-----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, CRXdaChWjaOpuLZSzfAApAHv74y2Mg/ItFiKCsqlRE6ss1IQOMCY5x1ooD5Ss2Se 6fsZQtQuAXxO5S/yjXZ1Zg== 0000897069-98-000383.txt : 19980716 0000897069-98-000383.hdr.sgml : 19980716 ACCESSION NUMBER: 0000897069-98-000383 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980715 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-Q SEC ACT: SEC FILE NUMBER: 000-23438 FILM NUMBER: 98666781 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10-Q 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO ____________ Commission file number 0-23438 Effective Management Systems, Inc. (Exact name of registrant as specified in its charter) Wisconsin 39-1292200 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 12000 West Park Place, Milwaukee, WI 53224 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (414) 359-9800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X___ No _______ Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding as of May 31, 1998 Common Stock, $.01 par value 4,082,955 EFFECTIVE MANAGEMENT SYSTEMS, INC. Form 10-Q May 31, 1998 INDEX PART 1 - FINANCIAL INFORMATION PAGE Item 1 Financial Statements Consolidated Balance Sheets at May 31, 1998 and November 30, 1997 3 Consolidated Statements of Operations Three and Six Months Ended May 31, 1998 and May 31, 1997 5 Consolidated Statements of Cash Flows - Six 6 Months Ended May 31, 1998 and May 31, 1997 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 17 PART II - OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders 18 Item 6 Exhibits and Reports on Form 8-K 18 SIGNATURES 20 PART I Financial Information Item 1 Financial Statements EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited except for November 30, 1997 amounts) ASSETS 31-May 30-Nov 1998 1997 CURRENT ASSETS Cash $231 $14 Accounts Receivable: Trade, less allowance for doubtful accounts 9,110 12,370 Related Parties 1,012 604 Inventories 266 280 Refundable Income Taxes 312 312 Deferred Income Taxes 0 0 Prepaid Expenses and Other Current Assets 349 146 ------- ------- TOTAL CURRENT ASSETS 11,280 13,726 LONG TERM ASSETS Computer Software, net 3,566 7,717 Investments in and Advances to Unconsolidated Joint Ventures 182 182 Equipment and Leasehold Improvements, net 3,478 3,917 Intangible Assets, net 2,327 2,444 Other Assets 795 811 -------- -------- TOTAL LONG TERM ASSETS 10,348 15,071 -------- -------- TOTAL ASSETS $21,628 $28,797 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited except for November 30, 1997 amounts) LIABILITIES AND STOCKHOLDERS' EQUITY 31-May 30-Nov 1998 1997 CURRENT LIABILITIES Accounts Payable $1,949 $2,272 Accrued Liabilities 2,373 2,773 Deferred Revenues 5,775 5,887 Customer Deposits 538 63 Current portion of Long-term Obligations 976 946 -------- -------- TOTAL CURRENT LIABILITIES 11,611 11,941 LONG TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 1,113 317 Long-term Obligations 5,219 3,966 Deferred Income Taxes 0 0 ------- -------- TOTAL LONG TERM LIABILITIES 6,332 4,283 Commitments and Contingencies 0 0 STOCKHOLDERS' EQUITY Preferred Stock, $.01 par value; authorized 3,000,000 shares; none issued or outstanding 0 0 Common Stock, $.01 par value; authorized 20,000,000 shares; issued 4,082,955 and 4,067,310 shares; outstanding 4,070,330 and 4,054,685 shares 41 41 Common Stock Warrants 4 4 Additional Paid- in Capital 11,369 11,328 Retained Earnings (Deficit) (7,669) 1,260 Cost of Common Stock in Treasury(12,625 shares) (60) (60) ------- ------- TOTAL STOCKHOLDERS' EQUITY 3,685 12,573 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,628 $28,797 ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) THREE MONTHS ENDED SIX MONTHS ENDED 31-May 31-May 31-May 31-May 1998 1997 1998 1997 NET REVENUES: Software license fees $4,372 $5,317 $9,707 $9,528 Services 4,532 4,020 8,771 8,266 Hardware 444 1,045 1,116 2,063 ------- ------- ------- ------- Total net revenues 9,348 10,382 19,594 19,857 COST OF PRODUCTS AND SERVICES Software license fees 1,381 1,485 3,104 2,662 Services 3,374 3,496 6,594 7,197 Hardware 353 724 880 1,606 ------- ------- ------- ------- Total cost of products and services 5,108 5,705 10,578 11,465 Selling and marketing expenses 3,401 3,463 7,026 6,844 General and administrative expenses 1,019 1,297 2,213 2,362 Product development expenses 684 492 1,521 1,196 Restructuring and Other Charges 6,836 0 6,836 0 ------- ------- ------- ------- Total costs and operating expenses 17,048 10,957 28,174 21,867 ------- ------- ------- ------- LOSS FROM OPERATIONS (7,700) (575) (8,580) (2,010) Other (Income)/ Expense Equity in (earnings)/loss of unconsolidated joint ventures (1) (4) (1) (2) Interest (income) (10) (13) (20) (28) Interest expense 184 92 337 167 ------- ------- ------ ------- 173 75 316 137 ------- ------- ------ ------- LOSS BEFORE INCOME TAXES (7,873) (650) (8,896) (2,147) Income tax (benefit) expense 0 (269) 33 (883) ------- ------- ------ ------- NET LOSS ($7,873) ($381) ($8,929) ($1,264) ======= ======= ====== ======= Loss per share - basic and diluted ($1.93) ($0.09) ($2.19) ($0.31) ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) SIX MONTHS ENDED 31-May 31-May 1998 1997 OPERATING ACTIVITIES Net Loss ($8,929) ($1,264) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 693 570 Amortization of capitalized computer software development costs 1891 1348 Equity in earnings of joint ventures 0 0 Goodwill Amortization 117 113 Deferred income taxes 0 0 Restructuring and Other Charges 6836 Changes in operating assets and liabilities: Accounts Receivable 2251 1112 Inventories and other current assets (560) (661) Accounts payable and other liabilities (1,106) (1,792) ------ ------ Total adjustments 10,122 690 ------ ------ Net cash provided by(used in) in operating activities 1193 (574) INVESTING ACTIVITIES Additions to equipment and leasehold improvements (254) (870) Proceeds from sale of securities - 504 Software development costs capitalized (2,063) (2,162) Other 17 (23) ------- ------- Net cash (used in) investing activities (2,300) (2,551) FINANCING ACTIVITIES Proceeds on long-term debt and other notes payable 1,283 2,455 Proceeds from sale of stock 41 82 ------ ------- Net cash provided by financing activities 1324 2537 ------ ------- Net increase(decrease) in cash $217 ($588) Cash-beginning of period $14 $866 ====== ====== Cash-end of period $231 $278 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1998 (Unaudited) (In Thousands) Note 1 - Basis of Presentation The accompanying consolidated interim financial statements included herein have been prepared by Effective Management Systems, Inc. (the "Company"), without an audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the information furnished for the three and six month periods ended May 31, 1998 and May 31, 1997 includes all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the six months ended May 31, 1998 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending November 30, 1998. It is suggested that the interim financial statements be read in conjunction with the audited consolidated financial statements for the year ended November 30, 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2 - Additional Financial Disclosure Equipment and leasehold improvements consisted of the following: 31-May-1998 30-Nov-1997 Gross $9,526 $9,359 Less: Accumulated Depreciation (6,048) (5,442) ------ ------ Net $3,478 $3,917 Allowance for doubtful accounts consisted of the following: 31-May-1998 30-Nov-1997 Balance $ 484 $ 462 Provision for doubtful accounts consisted of the following: 31-May-1998 30-Nov-1997 $ 26 $ 17 Note 3 - Net Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended May 31, 1998 1997 Denominator Denominator for basic earnings per share - weighted average common shares 4,080 4,041 Effect of dilutive securities - stock options and warrants 0 0 ------ ------ Denominator for diluted earnings per share - adjusted weighted average common shares 4,080 4,041 ====== ====== Six Months Ended May 31, 1998 1997 Denominator Denominator for basic earnings per share - weighted average common shares 4,077 4,031 Effect of dilutive securities - stock options and warrants 0 0 ------ ------ Denominator for diluted earnings per share - adjusted weighted average common shares 4,077 4,031 ====== ====== Note 4 - Restructuring and Other Charges In the second quarter of fiscal 1998, the Company recorded a restructuring charge aggregating $6,836 related to entering into a distribution arrangement with the Baan Company and cost reductions aimed at improving the Company's financial performance. The components of the restructuring charge are described below. The restructuring charge includes $553 relating to the closing of operations in the West and Southwest regions of the United States and $1,213 for the exit costs and software write-off related to international operations. The Company established a relationship with former employees who purchased 80% of EMS Asia Pacific, Inc., a former wholly owned subsidiary of the Company, to handle future Asian international operations. The Company is a 20% partner in the venture, but has no ongoing responsibilities to fund any future operations. EMS-Asia Pacific, Inc. is responsible for future support, translation efforts and other activities supporting the Asian marketplace. In return for these efforts, the Company will transfer all accounts receivable, fixed assets, and cash to EMS-Asia Pacific, Inc. In addition, the charge includes $2,656 for both the write-off of capitalized software pertaining to the large company market, which software the Company now obtains through its relationship with Baan, and the write-off of other software whose future value was impaired by restructuring actions. The charge also reflects costs of $1,841 associated with the write-off of capitalized software mainly related to technology, the future value of which was impaired by restructuring actions and management's assumptions regarding future technological changes. As part of the restructuring, the Company also reduced certain of its operating expenses primarily in development, marketing, and administration though the termination of employees and other expense reductions resulting in a charge of $573. Approximately $6,402 of the total charge will not result in future cash expenditures , and the Company expects that all material restructuring actions will be completed by the end of the third quarter of fiscal 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company recorded a decrease of 10.0% in net revenues and a net loss of $7,873,000 for the second quarter of fiscal 1998 compared with a net loss of $381,000 for the second quarter of fiscal 1997. The second quarter of fiscal 1998 does not reflect a tax benefit relating to the loss since because the Company is in a loss carryforward position for financial reporting purposes. On April 13, 1998, the Company announced a major restructuring plan in which the Company established a distribution relationship with the Baan Company (a software developer with over $800 million in revenues) and took steps to reduce expenses to improve the Company's financial performance (see Restructuring and Other Charges below). The Baan distribution relationship is intended to enhance the Company's ability to market its manufacturing execution systems (MES) to larger size prospects. The Company intends to continue selling its TCM/MES product line to small to medium sized manufacturers. On May 29, 1998, the Company announced an agreement with former employees to sell a majority position in the Company's Asian distribution subsidiary. The former employees have assumed operational control of the venture and will handle ongoing responsibilities for future support, translation and other efforts. Before the restructuring charges, the Company recorded a loss from operations of $864,000 for the second quarter of fiscal 1998 compared with a loss from operations of $575,000 for the second quarter of fiscal 1997. Software revenues were down 17.8% in the second quarter of fiscal 1998 compared to the same period in the prior year. Management believes this decrease in software revenues was mainly the result of the attention focused on the restructuring, including the Company's decision to withdraw from certain geographic markets. The Company expects the restructuring to be substantially completed during the third fiscal quarter of 1998. The aggregate savings in operating expenses attributable to the restructuring are estimated to be $1,400,000 per quarter, although not all of such savings will be immediately recognizable and such savings may be offset, in part, by other changes in the Company's operations. The results of the second quarter of 1998 do not reflect the savings in operating expenses for the entire period, since the restructuring efforts began on April 13, 1998. The Company recorded a decrease in net revenues of 1.3% and