-----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, IUMPHmAZ8r996bSBK2t5bsm0T2i+6KFT9bpO6M9ITKlZIbKYF71U+QPUaj/FW0Dx UJLZx5Q5fknBmFAFzAGFnw== 0000897069-98-000614.txt : 19981216 0000897069-98-000614.hdr.sgml : 19981216 ACCESSION NUMBER: 0000897069-98-000614 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19981214 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: S-1 SEC ACT: SEC FILE NUMBER: 333-68901 FILM NUMBER: 98769313 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 S-1 1 FORM S-1 Registration No. 333-_______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 -------------------------- EFFECTIVE MANAGEMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter) Wisconsin 7389 39-1292200 (State of incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) 12000 West Park Place Milwaukee, Wisconsin 53224 (414) 359-9800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------------- Michael D. Dunham, President and Chief Executive Officer Effective Management Systems, Inc. 12000 West Park Place Milwaukee, Wisconsin 53224 (414) 359-9800 Facsimile (414) 359-9011 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ Copies to: Phillip J. Hanrahan Jay O. Rothman Foley & Lardner 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 (414) 271-2400 Facsimile: (414) 297-4900 ---------------------------------- Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement. ----------------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_| -----------------------------------
CALCULATION OF REGISTRATION FEE - ----------------------------------- ----------------------- -------------------- ----------------------- -------------------------- Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of Securities to be Registered be Registered(1) Offering Price Per Aggregate Offering Registration Fee Share(4) Price - ----------------------------------- ----------------------- -------------------- ----------------------- -------------------------- Common Stock, par value $.01 per share (2) 54,714 $2.09 $114,353 $ 32 - ----------------------------------- ----------------------- -------------------- ----------------------- -------------------------- Common Stock, par value $.01 per share (3) (4) 892,500 $2.09 $1,865,325 $519 - ----------------------------------- ----------------------- -------------------- ----------------------- -------------------------- (1) In accordance with Rule 416, this Registration Statement includes an indeterminable number of shares of common stock, par value $.01 per share (the "Common Stock"), of Effective Management Systems, Inc. (the "Company"), which may be necessary to adjust the number of shares to be issued upon exercise or conversion of: (i) certain warrants (the "Warrants") to purchase up to 54,714 shares of the Common Stock of the Company at an exercise price of $3.60 per share and (ii) the Company's Series B 8% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"). (2) Represents shares of the Common Stock underlying the Warrants. (3) Represents shares of the Common Stock underlying the Series B Preferred Stock. Because the conversion price of the Series B Preferred Stock is subject to adjustment based on the future market value of the Common Stock, the Company is registering the maximum number of shares that could be issuable following such adjustment. (4) Pursuant to Rule 457(c), the proposed maximum offering price per share has been calculated based on the average of the bid and asked prices for the Common Stock on December 11, 1998.
---------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to Completion Dated December 14, 1998 PROSPECTUS 947,214 Shares EFFECTIVE MANAGEMENT SYSTEMS, INC. Common Stock (par value $.01 per share) This Prospectus relates to the public offering of common stock, par value $.01 per share (the "Common Stock"), of Effective Management Systems, Inc. ("we" or the "Company"). We are registering 947,214 shares of the Common Stock for sale by certain selling shareholders (each a "Selling Shareholder," collectively the "Selling Shareholders"), as follows: - 54,714 shares of the Common Stock that may be issued upon the exercise of certain warrants (the "Warrants"). We issued the Warrants in connection with the sale of the Company's Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and the Company's Series B 8% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"). - Up to 892,500 shares of the Common Stock issuable in connection with the conversion of the Series B Preferred Stock. The conversion price for the Series B Preferred Stock is subject to adjustment depending on the future market value of the Common Stock. The 892,500 shares represents the maximum number of shares of Common Stock that would be issuable if the adjustment applies to the fullest extent possible. This amount does not necessarily represent the actual total number of shares of the Common Stock that these holders of Series B Preferred Stock would receive if they convert all of their shares because the conversion price is also subject to certain anti-dilution adjustments. We will not be selling any of the shares of the Common Stock that are registered under this Prospectus. No underwriters will be used in selling the shares. While we will pay the expenses incurred in registering the Common Stock, including legal and accounting fees, we will not receive any proceeds from the sale of these shares. However, we may receive gross cash proceeds of up to an aggregate of $196,970 upon the exercise of the Warrants. The Selling Shareholders may offer their shares of the Common Stock in public or private transactions, on or off the OTC Bulletin Board, at prevailing market prices, or at privately negotiated prices. In such transactions, the Selling Shareholders and any broker-dealers through whom such Common Stock are sold may be deemed to be underwriters within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), as more fully described herein. Any commissions paid or concessions allowed to any broker-dealer, and, if any broker-dealer purchases such Common Stock as a principal, any profits received on the resale of such shares may be deemed to be underwriting discounts and commissions under the Securities Act. All selling and other expenses, including brokerage fees and any underwriting discounts or commissions, incurred by individual Selling Shareholders will be borne by such Selling Shareholders. Each share of the Series B Preferred Stock is presently convertible at any time at the option of the holders at a conversion price of $3.00, subject to certain adjustments. Investing in the Common Stock involves certain risks. See "Risks Factors" beginning on page 8. The Common Stock is traded on the OTC Bulletin Board and, as a result, the market for the Common Stock is not particularly liquid. The price at which the Common Stock trades may fluctuate and any market for the Common Stock may be subject to disruptions that could make it difficult or impossible for the holders of the Common Stock to sell shares in a timely manner, if at all, or to recoup their investment in the Common Stock. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Our principal executive offices are located at 12000 West Park Place, Milwaukee, Wisconsin 53224, and our telephone number is (414) 359-9800. The date of this Prospectus is __________, 1999 AVAILABLE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file at the SEC's public reference room at the following locations: - Main Public Reference Room 450 Fifth Street, N.W. Washington, D.C. 20549 - Regional Public Reference Room 75 Park Place, 14th Floor New York, New York 10007 - Regional Public Reference Room Northwestern Atrium Center 500 West Madison Street, Suite 1400 Chicago, Illinois 60661-2511 You may obtain information on the operation of the SEC's public reference rooms by calling the SEC at (800) SEC-0330. We are required to file these documents with the SEC electronically. You can access the electronic versions of these filings on the Internet at the SEC's website, located at http://www.sec.gov. We have included this Prospectus in our registration statement that we filed with the SEC (the "Registration Statement"). The Registration Statement provides additional information that we are not required to include in the Prospectus. You can receive a copy of the entire Registration Statement as described above. Please note that the Registration Statement also includes complete copies of the documents described in the Prospectus. Special Note Regarding Forward-Looking Statements Certain matters discussed in this Prospectus are "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company or we "believe," "anticipate," "expect" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, including those described in the section captioned "Risk Factors" below. These factors are not exhaustive, and should be read in conjunction with other cautionary statements that are included in this Prospectus. The forward-looking statements made herein are only made as of the date of this report and we are not obligated to publicly update forward-looking statements to reflect subsequent events or circumstances. PROSPECTUS SUMMARY As used in this Prospectus, unless the context otherwise requires, the terms "we," "us" or "Company" mean Effective Management Systems, Inc. and its subsidiaries. This summary highlights information contained elsewhere in this Prospectus, and is not complete and may not contain all the information you should consider before investing in the Common Stock. You should read the entire Prospectus carefully. THE COMPANY Overview We develop, procure, market and support integrated manufacturing and business management software. We design our Time Critical Manufacturing/R/ ("TCM/R/") software with the underlying philosophy that time is a crucial element in manufacturing, and that reducing time in the manufacturing process leads directly to increased profits for the manufacturer. TCM/R/ software integrates technologies such as electronic data interchange, imaging, bar-coding, factory automation, engineering system integration, distributed numerical control, statistical process control and fourth generation language tools with the Company's proprietary algorithms for scheduling and production, to optimize the customer's labor, capital and inventory utilization. The software we offer functions on the Windows NT, IBM AIX, Open VMS, and HP-UX operating systems. We also provide services support for our software products and sell computer hardware. The software products we offer include: TCM/R/, which is a pre-integrated enterprise resource planning, accounting and manufacturing execution system, and FACTORYnet/R/ I/S, which is an integrated manufacturing execution system, providing production management, shop floor scheduling, and operations support. We also offer the manufacturing software of the Baan Company ("Baan"), which is an enterprise resource planning and accounting system that will ultimately be combined with our manufacturing execution system. Our distributor arrangement with Baan was entered into in April 1998. Our software products are usually integrated with a bar code, data collection system or direct machine controls, and provide up-to-the-minute information to track production and business operations. This facilitates real-time decision making and enables employees throughout an organization to respond quickly to marketplace demands and unanticipated events. We typically focus our sales and marketing efforts on discrete ("discrete" manufacturers assemble or fabricate parts into finished products as distinguished from "process" manufacturers which mix, separate and otherwise combine or control ingredients to create finished products) manufacturing plants. We have licensed our software products to over 1,700 customer sites. We distribute our products in the United States through eight branch offices and through six joint ventures and independent distributors. We have also established distribution channels through independent distributors in Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, we have a joint venture in China to support these distributors. We were incorporated in Wisconsin in 1978. We became a publicly held company as a result of our initial public offering which was completed in February 1994. During 1995, we acquired Intercim Corporation and the remaining interest in Effective Management Systems of Illinois, Inc., a joint venture subsidiary, and in 1996, we acquired the remaining interest in Darwin Data Systems Corporation, another joint venture subsidiary. For further details regarding these acquisitions, see Note 2 of Notes to the Company's Consolidated Financial Statements. 1 Strategy Our objective is to grow as a leading provider of integrated business software systems for discrete manufacturing plants within our target market. We have identified three strategic initiatives to achieve this goal. Focus on Time Critical Manufacturing. We believe that manufacturers are striving to become more "time competitive," and that manufacturing software which focuses solely on providing information for planning and on recording information for historical analysis will be inadequate to meet the needs and demands of manufacturers in the years to come. To be effective in the future, we believe that manufacturing software will be required to empower individuals at all levels of an organization to make immediate decisions regarding production processes and business activities. With few exceptions, we believe that the limited number of information system implementations currently in place which have this "time" focus have been developed on an individual customized basis. We are not aware of other major products available in our target market for discrete manufacturers which offers both planning and execution systems and has a strategy of focusing on time. Commitment to Manufacturing Execution Systems. We believe that discrete manufacturers can gain significant competitive advantage by implementing Manufacturing Execution Systems. These systems bring together the data and information from Enterprise Resource Planning Systems, Industrial Control Systems and Engineering Systems. Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our experience in the marketplace resulted in the 1995 introduction of the first "pre-integrated" Enterprise Resource Planning/Manufacturing Execution System/Controls software offering for discrete manufacturers. The acquisition of Intercim Corporation facilitated this pre-integration initiative. Software pre-integration means that a customer can buy a comprehensive set of software from the Company which has already been integrated and proven to function. The pre-integration package also contemplates that other software, for example, Computer Aided Design systems, may already be in place at the customer site. "Off-the-shelf interfaces" for popular Computer Aided Design systems which also are proven in advance are available to facilitate interaction with these software products. Implementation time frames for pre-integrated software are between nine and eighteen months. We plan to continue to focus on the pre-integrated software marketplace. We believe that "pre-integration" of much of our software reduces the time and cost of system implementations and increases the business value to the manufacturer similar to the way that "suites" of desktop software have affected that marketplace as compared to custom integration of word processing, data base and spreadsheet desktop products. Software Products We develop, market and support TCM/R/ application software for discrete manufacturing companies. We currently offer licenses for three software products: (a) TCM/R/, which is a full function business and Enterprise Resource Planning software system, including a pre-integrated Manufacturing Execution System providing production management, shop floor scheduling and operations support; (b) FACTORYnet/R/ I/S, which is a Manufacturing Execution System that provides production personnel with correct revisions of drawings, specifications, procedures, and instructions to help them make a better product and make it right the first time; and (c) the Baan product offering, which is a full function business Enterprise Resource Planning and accounting system for large companies that will be complemented by our pre-integrated Manufacturing Execution System. Markets and Customers We primarily target companies operating discrete manufacturing plants in the United States and Canada. These plants may be owned by privately held companies or by large, multi-national public 2 corporations. Our customers include, among others, capital equipment manufacturers, job shops, high volume manufacturers, automotive suppliers, consumer product manufacturers and aerospace equipment manufacturers. Sales and Marketing In the United States and Canada, we license our products and offer services through seventeen branch offices and seven joint ventures and independent distributors. We market our products through advertising campaigns in national trade periodicals and through direct mailings. We supplement these efforts with listings in relevant directories and trade show and conference appearances. We also receive leads regarding potential customers from hardware and services vendors, existing customers and various accounting and consulting firms. Sales cycles for our products vary substantially based on the degree of integration, consulting and training required and also on the status of the customer's hardware system implementation. A sales cycle is usually three to twelve months from the time an initial sales presentation is made until the time a signed license agreement is entered into with a customer. Product Development We believe we must continue to enhance, broaden and modify our existing line of software products to meet the constantly evolving needs of discrete manufacturers within our target market. We have relied on internal development, outside procurement, and development related to customized projects implemented at field sites to extend, enhance and support our software products, and develop and integrate new capabilities. Software development