other's Products and sell its Services, utilizing agreement forms which comply with and are subject to the terms and conditions herein set forth. Each party reserves the right to decline any specific engagement for business reasons. To the extent any proposed license of the other's Product involves use outside the United States, the obligation to comply with any applicable export or import restrictions are those of the user first and the party obtaining the business second. Each parties' License Agreement attached as Exhibit C. All payments and currency conversions will be in U.S. dollars. All contracts will be in English language. Commitments. Engagement Registration Process. The procedures for notifying the Product owner of a prospect obtained by the other party and the resulting classification of such prospect for purposes of compensation are as set forth on the attached Exhibit B, which is incorporated herein by this reference. However, in case of a conflict as to priority of registration for compensation classification, the party who gave the first Product demonstration prior to a registration shall control. Source Code Escrow. Having in mind the parties' above referenced highest priority of customer satisfaction, each party will place their respective Product's source code in escrow with NBD Bank, N.A. of Indianapolis, IN or such other third party as they may agree, at their own cost, under the same form of escrow agreement which shall provide for source code release in the event that the party becomes insolvent or is unable or unwilling to support or competitively develop their Product. Sales Effort and Collateral. Both parties will develop and maintain their capability to market and sell the other party's Products consistent with effective high quality industry standards. Both parties will make available to the other any sales and marketing collateral, including demonstration copies, as may be reasonably requested. Product Support. Both parties will develop and maintain their capabilities to provide technical first line support for the other parties' Products they license consistent with high quality industry standards. Each party will provide reasonable back up support on its own Products where the other was the seller and is the first line support provider. Each Other's Practices, Customers, and Statements. Each party will use its best efforts to understand and respect the other party's business practices and customer commitments and obligations not in conflict with the express rights and obligations herein set forth. Consistent with this provision and the Recitals above, neither party will make any statements, warranties, or representations with respect to the other party, its Products, Support, Services, or operations except as authorized and in furtherance of this Agreement. Periodic Meetings and Reports. The parties will meet periodically each year for the purpose of reviewing all aspects of this relationship and ongoing planning and cooperation efforts. Training. With respect to selling and technical support capability, each party will provide, without a training charge, two day courses to the other party's sales people and three day courses to the other party's support people who will be acting as such with respect to the training party's Products. Payments. 4.1 Amounts. Amounts owing the Product owner on Product, Support, and Services sold by the other are due in the proportions called for under Exhibit B from all receipts of payments as and when received by the seller. Term. Initial Term. The initial Term of this Agreement shall be one year. Renewal. This Agreement shall automatically renew for additional one year Terms unless terminated in writing at least 90 days in advance of the end of any given Term. Non-Exclusivity and Non-competition. Non-Exclusivity. Nothing in this Agreement will preclude either party from entering into similar relationships with other parties in the same technology or business; however, any party doing so must first give the other party 60 day written notice of its intent to do so. Non-Competition. Neither party will develop a feature/function capability that would be considered to be in the domain expertise of the other party, as referenced in the recitals above, without first giving the other party 60 day written notice of its intent to do so. Warranty, Remedy, and Limitation of Liability. Warranty. The parties warrant that their respective Products will perform in substantial compliance with the material written product specifications as set forth in user documentation materials supplied with the Product to customers, for one year from the date of license. Corrections. The parties will promptly, upon written notification of a breach of the above warranty, work to resolve the problem. If unable to resolve within a reasonable period of time, the party owning the product in question will offer to refund the entire license and any services fees received from the client in question. Prompt and reasonable effort depends upon the severity of the problem to the customer's operations. Infringement. Each party warrants and represents that its Product, including the documentation and collateral provided hereunder, does not infringe the U.S. property rights of any third party and that it will indemnify and hold the other and its licensees harmless from any and all costs it incurs in connection with any such claim so long as such indemnified party promptly advises it of such a claim, turns over defense of such claim, and cooperates in the defense of any such claim. No Consequential Damages. Except as set forth above, there are no other warranties, express or implied, pertaining to the matters covered in this Agreement, and all such other warranties, including those of fitness for a purpose and merchantability, are hereby disclaimed. In no event shall either party be liable for any consequential, general, or special damages even though the parties may be aware of the possibility of such damages. In the event of a non-warranty breach of this Agreement by either party, the breaching party's sole obligation and the other's sole recovery shall be for its actual damages, not to exceed any fees it actually paid the breaching party pursuant to this Agreement. Confidentiality and Proprietary Property. Confidentiality. The parties acknowledge that their Products, documentation, business operations and plans, and other information which they will exchange and become aware of during the course of this relationship contain confidential and Trade Secret information. Each will maintain this information as confidential, treating it at least as carefully as it would its own confidential and Trade Secret information, and will only use it as authorized in the furtherance of this Agreement and will only disclose it to those in a need to know who are subject to a written confidentiality agreement consistent with this provision. Products provided to Licenses for internal use is not a breach of confidentiality. Proprietary Property. Each will use reasonably and normal efforts to procedurally protect the proprietary information of the other through use of proprietary notices and legends as requested. Each will notify the other of any suspected violations of the other's property rights by third parties that it becomes aware of. Neither will lay claim to the other's proprietary property. Public Disclosure. The parties will consult with each other before any public disclosure of information regarding the other. 