a net loss of $8,929,000 for the first half of fiscal 1998 compared with a net loss of $1,264,000 for the first half of fiscal 1997. Although the goal of the restructuring is to return the Company to profitability, no assurance can be given that these various measures will actually result in the achievement of this goal. The Company's long term success is also dependent on its ability to attract and retain a highly qualified sales, development and service staff. The Company has recently experienced attrition at rates higher than its historical experience. The Company has taken steps to curtail the attrition, but no assurance can be given that these steps will be successful or that further attrition will not materially impact the Company's financial performance. Results of Operations Total Revenues Net revenues were $9,348,000 for the three months ended May 31, 1998, which was a decrease of 10.1% from the $10,382,000 for the same quarter in the previous year. Net revenues were $19,594,000 for the six months ended May 31, 1998, which was a decrease of 1.3% from the $19,857,000 for the same period in the previous year. The overall decrease in revenues for the three months ended May 31, 1998 was attributable primarily to the attention and efforts spent planning and executing the restructuring plan. The mix of revenues comparing software, services and hardware revenues as a percentage of net revenues was 46.8%, 48.5%, and 4.7%, respectively, in the second quarter of fiscal 1998, as compared with 51.2%, 38.7%, and 10.1%, respectively, in the second quarter of fiscal 1997. The mix of revenues comparing software, services and hardware revenues as a percentage of net revenues was 49.5%, 44.8%, and 5.7%, respectively, in the first half of fiscal 1998, as compared with 48.0%, 41.6%, and 10.4%, respectively, in the first half of fiscal 1997. International revenues represented less than 10% of net revenues for all periods presented. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer software orders and market acceptance of new products. The Company has historically operated with little software backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on software orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees decreased 17.8% to $4,372,000 in the second quarter of fiscal 1998 from $5,317,000 in the second quarter of fiscal 1997. The decrease in software license fees was mainly attributable to the attention and efforts spent in the restructuring process. In addition, certain sales personnel have begun training in the Baan products now offered by the Company, which, in turn, has caused sales productivity to decrease. Management expects that this decrease in productivity will continue during the next two fiscal quarters and thereafter productivity is expected to increase. Software license fees increased 1.9% to $9,707,000 in the first half of fiscal 1998 from $9,528,000 in the first half of fiscal 1997. The increase was attributable to increasing revenues from the Company's TCM products. Service Revenues The Company offers a number of optional services to its customers, including such services as a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues increased to $4,532,000 for the three months ended May 31, 1998, as compared with $4,020,000 for the same period of the prior year. Service revenues increased to $8,771,000 for the six months ended May 31, 1998, as compared with $8,266,000 for the same period of the prior year. The Company has generated a growing backlog of service work, particularly in the Central region of the United States, and has increased recruiting efforts to hire additional service personnel. Hardware Revenues Hardware revenues decreased 57.5% to $444,000 in the second quarter of fiscal 1998 compared with $1,045,000 for the corresponding period of 1997. Hardware revenues decreased 45.9% to $1,116,000 in the first half of fiscal 1998 compared with $2,063,000 for the corresponding period of 1997. The decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware and the discontinuation of hardware sales to an affiliate of the Company, EMS Solutions, Inc. (a decrease of $66,000 and $241,000 from the second quarter and first half of 1997, respectively)(See General and Administrative Expense below). Management expects the trend of declining hardware sales to continue due to the increasing sales of software licenses operating on the Microsoft Windows NT platform. Hardware used with the Microsoft Windows NT platform is either generally already in place at the customer site or readily available from local suppliers who can also provide local support. Cost of Software License Fees The cost of software license fees as a percentage of related revenue was 31.6% for the second quarter of fiscal 1998, an increase from 27.9% for the corresponding period of 1997. The cost of software license fees as a percentage of related revenue was 32.0% for the first half of fiscal 1998, an increase from 27.9% for the corresponding period of 1997. Cost of software license fees is composed of both amortization of past investment in software development and the third party costs associated with the software revenues. Software amortization is related to past investment in software development and does not vary consistently with variations in software revenues. Software amortization accounted for an increase of 2.1% in the cost of software license fees as a percentage of software license fee revenues for the second quarter of fiscal 1998 as compared to the second quarter of fiscal 1997. Software amortization accounted for an increase of 2.5% in the cost of software license fees as a percentage of software license fee revenues for the first half of fiscal 1998 as compared to the first half of fiscal 1997. The Company wrote off a substantial portion of its past investment in software development in conjunction with its restructuring efforts. (See Restructuring and Other Charges below). Software amortization will decrease in future fiscal quarters as a result of the amounts written off of previously capitalized development costs in the restructuring. The cost of software license fees is also dependent on the level of third party costs associated with certain software revenues and includes such items as purchased licenses and other components. The remaining increases in the cost of software license fees as a percentage of related revenue was due to these third party costs. Cost of Services The cost of services as a percentage of related revenue decreased to 74.5% for the three months ended May 31, 1998 as compared with 87.0% for the same quarter in the previous year. The cost of services as a percentage of related revenue decreased to 75.2% for the six months ended May 31, 1998 as compared with 87.1% for the same period in the previous year. The decrease was mainly due to increased levels of customer billing generated by existing personnel. The Company has experienced increased levels of service business from its customer base and a reduction in employees through attrition. The current backlog has grown to the point where the Company has begun efforts to hire additional service personnel. Management expects the cost of services as a percentage of related revenue to increase slightly with the additional training costs associated with the hiring of new personnel. The Company has also refocused its service staff to reduce the level of non-billable projects and increase the level of billable customer work. The Company has also taken further steps to reduce the level of customer warranty work by enhancing the quality of its software through improved internal processes. Cost of Hardware The cost of hardware as a percentage of related revenue increased to 79.5% in the second quarter of fiscal 1998 from 69.3% in the second quarter of fiscal 1997. The cost of hardware as a percentage of related revenue increased to 78.9% in the first half of fiscal 1998 from 77.8% in the first half of fiscal 1997. The cost of hardware as a percentage of related revenue varies with the size of the system, the margin mix of items comprising the system being sold, and the competitive pressure of the customer sale. The cost of hardware as a percentage of related revenue also varies with the amount of low margin hardware sales to affiliates. Hardware sales to affiliates declined by $61,000 in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997 and declined by $226,000 in the first half of fiscal 1998 compared to the first half of fiscal 1997. Selling and Marketing Expenses Selling and marketing expenses decreased $62,000, or 1.8%, from $3,463,000 in the second quarter of fiscal 1997 to $3,401,000 in the second quarter of fiscal 1998. This decrease was mainly due to reduction in staffing in the marketing area as a result of the restructuring (See Restructuring Charges below). Selling and marketing expenses increased $182,000, or 2.7%, from $6,844,000 in the first half of fiscal 1997 to $7,026,000 in the first half of fiscal 1998. This increase in selling and marketing expenses was mainly due to increased levels of compensation related to the corresponding growth in software revenues. General and Administrative Expenses General and administrative expenses decreased $278,000, or 21.4%, from $1,297,000 in the second quarter of fiscal 1997 to $1,019,000 in the second quarter of fiscal 1998. General and administrative expenses decreased $149,000, or 6.7%, from $2,362,000 in the first half of fiscal 1997 to $2,213,000 in the first half of fiscal 1998. The decrease in general and administrative expenses was mainly due to a reduction of expense related to the restructuring. (See Restructuring and Other Charges below). As a percentage of net revenues, general and administrative expenses were 10.9% and 12.5% in the second quarter of fiscal 1998 and 1997, respectively. As a percentage of net revenues, general and administrative expenses were 11.3% and 11.9% in the first half of fiscal 1998 and 1997, respectively. During the third quarter of fiscal 1997, the Company discontinued the practice of providing office space, accounting and administrative services, computer processing time, and other miscellaneous services to EMS Solutions, Inc., an affiliated entity. EMS Solutions, Inc. now operates as a stand-alone entity with no material ongoing relationship with the Company. Product Development Expense Product development expense increased 39.0% from $492,000 in the second quarter of fiscal 1997 to $684,000 in the second quarter of fiscal 1998. Product development expense increased 27.2% from $1,196,000 in the first half of fiscal 1997 to $1,521,000 in the first half of fiscal 1998. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $979,000 of product development costs in the second quarter of fiscal 1998 compared to $1,224,000 in the second quarter of fiscal 1997. The Company capitalized $1,987,000 of product development costs in the first half of fiscal 1998 compared to $2,162,000 in the first half of fiscal 1997. With the completion of two major development projects and with the cessation of development of software products for large customers which software is now supplied through the relationship with Baan, the Company has reduced the level of investment in product development. (See Restructuring Charges below). Restructuring and Other Charges In the second quarter of fiscal 1998, the Company recorded a restructuring charge of $6,836,000 related to entering into a new distributor arrangement for manufacturing software, and a reduction of costs focused on improving the Company's financial performance. On April 10, 1998, the Company signed an agreement to resell the manufacturing software of the Baan Company, a developer of software for the manufacturing industry. The Company intends to combine its manufacturing execution software (MES) with the Baan software product to serve the high end of the manufacturing mid-market. The Company has the right to represent the Baan product in the entire United States, but will focus its offering in a 19- state market including much of the Midwest and Eastern regions of the United States. The components of the charges are described below. The restructuring charge includes $553,000 relating to the refocusing of the Company's geographic markets and the closing of operations in the West and Southwest regions of the United States. From a geographic standpoint, the charge also includes $1,213,000 for exit costs and software write-off related to international operations. The Company established a relationship with former employees who purchased 80% of EMS Asia Pacific, Inc., a former wholly owned subsidiary of the Company, to handle future Asian international operations. The Company is a 20% partner in the venture, but has no ongoing responsibilities to fund any future operations. EMS-Asia Pacific, Inc. is responsible for future support, translation efforts and other activities