efforts currently in progress include the development of product enhancements such as enhanced manufacturing functionality (including visual scheduling and touch screen data collection), support for Microsoft SQL server, electronic commerce, extended operation on various relational database products, and other enhanced functional capability. There can be no assurance, however, that these development efforts will result in product enhancements that we will be able to market successfully. Certain of these enhancements are dependent upon the development efforts of third party suppliers over whom we have no control. In the event the development efforts of the third party suppliers are delayed or are unsuccessful, our software developments would be similarly delayed. Software development is, however, an evolutionary process and the Company's management believes it could eventually find other suppliers or, if unsuccessful in its search, that it could successfully re-engineer existing products to fulfill its requirements. Competition The manufacturing software industry is intensely competitive and rapidly changing. A number of companies offer products similar to our products. Some of our existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we have. Restructuring In the quarter ended May 31, 1998, we recorded a restructuring charge of $6,836,000 related to entering into a new distributor arrangement for manufacturing software, and a reduction of costs focused on improving our financial performance. In April 1998, we signed an agreement to resell the manufacturing software of Baan. We intend to combine our manufacturing execution software with the Baan software product to serve the high end of the manufacturing mid-market. We have the right to represent the Baan product in the entire United States, but we will focus our offering in a 19-state market including much of the Midwest and Eastern regions of the United States. The restructuring charge included $553,000 relating to the refocusing of our geographic markets and the closing of operations in the West and Southwest regions of the United States. From a geographic 3 standpoint, the charge also includes $1,213,000 for exit costs and software write-off related to international operations. In line with the introduction of the new product for the high end of the mid-market, we are refocusing our current TCM/R/ product to the lower end of the mid-market and we will continue to develop and support our product for this marketplace. We also intend to provide a path to the Baan product offering for those customers who are or may grow into the need for a larger company solution. The charge included $2,656,000 for both the write-off of capitalized software pertaining to large company functionality which is now supplied through the Baan product offering and the write-off of other software whose future value was impaired by restructuring actions. The charge also reflects costs of $1,841,000 associated with the write-off of capitalized software mainly related to technology, the future value of which was impaired by restructuring actions and management's assumptions regarding future technological changes. We have also reduced certain of our operating expenses primarily in development, marketing and administration through the termination of employees and other expense reductions which resulted in a charge of $573,000. Employees As of November 30, 1998, we had 299 full-time employees, of whom 60 were engaged in sales and marketing; 58 in product development; 140 in customer service; and 41 in management, finance and administration. Our employees are not represented by any collective bargaining organization and we have never experienced a work stoppage. We consider our employee relations to be good. THE SERIES B 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK OFFERING In October, 1998, we sold 780 shares of our Series B Preferred Stock, at a purchase price of $1,000 per share, for an aggregate gross purchase price of $780,000. In addition, we exchanged 1,005 shares of our Series B Preferred Stock for a like number of shares of our Series A Preferred Stock. We had issued the Series A Preferred Stock in August, 1998 for an aggregate gross purchase price of $1,005,000. Dividends accrue on the Series B Preferred Stock at a rate of 8% per year and are cumulative. The holders of the Series B Preferred Stock may convert their shares at any time into shares of the Common Stock at a conversion price of $3.00 per share, subject to adjustment. In addition, we issued the Warrants to purchase a total of up to 54,714 shares of Common Stock, in connection with the sale of the Series A and Series B Preferred Stock. The Warrants are exercisable at a price of $3.60 per share. This Prospectus relates to the shares of the Common Stock that may be issued upon conversion of the Series B Preferred Stock and upon the exercise of the Warrants. RISK FACTORS An investment in the Common Stock involves certain risks that a potential investor should carefully evaluate prior to making an investment. A discussion of certain factors to be considered in evaluating the Company, its business and an investment in the Common Stock is included in the section titled "Risk Factors" immediately following this Summary. 4 Summary Historical Consolidated Financial and Operating Data
Year Ended November 30, Nine Months Ended August 31, (Dollars in Thousands) (Dollars in Thousands) ------------------------------------------------------------ ---------------------- 1993 1994 1995(4) 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- Income Statement Data: Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748 Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573 Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455 -------- -------- -------- -------- -------- -------- -------- Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776 Cost of third party software license fees 405 797 1,149 2,484 3,065 1,906 1,886 Software development amortization 342 515 879 1,591 2,535 2,077 2,277 Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175 Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112 -------- -------- -------- -------- -------- -------- -------- Total cost of products/ services 9,397 9,925 15,300 21,163 22,860 16,641 15,450 Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326 -------- -------- -------- -------- -------- -------- -------- Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043 General and administrative expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837 Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118 Restructuring and other charges 0 0 0 0 0 0 6,836 -------- -------- -------- -------- -------- -------- -------- Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284 Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508) Other income (expense) (32) 342 80 (118) (337) (176) (481) Income (loss) before income taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989) Income tax expense (benefits) 650 975 79 112 (618) (883) (33) -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45) Weighted average common and common equivalent share outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038 ======== ======== ======== ======== ======== ======== ======== Other Data: Software investment as a percentage of software license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2% Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918 1 Balance Sheet Data: Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575) Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683 Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848 Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541 - --------------- (1) Does not include capitalized software development costs of $691, $1,105, $2,321, $3,372, and $4,471 recorded for the years ended November 1993, 1994, 1995, 1996 and 1997, respectively, and $3,207 and $2,800 for the nine months ended August 31, 1997 and 1998, respectively. (2) Weighted average common and common equivalent shares outstanding for the periods shown include the effect of common stock equivalents, if dilutive. (3) Software investment consists of product development expense and capitalized software development costs. (4) Includes results of Effective Management Systems of Illinois, Inc. and Intercim Corporation since being acquired effective March 31, 1995 and September 6, 1995, respectively.
5 RISK FACTORS The risk factors set forth below, as well as other information appearing in this Prospectus should be carefully considered before making an investment in the Common Stock. Certain statements in this Prospectus, including statements relating to our expected operations and financing activities, are forward-looking statements that involve certain risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." Losses from Operations. For the three and nine months ended August 31, 1998, we had operating losses of $1,093,000 and $10,022,000, respectively, compared to operating losses of $1,044,000 and $2,308,000 for the corresponding periods in 1997. As to the operating losses for the nine months ended August 31, 1998, $6,836,000 represented restructuring and other charges. As of August 31, 1998, we had a deficit in retained earnings of $8,761,000 compared to retained earnings of $1,260,000 at November 30, 1997. Although we have taken steps to improve our financial performance, we are unable to give any assurance that these actions will reverse our pattern of net losses. Net Income (Loss) for the Last Three Years. For the fiscal year ended November 30, 1997 we had net loss of $2,160,000. For the fiscal years ended November 30, 1996 and 1995, we had net income of $153,000 and $131,000, respectively. Absence Of Market For Common Stock There is currently no formal trading market for the Common Stock. Currently, the Common Stock trades only on the OTC Bulletin Board and, as a result, the market for the Common Stock is not particularly liquid. The price at which the Common Stock may trade may fluctuate and the market for the Common Stock may be subject to disruptions that could make it difficult or impossible for the holders of the Common Stock to sell shares in a timely manner, if at all. In addition, if trading markets do develop, they may be unstable and illiquid for an indeterminate period of time. Dependence on Principal Products. A significant portion of our revenue is derived from license fees for TCM/R/ and for FACTORYnet/R/ I/S and the sale of related support services. Accordingly, any event that could adversely affect license fees for TCM/R/ or FACTORYnet/R/ I/S, such as significant flaws or incompatibility, negative publicity or evaluation, or obsolescence of the hardware platforms on which the systems run, could have a material adverse effect on our results of operation. Our future financial performance will depend, in part, on the continued development and introduction of new and enhanced versions of TCM/R/, FACTORYnet/R/ I/S and other products, and customer acceptance of such new and enhanced products. Use of Proceeds. We are not selling any of the shares offered in this Prospectus, and we will not receive any of the proceeds from the sale of those shares. However, we may receive gross cash proceeds from the exercise of the Warrants in an amount equal to the number of Warrants exercised multiplied by $3.60 per share, subject to adjustment. We will bear all of the costs and expenses associated with registering the shares. The gross cash proceeds that we receive from the exercise of these securities will be reduced by the amount of related expenses. We anticipate that we will use the gross cash proceeds, if any, for working capital and general corporate purposes. 6 Dependence on Third Party Software. We recently entered into an arrangement pursuant to which we license certain software products from Baan to sell into a segment of our marketplace. As a result of this arrangement, we have refocused our current TCM/R/ product to the lower end of the mid-market and will rely on the Baan product to service the high end of the mid-market. There can be no assurance that we will be successful in marketing the Baan product offering, that such offering will remain viable in our target market or that Baan will continue such relationship after the expiration of its initial term. In addition to the Baan relationship, internally developed software products incorporate and use software technology and software products developed by other third parties. There can be no assurance that all of these companies will remain in business or that their product lines will remain viable. If any of these companies fails to remain in business or abandons or fails to enhance a particular product line, we may need to seek other suppliers. This could result in us having to significantly alter our internally developed product lines which could have a material adverse effect on our results of operations. There also can be no assurance that our current suppliers will not significantly alter their pricing in a manner adverse to us. Dependence on Key Employees. Our success is dependent to a significant extent on our executive officers and other key personnel (including technical and sales personnel), the loss of whom could have a material adverse effect on the Company. Our future success will depend in large part on our ability to attract and retain talented and qualified employees. Competition in the recruiting of highly-qualified personnel in the management information systems industry is intense and there can be no assurance that we can retain our key employees or that it can attract, assimilate and retain other qualified personnel in the future. We have recently experienced attrition at rates higher than our historical experience. We have taken steps to curtail the attrition, but we can give no assurance that these steps will be successful or that further attrition will not materially impact our financial performance. New Products and Technical Change. The market for our products (including third-party supplied products) is characterized by rapid technological advances, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing product offering and products currently under development obsolete and unmarketable. Our future success will depend upon our ability to enhance our current products and to develop and introduce or obtain from third-party suppliers new products that keep pace with technological developments, respond to evolving end-user requirements and achieve market acceptance. Any failure by us to anticipate or respond adequately to technological developments or end-user requirements, or any significant delays in product development, acquisition or introduction, could result in a loss of competitiveness or revenues. There can be no assurance that we will be successful in developing, acquiring and marketing new products or product enhancements on a timely basis or that we will not experience significant delays in the future, which could have a material adverse effect on our results of operation. Success of Recent Restructuring. In April 1998, we effected a major restructuring and recorded a restructuring charge of approximately $6.8 million. The restructuring related to entering into a new distribution arrangement with Baan for manufacturing software and various cost reductions aimed at improving our financial performance. In connection with the restructuring, we closed facilities both in the United States and internationally and took actions to rationalize our workforce, particularly in the development, marketing and administrative areas. Although we expect the restructuring to impact our financial performance positively, no assurance can be given that the restructuring will be successful or that it will not have unanticipated effects, such as the loss of significant customers and/or key employees. 7 Intellectual Property and Property Rights. We regard our software products as proprietary, in that title to and ownership of our software generally reside exclusively with the Company. We attempt to protect ownership of our software with a combination of copyright, trademark and trade secret laws, employee and third-party disclosure agreements and other methods of protection common in the industry. Despite these precautions, it may be possible for unauthorized third parties to copy or reverse-engineer certain portions of our products or to obtain and use information that we regard as proprietary. Like many software firms, we presently have no patents. We license the source code for our software to some customers for customization. Although our source code license contains confidentiality and nondisclosure provisions, there can be no assurances that such customers will take adequate precautions to protect such code. In addition, the laws of some foreign countries do not protect the our proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the mechanisms we use to protect our software will be adequate or that our competitors will not independently develop software products that are substantially equivalent or superior to our software products. Although we do not believe that our products infringe on the existing proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against us. Variability of Quarterly Operating Results; Limited Backlog. Our operating results can vary substantially from quarter to quarter due to various factors, including, among others: the size and timing of customer orders; the buying patterns of manufacturers in our target market; delays in the introduction of products or product enhancements by the Company or by other providers of hardware, software and components for the management information systems market; competition and pricing in the software industry; customer order deferrals in anticipation of new products; market acceptance of new products; reduction in demand for existing products; changes in operating expenses; and general economic conditions. We have historically operated with little backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is dependent on orders booked and shipped during that quarter. A significant portion of our operating expenses are based on anticipated revenue levels and are relatively fixed in nature. If revenue does not meet our expectations in any given quarter, operating results may be adversely affected. Competition. The management information systems industry is intensely competitive and rapidly changing. A number of companies offer products similar to the products we offer. Some of our existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sale organizations and significantly greater financial resources than the Company and its third-party suppliers. There can be no assurance that such competitors will not develop products that are superior to the products we offer or that achieve greater market acceptance. Our future success will depend, in part, upon our ability to increase software license fee revenues in our target markets. There can be no assurance that we will be able to compete successfully against our competitors or that the competitive pressures we face will not adversely affect our financial performance. Expansion Plans. We plan to expand our business within our distribution network in the United States with the objective of increasing total net revenues and profits. There can be no assurance, however, that the efforts and funds directed towards enhancing our product offering and expanding within our distribution network will result in revenue and profit growth. Any future growth of the Company will also depend on, among other things, our ability to gain market acceptance for our product offering in target geographic areas and to monitor and control the additional costs and expenses associated with expansion. We are also dependent upon securing services at competitive rates from third-party service providers. No assurance can be given that we will be able to successfully manage these aspects of our business. 