9. Dispute Resolution Procedure. Management Effort. If a dispute arises between the parties arising out of or relating to this Agreement and the performance of their respective obligations hereunder, they shall first advise the other in writing of the matter and management of each shall meet to attempt to resolve the matter before taking any other action. Arbitration. If the parties are unable to resolve a dispute as above, it may only be settled in accordance with the Commercial Rules of the American Arbitration Association at the location closest to the party against whom the claim is filed and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 10. Termination. Termination Procedures. Both parties may terminate this Agreement upon 90 days written notice for convenience, and may terminate it upon 30 day written notice and cure period for other material breach except that, if the reason for termination is breach of confidentiality, insolvency, or failure to pay sums due, the notice and cure period shall be 10 days. After Termination. If the termination is for convenience, the party which did not choose to terminate the Agreement shall be able to complete, within a reasonable amount of time, all sales efforts in process where the prospect had received a demonstration of the Product prior to such notice. No termination will affect the rights previously granted to third party licensees in accordance with the terms of this Agreement. All ongoing obligations to such licensees shall continue to be performed by the party who made the sale. 11. General Provisions. Each Other's Employees. Neither party will directly or indirectly solicit, encourage, or hire any employees of the other during and for one year after the termination of this Agreement without the written consent of the other. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter, superseding any prior proposals or agreements, whether oral or written, all such prior agreements or understandings being hereby revoked. Any changes to this Agreement must be in writing, signed by the parties, and reference this Agreement. Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Minnesota. Further Actions. The parties agree to take any and all further actions, including the execution of documents required to fully effect the provisions and intent of this Agreement. In Witness Whereof, each party represents that it has full power and authority to enter into and perform this Agreement, that the person signing on behalf of each party has been properly authorized and empowered to do so, and that each has carefully reviewed it and consulted with such experts as each deemed necessary. Cimx: Intercim: By: ____________________________ By: ____________________________ Name: Anthony Cuilwik Name: Joseph Poirier Title: President Title: President, CEO Exhibit A Products: Intercim Products: FACTORYnet/R/ (Advanced application software, an integrated information management system for the entire factory floor Cimx Products: [ " " ] CS/CAPP( Client Server/Computer Aided Process Planning CS/TOOL( Client Server/Tool Management QCAP( Quality Characteristic Accountability Planning ShopBrowser( Web Enabled Shop Floor Viewing Best Practice Implementor( Generative Planning Exhibit B Registration Process: For those engagements that are applicable to this agreement, both parties will maintain a joint customers/prospects list identifying: 1. The type of engagement (per table 1) 2. The registering party 3. An estimate of each parties products and services involved in the sale 4. The next action needed to close the sale The joint list will be updated monthly, or as required, should a significant change occur. It is the responsibility of each party to notify the other party whenever a change or update is required.
Table 1 Engagement Nature of Engagement Compensation Services Prime/Sub Both parties have been 10% to 20% of the The prime will uplift involved in the selling product, depending the standard rates by cycle. The customer on the level of 25% to 35%. The prime wishes to have a single support provided, will provide "level 1 point of accountability as compensation to support". through one party, or Prime on sale of it is determined that Subs' product. this is the best way of serving this customer. OEM Either company acting 50% of the product Services provided to as an agent of the gross revenue paid the other party at other sells a deal that to agent who sells standard rates. includes both parties it. products. Leads Either company finds an 5% on product 0% on N/A opportunity that does services paid to not include their company providing products and/or decides the lead. not to pursue the engagement.
EX-21 4 Exhibit 21 List of Subsidiaries of Effective Management Systems, Inc. Name of Subsidiary Jurisdiction of Incorporation EMS-East, Inc. Massachusetts Effective Management Systems of Illinois, Inc. Illinois Total Management Systems, Inc. Ohio EMS-Asia Pacific, Ltd. Hong Kong EMS China, Ltd. Hong Kong EX-23 5 Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-79838) pertaining to the Effective Management Systems, Inc. 1994 Employee Stock Purchase Plan, the Registration Statement on Form S-8 (No. 33-78658) pertaining to the Effective Management Systems, Inc. 1993 Stock Option Plan and the Registration Statement on Form S-3 (No. 33-95816) pertaining to the registration of 550,000 shares of its common stock of our report dated January 16, 1998, with respect to the consolidated financial statements of Effective Management Systems, Inc. included in the Annual Report on Form 10-K for the year ended November 30, 1997. /s/ Ernst & Young LLP Ernst & Young LLP Milwaukee, Wisconsin February 25, 1998 EX-27 6
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR NOV-30-1997 DEC-01-1996 NOV-30-1997 14 0 12,832 462 280 13,726 9,359 5,442 28,797 11,941 0 0 0 41 12,532 28,797 4,112 42,645 3,260 45,046 377 0 352 (2,778) (618) (2,160) 0 0 0 (2,160) (.53) 0
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