supporting the Asian marketplace. In return, the Company will transfer all accounts receivable, fixed assets, and cash to EMS-Asia Pacific, Inc. In line with the introduction of the new product for the high end of the mid-market, the Company is refocusing its current TCM product to the lower end of the mid-market and will continue to develop and support the product for this marketplace. The Company also intends to provide a path to the Baan product offering for those customers who are or may grow into the need for a larger company solution. The charge includes $2,656,000 for both the write-off of capitalized software pertaining to large company functionality which will now be supplied through the Baan product offering and the write-off of other software whose future value was impaired by restructuring actions. The charge also reflects costs of $1,841,000 associated with the write-off of capitalized software mainly related to technology, the future value of which was impaired by restructuring actions and management's assumptions regarding future technological changes. The Company also reduced certain of its operating expenses primarily in development, marketing, and administration though the termination of employees and other expense reductions resulting in a charge of $573,000. Management expects the level of remaining personnel to be sufficient in these areas for the short term to provide positive results within the Company's new strategy and positive results for all new and established customers. The aggregate savings in operating expenses attributable to the restructuring are estimated to be $1,400,000 per quarter, although not all of such savings will be immediately recognizable and such savings may be offset, in part, by other changes in the Company's operations. Approximately $6,402,000 of the total charge will not result in future cash expenditures, and the Company expects that all material restructuring actions will be completed by the end of the third quarter of fiscal 1998. Other Income\Expense-Net Other income\expense-net was $173,000 of expense for the second quarter of fiscal 1997 compared to $75,000 of expense for the second quarter of fiscal 1998. Other income\expense-net was $137,000 of expense for the first half of fiscal 1997 compared to $316,000 of expense for the first half of fiscal 1998. The increase in the level of expense was mainly the result of an increase in interest expense as a result of increased borrowings under the Company's borrowing facility. Income Tax No income tax benefit was recorded for the second quarter of fiscal 1998 compared to a benefit of $269,000 for the second quarter of fiscal 1997. A small tax expense of $33,000 (for state and local taxes) and no income tax benefit was recorded for the first half of fiscal 1998 compared to a benefit of $883,000 for the first half of fiscal 1997. At May 31, 1998, the Company, for financial reporting purposes, is in a tax loss carryforward position. Generally accepted accounting principles prohibit the Company from recording a tax benefit under these circumstances. Liquidity and Capital Resources At May 31, 1998, the Company had cash and marketable securities aggregating $231,000. During the first half of fiscal 1998, the Company's operating activities provided $1,117,000 of cash compared to using $574,000 of cash for the same period of the prior year. This decrease in the use of cash was mainly attributable to the Company's reduction in accounts receivable, and an increase in non-cash charges to operating income. Investing activities used cash of $2,300,000 in the first half of fiscal 1998 compared to using $2,551,000 of cash in the first half of fiscal 1997. The principal use of the cash in the first half of fiscal 1998 was $2,063,000 for capitalized product development. The principal uses of cash in the first half of fiscal 1997 included $2,162,000 for capitalized product development and $870,000 for purchases of equipment and furniture. Financing activities provided $1,324,000 of cash in the first half of fiscal 1998 compared with providing $2,537,000 of cash in the first half of fiscal 1997. The cash provided in fiscal 1998 mainly reflected borrowings under the Company's borrowing facility. As of May 31, 1998, the Company, based on the level of of eligible accounts receivables, had $1,930,000 of availability under its $6,000,000 line of credit. On May 8, 1998, the Company amended its agreement with Foothill Capital Corporation to allow an additional availability amount up to $750,000 beyond the current arrangement through August 31, 1998. The availability of $1,930,000 under the line of credit facility at May 31, 1998 includes the $750,000 from the amended agreement. As of July 10, 1998, the Company had $397,000 of availability under its line of credit. The Company's credit agreement with Foothill Capital Corporation contains certain restrictive covenants relating to income (EBITDA), tangible net worth, and level of capital expenditures. On May 8, 1998 and July 9, 1998, the Company obtained waivers from the lender as a result of its failure to meet the tangible net worth and EBITDA covenants. In order to meet covenants in the future, the Company will need positive operational results in the short term. In the event that the Company's performance does not improve in the short term, the Company will need to secure additional waivers and/or alternative sources of financing. The Company is reviewing alternative sources of financing to deal with its current financial status. Although management believes that waivers and/or additional financing can be obtained, if needed, no assurance can be given that waivers or such additional financing will be available to the Company on acceptable terms. In the event that the Company is unable to secure necessary waivers or additional financing, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund continuing operations at current levels. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD- LOOKING STATEMENTS. SUCH UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, PRODUCT DEMAND AND MARKET ACCEPTANCE FOR THE COMPANY'S AND THIRD PARTY SUPPLIED PRODUCTS; THE COMPANY'S ABILITY TO SUCCESSFULLY IMPLEMENT ITS RESTRUCTURING PLAN; THE COMPANY'S ABILITY TO SUCCESSFULLY TRANSITION TO THE BAAN PRODUCT OFFERINGS; THE IMPACT OF COMPETITIVE PRODUCTS; THE COMPANY'S ABILITY TO MAINTAIN EFFICIENT MARKETING AND DISTRIBUTION OPERATIONS WITH RESPECT TO NEW PRODUCTS; FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS; THE COMPANY'S ABILITY TO RETAIN KEY TECHNICAL AND MANAGEMENT PERSONNEL; THE COMPANY'S SUCCESS IN IMPROVING ITS FINANCIAL PERFORMANCE; TO THE EXTENT NECESSARY, THE COMPANY'S ABILITY TO SECURE AMENDMENTS, WAIVERS AND/OR REFINANCING OR EXTENSION OF ITS LINE OF CREDIT; TIMING OF PRODUCT DEVELOPMENT; PRODUCT PRICING AND OTHER FACTORS DETAILED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. Item 3. Quantitative and Qualitative Disclosure about Market Risk Not Applicable Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders held on April 30, 1998, Helmut Adam and Michael D. Dunham were elected as directors of the Company for terms expiring at the annual meeting in 2001. The following table sets forth certain information with respect to the election of Messrs. Adam and Dunham as directors at the annual meeting: Name of Nominee Shares Voted For Shares Withholding Authority Helmut M. Adam 3,608,353 16,732 Michael D. Dunham 3,608,353 16,732 The following table sets forth the other directors of the Company whose terms continued after the 1998 annual meeting: Name of Director Term Expires Scott J. Mermel 1999 Robert E. Weisenberg 1999 Thomas M. Dykstra 2000 At the annual meeting, shareholders also approved the Effective Management Systems, Inc. 1998 Employee Stock Purchase Plan (the "1998 Plan") and the Effective Management Systems, Inc. 1993 Stock Option Plan, as amended (the "1993 Plan"). The votes For and Against and Abstentions with respect to the 1998 Plan were 2,417,225, 22,301, and 19,928, respectively, and the broker non-votes totaled 1,165,631. The votes For and Against and Abstentions with respect to the 1993 Plan were 2,381,757, 53,879, and 23,818, respectively, and the broker non-votes totaled 1,165,631. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Waiver and First Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS- East, Inc., and Effective Management Systems of Illinois, Inc., dated May 8, 1998. 4.2 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated July 9, 1998. 10.1 Reseller Agreement and Addendum Number One by and between Baan Midmarket Solutions, LLC and Effective Management Systems, Inc., dated April 10, 1998. 10.2 Distribution Agreement between EMS Asia Pacific Limited and Effective Management Systems, Inc. dated May 29, 1998 10.3 Effective Management Systems, Inc. 1993 Stock Option Plan, as amended 27 Financial Data Schedule [EDGAR version only] (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EFFECTIVE MANAGEMENT SYSTEMS, INC. July 14, 1998 By: /s/ MICHAEL D. DUNHAM Michael D. Dunham President (principal executive officer) By: /s/JEFFREY J. FOSSUM Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer (principal financial and accounting officer) Exhibit Index Exhibit Number 4.1 Waiver and First Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS- East, Inc., and Effective Management Systems of Illinois, Inc., dated May 8, 1998. 4.2 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated July 9, 1998. 10.1 Reseller Agreement and Addendum Number One by and between Baan Midmarket Solutions, LLC and Effective Management Systems, Inc., dated April 10, 1998. 10.2 Distribution Agreement between EMS Asia Pacific Limited and Effective Management Systems, Inc. dated May 29, 1998 10.3 Effective Management Systems, Inc. 1993 Stock Option Plan, as amended 27 Financial Data Schedule [EDGAR version only] EX-4.1 2 WAIVER AND FIRST AMENDMENT TO LOAN AGREEMENT THIS WAIVER AND FIRST AMENDMENT (this "Amendment") is entered into as of May 8, 1998, among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of Illinois, Inc. ("EMS- Illinois"), an Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement dated as of December 30, 1997 (the "Loan Agreement"); WHEREAS, Borrowers have executed a Secured Promissory Note dated December 30, 1997 (the "Note"); WHEREAS, Borrowers have requested that Lender consent to the deferral of the two installment payments of principal due on May 10, 1998 and June 10, 1998 under the Note until the third anniversary of the Closing Date (as defined in the Loan Agreement); and WHEREAS, Borrowers have requested that Lender amend the Loan Agreement, and Lender has agreed to do so subject to the terms and conditions contained herein; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Consent. Subject to the satisfaction of the conditions set forth in Section 5 hereof, Lender hereby consents to the deferral of the two installment payments of principal due on May 10, 1998 and June 10, 1998 under the Note until the third anniversary of the Closing Date. 3. Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 5 hereof, the Loan Agreement is amended as follows: (a) Section 2.1(a) of the Loan Agreement if hereby amended and restated in its entirety, as follows: "(a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrowers in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Revolving Amount less the outstanding balance of all undrawn or unreimbursed Letters of Credit, or (ii) the Borrowing Base less (A) the aggregate amount of all undrawn or unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (x) the lesser of (i) 80% of Eligible Accounts of Borrowers, less the amount, if any, of the Dilution Reserve, and (ii) and 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 judgement), minus (y) the aggregate amount of reserves, if any, established by Foothill under Section 2.1(b), plus. (z) the "Additional Availability Amount" (as defined below). The "Additional Availability Amount" means (i) during the period commencing on May 8, 1998 and ending on August 31, 1998 (the "Additional Availability Termination Date"), an amount up to $750,000 as designated in writing by EMS to Foothill, provided that such designation shall be in increments of $250,000 and (ii) at all times on and after the Additional Availability Termination Date, an amount equal to zero." (b) Section 2.11 of the Loan Agreement is hereby amended to add the following sentence at the end of said section, as follows: "(e) Additional Availability Fees. At the time EMS designates an Additional Availability Amount, a fee of $2,500 per $250,000 so designated." 