8 Financial Covenants and Limitations. Our credit agreement with our primary lender contains certain restrictive covenants, including covenants relating to earnings before interest, taxes, depreciation and amortization ("EBITDA") and tangible net worth. As a result of our recent financial performance and restructuring, we have been obligated to obtain and have obtained covenant relief from our lender relating to the EBITDA and tangible net worth covenants. In the event that our financial performance does not improve and if we are unable to secure additional investment capital, we will require additional covenant relief. In the event that such covenant relief is not obtained, it would likely have a material adverse effect on our liquidity, including our ability to fund continuing operations at current levels. In addition, our current credit facility contains limits on the amount we may borrow based on the level of our outstanding accounts receivable. At December 1, 1998, we had borrowing availability of $559,000 under our credit agreement. "Penny Stock" Rules. The Common Stock is currently traded on the OTC Bulletin Board after having been delisted from the Nasdaq National Market for failing to meet minimum eligibility requirements. Since the Common Stock is not traded on the Nasdaq National Market or the Nasdaq Small Cap Market, if no other exclusion from the definition of "penny stock" under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is available, then any broker engaging in a transaction in the Company's securities is required to provide any customer with a risk disclosure document and the compensation of the broker/dealer in the transaction and monthly account statements showing the market values of the Company's securities held in the customer's accounts. The bid and offer quotations and compensation information must be provided prior to effecting the transaction and must be contained on the customer's confirmation. If brokers are subject to the "penny stock" rules when engaging in transactions in our securities, they may be less willing to engage in such transactions. Control by Management. Our management currently holds approximately 37% of the outstanding Common Stock. As a result, management personnel have a significant impact, if they act together, on the election of directors and shareholder approval of various corporate actions. No Dividends. We have never paid any cash dividends on the Common Stock and do not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of dividends on the Common Stock by the Company will depend on our earnings, financial condition and other business and economic factors affecting the Company at that time as the Board of Directors may consider relevant. Anti-Takeover Provisions of Charter, Bylaws and Wisconsin Law. Certain provisions of our charter and bylaws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer or proxy contest involving the Company that is not approved by the Board of Directors, even if such events may be beneficial to the interests of shareholders. For example, our charter authorizes the Board of Directors, without shareholder approval, to issue preferred stock in addition to the Series A Preferred Stock and the Series B Preferred Stock with voting or conversion rights which could adversely affect the voting power of the holders of the Common Stock. In addition, the Wisconsin Business Corporation Law contains provisions that may have the effect of delaying or making more difficult attempts by others to obtain control of the Company without the approval of the Board of Directors. Year 2000 Compliance. Many computer programs and applications define the applicable year using two digits rather than four in order to save memory and enhance the speed of repeated date-based calculations. The "Year 2000 9 problem" refers to the inability of these computer programs on and after January 1, 2000 to recognize that "00" refers to "2000" rather than "1900." The term "Year 2000-compliant" means a computer or a computer system which has been designed or modified to recognize dates on and after January 1, 2000. We utilize a combination of our own software and custom-written systems for running our own operations. Based on our own evaluation, we believe that we will incur no significant costs associated with ensuring Year 2000 compliance of our internal systems. Since the release of version 5.1.2 of the Company's software product, our software product has been Year 2000 compliant. Effect Of Future Sales Of Common Stock; Registration Rights We cannot predict the effect, if any, that future sales or issuance of the Common Stock or the availability of the Common Stock for future sale or issuance will have on future market prices of the Common Stock. Sales of substantial amounts of the Common Stock or the perception that such sales may occur, could adversely affect prevailing market prices for the Common Stock. The agreement under which we sold the Series B Preferred Stock (the "Purchase Agreement") obligates us, at our sole cost and expense, to file a registration statement covering shares of the Common Stock issuable upon conversion of the Series B Preferred Stock and to use our best efforts to have such registration statement declared effective as soon as possible after filing and to keep the registration statement effective for up to three years. The Registration Statement of which this Prospectus is a part is the registration statement referred to in the Purchase Agreement. The Purchase Agreement also provides for certain demand and piggyback registration rights. See "Description of Capital Stock." 10 USE OF PROCEEDS We will not receive any of the proceeds from the sale of the shares of the Common Stock by the Selling Shareholders. If all of the Warrants are exercised at the exercise price of $3.60, we will receive gross cash proceeds of approximately $196,970. See "Plan of Distribution." The proceeds may be used for working capital and general corporate purposes. SELLING SECURITY HOLDERS The following table sets forth the number of Shares (as hereinafter defined) and the total number of Shares assuming the conversion or exercise of all the Series B Preferred Stock and the Warrants owned by each of the Selling Shareholders and registered hereunder. Because the Selling Shareholders may offer all or part of the shares of the Common Stock received upon conversion or exercise of the Series B Preferred Stock or the Warrants (the "Shares"), which they hold pursuant to the offering contemplated by this Prospectus, and because their offering is not being underwritten on a firm commitment basis, no estimate can be given as to the amount of the Series B Preferred Stock or the Warrants that will be held upon termination of this offering. The Shares offered by this Prospectus may be offered from time to time by the Selling Shareholders named below. 11 Shares underlying the Series B Preferred Stock and Warrants to be registered and offered by the Selling Shareholders.
Shares Beneficially Owned Shares Beneficially Owned After Prior to Offering Offering (1) Amount and Number of Amount and Name and Address of Nature of Percentage Shares Offered Nature of Percentage of Beneficial Owner Ownership of Class Hereby Ownership Class Selling Shareholders(2)(3): Alvin R. Bonnette, Trustee 16,667 * 16,667 0 * Arthur D. Sterling and Marie Sterling 8,333 * 8,333 0 * Christopher Schreiber(4) 6,145 * 6,145 0 * Carl M. Birkelbach(7) 2,100 * 2,100 0 * David H. Padden 1983 Trust 6,667 * 6,667 0 * David Random 8,333 * 8,333 0 * Donald Gross 3,333 * 3,333 0 * Donald T. McKiernan(7) 3,200 * 3,200 0 * Douglas E. Hailey(5) 14,965 * 14,965 0 * EmJayco 10,000 * 10,000 0 * Gary Arnold 50,000 1.1% 50,000 0 * George N. Gaynor 6,667 * 6,667 0 * Gustave Levinson and Lydia F Levinson 8,333 * 8,333 0 * JDN Partners, L.P. 66,667 1.4% 66,667 0 * John Clifford 33,333 * 33,333 0 * John D. Holley 50,000 1.1% 75,000 0 * John L. Palazzola and Maria Palazzola 8,333 * 8,333 0 * John R. Bertsch 6,667 * 6,667 0 * John R. Graham, Trustee of the John R. Graham Trust dated 1/3/92 3,333 * 3,333 0 * Joseph G. D'Amadeo(7) 6,515 * 6,515 0 * Laura A. Conroy(7) 2,400 * 2,400 0 * Lawrence S. Smith 3,333 * 3,333 0 * Lewco Securities as Nominee for Schroder & Co. Custodian f/b/o Ron Magruder and Elizabeth Magruder 33,333 * 33,333 0 * Lone Star Holdings Partners, L.P 66,667 1.4% 66,667 0 * Michael E. Recca(7) 7,754 * 7,754 0 * Michael Taglich(6) 14,850 * 14,850 0 * Morton Topfer 83,333 1.6% 83,333 0 * Rafael Caballero 16,667 * 16,667 0 * Richard C. Oh(7) 1,000 * 1,000 0 * Robert C. Schroeder(7) 1,600 * 1,600 0 * Robert F. Taglich(6) 8,333 * 8,333 0 * Robert L DeBruyn and Tracey H. DeBruyn 3,333 * 3,333 0 * Sanford R. Penn Jr 16,667 * 16,667 0 * Shadow Capital LLC 16,667 * 16,667 0 * Thomas J. Waggoner and Patsy Ann Waggoner 3,333 * 3,333 0 * Thomas P. Morrisey 10,000 * 10,000 0 * U.S. Bank, National Association, as Trustee for the Dorsey & Whitney Master Trust FBO Stanley Rein 6,667 * 6,667 0 * Vincent M. Palmieri(7) 1,000 * 1,000 0 * William C. Smith Jr 3,333 * 3,333 0 * William J. Easton Jr 3,333 * 3,333 0 * William Kuntz 10,000 * 10,000 0 * William Wieck & Elizabeth Wieck 5,000 * 5,000 0 * Wulf Paulick and Renate Paulick 5,000 * 5,000 0 * - ------------- * represents less than 1%. (1) Assumes the sale of all of the Shares offered by each Selling Shareholder. 13 (2) Percentage ownership for Selling Shareholders is based on 4,755,700 (4,105,986 outstanding as of October 22, 1998, plus 54,714 exercisable through the Warrants and 595,000 exercisable through conversion of the Series B Preferred Stock at $3.00) shares of the Common Stock outstanding. (3) The number of shares beneficially owned with respect to Selling Shareholders holding the Series B Preferred Stock is based on conversion at the current conversion price of $3.00. (4) Includes (i) 1,667 shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock and (ii) 4,478 issuable upon exercise of certain of the Warrants. (5) Includes (i) 3,333 shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock and (ii) 11,632 issuable upon exercise of certain of the Warrants. (6) Includes (i) 8,333 shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock and (ii) 6,517 issuable upon exercise of certain of the Warrants. (7) Represents shares issuable upon exercise of certain of the Warrants.
14 DIVIDEND POLICY We have no present intention of paying any dividends on the Common Stock. We expect that, except for the dividends required to be paid or payable to the holders of the Series A or Series B Preferred Stock, we will retain our earnings, if any, to finance operations. The declaration and payment of future dividends to holders of the Common Stock will be at the discretion of the Company's Board of Directors and will depend upon many factors, including the Company's financial condition, earnings, the capital requirements of its operating subsidiaries, legal requirements and such other factors as the Board of Directors deems relevant. MARKET FOR THE COMMON STOCK There is currently no established public trading market for the Common Stock. The Common Stock is traded on the OTC Bulletin Board. See "Risk Factors--Absence of Market for Common Stock." As of October 15, 1998, we had 432 record holders of the Common Stock and 304 record holders of certain publicly traded warrants to purchase Common Stock (the "Public Warrants"). See "Description of Capital Stock". PRICE RANGE OF COMMON STOCK The Company's Common Stock was traded on the Nasdaq National Market for fiscal years ended November 30, 1996 and 1997, and through November 6, 1998 for the fiscal year ended November 30, 1998. Currently, the Company's Common Stock is traded on the OTC Bulletin Board. The range of high and low bid closing quotations for the Common Stock and the Public Warrants for each fiscal quarter for the two (2) completed fiscal years and the most current fiscal year, are as follows: Common Stock Public Warrants 1999 High Low High Low First Quarter $ ______ $ ______ $ ______ $ ______ (through _______, 1999) 1998 High Low High Low First Quarter $ 4-3/8 $ 2-1/16 $ 2 $ 1-1/8 Second Quarter $ 5-7/8 $ 3 $ 1-5/8 $ 1 Third Quarter $ 2-7/8 $ 5-3/8 $ 1-1/2 $ 1/2 Fourth Quarter $ 3-3/4 $ 1-7/8 $ 1-1/8 $ 3/8 1997 High Low High Low First Quarter $ 7-3/4 $ 5-1/2 $ 3-3/16 $ 2-1/2 15 Common Stock Public Warrants Second Quarter $ 7-1/2 $ 6-1/2 $ 2-1/2 $ 3/4 Third Quarter $ 6-1/8 $ 4 $ 1-1/2 $ 1 Fourth Quarter $ 6-1/2 $ 4 $ 2 $ 1-1/2 16 Selected Historical Consolidated Financial Data The following table sets forth the selected historical financial data of the Company for each of the preceding five years ended November 30, 1997 and for the nine month periods ended August 31, 1997 and 1998. The selected historical data for each of the preceding five years ended November 30, 1997 are derived from the audited consolidated financial statements of the Company. The selected historical data for each of the nine month periods ended August 31, 1997 and 1998 are derived from the unaudited interim consolidated financial statements of the Company. In the opinion of management, the interim consolidated financial statements reflect all adjustments (consisting only of normal and recurring adjustments necessary to fairly present the information presented for such periods.) The selected historical financial data presented herein are qualified in their entirety by, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Summary Historical Consolidated Financial and Operating Data
Year Ended November 30, Nine Months Ended August 31, (Dollars in Thousands) (Dollars in Thousands) ------------------------------------------------------------ ---------------------- 1993 1994 1995(4) 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- Income Statement Data: Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748 Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573 Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455 -------- -------- -------- -------- -------- -------- -------- Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776 Cost of third party software license fees 405 797 1,149 2,484 3,065 1,906 1,886 Software development amortization 342 515 879 1,591 2,535 2,077 2,277 Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175 Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112 -------- -------- -------- -------- -------- -------- -------- Total cost of products/ services 9,397 9,925 15,300 21,163 22,860 16,641 15,450 Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326 -------- -------- -------- -------- -------- -------- -------- Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043 General and administrative expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837 Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118 Restructuring and other charges 0 0 0 0 0 0 6,836 -------- -------- -------- -------- -------- -------- -------- Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284 Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508) Other income (expense) (32) 342 80 (118) (337) (176) (481) Income (loss) before income taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989) Income tax expense (benefits) 650 975 79 112 (618) (883) (33) -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45) Weighted average common and common equivalent share outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038 ======== ======== ======== ======== ======== ======== ======== Other Data: Software investment as a percentage of software license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2% Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918 1 Balance Sheet Data: Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575) Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683 Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848 Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541 - --------------- (1) Does not include capitalized software development costs of $691, $1,105, $2,321, $3,372, and $4,471 recorded for the years ended November 1993, 1994, 1995, 1996 and 1997, respectively, and $3,207 and $2,800 for the nine months ended August 31, 1997 and 1998, respectively. (2) Weighted average common and common equivalent shares outstanding for the periods shown include the effect of common stock equivalents, if dilutive. (3) Software investment consists of product development expense and capitalized software development costs.
17 (4) Includes results of Effective Management Systems of Illinois, Inc. and Intercim Corporation since being acquired effective March 31, 1995 and September 6, 1995, respectively. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations - At and for the Three and Nine Months Ended August 31, 1998 Compared to the Three AND Nine Months Ended August 31, 1997. Overview The Company recorded a decrease of 15.5% in net revenues and a net loss of $1,093,000 for the third quarter of fiscal 1998 compared with a net loss of $1,044,000 for the third quarter of fiscal 1997. The third quarter of fiscal 1998 does not reflect a tax benefit relating to the loss because the Company is in a loss carry forward position for financial reporting purposes. Software revenues were down 22.1% in the third quarter of fiscal 1998 compared to the same period in the prior year. Management believes this decrease in software revenues was mainly the result of the attention and efforts spent in the transition to adding the new Baan product line, reduced revenues from restructured operations (a reduction of $716,000 from the third quarter of 1997) and reduced revenues due to lower levels of personnel caused by attrition. The Company recorded a decrease in net revenues of 6.0% and a net loss of $10,022,000 (including a $6,836,000 restructuring charge incurred in the second quarter of 1998) for the first three quarters of fiscal 1998, compared with a net loss of $2,308,000 for the first three quarters of fiscal 1997. Although the goal of the Company is to return to profitability, no assurance can be given that the various measures that the Company has taken will actually result in the achievement of this goal. Our long term success is also dependent on our ability to attract and retain a highly qualified sales, development and service staff. We have recently experienced attrition at rates higher than our historical experience. We have taken steps to curtail the attrition, but no assurance can be given that these steps will be successful or that further attrition will not materially impact our financial performance. Results of Operations Net Revenues Net revenues were $8,182,000 for the three months ended August 31, 1998, which was a decrease of 15.5% from the $9,682,000 for the same quarter in the previous year. Net revenues were $27,776,000 for the nine months ended August 31, 1998, which was a decrease of 6.0% from the $29,539,000 for the same period in the previous year. the overall decrease in revenues for the three months ended August 31, 1998 was attributable primarily to the attention and efforts spent planning and executing the restructuring plan. The mix of revenues comparing software, services and hardware revenues as a percentage of net revenues was 47.3%, 48.6%, and 4.1%, respectively, in the third quarter of fiscal 1998, as compared with 51.3%, 42.3%, and 6.4%, respectively, in the third quarter of fiscal 1997. The mix of revenues comparing software, services and hardware revenues as a percentage of net revenues was 48.9%, 45.9%, and 5.2%, respectively, in the first three quarters of fiscal 1998, as compared with 49.1%, 41.8%, and 9.1%, respectively, in the first three quarters of fiscal 1997. International revenues represented less than 10% of net revenues for all periods presented. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer software backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on software orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees decreased 22.1% to $3,866,000 in the third quarter of fiscal 1998 from $4,963,000 in the third quarter of fiscal 1997. The decrease in software license fees was mainly attributable to the attention and efforts spent in the transition to adding the new Baan product lines, reduced revenues from restructured operations (a reduction of $664,000 from the third quarter of fiscal 1997), and reduced revenues due to lower levels of sales personnel caused by attrition. As additional sales personnel continue to train in the Baan products, sales productivity temporarily decreases. The length of the sales cycle can range from two to twelve months depending on such factors as the size of the prospect or complexity of the prospect need. The Company is also in the process of building a sufficient level of prospect leads to maintain and enhance necessary levels of 19 sales activity. Management expects that this decrease in productivity will mainly continue during the next fiscal quarter, and, thereafter, productivity is expected to increase. Management is also actively recruiting new sales talent through various methods. Software license fees decreased 6.3% to $13,573,000 in the first three quarters of fiscal 1998 from $14,491,000 in the first three quarters of fiscal 1997. The decrease was mainly attributable to the reasons mentioned above for the third quarter of the 1998 fiscal year except that software revenues rose in the first quarter of fiscal 1998 due to the introduction of new products. Service Revenues We offer a number of optional services to our customers, including such services as a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues decreased to $3,977,000 for the three months ended August 31, 1998, as compared with $4,095,000 for the same period of the prior year. This decrease was mainly the result of a lower level of service personnel though attrition. Service revenues increased to $12,748,000 for the nine months ended August 31, 1998, as compared with $12,361,000 for the same period of the prior year. Management expects the level of service demand to grow as the Company transitions to the addition of the Baan product line and recognizes the incremental revenues associated with that transition. We have expanded our recruiting efforts and have begun to hire additional service personnel. Hardware Revenues Hardware revenues decreased 45.7% to $339,000 in the third quarter of fiscal 1998 compared with $624,000 for the corresponding period of 1997. Hardware revenues decreased 45.9% to $1,455,000 in the first three quarters of fiscal 1998 compared with $2,687,000 for the corresponding period of 1997. The decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware and the discontinuation of hardware sales to an affiliate of the Company, EMS Solutions, Inc. (a decrease of $93,000 and $334,000 from the third quarter and first three quarters of 1997, respectively) (See General and Administrative Expense below). Management expects the trend of declining hardware sales to continue due to the increasing sales of software licenses operating on the Microsoft Windows NT platform. Hardware used with the Microsoft Windows NT platform is either generally already in place at the customer site or readily available from local suppliers who can also provide local support. Cost of Software License Fees The cost of software license fees as a percentage of related revenue was 27.4% for the third quarter of fiscal 1998, an increase from 26.6% for the corresponding period of 1997. The cost of software license fees as a percentage of related revenue was 30.7% for the first three quarters of fiscal 1998, an increase from 27.5% for the corresponding period of 1997. Cost of software license fees is composed of both amortization of past investment in software development and the third party costs associated with the software revenues. Software amortization is related to past investment in software development and does not vary consistently with variations in software revenues. We wrote off a substantial portion of our past investment in software development in conjunction with our restructuring efforts in the quarter ended May 31, 1998. (See the discussion under the caption "Restructuring and Other Charges" in the section of the Company's Form 10-Q for the period ended May 31, 1998 titled "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Software amortization decreased $343,000 in the third quarter of fiscal 1998 as compared to the same period of 1997 as a result of the amounts written off of previously capitalized development costs in the restructuring. The cost of software license fees is also dependent on the level of third party costs associated with certain software revenues and includes such items as purchased licenses and other components. The third party costs includes costs associated with the new Baan product line revenues and vary directly with those revenues. The remaining increases in the cost of software license fees as a percentage of related revenue was due to these third party costs and to lower levels of software revenue. 20 Cost of Services The cost of services as a percentage of related revenue increased to 90.0% for the three months ended August 31, 1998 as compared with 82.7% for the same quarter in the previous year. The increase was mainly due to additional compensation for current personnel, higher costs of outside sourced labor, and additional warranty work associated with new versions of the Company's software. The cost of services as a percentage of related revenue decreased to 79.8% for the nine months ended August 31, 1998 as compared with 85.6% for the same period in the previous year. The decrease was mainly due to increased levels of customer billing generated by existing personnel less the factors listed above for performance during the third quarter of fiscal 1998. We have experienced increased levels of service business from our customer base and a reduction in employees through attrition. The current service backlog exceeds current capacity and the Company continues efforts to hire additional service personnel. Management expects the cost of services as a percentage of related revenue to increase slightly with the additional training costs associated with the hiring of new personnel. We also continue to take further steps to reduce the level of customer warranty work by enhancing the quality of our software through improved internal processes. Cost of Hardware The cost of hardware as a percentage of related revenue decreased to 68.4% in the third quarter of fiscal 1998 from 75.0% in the third quarter of fiscal 1997. The cost of hardware as a percentage of related revenue decreased to 76.4% in the first three quarters of fiscal 1998 from 77.2% in the first three quarters of fiscal 1997. The cost of hardware as a percentage of related revenue varies with the size of the system, the margin mix of items comprising the system being sold, and the competitive pressure of the customer sale. The cost of hardware as a percentage of related revenue also varies with the amount of low margin hardware sales to affiliates. Hardware sales to affiliates declined by $93,000 in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and declined by $334,000 in the first three quarters of fiscal 1998 compared to the first three quarters of fiscal 1997. Selling and Marketing Expenses Selling and marketing expenses decreased $1,242,000, or 29.2%, from $4,259,000 in the third quarter of fiscal 1997 to $3,017,000 in the third quarter of fiscal 1998. Selling and marketing expenses decreased $1,060,000, or 9.5%, from $11,103,000 in the first three quarters of fiscal 1997 to $10,043,000 in the first three quarters of fiscal 1998. This decrease was mainly due to the restructuring resulting in reduced staffing and closed locations, and reduced marketing expense. The Company also experienced lower compensation expense related to employee attrition. General and Administrative Expenses General and administrative expenses decreased $7,000, or 1.1%, from $631,000 in the third quarter of fiscal 1997 to $624,000 in the third quarter of fiscal 1998. General and administrative expenses decreased $156,000, or 5.2%, from $2,993,000 in the first three quarters of fiscal 1997 to $2,837,000 in the first three quarters of fiscal 1998. The decrease in general and administrative expenses was mainly due to a reduction of expense related to the restructuring. As a percentage of net revenues, general and administrative expenses were 7.6% and 6.5% in the third quarter of fiscal 1998 and 1997, respectively. As a percentage of net revenues, general and administrative expenses were 10.2% and 10.1% in the first three quarters of fiscal 1998 and 1997, respectively. The increase in general and administrative expenses as a percentage of net revenues was mainly attributable to the reduced level of revenues during the transition to adding the Baan product line. Product Development Expense Product development expense decreased 3.9% from $621,000 in the third quarter of fiscal 1997 to $597,000 in the third quarter of fiscal 1998. Product development expense, exclusive of reductions for capitalized software, decreased by $24,000, and capitalized software decreased by $308,000. Product 21 development expense increased 16.6% from $1,817,000 in the first three quarters of fiscal 1997 to $2,118,000 in the first three quarters of fiscal 1998. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $737,000 of product development costs in the third quarter of fiscal 1998 compared to $1,045,000 in the third quarter of fiscal 1997. The Company capitalized $2,800,000 of product development costs in the first three quarters of fiscal 1998 compared to $3,207,000 in the first three quarters of fiscal 1997. With the completion of two major development projects and with the cessation of development of software products for large customers which software is now supplied through the relationship with Baan, the Company has reduced the level of investment in product development. Restructuring and Other Charges In the second quarter of fiscal 1998, the Company recorded a restructuring charge of $6,836,000 related to entering into a new distributor arrangement for manufacturing software, and a reduction of costs focused on improving the Company's financial performance. Approximately $6,600,000 of the total charge has been paid or expensed as of August 31, 1998. The Company anticipates the remaining liability of approximately $200,000 to be paid in the fourth quarter of fiscal 1998, which will be financed through working capital. Other Income (Expense) Other income (expense) was $39,000 of expense for the third quarter of fiscal 1997 compared to $165,000 of expense for the third quarter of fiscal 1998. Other income (expense) was $176,000 of expense for the first three quarters of fiscal 1997 compared to $481,000 of expense for the first three quarters of fiscal 1998. The increase in the level of expense was mainly the result of an increase in interest expense as a result of increased borrowings under the Company's borrowing facility. Income Tax No income tax benefit was recorded for the third quarter of fiscal 1998 or the third quarter of fiscal 1997. A small tax expense of $33,000 (for state and local taxes) and no income tax benefit was recorded for the first three quarters of fiscal 1998 compared to a benefit of $883,000 for the first three quarters of fiscal 1997. At August 31, 1998, the Company, for financial reporting purposes, is in a tax loss carryforward position. Generally accepted accounting principles prohibit the Company from recording a tax benefit under these circumstances. Liquidity and Capital Resources At August 31, 1998, the Company had cash and marketable securities aggregating $8,000. During the first three quarters of fiscal 1998, the Company's operating activities provided $1,656,000 of cash compared to using $160,000 of cash for the same period of the prior year. This decrease in the use of cash was mainly attributable to the restructuring of our operations and the reduction in accounts receivable. On September 29, 1998, the Company received payment in full of $307,000 on a note from EMS Solutions, Inc. which was, "previously to be paid over a six year term beginning January 1, 1998. Investing activities used cash of $2,712,000 in the first three quarters of fiscal 1998 compared to using $3,901,000 of cash in the first three quarters of fiscal 1997. The principal use of the cash in the first three quarters of fiscal 1998 was $2,800,000 capitalized product development. The principal uses of cash in the first three quarters of fiscal 1997 included $3,207,000 for capitalized product development and $1,101,000 for purchases of equipment and furniture. Financing activities provided $1,050,000 of cash in the first three quarters of fiscal 1998 compared with providing $3,602,000 of cash in the first three quarters of fiscal 1997. The cash provided in fiscal 1998 mainly reflected the equity contribution from the Company's preferred stock offering. (See Note 5 to the Consolidated Financial Statements) As of August 31, 1998, we, based on the level of eligible accounts receivable, had $1,828,000 of availability under our then $6,000,000 line of credit. As of September 30, 1998, we had $569,000 of availability under our line of credit. The Company's credit agreement with Foothill Capital Corporation also contains certain restrictive covenants relating to income (EBITDA), tangible net worth, and level of capital 22 expenditures. On October 6, 1998, we amended our loan facility to reset the tangible net worth and EBITDA covenants to levels in keeping with the Company's current financial position. The amendment also restructured the loan facility to increase the term loan by $776,553 with an amortization period of 36 months and to reduce the revolving line of credit to a limit of $5,000,000. These changes will provide the Company with additional short-term working capital. In order to meet financial covenants in the future, the Company will need positive operational results in the short term. In the event that the Company's performance does not improve in the short term, the Company will need to secure additional waivers and/or alternative sources of financing. We are continuing our review of alternative sources of financing to deal with our current financial status. Although management believes that waivers and/or additional financing can be obtained, if needed, no assurance can be given that waivers or such additional financing will be available to the Company on acceptable terms. In the event that we are unable to secure necessary waivers or additional financing, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund continuing operations at current levels. Year 2000 The Company utilizes a combination of its own software and custom-written systems for running its own operations. Based on its own evaluation, the Company believes that it will incur no significant costs associated with ensuring Year 2000 compliance of its internal systems. Since the release of version 5.1.2 of the Company's software product, the Company's software product has been Year 2000 compliant. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - AT AND FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995. Overview The Company recorded a loss of approximately $2.2 million in fiscal 1997 as compared with net income of $153,000 in fiscal 1996. The decline-in results of operation was due in part to the delayed introduction of version 6.0 of the Company's TCM software product as well as increased service costs associated with the implementation of new products and technologies. On November 26, 1997, the Company released version 6.0 of its TCM product which management believes will positively impact the Company's position in the market. TCM version 6.0 of the Company's product basically completed the application of a Windows compliant interface, the lack of which had negatively impacted software sales in the past. Also in fiscal 1997, the Company initiated a cost reduction program (the "1997 Cost Reduction") with the goal of reducing costs by $2 million per annum. The Company also announced a restructuring of executive management, which included the departure of two executives. The results of both these cost reductions are expected to be fully realized as fiscal 1998 progresses. The Company recorded a small increase in net income for fiscal 1996 compared with fiscal 1995. The increase was mainly the result of the introduction of new products and technologies along with the expansion of new market channels. During fiscal 1996, the Company became the first pre-integrated supplier of manufacturing software to fully integrate customer service, engineering, production control, dispatching, quality control and machine tool communication. Effective March 3 1,1995, the Company acquired the remaining 50% interest (in addition to the 50% interest previously owned) in Effective Management System of Illinois, Inc. ("EMS-ILL") for a cost of approximately $793,000 in Company common stock, cash, and related direct acquisition costs. The acquisition was accounted for as a purchase and resulted in the Company recording $395,000 of goodwill, which is being amortized over a twenty-year period. On September 6, 1995, the Company acquired all of the common stock of Intercim Corporation ("Intercim") for a cost of approximately $3,355,000 in Company common stock, warrants and related direct acquisition costs. The warrants have a ten-year term and an exercise price of 56.75. The acquisition was accounted for as a purchase. Goodwill of $1,437,000 resulted from the transaction, which is being amortized 23 over a twelve-year period. The acquisitions of EMS-ILL and Intercim are herein referred to as the "1995 Acquisitions." Results of Operations Total Revenue. Total revenue for fiscal 1997 increased 3.4% to $42,645,000 from $41,257,000 in fiscal 1996 and grew 42.1% from $29,024,000 in fiscal 1995 to fiscal 1996. The mix of software, services, and hardware revenues was 51.0%, 39.4%, and 9.6%, respectively, in fiscal 1997 as compared to 46.3%, 37.4%, and 16.3%, respectively, in 1996, and 39.7%, 37.8%, and 22.5%, respectively, in 1995. The growth in software and service revenues as a percentage of total revenues during these years was the result of a strategic decision by the Company to focus its marketing and selling efforts on generating an increased percentage of its revenues from higher margin software and services as opposed to lower margin hardware sales. International revenues represented less than 10% of total revenues for all periods presented. Software License Fee Revenues. Software license fee revenues are customer charges for the right to use the Company's software products. These revenues increased 13.9% to $21,752,000 in fiscal 1997 from $19,094,000 in fiscal 1996. The main reason for this increase was the additional sales made to new customers during fiscal 1997. Software license fee revenues increased to $19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995 Acquisitions accounted for $4,622,000 of the fiscal 1996 increase in revenues. Exclusive of the revenues from the 1995 Acquisitions, the increase in software license fees during fiscal 1996 was mainly the result of new sales from a marketing relationship with International Business Machines Corporation, the hiring of additional sales personnel, and increased productivity of existing sales personnel. Service Revenues. The Company offers both mandatory and optional services to its customers. Services provided include a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues increased 8.9% to $16,781,000 in fiscal 1997 from $15,412,000 in fiscal 1996. Service revenues increased 40.6% to $15,412,000 from $10,962,000 in fiscal 1995. These increases were primarily due to growth in the customer base and normal price increases. Of the increase in fiscal 1996, $4,496,000 was attributable to the 1995 Acquisitions. Hardware Revenues. As an option, the Company sells computer hardware manufactured by others, along with the Company's software and services, to provide its customers "integrated" solutions to their management information system needs. Hardware revenues decreased 39.1% to $4,112,000 in fiscal 1997 from $6,751,000 in fiscal 1996. The decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware. The Company has decided to reduce its sales of commodity priced hardware products and those which require specific expertise beyond the scope of the Company's product focus. The Company has developed relationships with various system integrators which sell the hardware and provide these value-added hardware services. Hardware revenues increased 3.4% to $6,751,000 in fiscal 1996 from $6,528,000 in fiscal 1995. This increase was primarily attributable to the 1995 Acquisitions. Cost of Third-Parry Software License Fees. Most of the Company's system sales also include the sale of a report writer, a word processor, and/or other software components provided by outside suppliers. The integration of these products into the Company's software products generally requires that the Company pay royalties to these suppliers. Cost of third-party software license fees increased to $3,065,000 in fiscal 1997 from $2,484,000 in fiscal 1996, and from $1,419,000 in fiscal 1995. Since these third-party software products are generally sold in conjunction with the Company's software license, the increase was primarily attributable to a rise in the level of the Company's software license fees. In fiscal 1996, the 1995 Acquisitions added $470,000 to the cost of third-party software license fees. Software Development Amortization. Software development amortization represents the amortization of past investments made by the Company in product development. Software development amortization increased from $879,000 in fiscal 1995 to $1,591,000 in fiscal 1996, and to $2,535,000 in fiscal 1997. In 1994, the Company made a decision to significantly advance software products and technologies. This strategic decision resulted in a substantial increase in the Company's investment in software product development. 24 During the three-year period ended November 30, 1997 and prior to the final completion of the software products, growth in software development amortization exceeded the growth of software license fees. Cost of Services. Cost of services as a percentage of related revenues increased to 83.4% in 1997 from 78.6% in 1996. The main reasons for the increases include allocation of resources to assist in developing new product, educational costs related to new products and technologies, training costs associated with new personnel, increased costs related to warranty work, and the costs of establishing a sales and service presence in China ($245,000). The 1997 Cost Reduction reduced fiscal 1997 cost of services by $264,000 through a work force reduction and a decrease of indirect activities. Cost of services as a percentage of related revenues increased to 78.6% in fiscal 1996 from 71.9% in fiscal 1995. The increase was attributable to a rising cost of labor; additional management expense relating to expanding the service organization; additional expenses to further develop a worldwide learning initiative related to new selling relationships (3.5% of related revenues in fiscal 1996); and the training expense related to newly-hired employees. Cost of Hardware. Cost of hardware as a percentage of related revenues increased to 79.3% in fiscal 1997 compared to 73.8% in fiscal 1996. Cost of hardware as a percentage of hardware revenues decreased to 73.8% in 1996 from 78.4% in fiscal 1995. Cost of hardware as a percentage of related revenues varies with the amount of price discounting, the proportion of high margin hardware sales where the Company brings technical expertise to the process, and the proportion of customers who purchase low margin hardware from the Company. Cost of hardware as a percentage of related revenues can rise or fall depending on the mix of these factors. Additionally, the cost of hardware as a percentage of hardware revenues can vary due to the proportion of lower-margin sales (cost plus 11 %) made to the Company's joint ventures and affiliates, which were $534,000, $1,264,000, and $1,091,000 in fiscal 1997, 1996, and 1995, respectively. Commencing January 1, 1996, the Company began charging 11% over cost on hardware sales (previously sold at cost) to EMS Solutions, In:., an affiliated entity owned by certain officers of the Company, to match similar terms offered to the Company's joint ventures. In June, 1997, EMS Solutions, Inc. ceased the purchase of hardware from the Company and began sourcing the hardware through non-affiliated outside vendors. Sales of hardware to EMS Solutions, Inc. were $331,000 in fiscal 1997, $851,000 in fiscal 1996 and $926,000 in fiscal 1995. Net Product Development Expenses. Product development expenses, net of amounts capitalized, increased from $1,086,000 in fiscal 1995 to $2,235,000 in fiscal 1996 and to $2,391,000 in fiscal 1997. These increases were mainly the result of the Company's strategic initiative to increase investment in the development of future products, including the incorporation of various new technologies into the Company's software products. The 1997 Cost Reduction lowered new product development expense by $876,000 through reduction of the use of third-party consultants and a work force reduction. Management does not expect the reductions to impair the Company's research and development since such cost reductions represent a reduction in a temporary ramp-up to speed delivery of version 6.0 of the Company's software and a reduction in the number of consultants retained in respect to a customer project which was subsequently discontinued by the customer. In fiscal 1996, tie 1995 Acquisitions Added $659,000 to product expense, excluding $1,329,000 which was capitalized in accordance with Statement of Financial Standards (SFAS) No. 86. Management expects product development expense to stabilize in 1998 as effort relating to the incorporation of certain new technologies concludes. Total development expense (defined as net development expense plus amounts capitalized) increased to $6,862,000 in fiscal 1997 from $5,607,000 in fiscal 1996 and from $3,407,000 in fiscal 1995. These expenses expressed as a percent of related software revenues were 31.5%, 29.4% and 29.5% in fiscal 1997, 1996 and 1995, respectively. Selling and Marketing Expenses. Selling and marketing expenses increased to $15,957,000 in fiscal 1997 from $14,060,000 in fiscal 1996 and $9,479,000 in fiscal 1995. As a percent of gross margin (total net revenues minus total costs of products and services), selling and marketing expense increased from 70.0% to 80.7% between fiscal 1996 and fiscal 1997, and from 69.1% to 70.0% between fiscal 1995 and fiscal 1996, respectively. The increase in selling and marketing expense as a percent of gross margin between fiscal 1997 and fiscal 1996 was due to: 1) lower margin due to higher costs of software license fees (see above) and higher costs of services (see above); 2) increased expenses from developing international markets ($134,000) and lower productivity of new personnel; and 3) concern of prospective customers regarding the Company's negative operational results for fiscal 1997. The 1997 Cost Reduction lowered selling and marketing expense by $730,000 in fiscal 1997, mainly through a decrease in international market expansion, a focusing of market 25 communications, and work force reduction. The 1995 Acquisitions accounted for $1,756,000 of the increase in the selling and marketing expenses in fiscal 1996. General and Administrative Expenses. For fiscal 1997, general and administrative expense increased to $3,838,000 from $3,416,000 in fiscal 1996 and from $3,029,000 in fiscal 1995. As a percent of gross margin (total net revenues minus total costs of products and services), these expenses were 22.1%, 17.0% and 19.4% in fiscal 1995, 1996 and 1997, respectively. The increase in general and administrative expense as a percent of gross margin from fiscal 1996 to fiscal 1997 was mainly due to an increase in the provision for bad debts (2.5%). The 1997 Cost Reduction lowered general and administrative expense by $303,000 in fiscal 1997 mainly through a work force reduction. The 1995 Acquisitions increased general and administrative expense by $1,009,000 in fiscal 1996. Other primary reasons for the increase in fiscal 1996 compared to fiscal 1995 include additional depreciation from rising levels of capital purchases ($161,000); added support personnel for system and facilities needs ($71,000); and additional administrative costs attributable to the growth in hardware and service revenues. Other Income/Expense. Other income/expense provided $377,000 of expense for fiscal 1997 compared with $118,000 of expense for fiscal 1996 and $80,000 of income for fiscal 1995. Equity losses from affiliates were $25,000 in fiscal 1997 compared with $25,000 of income for fiscal 1996 and $31,000 of losses in fiscal 1995. The equity earnings for fiscal 1995 declined, in part, due to the merger with EMS-ILL, which resulted in reduced equity earnings from this former joint venture. Interest expense and interest income were $399,000 and $47,000, respectively, in fiscal 1997; $145,000 and $89,000, respectively, in fiscal 1996; and $52,000 and $176,000, respectively, in fiscal 1995. The decrease in interest income and the simultaneous rise in interest expense were mainly due to the Company's reduction in cash and short-term assets to fund investments in products, distribution channels, and service infrastructure. The Company anticipates that interest expense will continue to rise in the short-term with continued application of cash for operating and capital expenditure purposes. Income Tax Expense. The effective income tax benefit rate was 22.2% for fiscal 1997 versus an effective income tax rate of 42.3% for fiscal 1996 and 37.6% for fiscal 1995. In fiscal 1997, the Company recorded a valuation allowance equal to 100% of the net deferred tax assets based on uncertainty regarding realization of such assets and thereby reduced the amount of tax benefit recorded by $329,000. In fiscal 1996, the effective income tax rate was higher than in fiscal 1995 due to reduced tax-exempt interest income and non-deductible meals and entertainment expenses. Liquidity and Capital Resources Cash provided by operations was $1,733,000 in fiscal 1997, $2,906,000 in fiscal 1996 and $1,915,000 in fiscal 1995. Non-cash expenditures, including both depreciation