4. Ratification. This Amendment, subject to satisfaction of the conditions provided below, shall constitute amendments to the Loan Agreement and all of the Loan Documents as appropriate to express the agreements contained herein. In all other respects, the Loan Agreement and the Loan Documents shall remain unchanged and in full force and effect in accordance with their original terms. Without limiting the foregoing, Borrower acknowledges that Eligible Accounts do not include Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold (unless the Account Debtor with respect to such bill and hold goods has unconditionally agreed in writing to purchase such goods), or other terms by reason of which the payment by the Account Debtor may be conditional. 5. Conditions to Effectiveness. Subject to Section 6 below, the amendments to the Loan Agreement set forth in this Amendment shall become effective as of the date of this Amendment and upon the satisfaction of the following conditions precedent in form and substance satisfactory to Lender: (a) Deferral Fee. Borrower shall pay to Lender a deferral fee equal to Two Thousand Five Hundred Dollars ($2,500) (b) No Default. No Event of Default or event which, with the giving of notice or the passage of time, or both would become an Event of Default, shall have occurred and be continuing, and, after giving effect to the amendments contained herein, no Event of Default or event which, with the giving of notice or the passage of time, or both, would become an Event of Default, shall have occurred and be continuing. 6. Miscellaneous. (a) Warranties and Absence of Defaults. In order to induce Lender to enter into this Amendment, each Borrower hereby warrants to Lender, as of the date hereof, that: (i) The warranties of such Borrower contained in the Loan Agreement, as herein amended, are true and correct as of the date hereof as if made on the date hereof. (ii) All information, reports and other papers and data heretofore furnished to Lender by such Borrower in connection with this Amendment, the Loan Agreement and the other Loan Documents are accurate and correct in all material respects and complete insofar as may be necessary to give Lender true and accurate knowledge of the subject matter thereof. Such Borrower has disclosed to Lender every fact of which it is aware which would reasonably be expected to materially and adversely affect the business, operations or financial condition of such Borrower or the ability of such Borrower to perform its obligations under this Amendment, the Loan Agreement or under any of the other Loan Documents. None of the information furnished to Lender by or on behalf of such Borrower contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. (iii) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof. (b) Expenses. Borrowers agree to pay on demand all costs and expenses of Lender (including the reasonable fees and expenses of outside counsel for Lender) in connection with the preparation, negotiation, execution, delivery and administration of the Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. In addition, Borrowers agree to pay, and save Lender harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided in this Section 6 (b) shall survive any termination of this Amendment and the Loan Agreement as amended hereby. (c) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of California. (d) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. (e) Reference to Loan Agreement. On and after the effectiveness of the amendment to the Loan Agreement accomplished hereby, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference to the Loan Agreement in any Loan Documents, or other agreements, documents or other instruments executed and delivered pursuant to the Loan Agreement, shall mean and be a reference tot he Loan Agreement, as amended by this Amendment. (f) Successors. This Amendment shall be binding upon Borrowers, Lender and their respective successors and assigns, and shall inure to the benefit of Borrowers, Lender and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By Its President EMS-EAST, Inc., a Massachusetts corporation By Its Secretary EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By Its Secretary FOOTHILL CAPITAL CORPORATION, a California corporation By Its Vice President EX-4.2 3 WAIVER THIS WAIVER (this "Waiver") is entered into as of July 9, 1998, between Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of Illinois, Inc. ("EMS-Illinois"), and Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security agreement dated as of December 30, 1997, as amended by that certain Waiver and First Amendment dated as of May 8, 1998 (the "Loan Agreement"); WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net Worth (as defined in the Loan Agreement) for the fiscal quarter ended May 31, 1998 is approximately negative Four Million Five Hundred Forty-Six Thousand Dollars (-$4,546,000); WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined in the Loan Agreement) for the six month period ending May 31, 1998 is approximately negative Eight Million Fifty-Nine Thousand Dollars (-$8,059,000); WHEREAS, as a result of the foregoing, Events of Default exist under Sections 7.20(a), 7.20(b) and 8.2 of the Loan Agreement; WHEREAS, Borrower has requested that Lender waive the foregoing Events of Default and Lender has agreed to do so subject to the terms hereof, NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows; 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Waiver. Subject to the reaffirmation by each Borrower of its representations and warranties under the Loan Agreement and its representations and warranties set forth herein and receipt by Lender of the waiver fee referred to below, Lender hereby waives the Events of Default arising solely as a result of the (i) Tangible Net Worth of Borrowers not being at least Two Hundred Fifty Thousand Dollars ($250,000) for the fiscal quarter ended May 31, 1998 and (ii) EBITDA of Borrowers not being at least Zero Dollars ($0) for the six month period ending May 31, 1998. The foregoing waiver shall not constitute a waiver of any other Event of Default that may exist, or a waiver of any future Event of Default that may occur. 3. Representations. In order to induce Lender to enter into this Waiver, Borrower hereby represents and warrants to Lender that; (a) The representations and warranties of each Borrower contained in the Loan Agreement, are true and correct as of the date hereof as if made on the date hereof; (b) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof (other than as described in Section 2 above); (c) The Tangible Net Worth of Borrowers as of May 31, 1998 is approximately negative Four Million Five Hundred Forty-Six Thousand Dollars (-$4,546,000); and (d) The EBITDA of Borrowers for the six month ending May 31, 1998 was approximately negative Eight Million Fifty-Nine Thousand Dollars (-$8,059,000). 4. Waiver Fee. In consideration of the waiver described above, Borrowers agree to pay Lender a waiver fee of Five Hundred Dollars ($500) on the date hereof. The remainder of the page is intentionally left blank IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By Its Secretary EMS-EAST, Inc., a Massachusetts corporation By Its Secretary EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By Its Treasurer FOOTHILL CAPITAL CORPORATION By Its Senior Vice President EX-10.1 4 Exhibit 10.1 Baan Business Partner Authorization Agreement ______________________________________________________________________ Reseller Name This authorization is intended by the Reseller name above as an addition and amendment to any other terms and conditions of sales to which they may mutually agree with regard to Reseller purchase of products supplied by Baan. If Baan approved Distributor's sale of these products to Reseller, Baan will be regarded as a third-party beneficiary of the agreements and commitments made herein. Subject to such approval, and for good and valuable consideration, including Distributor's willingness to sell these products to Reseller, Reseller certifies and agrees as follows: A. The following limitations will apply to approved Reseller sales activity: 1. Reseller will not advertise, promote Baan products outside any geographic or vertical area(s) recognized and agreed to in writing by Baan. 2. Reseller will sell Baan products only to end-user customers (other than Reseller's corporate parent, division, or any subsidiary of corporate parent) in North America for use in North America. 3. Target Market 4. Quota Relationships A. Distributor and Reseller are independent contractors engaged in purchasing Baan products for resale to their respective customers. Neither Distributor nor Reseller is an agent or legal representative of Baan for any purpose, and neither has any authority to act for, bind or commit Baan. B. Neither Distributor nor Reseller has any authority to make any commitment on behalf of Baan with respect to quantities, deliveries, modifications, interfacing capability, suitability of software, or suitability in specific applications. Reseller has no authority to modify the warranty offered with Baan products. Reseller will indemnify Distributor and Baan from liability for any modified warranty or other commitment by Reseller. C. Reseller will not represent itself in any way that implies Reseller is an agent or branch of Baan. Reseller will immediately change or discontinue any representation or business practice found to be misleading or deceptive by Distributor or Baan. D. For the term of this authorization, software only Resellers will only be authorized to purchase Baan products from Distributor. E. If software only Reseller's relationship with Distributor is terminated during the term of this authorization, Reseller may only change its purchasing relationship to another Distributor once during the remaining term. F. This authorization is effective upon notice of approval by Baan. This authorization will expire automatically upon the earliest of the following dates: the "anniversary date" of any agreement between Baan, or 12 months from the date of Baan's notice of approval. G. Baan may, from time to time, give Reseller written notice of amendments to this authorization. Any such amendment will automatically become a part of this authorization 30 days from the date of the notice, unless otherwise specified in the notice. H. Any change in the Reseller's vertical market(s), primary reselling geography, must be approved in writing by Baan. I. Baan, Distributor or Reseller may terminate this authorization without cause at any time upon 30 days written notice or with cause at any time upon 15 days written notice. J. This authorization will terminate immediately if Reseller ceases to have a buying relationship with Distributor, or Baan's agreement with Distributor terminates. K. Upon expiration without renewal or termination of this authorization for any reason, Reseller will immediately cease to be a Baan Reseller and will refrain from representing itself as such and from using any Baan trademark or trade name. L. Upon expiration without renewal or termination of this authorization, all rights to any accrued Baan market expansion funds will automatically lapse. Reseller Obligations A. At Baan's discretion, and upon reasonable notice to Reseller, Baan or Baan's designate will be given on-site access to Reseller's customer lists, mailing lists, customers satisfaction files, inventory records, invoices, and other books and records of account as necessary to enable Baan to verify and audit Reseller's compliance with the terms of this authorization. Failure to comply with Baan's request will be considered a repudiation of this authorization justifying Baan's termination of this authorization. B. The following criteria apply to all Resellers in order to obtain and maintain Baan authorization to sell Baan products. 1. Reseller must comply with all training requirements designated by Baan on each product line the Reseller carries. 2. Reseller's sale of "Baan Software Support Options" and other support services to its end-user customers is subject to the terms and conditions set forth in the applicable Baan support reference materials. 3. Reseller is responsible for maintaining support services for the added-value portion of the system. 4. Reseller will provide the following information to Distributor (or upon request to Baan), at time of order or prior to shipment of Baan products to end-user customer: a. Name and address of end-user customer b. Ship date of Baan products to end-user customer c. Baan product numbers and serial numbers d. Primary and alternate end-user customer Response Center caller e. Other information which Baan may reasonably require Licensing A. Unless prior written consent is obtained from Baan, Reseller will not copy or modify any Baan materials supplied through Distributor, except that software materials may be copied for archival purposes, to replace a defective copy, or for program error verification. Reseller will not remove, omit, or alter any label or copyright notice on these materials. B. Reseller is granted the right to distribute software materials supplied by Baan in accordance with the Software License Agreement attached hereto. Reseller may also use the materials for demonstration purposes in accordance with that Software License Agreement. 