relating to capital expenditures and amortization associated with software product development, contributed to the cash provided. Investment activities used cash of $5,363,000 in fiscal 1997 compared to $4,163,000 of cash in fiscal 1996 and $1,850,000 of cash in fiscal 1995. The cash was used to fund capital expenditures of $1,177,000, $1,424,000, and $1,430,000 in fiscal 1997, 1996, and 1995, respectively, and to fund investment in capitalized software product development of $4,471,000, $3,372,000 and $2,321,000 in fiscal 1997, 1996, and 1995, respectively. The Company sold $505,000 of available-for-sale securities in fiscal 1997, $1,247,000 of available-for-sale securities in fiscal 1996, and $1,584,000 of available-for-sale securities and $743,000 hold-to-maturity securities in fiscal 1995, which funded, in part, the capital expenditures and capitalized product development. For fiscal 1998, the Company estimates that capital expenditures will approximate $1,000,000 and capitalized software product development will approximate $4,000,000. Financing activities provided $2,778,000 of cash in fiscal 1997, $1,788,000 of cash in fiscal 1996, and used $10,000 of cash in fiscal 1995. As of November 30, 1997, the Company had $2,538,000 of availability under its then existing $6,300,000 revolving line of credit based on the level of the Company's eligible accounts receivable. On December 31, 1997, the Company entered into a new borrowing agreement with Foothill Capital Corporation to replace its prior facility. The new facility includes a $6,000,000 revolving line of 26 credit and a three-year term note for $3,112,500. Interest on the revolver is payable monthly based on the bank's base rate plus .75% (9.25% on December 31, 1997); the term note bears interest at 13.5% per year. The new agreement does contain certain restrictive covenants relating to income (EBITDA) ,tangible net worth and level of capital expenditures. In order to meet these covenants, the Company will need positive operational results in fiscal 1998. As of December 31, 1997, the Company had $3,751,000 of availability under the new revolving line of credit. The Company utilizes a combination of its own software and custom written systems for running its own operations. Based on its own evaluation, the Company believes that there will be no significant costs associated with ensuring Year 2000 compliance of its internal systems. Since the release of version 5.1.2 of the Company's software product, the Company's software product has been Year 2000 compliant. American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition" (SOP 97-2), was issued in October 1997. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. Therefore, SOP 97-2 will effect transactions entered into by the Company beginning December 1, 1998. SOP 97-2 addresses various aspects of the recognition of revenue on software transactions and supersedes SOP 91-1, the policy currently followed by the Company. SOP 97-2 provides guidance on software arrangements consisting of multiple elements, evidence of fair value, delivery of elements, accounting for service elements, and software arrangements requiring significant Production, modification, or customization of software. BUSINESS Overview We develop, market and support integrated manufacturing and business management software. Our Time Critical Manufacturing/TM/ ("TCMJ/TM/") software is designed with the underlying philosophy that time is a crucial element in manufacturing, and that reducing time in the manufacturing process leads directly to increased profits for the manufacturer. TCMJ/TM/ software integrates technologies such as electronic data interchange ("EDI"), imaging, bar-coding, factory automation, engineering system integration, distributed numerical control ("DNC"), statistical process control ("SPC"), and fourth generation language ("4GL") tools with our proprietary algorithms for scheduling and production, to optimize the customer's labor, capital and inventory utilization. The software we offer functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX operating systems. We also provide services support for its software products and, on a selective basis, sells computer hardware. Software products offered by the Company include: TCM/R/, which is a pre-integrated enterprise resource planning, accounting and manufacturing execution system; and FACTORYnet/R/ I/S, which is an integrated Manufacturing Execution System, providing production management, shop floor scheduling, and operations support. These software products are usually integrated with a bar code data collection system or direct machine controls, and provide up-to-the-minute information to track production and business operations. This facilitates real-time decision making and enables employees throughout an organization to respond quickly to marketplace demands and unanticipated events. We typically focus our sales and marketing efforts on discrete manufacturing plants. We have licensed our software products to over 1,500 customer sites. We distribute our products in the United States through eight branch offices and through six joint ventures and independent distributors. We have also established distribution channels through independent distributors in Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, the Company has joint ventures in China to support these distributors. We were incorporated in Wisconsin in 1978. We became a publicly held company as a result of our initial public offering which was completed in February 1994. During 1995, we acquired Intercim Corporation and the remaining interest in Effective Management Systems of Illinois, Inc., a joint venture subsidiary. In 1996, we acquired the remaining interest in Darwin Data Systems Corporation another joint 27 venture subsidiary. For further details regarding these acquisitions, see Note 2 of Notes to the Company's Consolidated Financial Statements. Industry Background In the early 1970's, the Material Requirements Planning ("MRP") approach was developed to enable manufacturing companies, with the aid of computers, to plan and manage their businesses more efficiently by managing the flow of materials at various stages of the manufacturing process. In the 1980's, this management approach evolved into Manufacturing Resource Planning ("MRP II"), which considers labor and equipment planning for the manufacturing process as part of an iterative materials planning approach. Concurrently with the evolution of MRP II, manufacturing companies (predominantly in Japan) developed a management technique which emphasizes the supply of component parts to "assembly-oriented" manufacturing plants on a "just-in-time" basis. This technique not only was the first to emphasize "time" in its orientation, but also had other desirable outcomes for manufacturers, including improved quality, lower costs and lower inventory levels. In the 1990's, new management approaches for manufacturing companies have emerged which focus on "time" as the critical element in the manufacturing process. In these management approaches, the manufacturer analyzes the component of time across its entire organization with the goal of correlating the expenditure of time to the addition of value to the finished product or service. Beyond the production focus of the "just-in-time" environment, this new approach focuses on time in all areas of the operation from engineering to manufacturing and from customer order processing to shipment. This new approach differs from MRP II in that it often focuses on improving business operations by treating plant capacity and labor resources as the primary scheduling items and treating material availability as a secondary consideration in manufacturing planning. The new approach emphasizes "operations decision-making" support in contrast to the planning emphasis of MRP II and more recently developed planning systems such as Enterprise Resource Planning ("ERP"). In addition, a category of information systems has been identified as Manufacturing Execution Systems which compliments ERP systems by making available real-time information from the factory floor and enhancing production performance and decision-making associated with plant operations. We believe that these Manufacturing Execution Systems represent a relatively new marketplace with substantial benefit potential for manufacturers. We believe that this "time emphasis" in manufacturing management, which is the focus of our TCM/R/ and FACTORYnet/R/ I/S products, will be an essential component of the management approach for many manufacturers in the future. Strategy Our objective is to grow as a leading provider of integrated business software systems for discrete manufacturing plants within its target market. We have identified three strategic initiatives to achieve this goal. Focus on Time Critical Manufacturing. We believe that manufacturers are striving to become more "time competitive," and that manufacturing software which focuses solely on providing information for planning and on recording information for historical analysis will be inadequate to meet the needs and demands of manufacturers in the years to come. To be effective in the future, we believe that manufacturing software will be required to empower individuals at all levels of an organization to make immediate decisions regarding production processes and business activities. Since 1988, we have focused our resources on developing software to assist time-oriented manufacturing management. Our software facilitates real-time decision-making by enabling employees to change processes proactively and react quickly to marketplace demands and unanticipated events. With few exceptions, we believe that the limited number of information system implementations currently in place which have this "time" focus have been developed on an individual customized basis. We are not aware of other major products available in its target market for discrete manufacturers which offers both planning and execution systems and has a strategy of focusing on time. 28 Commitment to Manufacturing Execution Systems. We believe that discrete manufacturers can gain significant competitive advantage by implementing Manufacturing Execution Systems. These systems bring together the data and information from ERP Systems, Industrial Control Systems, and Engineering Systems as illustrated below. We offered our first Manufacturing Execution System package in 1988 and believe that it is currently a leader in this software segment. Typical business functions included in a Manufacturing Execution System are described below (see - - "Time Critical Manufacturing - Software Products"). Although the people in an organization which use this software on a minute-to-minute and hour-to-hour basis are the factory operations personnel, we believe that the value manufacturers realize from implementing a Manufacturing Execution System extends far beyond this realm. We believe, based on the experience of our customers, that the major benefit of implementing a Manufacturing Execution System within an organization is improved customer service and competitiveness. These systems allow an organization to reduce non-value added elapsed time in the overall business process. We currently offer two Manufacturing Execution System products, one which is pre-integrated with a total software offering for the entire enterprise (TCM/R/) and the second is FACTORYnet/R/ I/S in which our personnel use Manufacturing Execution System software to "round out" and complete partial manufacturing execution system initiatives already undertaken by the customer. Management believes Manufacturing Execution Systems provide a significant market opportunity for us and, correspondingly, has strategically committed the Company to enhancing its Manufacturing Execution System offerings and marketplace presence. Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our experience in the marketplace resulted in the 1995 introduction of the first "pre-integrated" ERP/Manufacturing Execution System/Controls software offering for discrete manufacturers. This pre-integration initiative was facilitated by the acquisition of Intercim Corporation. In the first era of "custom" software, only large corporations could afford the risk and capital outlays necessary to develop such software. Results from these software investments were mixed and implementation times generally spanned from five years to infinity. During the 1980's the industry entered its second era of "custom systems integrated" software. During this era, which actually spans from the mid-1980's until the present time, systems integration organizations worked with manufacturing companies to procure software components (for example, ERP, Statistical Process Control, Plant Maintenance, etc.) and integrated them on a custom basis for a given facility or corporation. The advent of this era dramatically reduced risk and capital capacity and for the first time made such products affordable for mid-sized corporations. Implementation time frames were reduced to three to five years. This approach represents the state-of-the-art for many manufacturers today. We introduced the "pre-integrated" era in 1995 when we offered the first pre-integrated software package for discrete manufacturers. Software pre-integration means that a customer can buy a comprehensive set of software from us which has already been integrated and proven to function. The various software components may be built by us or suppliers to us. In the case where there are suppliers to us, we have generally established alliances so that it can have design influence over the software. The pre-integration package also contemplates that other software, for example, Computer Aided Design systems, may already be in place at the customer site. "Off-the-shelf interfaces" for popular Computer Aided Design systems which also are proven in advance are available to facilitate interaction with these software products. Pre-integrated software reduces risk and cost for the manufacturing company and also allows manufacturers of varying sizes to take advantage of the features offered by the software. Implementation time frames for pre-integrated software are between nine and eighteen months. We plan to continue to focus on the pre-integrated software marketplace. During 1996, Version 5.3 of TCM/R/ became the first industry product to span the business functions from ERP through Manufacturing Execution Systems to Statistical Process Control (SPC) and Direct Numerical Control (DNC). This was followed in 1997 by Version 6.0 of TCM/R/, which brought this functionality into a Graphical User Interface (GUI) product, which improved the software's ease of use. We believe that "pre-integration" of much of this software reduces the time and cost of system implementations and increases the business value to the manufacturer similar to the way that "suites" of desktop 29 software have affected that marketplace as compared to custom integration of word processing, data base, and spreadsheet desktop products. Software Products We develop, market and support TCM/TM/ application software for discrete manufacturing companies. We currently offer licenses for two software products: (a) TCM/R/, which is a full function business and ERP software system, including a pre-integrated Manufacturing Execution System providing production management, shop floor scheduling and operations support; and b) FACTORYnet/R/ I/S, which is a Manufacturing Execution System that provides production personnel with correct revisions of drawings, specifications, procedures, and instructions to help them make a better product and make it right the first time. Our software products are intended to provide a set of "tactical tools" which will enable the customer to achieve its strategic goals by correlating the expenditure of time to the addition of value to the finished product or service. Our products are designed for discrete manufacturers, including both stand-alone manufacturing plants and autonomous divisions of large corporations. "Discrete" manufacturers assemble or fabricate parts into finished products as distinguished from "process" manufacturers which mix, separate and otherwise combine or control ingredients to create finished products. Our focus on discrete manufacturers includes the market segments of repetitive and electronics manufacturers which some people identify as additional market segments. Time Critical Manufacturing -- Software Products Our software provides assistance for a broad range of tasks identified in the six categories set forth below. The TCM/R/ product can include software from all of these six categories. TCM/R/ and FACTORYnet/R/ I/S provide different capabilities within the Manufacturing Execution System and Decision Support Tools categories described below. We anticipate that over time the two Manufacturing Execution System product offerings will evolve into a single product which is more comprehensive than either of the current Manufacturing Execution System offerings.