1. Where an end-user agreement is supplied with the software, the user must sign the agreement or indicate acceptance by opening the media package in order to obtain a license to use the software. Use of the software will be subject to the terms of the agreement. 2. Where the software is designated as confidential or trade secret in its license terms, Reseller will safeguard the software in accordance with industry standards and applicable law, using the same degree of care to prevent unauthorized disclosure as it uses with its own trade secrets and those of other suppliers. Trademarks; Logos; Trade Names A. From time to time, Baan may authorize Reseller in writing to use one or more designated Baan trademarks, logotypes, trade names, and insignia (Baan Marks). Reseller is authorized, upon Baan's execution of this authorization to use the Baan Mark, known as the Baan Solution Partner Insignia. Reseller may use the Baan Marks solely in connection with the sales, advertisement, and promotion of the Baan products purchased from Distributor. Any use of the Baan Marks must be in good taste, in a manner that preserves their value as Baan Marks, and in accordance with all standards and guidelines provided by Baan for their use. B. Reseller will not use any Baan Mark or symbol in a way that may imply that Distributor or Reseller is an agency or branch of Baan. Upon Baan's request, Reseller will discontinue the use of any Baan Mark or symbol. Any rights or purported rights in any Baan Marks acquired through Distributor's or Reseller's use belong solely to Baan. All rights to use the Baan Marks shall cease upon expiration or termination of this authorization, at which time Reseller will immediately cease to be a Baan authorized Baan Business Partner and will refrain from representing itself as such. C. Reseller agrees not to resell demonstration Baan products. Authorized Signatures The exhibit listed below is attached to and made part of this authorization: Reseller Authorized signature: /s/ Thomas M. Dykstra ------------------------------------------------------------------------ Date: 2/10/98 ------------------------------------------------------------------------ Print name: Thomas M. Dykstra ------------------------------------------------------------------------ Title: CTO/VP ------------------------------------------------------------------------ Distributor Company name: Pioneer-Standard Electronics, Inc. ------------------------------------------------------------------------ Authorized signature: /s/ William J. Macchione ------------------------------------------------------------------------ Date: 4/10/98 ------------------------------------------------------------------------ Print name: William J. Macchione ------------------------------------------------------------------------ Title: Corporate Marketing Manager ------------------------------------------------------------------------ Baan hereby approves Reseller as an authorized Reseller of Baan products through Distributor named herein. Baan Company Authorized signature: /s/ Lou Sassano ------------------------------------------------------------------------ Date: 4-10-98 ------------------------------------------------------------------------ Printed name: Lou Sassano ------------------------------------------------------------------------ Title: Dir. Channel Development ------------------------------------------------------------------------ TARGET MARKET: (City & State) Michigan, Illinois, Wisconsin, Minnesota, Iowa, Missouri, Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, New York, Pennsylvania, Virginia, North Carolina, South Carolina, Florida, Ohio, Indiana APPROVED QUOTA: 1,200 Seats by December 31, 1998 (not including installed- base migrations) ADDENDUM NUMBER ONE TO RESELLER AUTHORIZATION This is Addendum Number One (the "Addendum") dated 4/10/98 to that certain Authorization dated 4/10/98 (the "Agreement"), by and between Effective Management Systems, Inc. ("Reseller") and Baan MidMarket Solutions, LLC. ("Baan"). In consideration of the mutual covenants set forth herein and in the Authorization, Reseller and Baan agree as follows: Priority. The parties agree that the Authorization is hereby amended as set forth in this Addendum Number One. Any inconsistency between this Addendum and the Authorization shall be resolved in favor of the intent of the parties as expressed by this Addendum. Terms used herein with the initial letter capitalized which are not otherwise defined herein, shall have the meaning given said terms in the Authorization. The Authorization as amended by this Addendum Number One shall remain in full force and effect. Reseller Name Section A.1. At the end of the Section after "agreed to in writing by Baan" insert "with the following three exceptions: 1. Reseller can advertise and promote any value added product that Reseller has developed to function in conjunction with the Baan product. In such advertisement or promotion, Reseller can state that the Reseller is a Baan Reseller and that the Reseller's value added product functions in conjunction with the Baan product. 2. Reseller can create and distribute an introductory marketing piece that may be sent to Reseller's existing user base outside the territories stated in A.3 below, in an effort to educate the user base as to the new offerings and status of Reseller's business. 3. Reseller can advertise and promote their Baan-related services to their existing user base outside the territories stated in A.3 below, with the prior consent of Baan management and if it is in conjunction with a Baan sponsored or supported marketing program targeted at the Reseller existing user base." Relationships Section F. Delete the Section in its entirety and replace with the following: "This authorization is effective upon notice of approval by Baan, and shall remain in effect for an initial term of one (1) year. This Authorization will automatically renew at the end of the initial term and any subsequent term for a renewal term of one (1) year, unless terminated by either Baan, Distributor or Reseller in accordance with the terms set forth in this agreement." Paragraph G. At the end of the Section insert "It is Baan's general purpose to make such changes as are reasonably necessary to improve Baan's reseller program, in Baan's sole opinion. The intent of changes to the program is not to negatively impact any reseller." Paragraph I. Delete "30 days" and insert "180 days". Section J. At the end of this Section, after "terminates" insert a period. Insert the following sentence at the end of the Section: "If Baan's agreement with Distributor is terminated, Reseller may immediately apply with another approved Baan Distributor, and a new Authorization may need to be executed." Reseller Obligations Section A. After the phrase "Baan's designate will be given on-site access to Reseller's" insert the phrase "Baan-related". In the second sentence after the phrase "the terms of this Authorization" insert the phrase "is mandatory". At the end of the Section insert "Baan shall use reasonable care to prevent any unauthorized disclosures of any Reseller confidential information which Baan may have access to pursuant to this Section. Baan shall use the same degree of care in protecting Reseller's trade secrets as it would use with its own trade secrets." Licensing Section B.2. Delete "reseller" and insert "Reseller". At the end of the Authorization, insert the following: "Miscellaneous A. Baan recognizes that Reseller has considerable Hot Line Telephone Support resources and capability. Both Baan and Reseller may wish to exploit this capability to rapidly penetrate the market for companies in the $10-100mm sales range with the Baan product. To this end, Baan and Reseller agree to investigate opportunities to use Reseller resources either as a subcontracting resource to Baan, or as a direct supplier of Hot Line Telephone Support to Reseller's new and existing customers that have licensed the Baan Software. B. Baan recognizes the urgency of creating a program for the migration of Reseller's customers to the Baan Product. Therefore, Baan and Reseller will use reasonable best efforts to create and announce, prior to April 30, 1998, a migration promotion for new and existing Reseller customers, such that they will have an attractive growth path from the Reseller product line to the Baan product. This promotion should allow the Reseller customer to migrate at their option. C. Baan and Reseller will use best efforts to meet within the next thirty (30) days to discuss the possibility of providing Reseller with a current copy of the Baan source code, and keeping Reseller current on any new releases. IN WITNESS WHEREOF, the parties have executed this Addendum as of the date first written above. Effective Management Systems, Inc. Baan U.S.A., Inc. By: /s/ Thomas M. Dykstra By: /s/ Lou Sassano Name: Thomas M. Dykstra Name: Lou Sassano Title: CTO/VP Title: Dir. Channel Development Distributor: Pioneer-Standard Electronics, Inc. By: /s/ William J. Macchione Name: William J. Macchione Title: Corporate Marketing Manager EX-10.2 5 EMS Asia Distribution Agreement * This EMS Asia Distribution Agreement ("Agreement") is entered into as of the 29th day of May, 1998 by Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation with its principal place of business at 12000 West Park Place, Milwaukee, Wisconsin 53224, and EMS Asia Pacific Limited ("MARKETING PARTNER" or "MP"), a Hong Kong company with its Hong Kong business address located at 114 Tower II, The Gateway, 25-27 Canton Road, Kowloon, Hong Kong. 1. Definitions 1.1 "Products" shall mean the EMS computer software system known as TCM/TM/ and any MES technology based software developed by EMS which would attach to Baan software ("Software"), and any Improvements to the Software as defined below. It includes object code and, except with respect to those portions which it is standard EMS U.S. practice to withhold, source code. It shall also include the right to any updates when generally made available from time to time as point releases and the right to use the development language Synergy', in which the Software is written, in connection with authorized uses of the Software. 1.2 "Technical Information" shall mean i) the knowledge, experience, and information of EMS, not in written or printed form, relating to the servicing, use, or sale of the Products ("Know-How") and ii) any written materials containing information relating to the servicing, use, or sale of Products ("Technical Data"). 1.3 "Improvements" shall mean any change or modification, whether or not patentable, copyrightable or susceptible to any other form of protection, in or relating to the design, manufacture, composition, assembly or servicing of the Software, including all derivative works thereof, regardless by whom made or paid for, the ownership of which shall solely belong to EMS. 1.4 "End Users" shall mean any entity which uses the Software in their own business for their own internal operational purposes as authorized under this Agreement. 2. Authority. MP is hereby authorized, on an exclusive basis in the Territory' (as defined in the attached Exhibit A-1) and subject to the terms of this Agreement, to i) sell licenses of Software under circumstances which insure that basic support will be available to the licensee, ii) solicit orders for services, including support, related to the Products ( Services'), to be performed by EMS certified providers of such Services in the Territory, iii) appoint resellers with EMS prior approval, iv) use the Products in its own internal operations as an End User without additional cost, but under the same restrictions as any other user, v) utilize EMS' proprietary translation tool on a non-exclusive basis and solely in furtherance of this relationship. MP shall use its best efforts to obtain such sales and orders and otherwise perform its obligations under this Agreement, and vi) to the extent EMS has such authority, the right to sell any third party software EMS is selling, without any EMS markup. 3. End User License. MP agrees to utilize, present to, and obtain the signature of End Users on the form of EMS license agreement attached to this Agreement as Exhibit B ("License") as amended from time to time by EMS in its sole discretion. Except as permitted herein, the terms of the License may not be changed by MP in any respect without EMS' prior written consent. 4. License Payment Terms and Cost Payment to EMS. 4.1 MP shall make reasonable effort to require payment terms from End Users under Licenses calling for full payment due 90 days after Installation. 4.2 Pursuant to such Licenses, MP shall collect all payments called for thereunder unless EMS instructs the End User and MP otherwise. MP shall be obligated to pay EMS the amounts due EMS on each such License within 30 days of MP's receipt of any such payments and shall make every reasonable effort to enforce each License Agreement's payment terms. 4.3 The License fee amount due EMS shall, unless otherwise agreed in writing, be the percentage set forth on Exhibit A-2 for the Products at the prices set forth on the applicable License, regardless of the actual License payments collected. However, MP may not manipulate the price of Services, beyond market standard such that the price of a License has been reduced below market standard, thereby reducing the fee to EMS. 5. MARKETING PARTNER Retention. MP shall retain as applicable i) on all License payments received, an amount equal to the difference between the actual License payment amount and the amount it owes EMS, and ii) on all Services it sells the actual Services payments it receives. 6. Business Plan and Forecast. The parties shall annually develop a mutually acceptable Business plan to be reviewed quarterly which shall include a sales level performance target, the first of which is set forth on Exhibit A-3. Such target is a forecast of payments to be received by EMS during each year of this Agreement. 7. EMS Obligations. 7.1 Liaison. Except as specifically advised otherwise, all requests, communications, and issues relating to EMS's responsibilities under this Agreement, as well as with third party software vendors whose products are sublicensed pursuant to this Agreement, will be administered directly by EMS. 7.2 MARKETING PARTNER Support. 7.2.1 EMS will provide, at standard charge, technical phone, fax, and E-mail support through EMS' international help desk offices in Milwaukee, WI. 7.2.2 MP may purchase EMS consulting and training services from EMS at the then current daily charge for such services plus travel expenses. 7.2.3 EMS will provide, at no cost to MP, one set of available English training videos. 7.3 Demonstration Licenses. EMS will make available, at no charge to MP, a reasonable number of run time demonstration licenses for the Products for use on EMS supported hardware configurations. 7.4 Promotional Materials and International Customer Conference. EMS will make available, at no charge to MP, one copy of standard released EMS promotional literature art work, and three admissions to each EMS' International Customer Conference and Technology Seminar which is held annually in the United States. Participants are responsible for all their travel and related expenses. 7.5 Product and Market Information Updates. EMS will make available, at no charge to MP, by hard copy, monthly, information on the Products and EMS' markets, and information on the Products and the company. 7.6 Technical Certification. EMS will make available a technical support personnel certification program, and agrees to assist MP in the certification of its personnel. 7.7 Business and Marketing Consultation. EMS will share appropriate reference information profiles and competitive information with MP. 7.8 Documentation. EMS will provide, at no charge to MP, two sets of available user and technical documentation in English, and to the extent available, in local language. The technical documentation includes training seminar material. Additional copies of the documentation may be purchased at EMS cost. English language user documentation, in electronic or hard copy form, as released for Asia use, will be made available with each license purchased. 7.9 Existing Market Penetration Resources. EMS shall provide to MP such existing market materials and information, as set forth on Exhibit A- 4, as will assist MP in maintaining and penetrating the Territory. 8. MARKETING PARTNER Obligations. 8.1 Order Handling. MP shall place all orders for Products with EMS from a location in the USA in US dollars or upcharge minimum License Payments by any local country required tax or royalty withholding. Any and all taxes or other fees, costs, or expenses relating to the purchase, export, transfer, and import of the Products from EMS to final location shall be the sole responsibility of MP. 8.2. Non-Competition. MP may not offer products which compete with the Products or Services to any prospect or account registered to MP. During the Term, MP agrees not to directly or indirectly develop or market any product which competes with the Software, and for Five years thereafter not to develop such a product. Not withstanding this limitation, MP may enter into a distribution arrangement with Baan for its application software product in the Territory at any time. 8.3 MARKETING PARTNER Personnel, Offices, and Capabilities. MP represents that it has and will use experienced software professionals familiar with the market and its needs with respect to sales and service personnel, and agrees to have the necessary qualified full time dedicated sales personnel and systems engineers available in order to effectively perform its obligations under this Agreement in support of the Business Plan. MP also agrees to maintain at least one office in a strategic area of the Territory and agrees to provide sales and pre-sales services to prospects with demonstrations utilizing appropriate hardware and software. 8.4 Expenses and Taxes. MP agrees to pay for all travel and related expenses of any EMS pre-sales services requested by MP and any and all local taxes and duties relating to MP's responsibilities and obligations. 8.5 Account Management. MP shall act as Account Manager during each License implementation period. Such responsibility shall include first line response and liaison to all inquiries from the End User relating to EMS or the Products. 8.6 Representing EMS and the Products, and Software Security. MP shall appropriately represent EMS and the Products by limiting all of its statements, whether written or verbal, relating to EMS or the Products to those set forth in the current Technical Data and other written technical and marketing literature provided to MP by EMS pursuant to this Agreement. MP shall install and activate Software security for each license. 8.7 Territory, Prospect, and Account Management Plan. As part of its regular business plan activities, MP agrees to develop and adhere to an appropriate Territory, Prospect, and Account Management Plan. 8.8 End User Support. MP acknowledges it has full responsibility to support its End Users, agrees to work to ensure the highest level of customer satisfaction possible, and only market and sell the Products to prospects where there is a good fit with the prospect's needs. 8.9 Localization. MP shall be responsible to perform, at its own expense, and at all times during the Term of this Agreement, the appropriate and necessary work to adapt or improve and enhance the Products, as updated and revised by EMS from time to time, for local language, currency, and any other localization needs, such that the Products become and remain competitive in the Territory for fully integrated manufacturing operations computer software systems. Upon release by MP, MP shall furnish to EMS a copy of all such localized Products and corresponding Technical Data. 8.10 Existing Market Obligations Assumption. MP shall assume the existing service and assistance obligations and relationship responsibilities to customers and prospects in the Territory in order to provide a smooth transition to MP from preexisting conditions while maintaining a positive attitude toward and perception of EMS and the Products. 9. Accounting, Record-keeping, and Confidentiality. 9.1 Maintenance of Records and Review. The MP shall maintain all appropriate books, records, and correspondence with respect to the performance of its obligations hereunder, and EMS shall have the right, upon reasonable request, to review or have reviewed, at its own expense, such materials. 9.2 Confidentiality. MP acknowledges that all the Products and Technical Information, and information relating to EMS' business, marketing, and future plans, are and constitute valuable assets and Trade Secrets of EMS which are proprietary to EMS and may also be subject to an assertion of confidentiality by one or more licensors of EMS ("Confidential Information"). Accordingly, MP agrees that any disclosure of any nature it may make of Confidential Information would constitute a serious and material loss to EMS and is good cause for immediate termination. Likewise, EMS acknowledges that it may receive similar proprietary information from MP and, therefore, each agrees; i) not to disclose any Confidential Information to any employee, agent, or other party, including a prospect, except as permitted by and in furtherance of this Agreement, and then only to such people or entities who have a need to know and are subject to a Confidentiality Agreement' in the form approved by the other party from time to time and attached in current approved form as Exhibit C, and ii) to take all reasonable precautions to prevent unauthorized parties from discovering, acquiring, or using Confidential Information. 9.3 Survival of Confidentiality. Notwithstanding any other provisions of this Agreement, the obligations of confidentiality of this paragraph shall survive the termination or expiration of this Agreement. 10. Term. 10.1 Initial Term. The initial Term of this Agreement is three years unless earlier terminated. This Agreement may be earlier terminated by either party if the other materially breaches it and does not cure the breach within 30 days after written notice. It shall be considered a material breach and there shall be no cure period if Confidentiality has been breached by either party, either party becomes insolvent, MP violates or permits the violation of EMS's Software security system, or MP fails to achieve its annual Business Plan's performance target as set forth in Exhibit A-3 and the next two quarters, leveled, of the following year's annual performance target. 10.2 Subsequent Terms. After the initial Term, this Agreement may be renewed for one year Terms if both parties mutually agree to do so in writing prior the expiration of the current Term. 11. Disputes. All disputes, controversies, or differences which may arise between the parties which cannot be settled amicably by conciliation between them shall be heard, settled, and decided by arbitration in Milwaukee, WI in accordance with the Commercial Rules of American Arbitration Association, and under the laws of the State of Wisconsin, USA Such arbitration shall be conducted in English. Each party must supply all documents in English and will have interpreters available if necessary. The decision of the arbitrator will be accepted as final and binding upon the parties, and enforceable in any court of competent jurisdiction. Each party will bear its own costs of arbitration pending the award of the arbitrator, which award may include costs. 12. Export Control. The Parties acknowledge that the export and re-export of the Technical Information and the Software may become subject to United States (USA) export controls. MP shall comply at all times with any applicable USA export controls and furnish and supply such information to EMS as EMS may reasonably request in order to satisfy its obligations under any such USA law. 13. Limitation on Remedies. Under no circumstances shall either party be liable to the other party by reason of breach, termination, or non-renewal of this Agreement for any consequential, general, or special damages even though the Parties may be aware of the possibility of such damages. 14. Miscellaneous. 14.1 Independence and Authority. The parties hereto are independent contractors solely responsible for their own business operation and compliance obligations. Each represents to the other full authority to enter into this Agreement and all proper and required authority to perform its obligations hereunder. 14.2 Severability. If any provision of this Agreement shall be deemed illegal or unenforceable, such illegality or unenforceability shall not affect the validity and enforceability of any legal and enforceable provisions hereof, this Agreement shall be construed as if such illegal and unenforceable provisions had not been inserted herein, unless such illegality or unenforceability shall destroy the Agreement's underlying business purpose. 14.3 Assignment. This Agreement may not be assigned in whole or in part by any party hereto without the prior written consent of all parties. 14.4 Entire Agreement. This Agreement, including the referenced and attached Exhibits, constitutes the entire agreement between the Parties with respect to the matters herein and supersedes all prior understandings and agreements relating to such matters. No modification of this Agreement will be effective unless in writing signed by both Parties and referencing this Agreement. Except as otherwise set forth, all communications and information called for to be provided one party to the other, shall be in English. 