Time Critical Manufacturing Software Suites I. PLANNING Master Production Scheduling Manufacturing Resource Planning II Capacity Planning II. PRODUCT DATA MANAGEMENT Product Configurator Engineering Change Control Standard Bills of Material Standard Routings Computer Aided Manufacturing ("CAM") Document Library Item Master Computer Aided Design ("CAD") Standard Cost Build Up Interface III. SUPPLY CHAIN MANAGEMENT Customer Service Inventory Control Procurement ---------------- ----------------- ----------- Estimate/Quote Inventory Management Requisitions Customer Maintenance Distribution Management Vendor Maintenance Customer Order Processing Purchase Orders Shipping Vendor Performance Liability & Warranty Electronic Data Interchange Electronic Data Interchange IV. MANUFACTURING EXECUTION SYSTEM Shop Floor management Job Cost Bar Code Factory Data Collection Time & Attendance Plant & Equipment Maintenance Shop Floor Scheduling "As Built History" Quality Management* Electronic Traveler Machine Interface Message & Alarms EMS Gateway Electronic Work Instructions Distributed Numerical Control V. FINANCE, ACCOUNTING AND 30 ADMINISTRATION General Ledger Fixed Assets* Accounts Receivable Human Resources* Accounts Payable Payroll* Standard Cost VI. DECISION SUPPORT TOOLS Executive Information System Document Library Report Writer E-Mail Database Internet Notification Services ODBC Access
*These Products Are Provided Based On Third Party Sublicensing Alliances. I. Planning. The planning modules provide master production scheduling capability integrated with rough cut capacity planning to assist production organizations in planning materials requirements and manufacturing resource levels for the manufacturing facility. II. Product Data Management ("PDM"). PDM modules allow for product definition and control of engineering changes and relationships among component parts. These modules include software which interface with industry popular CAD systems and offer CAM software. III. Supply Chain Management. Customer Service. Modules provide control over the customer order cycle, including quotations, order entry, acknowledgment printing, pick ticket printing, shipping and invoicing. These modules allow for flexible pricing tables and multiple order types, including telephone orders, blanket orders and releases, over-the-counter orders and credit memos. We believe that our software for EDI, which facilitates electronic order entry and advance shipping notification, is particularly useful in meeting the needs of the automotive and retail supply industries. Inventory Management. The Inventory Management modules provide engineering data control and offer inventory record keeping, availability projections and replenishment planning. These modules provide bin, lot and serial number control, multi-location support, cycle counting and physical inventory control. Procurement. The Procurement modules provide control of the purchasing cycle, including authorized vendor price quotations, purchase order entry and printing, receipts entry and vendor performance analysis. These modules coordinate blanket orders and releases, one-time purchase orders, orders for non-productive materials and electronic mail notification upon receipt. IV. Manufacturing Execution System. The TCM/R/ and FACTORYnet/R/ I/S software products offer integrated Manufacturing Execution Systems which (i) provide production management, shop floor scheduling, distribution of "electronic drawings" as well as textual information on factory floor computer workstations, (ii) collect information from bar coding systems and (iii) facilitate the establishment of direct connections for virtually any NC/CNC machine tool and/or CAD systems. The products also include quality systems integration for SPC analysis. These Manufacturing Execution Systems may operate as stand-alone systems or be integrated into existing customer systems, and are pre-integrated with the remainder of the our software. 31 V. Finance, Accounting and Administration. These modules provide general accounting and financial assistance in tracking and estimating planned and actual work-in-process costs. Any information from the finance and accounting database may be readily pulled into personal computer spreadsheet systems for further analysis and reporting. These modules also interface with third party human resource, fixed assets, and payroll software products sold by us. VI. Decision Support Tools. These software modules are a combination of internally developed and third party software sold by us which facilitate easy data management, analysis, customization, communication, etc., with and between the our software and other software in the customer's computing environment. Our software modules may be licensed individually or in combination to allow companies with differing business needs and schedules to have flexibility in the implementation of the software system. Customers generally license between $30,000 and $1,000,000 of software per plant, with the total license fees per plant based on the modules licensed and a per seat license fee. Software Technology We invest in a wide range of software technologies which are important not only for the our end user customer but also for our internal software development and distribution. In appropriate circumstances, we have licensed software developed by others and integrated various features of that software into its own software products. For example, our software products incorporate imaging technology, which enables the user to store and interactively display images such as photographs of steps in a particular production process, diagrams of manufacturing sub-assemblies or motion video depicting the proper operation of a machine. This imaging capability facilitates manufacturing and production set-up and also assists users in satisfying ISO 9000 certification criteria (a set of international quality standards). Our products also include EDI, which facilitates electronic order entry and advance shipping notification. For internal software development, we employ 4GL sets of development tools which we believe are instrumental in achieving software productivity improvements and allow end users flexibility to customize their software systems. We have also developed proprietary software which facilitates the conversion of our software products into various foreign languages, including complex Asian languages. We believe that this technology is useful not only in penetrating foreign software markets, but also in assisting customers which use our software products on a multi-national basis. For a further discussion of our ongoing efforts to develop new software technologies, see "Product Development." Customer Services We offer comprehensive services for customers. Services provided by us include a telephone support program, system integration, custom software development, implementation consulting, and formal classroom and on-site training. At the customer's option, these services, which are available for both of our software products, can be provided entirely by us or may be supplied in part by the customer or another third party such as a systems integrator or consulting firm. These services, which provide a recurring stream of revenue for us, are offered on an unbundled basis for either an annual or a multi-year subscription period. All of the services offered by us are optional, except that we require first-time licensees of our software to subscribe for at least two years of telephone support. We believe that the availability of effective customer services is critical for customer satisfaction and to increase software license fee revenues. We further believe that services can provide a continuing and more predictable source of revenue as compared to software license fee revenues. For the years ended November 30, 1995, 1996, 1997 and the nine months ended August 31, 1998, services revenues accounted for 37.8%, 37.4%, 39.4% and 45.9% of our total net revenues, respectively. 32 The following is a brief description of the various services we provide: Telephone Support Program. Our telephone support program is a comprehensive, fee-based program designed to help customers obtain the maximum benefit from our business management software. The telephone support program is handled out of our Minnesota, Illinois, and Wisconsin offices and is staffed by thirty trained professionals. The program includes, among other services, answering technical questions regarding standard software, and diagnosing and resolving equipment and software problems. System Integration and Custom Software Development. We offer system integration and custom software development services, on a fee basis, to meet specific customer requirements and to integrate our software with a customer's existing computer system. We have developed a Time Critical Implementation Methodology ("TCIM"), which is a proprietary implementation methodology intended to facilitate integration and efficient implementation of our products at customer sites. This approach is designed to allow the customer to obtain business benefits sooner than with less structured methodologies. Ongoing technical support is also available from us to all customers who elect to purchase custom software development services. Implementation Consulting. We provide consulting services, on a fee basis, to assist customers in implementing our software systems using the TCIM approach. These services include value-added implementation planning, project management and specialized customer training. We employ a full-time professional services staff to provide these and other services. Training. We offer customers a series of both classroom and on-site training options. Training includes classroom and personal instruction at a number of our locations or at the customer's plant site. Standardized training is offered for a fixed fee per class. Hardware Products We sell computer hardware and data collection equipment in order to facilitate sales of our software products to customers requiring a complete management information system. We sell, among other hardware, factory data collection equipment, CAMates/R/ (a small specialized computer allowing users to monitor and collect data from production machines), bar coding systems, networking and communication equipment, and occasionally server and client computer hardware. The factory data collection and bar coding hardware is purchased from the original manufacturers and resold on a project basis. This equipment ranges from fixed mount bar code scanners and printers to portable units and radio frequency network units. We also offer our customers networking and communication hardware and server and client computing hardware which we purchase from original manufacturers, including Intermec Corporation, plus two distributors, Keylink SystemsSM and Ingram Micro, Inc. During the past several years, we have focused our efforts on generating an increasing percentage of our net revenues from software license fees, which have a higher margin than hardware revenues. Markets and Customers We target companies operating discrete manufacturing plants in the United States, Canada, the Pacific Rim, and Europe. These plants may be owned by privately held companies or by large, multi-national public corporations. Our customers include, among others, capital equipment manufacturers, job shops, high volume manufacturers, automotive suppliers, consumer product manufacturers, and aerospace equipment manufacturers. During each of the past three fiscal years, no one customer has accounted for more than 10% of our total net revenues. Sales and Marketing In the United States and Canada, we license our products and offer services through a direct branch office sales force, joint ventures and independent distributors as reflected in the table below: 33 Branch Office Locations Independent Distributor Joint Venture Territories Location Austin, TX Camarillo, CA Cleveland, OH Baltimore, MA Miller Place, NY Boston, MA Menomonee, MI Chicago, IL Pittsburgh, PA Cincinnati, OH Wausau, WI Detroit, MI West Des Moines, IA Green Bay, WI Houston, TX Indianapolis, IN Los Angeles, CA Milwaukee, WI Minneapolis, MN Norwalk, CN Philadelphia, PA Port St. Lucie, FL Rockford, IL San Jose, CA We own 50% of the joint venture operating in Cleveland. We obtained our interest in this joint venture primarily in exchange for technical knowledge and management expertise. We have no obligation to fund any losses that may be incurred by the joint venture. Our direct sales personnel are compensated on a salary plus commission basis. Our joint venture and independent distributor agreements generally provide that sales will be made by authorized resellers from offices within a designated territory. The agreements obligate us to license the reseller at specified prices and to provide training to each reseller. Resellers are normally obligated to sell a specified minimum amount of our software to keep the agreements in effect. We also maintain a staff of systems consultants who offer pre- and post-sales support to the sales and distribution network. We market our products through advertising campaigns in national trade periodicals and through direct mailings. These efforts are supplemented by listings in relevant directories and trade show and conference appearances. We are also given leads regarding potential customers by its hardware and services vendors, existing customers and various accounting and consulting firms. Sales cycles for our products vary substantially based on the degree of integration, consulting and training required and also on the status of the customer's hardware system implementation. A sales cycle is usually three to twelve months from the time an initial sales presentation is made until the time a signed license agreement is entered into with a customer. In addition to our domestic markets, over the last several years we have begun efforts to develop a market for its products in the Pacific Rim and Europe. We have established independent distributor relationships in Japan, South Korea, the Peoples Republic of China, the United Kingdom, and Belgium. In each of these countries, our software products have been or are in the process of being converted to the local language. We have, as part of a 20% owned joint venture, an office in Hong Kong to support our Asian distributors. Strategic Arrangements A facet of our strategy is to establish arrangements with suppliers of state of the art information systems technology. Over the last five years we have worked to expand the number of its strategic relationships. 34 We have distributor relationships with Keylink SystemsSM, a subsidiary of Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which supply computers, associated peripherals and third party software. We have arrangements with Intermec Corporation relating to bar code data collection systems which are integrated on an "off-the-shelf" basis into our software products. Our software has been integrated with other bar coding systems on a customized basis. We also have a relationship with the Datamyte Division of Rockwell Automation for its Quantum quality control software product line. In addition to its relationships with equipment providers, we have relationships with numerous software product suppliers. These companies provide software which we use within its TCM/R/ and FACTORYnet/R/ I/S software. Synergex International Corporation has provided the Synergy 4GL Applications Development Environment since 1990. We purchase EDI software from Supply Tech and Radley Corporation. Our relationship with the equipment and software product suppliers described above is basically that of a reseller of such suppliers' products. As such, we are entitled to volume discounts on products which it purchases and is generally entitled to the benefits of cooperative marketing programs. Product Development We believe it must continue to enhance, broaden and modify its existing line of software products to meet the constantly evolving needs of discrete manufacturers within its target market. We have relied on internal development and development related to customized projects implemented at field sites to extend, enhance and support its software products, and develop and integrate new capabilities. In general, we have historically made one new product release each year. These formal releases are supplemented by periodic releases for its EDI software to respond to ongoing changes in trading partner requirements. During the fiscal years ended November 30, 1995, 1996 and 1997, our total software investment (consisting of product development expenses and capitalized software development costs) was $3.4 million, $5.6 million and $6.9 million, respectively. Product development expenditures which were expensed and not capitalized during those three fiscal years totaled $1.1 million, $2.2 million and $2.4 million, respectively. Software development efforts currently in progress include the development of product enhancements such as additional object orientation features within our products, enhanced client-server network operations on various operating systems, extended operation on various relational database products, and enhanced functional capability. There can be no assurance, however, that these development efforts will result in product enhancements that we will be able to market successfully. Certain of these enhancements are dependent upon the development efforts of third party suppliers over whom we have no control. In the event the development efforts of the third party suppliers are delayed or are unsuccessful, our software developments would be similarly delayed. Software development is, however, an evolutionary process and our management believes it could eventually find other suppliers or, if unsuccessful in its search, that it could successfully re-engineer existing products to fulfill its requirements. Competition The manufacturing software industry is intensely competitive and rapidly changing. A number of companies offer products similar to our products. Some of our existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than us. We believe that