14.5 Non-Recruitment. Both parties agree, during the Term and for a one year period thereafter, not to recruit or hire, without the written approval of the other, any employee or agent acting on behalf of the other during the Term. Agreed to as of the above date by: EMS Asia Pacific Limited By __________________________________________ Donald W. Vahlsing, Director Agreed to and Accepted at Milwaukee, WI by: Effective Management Systems, Inc. By __________________________________________ Michael D. Dunham, President Exhibit A to EMS Asia Distribution Agreement dated 5/29/98 1. (P 2.0) TERRITORY shall mean: Korea, Japan, China, Taiwan, the South East Asia countries (including Singapore, Malaysia, Thailand, and Vietnam), Indonesia, Philippines, Australia, and New Zealand 2. (P 4.3) MARKETING PARTNER'S required License fee payments to EMS is composed of a) $2,000 per month for 30 months following MP achieving Gross Margin Base, except that, if terminated early by EMS for breach by MP, any remaining payments shall be immediately due and, if terminated by MP for breach by EMS, no further payments shall thereafter be due, and b) the following % of License payments called for, as collected, starting the month following MP achieving Gross Margin Base: first 12 months: . . . . . . . . . 20 % Next 12 months: . . . . . . . . . 25 % thereafter: . . . . . . . . . . . 30 % where 'Gross Margin' is calculated according to U.S. gaap, consistently applied with EMS past practices, and Gross Margin Base' equals the earlier to occur of $100,000 for three consecutive quarters or $200,000 in any one quarter. 3. (P 6.0) MARKETING PARTNER'S forecast of Payments to be actually received by MARKETING PARTNER during the Term is: year 1 . . . . . . . . . . . . . . . . $_________________. year 2 . . . . . . . . . . . . . . . . $_________________. year 3 . . . . . . . . . . . . . . . . $_________________. 4. (P 7.9) Existing Market Resources to be provided by EMS to MP: Existing receivables, fixed assets, contracts rights and obligations, leases, cash amounts which EMS deems reasonable for these purposes, all as listed in the Attachment to this Exhibit, and other non material assistance in establishing and maintaining government permissions and registrations, personal relationships with existing vendors, suppliers, and qualified personnel previously performing and providing the selling and servicing obligations required under this Agreement, all to maintain and enhance the Products' market position and growth objectives envisioned by this Agreement. ________ ________ (Exhibit A initials) Exhibit B to EMS Asia Distribution Agreement dated 5/29/98 (P 3.0) The approved EMS End User License Agreement to be used by MARKETING PARTNER hereunder in current form is attached hereto or will be provided. ________ ________ (Exhibit B initials) Exhibit C to EMS Asia Distribution Agreement dated 5/29/98 (P 9.2) Confidentiality Agreements (as currently approved by the respective parties) are attached hereto or will be provided) _________ _________ (Exhibit C initials) EX-10.3 6 EFFECTIVE MANAGEMENT SYSTEMS, INC. 1993 STOCK OPTION PLAN AS AMENDED 1. Purpose. The purpose of the Effective Management Systems, Inc. 1993 Stock Option Plan (the "Plan") is to promote the best interests of Effective Management Systems, Inc. (the "Company") and its shareholders by providing employees of the Company and its subsidiaries and members of the Company's Board of Directors who are not employees of the Company or its subsidiaries with an opportunity to acquire a proprietary interest in the Company. It is intended that the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company by employees of the Company and its subsidiaries. In addition, by encouraging stock ownership by non-employee directors, the Company seeks both to attract and retain on its Board of Directors (the "Board") persons of exceptional competence and to provide a further incentive to serve as a director of the Company. It is intended that certain of the options issued pursuant to the Plan will constitute incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and successor provisions thereto (the "Code"), and the remainder of the options issued under the Plan will constitute nonstatutory stock options. 2. Administration. The Plan shall be administered by a committee designated by the Board (the "Committee"). The Committee shall consist of not less than two members of the Board who are "non-employee directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by at least a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully as effective as if it had been made by a unanimous vote at a meeting duly called and held. In accordance with the provisions of the Plan, the Committee shall: select the employees to whom options are granted; determine the number of shares to be covered by each option, the time at which the option is to be granted, the type of option, the option period, the option exercise price and the manner and time in which options become exercisable; and establish such other provisions of the option agreements as the Committee may deem necessary or desirable. Grants of options to non-employee directors, all of which options shall be nonstatutory stock options, shall be automatic and the amount and the terms of such awards shall be determined in accordance with Section 5 hereof. The Committee may adopt such rules and regulations for carrying out the Plan as it may deem proper and in the best interests of the Company. The interpretation of any provision of the Plan by the Committee and any determination made by the Committee on the matters referred to in this Section 2 shall be final. 3. Shares Subject to the Plan. The shares to be subject to options under the Plan shall be shares of the Company's Common Stock ("Stock"). The total number of shares of Stock which may be purchased pursuant to options granted under the Plan shall not exceed an aggregate of 750,025 shares, subject to adjustment as provided in Section 8 hereof. Shares of Stock delivered upon exercise of an option under the Plan may consist, in whole or in part, of authorized but unissued shares or of treasury shares. In the event that an option granted under the Plan expires, is cancelled or terminates unexercised as to any shares of Stock covered thereby, such shares shall thereafter be available for the granting of additional options under the Plan. 4. Grants to Employees. (a) Eligibility. Any employee ("Employee") of the Company or its present and future subsidiaries, as defined in Section 424(f) of the Code ("Subsidiaries"), including any such Employee who is also an officer or director of the Company, whose judgment, initiative and efforts contribute to the successful performance of the Company shall be eligible to receive options under the Plan. Notwithstanding any provision to the contrary herein, no Employee shall be granted options that could result in such Employee receiving more than 200,000 shares of Stock under the Plan (such number of Shares shall be subject to adjustment as provided in Section 8 hereof). (b) Option Price. The option exercise price per share of Stock shall be fixed by the Committee, but shall not be less than 100% of the fair market value of a share of Stock on the date the option is granted; provided, however, that no Incentive Stock Option shall be granted to any Employee who, at the time such Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent corporation or Subsidiaries unless the option exercise price of such Incentive Stock Option is at least 110% of the fair market value of a share of Stock on the date of grant. Unless otherwise determined by the Committee, the "fair market value" of a share of Stock on the date of grant shall be the last sale price for shares of Stock in the NASDAQ National Market System on the trading date next preceding the date on which the option is granted, as reported in The Wall Street Journal (Midwest Edition); provided, however, that if the principal market for the Stock is then a national securities exchange, the "fair market value" shall be the closing price for shares of Stock on the principal securities exchange on which the Stock is traded on the trading date next preceding the date of grant, or, in either case above, if no trading occurred on the trading date next preceding the date of grant, then the option price per share shall be determined with reference to the next preceding date on which the Stock is traded. (c) Grant of Options. Subject to the terms and conditions of the Plan, the Committee may, from time to time, grant to Employees options to purchase such number of shares of Stock and on such terms and conditions as the Committee may determine; provided, however, that any option granted to an Employee who is subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, on the date of the grant shall not become exercisable (except as otherwise specifically set forth in the option agreement) until at least six months elapse from the date of grant. More than one option may be granted to the same Employee. The date on which an option is granted shall be the date the Committee approves the granting of the option or if the Committee so specifies, such later date as the Committee may determine. Options granted to Employees may be either Incentive Stock Options or nonstatutory stock options as determined by the Committee. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. (d) Option Period. The Committee shall determine the expiration date of each option, but such expiration date shall be not later than ten years after the date such option is granted; provided, however, that no Incentive Stock Option shall be granted to any Employee who, at the time such Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent corporation or Subsidiaries unless such Incentive Stock Option by its terms is not exercisable after the expiration of five years from the date of grant. (e) Maximum Per Participant. The aggregate fair market value (determined as of the date the option is granted) of the Stock with respect to which any Incentive Stock Options are exercisable for the first time by an Employee during any calendar year under the Plan or any other plan of the Company or any parent corporation or Subsidiary shall not exceed $100,000. (f) Exercise of Options. An option may be exercised, subject to its terms and conditions and the terms and conditions of the Plan, in full at any time or in part from time to time by delivery to the Assistant Secretary of the Company at the Company's principal office in Milwaukee, Wisconsin, of a written notice of exercise specifying the number of shares with respect to which the option is being exercised. Any notice of exercise shall be accompanied by full payment of the option price of the shares being purchased (i) in cash or its equivalent; (ii) with the consent of the Committee (as set forth in the option agreement or otherwise), by tendering previously acquired shares of Stock (valued at their fair market value as of the date of exercise, as determined by the Committee consistent with the method of valuation set forth in Section 4(b) above); or (iii) with the consent of the Committee (as set forth in the option agreement or otherwise), by any combination of the means of payment set forth in subparagraphs (i) and (ii). For purposes of this Section 4, the term "previously acquired shares of Stock" shall only include Stock owned by the Employee prior to the exercise of the option for which payment is being made and shall not include shares of Stock which are being acquired pursuant to the exercise of said option. No shares shall be issued until full payment therefor has been made. 5. Grants to Non-Employee Directors. (a) Eligibility. Each member of the Board who is not an employee of the Company or any of its Subsidiaries or any parent corporation of the Company (a "Non-Employee Director") shall be eligible to be granted nonstatutory stock options under the Plan. A Non-Employee Director may hold more than one option, but only on the terms and subject to any restrictions set forth in this Section 5. (b) Option Price. The option exercise price per share of Stock shall be equal to 100% of the fair market value of a share of Stock on the date the option is granted. For purposes of this Section 5, the "fair market value" of a share of Stock shall be determined in the manner set forth in Section 4(b) hereof; provided, however, that, to the extent applicable, the fair market value of a share of Stock shall be determined with reference to the reported market price of the Stock determined in the manner provided in Section 4(b). (c) Grant of Options. Any person who is first elected as a Non-Employee Director after the date of approval of the Plan by the Board shall automatically on the date of such election be granted an option to purchase 2,030 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8). Thereafter, in consideration for serving on the Board, each Non-Employee Director (if he or she continues to serve in such capacity) shall automatically be granted an option on the day following the annual meeting of shareholders in each year commencing with the 1995 annual meeting and continuing for so long as the Plan remains in effect and a sufficient number of shares are available thereunder for the granting of such option. Such option shall entitle the Non-Employee Director to purchase 1,500 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8). In addition, in consideration for serving on committees of the Board, each Non-Employee Director (if he or she continues to serve in such capacity) shall automatically be granted an additional option on the day following the annual meeting of shareholders in each year commencing with the 1995 annual meeting and continuing for so long as the Plan remains in effect and a sufficient number of shares are available thereunder for the granting of such option. Such option shall entitle the Non-Employee Director to purchase a number of shares of Stock equal to the product of (i) 1,000 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8) multiplied by (ii) the number of committees of the Board on which the Non-Employee Director is then serving. (d) Exercisability and Termination of Options. Options granted to Non-Employee Directors shall vest and become exercisable, but only during the time that the Non-Employee Director serves in such capacity, as to 10% of the shares of Stock subject thereto after one year has elapsed from the date of grant, as to an additional 20% after the second year has elapsed from the date of grant, as to an additional 30% after the third year has elapsed from the date of grant, and as to the final 40% after the fourth calendar year has elapsed from the date of grant; provided, however, that if a Non-Employee Director ceases to be a director of the Company by reason of death, disability or retirement within four years after the date of grant or in the event of a Change in Control (as defined in Section 5(f) below), the option shall become immediately exercisable in full. Options granted to Non-Employee Directors shall terminate on the earlier of: (i) ten years after the date of grant; (ii) six months after the Non-Employee Director ceases to be a director of the Company by reason of death; or (iii) three months after the Non-Employee Director ceases to be a director of the Company for any reason other than death. (e) Exercise of Options. An option may be exercised, subject to its terms and conditions and the terms and conditions of the Plan, in full at any time or in part from time to time by delivery to the Assistant Secretary of the Company at the Company's principal office in Milwaukee, Wisconsin, of a written notice of exercise specifying the number of shares with respect to which the option is being exercised. Any notice of exercise shall be accompanied by full payment of the option price of the shares being purchased (i) in cash or its equivalent; (ii) by tendering previously acquired shares of Stock (valued at their fair market value as of the date of exercise as determined in the manner set forth in Section 4(b) above; provided, however, that, to the extent applicable, the fair market value of a share of Stock shall be determined with reference to the reported market price of the Stock determined in the manner provided in Section 4(b)); or (iii) by any combination of the means of payment set forth in subparagraphs (i) and (ii). For purposes of subparagraphs (ii) and (iii) above, the term "previously acquired shares of Stock" shall only include Stock owned by the Non-Employee Director prior to the exercise of the option for which payment is being made and shall not include shares of Stock which are being acquired pursuant to the exercise of said option. No shares shall be issued until full payment therefor has been made. (f) Change in Control. A "Change in Control" shall be deemed to have occurred if the events set forth in any one of the following paragraphs shall have occurred: (i) any "Person" (as such term is defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended, as modified and used in sections 13(d) and 14(d) thereof), other than (A) the Company or any Subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any Subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportion as their ownership of Stock in the Company ("Excluded Persons"), is or becomes the "Beneficial Owner" (as defined in rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing 25% or more of either the then outstanding shares of Stock or the combined voting power of the Company's then outstanding voting securities; or (ii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect Subsidiary) pursuant to applicable stock exchange requirements, other than (i) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of either the then outstanding shares of Stock or the combined voting power of the Company's then outstanding voting securities; or (iii) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the Stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity that owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 6. Nontransferability of Options. No option shall be transferable by an optionee other than by will or the laws of descent and distribution. Options under the Plan may be exercised during the life of the optionee only by the optionee or his guardian or legal representative. 7. Powers of the Company Not Affected. The existence of the Plan or any options granted under the Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issuance of bonds, debentures, or preferred or prior preference stock ahead of or affecting the Stock or the rights thereof, or any dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company's assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. 8. Capital Adjustments Affecting Stock. In the event of a capital adjustment resulting from a stock dividend (other than a stock dividend in lieu of an ordinary cash dividend), stock split, reorganization, spin-off, split up or distribution of assets to shareholders, recapitalization, merger, consolidation, combination or exchange of shares or the like following Board approval of the Plan, the number of shares of Stock subject to the Plan, the number of shares referenced in the limitation in Section 4(a) hereof, the number of shares subject to options to be granted to Non-Employee Directors pursuant to Section 5(c) hereof, and the number of shares under option in outstanding option agreements shall be adjusted in a manner consistent with such capital adjustment; provided, however, that no such adjustment shall require the Company to sell any fractional shares and the adjustment shall be limited accordingly. The price of any shares under option shall be adjusted so that there will be no change in the aggregate purchase price payable upon exercise of any such option. The determination of the Committee as to any adjustment shall be final. 9. Corporate Mergers and Other Consolidations. The Committee may also grant options having terms and provisions which vary from those specified in the Plan provided that any options granted pursuant to this Section 9 are granted in substitution for, or in connection with the assumption of, existing options granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition or other combination or reorganization to which the Company is a party. 10. Option Agreements. All options granted under the Plan shall be evidenced by written agreements (which need not be identical) in such form as the Committee shall determine. Each option agreement shall specify whether the option granted thereunder is intended to constitute an Incentive Stock Option or a nonstatutory stock option. 11. Rights as a Shareholder; Rights as an Employee or a Director. An optionee shall have no rights as a shareholder with respect to shares covered by an option until the date of issuance of stock certificates to him or her and only after such shares are fully paid. Neither the Plan nor any option granted hereunder shall confer upon any optionee the right to continue as an employee or as a director of the Company. 12. Transfer Restrictions. Shares of Stock purchased under the Plan and held by any person who is an officer or director of the Company, or who directly or indirectly controls the Company, may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or except in a transaction which, in the opinion of counsel for the Company, is exempt from registration under said Act. The Committee may waive the foregoing restrictions in whole or in part in any particular case or cases or may terminate such restrictions whenever the Committee determines that such restrictions afford no substantial benefit to the Company. 13. Amendment of Plan. The Board shall have the right to amend the Plan at any time and for any reason; provided, however, that the provisions of Section 5 of the Plan shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules promulgated thereunder; and provided further that shareholder approval of any amendment to the Plan shall also be obtained: (a) if otherwise required by (i) the rules and/or regulations promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (in order for the Plan to remain qualified under Rule 16b-3 or any successor provision under such Act), (ii) the Code, or any rules promulgated thereunder (in order to allow for Incentive Stock Options to be granted under the Plan) or (iii) the quotation or listing requirements of NASDAQ or any principal securities exchange or market on which the Stock is then traded (in order to maintain the Stock's quotation or listing thereon); (b) if such amendment materially modifies the eligibility requirements as provided in Sections 4(a) and 5(a) hereof; (c) if such amendment increases the total number of shares of Stock, except as provided in Section 8 hereof, which may be purchased pursuant to the exercise of options granted under the Plan; or (d) if such amendment reduces the minimum option price per share at which options may be granted as provided in Sections 4(b) and 5(b) hereof. Any amendment of the Plan shall not, without the consent of the optionee, alter or impair any of the rights or obligations under any option previously granted to the optionee. 14. Termination of Plan. The Board shall have the right to suspend or terminate the Plan at any time; provided, however, that no Incentive Stock Options may be granted after the tenth anniversary of the effective date of the Plan. Termination of the Plan shall not affect the rights of optionees under options previously granted to them, and all unexpired options shall continue in force and operation after termination of the Plan except as they may lapse or be terminated by their own terms and conditions. 15. Effective Date. The Plan shall become effective on the date of adoption by the Board, subject to approval and ratification by the shareholders of the Company within twelve months of the date of adoption by the Board. All options granted prior to shareholder approval and ratification of the Plan shall be subject to such approval and ratification and shall not be exercisable until after such approval and ratification. 16. Tax Withholding. The Company may deduct and withhold from any cash otherwise payable to the optionee (whether payable as salary, bonus or other compensation) such amount as may be required for the purpose of satisfying the Company's obligation to withhold Federal, state or local taxes. Further, in the event the amount so withheld is insufficient for such purpose, the Company may require that the optionee pay to the Company upon its demand or otherwise make arrangements satisfactory to the Company for payment of such amount as may be requested by the Company in order to satisfy its obligation to withhold any such taxes. With the consent of the Committee, an Employee may be permitted to satisfy the Company's withholding tax requirements by electing to have the Company withhold shares of Stock otherwise issuable to the Employee or to deliver to the Company shares of Stock having a fair market value on the date income is recognized pursuant to the exercise of an option equal to the amount required to be withheld. The election shall be made in writing and shall be made according to such rules and in such form as the Committee may determine. EX-27 7
5 1,000 6-MOS NOV-30-1998 MAR-01-1998 MAY-31-1998 231 0 10,606 (484) 266 11,280 9,526 (6048) 21,628 11,611 0 0 0 41 3,685 21,628 1,116 19,594 880 28,174 316 26 337 (8,896) 33 (8,929) 0 0 0 (8,929) (2.19) 0 Not required to be calculated in accordance with generally accepted accounting principles.
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