its employees' understanding of diverse manufacturing operations and processes and the potential business benefits of the TCMJ management approach to such operations allow us to differentiate itself from competitors. Other competitive factors include software product features and functions, product 35 architecture, the ability to function on a variety of operating systems, technical support and other related services, ease of product integration with third party application software, price, and performance. In December 1997, Gartner Group identified twenty-four competitors of the Company in the North American mid-market Enterprise Resource Planning area for discrete manufacturers. Additionally, that firm identified eight competitors in the Manufacturing Execution Systems market as of June, 1997. Although Gartner Group identified a limited number of competitors in its Manufacturing Execution Systems study, we generally do not encounter these competitors in the marketplace. We believe that our primary competition for its Manufacturing Execution System products are customized software products developed by internal data processing staffs or by third party customized software developers. None of the competitors identified by Gartner Group had integrated product offerings for both ERP and Manufacturing Execution System discrete manufacturers. Intellectual Property We have registered or have applied for registration of our "EMS" and "TCMJ" trademarks for software services and products with the United States Patent and Trademark Office and with the equivalent offices of most foreign countries in which we currently do business. Among others, we have also received or applied for trademarks for products marketed under the names FACTORYnet/R/ I/S and CAMate/R/. We regard our software products as proprietary in that title to and ownership of our software reside exclusively with us. We attempt to protect our rights with a combination of trademark, copyright and employee and third-party nondisclosure agreements. Despite these precautions, it may be possible for unauthorized parties to copy or reverse-engineer portions of our software products. While our competitive position could conceivably be threatened by our inability to protect our proprietary information, we believe that copyright and trademark protection are less important to our success than other factors such as the knowledge, ability and experience of our personnel, name recognition and ongoing product development and support. Employees As of November 30, 1998, we had 299 full-time employees, of whom 60 were engaged in sales and marketing; 58 in product development; 140 in customer service; and 41 in management, finance and administration. Our employees are not represented by any collective bargaining organization and we have never experienced a work stoppage. We consider our employee relations to be good. Properties Our Corporate headquarters are located in Milwaukee, Wisconsin, in a leased office consisting of approximately 42,000 square feet under a lease expiring November 30, 2003. We lease additional facilities domestically in Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati, Ohio; Detroit, Michigan; Hartford, Connecticut; Houston, Texas; Indianapolis, Indiana; Minneapolis, Minnesota; Philadelphia, Pennsylvania; Port St. Lucie, Florida; Rockford, Illinois and San Jose, California. We lease office space internationally in Hong Kong, and China. See Note 7 of the Notes to Consolidated Financial Statements for information regarding our total lease obligations. Legal Proceedings As of the date of this filing, neither we nor any of our subsidiaries is a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material effect on our results of operations or financial position. In December, 1998, a judgement was issued in a legal proceeding that resulted in the Company being ordered to pay $212,000. 36 MANAGEMENT Directors and Executive Officers The following table sets forth the name, age and position with the Company of each person who, as of November 30, 1998, is a director, nominee for director, and/or executive officer of the Company: Name Age Position with the Company Helmut M. Adam 47 Director Jeffrey J. Fossum 45 Chief Financial Officer and Assistant Treasurer Michael D. Dunham 53 President and Chief Executive Officer; Director Robert E. Weisenberg 49 Director Scott J. Mermel 50 Director Thomas M. Dykstra 57 Vice President, Secretary and Treasurer; Director Wayne T. Wedell 39 Vice President - Services Helmut M. Adam, 47, a director since 1987, has served as President of Olympus Flag & Banner, Inc., a manufacturer of banners, flags and display products, since 1992. Prior thereto, Mr. Adam was President of Ransomes, Inc., a manufacturer of commercial grass mowing equipment. Mr. Adam is a Certified Public Accountant. Michael D. Dunham, 53, a director since 1978 and co-founder of the Company, has served as President and Chief Executive Officer of the Company since its inception in 1978. Mr. Dunham has over 20 years of experience in management, sales, consulting, software design and development in the manufacturing and distribution software industry. Mr. Dunham has a B.S. degree in electrical engineering from the University of Denver and a Masters of Management Science degree from the Stevens Institute of Technology. Mr. Dunham is a Fellow of the American Production and Inventory Control Society. Scott J. Mermel, 50, a director since 1987, is a private investor. From April 1997 to July 1998, Mr. Mermel served as Vice President, Marketing of Metrix, Inc., a developer and marketer of customer service and product support software. From 1980 to April 1997, Mr. Mermel was a floor trading member of the Chicago Mercantile Exchange. Prior to that, he held several managerial positions with Xerox Computer Services, a developer and marketer of software systems for manufacturing companies. Robert E. Weisenberg, 49, a director since 1993, is President of Northwoods Software Development, Inc., a software development firm. From December 1989 to December 1997, Mr. Weisenberg was Vice President - Operations and General Manager of the Company. Mr. Weisenberg also served as Assistant Secretary of the Company from December 1993 until December 1997. Mr. Weisenberg has a B.A. from Stanford University and is a Certified Public Accountant. Thomas M. Dykstra, 57, a director since 1978 and a co-founder of the Company, has served as a Vice President and as Secretary and Treasurer of the Company since its incorporation in 1978. During his tenure with the Company, Mr. Dykstra has managed several different functions including product development, marketing, affiliate sales, finance, and administration and support. Mr. Dykstra has a degree in mathematics from Hope College and an M.B.A. degree from the University of Chicago. Mr. Dykstra is a Fellow of the American Production and Inventory Control Society. 37 Jeffrey J. Fossum, 45, has served as Chief Financial Officer of the Company since 1987 and as Assistant Treasurer since December 1993. From 1983 to 1987, Mr. Fossum was the Controller of Berg Company, a manufacturer of restaurant equipment. Mr. Fossum received his B.A. degree from the University of Wisconsin-Eau Claire. Mr. Fossum is a Certified Public Accountant. Wayne T. Wedell, 39, joined the Company in 1981 and has held positions of Account Manager, Senior Account Manager, Group Manager as well as Professional Services Manager, and was promoted to Vice President - Services in 1992. Mr. Wedell holds a B.A. degree in business administration from the University of Wisconsin-Milwaukee. Executive Compensation The following table sets forth certain information concerning compensation paid for the last three fiscal years to the Company's Chief Executive Officers and each of the Company's other executive officers who earned cash compensation in excess of $100,000 for the fiscal year ended November 30, 1998. The persons named in the table are sometimes referred to herein as the "Named Executive Officers." Name and Other Principal Position Year Salary(1) Bonus Compensation Michael D. Dunham 1998 $170,351 $ -0- $ -0- President and CEO 1997 $185,586 -0- -0- 1996 $175,148 -0- -0- Thomas M. Dykstra 1998 $161,735 $ -0- $ -0- Vice President, Secretary 1997 $176,308 -0- -0- and Treasurer 1996 $164,739 -0- -0- (1) Certain personal benefits provided by the Company and its subsidiaries to the Named Executive Officers are not included in the table. Such benefits consisted of Company-provided automobiles and reimbursement of certain medical expenses. The aggregate amount of such benefits for each Named Executive Officer in each year reflected in the table did not exceed 10% of the sum of such officer's salary and bonus in each respective year. Director Compensation Directors who are officers or employees of the Company receive no compensation as such for service as members of either the Board or committees thereof. In fiscal 1998, the non-employee directors received a cash retainer fee of $3,500. In addition, non-employee directors of the Company are entitled to receive grants of options to purchase Common Stock under the Company's 1993 Stock Option Plan (the "1993 Plan"). Under the 1993 Plan, each person who is first elected as a non-employee director automatically receives on the date of his or her election an option to purchase 2,030 shares of the Common Stock. On the day following the annual meeting of shareholders in each year, each non-employee director is also entitled to receive an option to purchase 1,500 shares of the Common Stock for serving on the Board and an option to purchase 1,000 shares of the Common Stock for each Board committee on which the director serves. Options granted to non-employee directors have a per share exerciser price of 100% of the fair market value of a share of the Common Stock on the date of the grant. Non-employee director options under the 1993 Plan vest as to 10% of the shares subject thereto on the first anniversary of the grant date, an additional 20% on the second anniversary of the grant date, an additional 30% on the third anniversary of the grant date, and the final 40% on the fourth anniversary of the grant date, except that if the non-employee director ceases to be a director by reason of death, disability or retirement during such period, or in the event of a change in control of the Company, the option will become immediately exercisable in full. Options granted to non-employee directors will terminate on the earlier of (a) ten years after the date of grant, (b) six months after the non-employee director ceases to be a director of the 38 Company by reason of death, or (c) three months after the non-employee director ceases to be a director of the Company for any reason other than death. Under the terms of the 1993 Plan, Messrs. Mermel and Adam each received in fiscal 1998 an option to purchase 3,500 shares, and Mr. Weisenberg received an option to purchase 1,500 shares, of the Common Stock at a per share exercise price of $3-7/16. No options were exercised by the non-employee directors during fiscal 1998. Board of Directors Committees The Board has standing Audit and Compensation Committees. The Audit Committee is responsible for recommending to the Board the appointment of independent auditors, approving the scope of the annual audit activities of the auditors, approving the audit fee payable to the auditors and reviewing audit results. Messrs. Adam, Dunham and Mermel are members of the Audit Committee. The Audit Committee held one meeting in fiscal 1998. The Compensation Committee (a) reviews and recommends to the Board the compensation structure for the Company's directors, officers and other managerial personnel, including salary rates, participation in any incentive bonus plans, fringe benefits, non-cash perquisites and other forms of compensation, and (b) administers the Company's 1993 Plan and the 1994 Employee Stock Purchase Plan. The Compensation Committee also administers the 1998 Stock Purchase Plan. Messrs. Adam and Mermel are members of the Compensation Committee. The Compensation Committee held five meeting in fiscal 1998. The Board has no standing nominating committee. The Board selects the director nominees to stand for election at the Company's annual meetings of shareholders and to fill vacancies occurring on the Board. The Board will consider nominees recommended by shareholders, but has no established procedures which shareholders must follow to make a recommendation. The Company's Bylaws also provide for shareholder nominations of candidates for election as directors. These provisions require such nominations to be made pursuant to timely notice (as specified in the Bylaws) in writing to the Secretary of the Company. The shareholder's notice of nomination must contain information relating to the nominee which is required to be disclosed by the Company's Bylaws and the Exchange Act. Stock Options The Company has in effect the 1993 Plan pursuant to which options to purchase the Common Stock may be granted to employees (including executive officers) of the Company and its subsidiaries. No options were granted to the Named Executive Officers during fiscal 1998 and no Named Executive Officer held options to acquire the Common Stock during fiscal 1998. Employment Agreements Messrs. Fossum and Wedell have entered into Special Compensation and Separation Agreements. Mr. Fossum's Agreement obligates the Company to compensate Mr. Fossum at a level consistent with his position relative to other executives, but the Agreement may be terminated at any time with certain exceptions related to the Company closing a transaction with an alliance partner prior to July 1, 1999. Mr. Wedell's Agreement is for eight years and obligates the Company to compensate Mr. Wedell at an initial salary of $90,000 (future salary to be set by the Compensation Committee of the Company), and pursuant to his Agreement, the Company, under certain circumstances, must pay consideration in the event it terminates Mr. Wedell prior to the end of the eight-year term. Related Party Transactions Michael D. Dunham, the Company's President, Thomas M. Dykstra, the Company's Vice President, Secretary and Treasurer, Robert E. Weisenberg, the former Vice President-Operations and General Manager and Assistant Secretary of the Company, and Donald W. Vahlsing, an employee of the Company, own all of the outstanding common stock of EMS Solutions, Inc. ("EMS Solutions"). EMS Solutions employs 18 39 people, including a full-time Vice President and General Manager. Although Messrs. Dunham and Dykstra are shareholders and directors and Messrs. Weisenberg and Vahlsing are shareholders of EMS Solutions, they are not involved in the daily management of its operations. EMS Solutions develops and sells computer software and related hardware to the food vending and food distribution industry. In the past, the Company provided office space, accounting and administrative services, computer processing time, and other miscellaneous services to EMS Solutions. Fees received for these services amounted to approximately $122,000 for the fiscal year ended November 30, 1997. Management believes that the fees charged for these services were comparable to the fees that would have been charged by unaffiliated third parties. The Company also sold computer hardware to EMS Solutions. Sales of such hardware to EMS Solutions by the Company totaled approximately $331,000 for the fiscal year ended November 30, 1997. At November 30, 1997, EMS Solutions had debt outstanding to the Company of approximately $404,000. Such debt represented trade payables for services and equipment provided by the Company to EMS Solutions. Interest was paid by EMS Solutions with respect to these trade payables at a rate equal to the Company's cost of funds under its revolving line of credit. The rate of interest charged (which was recalculated monthly) on the trade payables of EMS Solutions was 9.5% at November 30, 1997. On July 1, 1997, EMS Solutions moved to new facilities and no longer utilizes office space or other material services of the Company. In addition, EMS Solutions no longer purchases computer hardware from the Company. On September 29, 1998, the Company received payment in full of $307,000 on a note from EMS Solutions, Inc. STOCK HELD BY OFFICERS AND DIRECTORS The following table sets forth certain information concerning the beneficial ownership of shares of the Common Stock on November 30, 1998 by: (i) each director of the Company, (ii) each executive officer of the Company, and (iii) all director and current executive officers as a group. None of these individuals are selling Common Stock pursuant to this Prospectus. Shares Beneficially Owned Prior to Offering Name and Address of Amount and Percentage Beneficial Owner(1) Nature of of Class Ownership(1) (1)(2) Directors and Officers(7)(8): Michael D. Dunham 637,300 15.6% Thomas M. Dykstra 575,000(3) 14% Robert E. Wiesenberg(4) 283,200 6.9% Donald W. Vahlsing(5) 250,900 6.1% Richard W. Grelck 216,304 5.2% Helmut M. Adam 24,435 * Scott J. Mermel 24,435 * Wayne T. Wedell 27,460 * Jeffrey J. Fossum 20,821 * All Directors and Executive Officers as a Group (7 1,808,955(6) 44% persons) 40 - ------------ * Represents less than 1%. (1) The address of each person who holds in excess of 5% of the Common Stock identified in this table is 12000 West Park Place, Milwaukee, Wisconsin 53224. (2) Includes the following shares subject to stock options which were exercisable as of or within 60 days of November 30, 1998: Mr. Grelck, 189,804 shares; Mr. Adam, 22,435 shares; Mr. Mermel, 22,435 shares; and all directors and executive officers as a group, 257,394 shares. (3) Consists of (a) 165,000 shares held by the Dykstra Family Limited Partnership for which Mr. Dykstra acts as managing general partner and (b) 410,000 shares held by a family trust for which Mr. Dykstra serves as trustee. (4) Mr. Weisenberg resigned as Vice President--Operations and General Manager and Assistant Secretary of the Company on December 31, 1997. (5) Mr. Vahlsing works part-time for the Company. (6) Assumes the exercise of all options held by the group which were exercisable as of or within 60 days of November 30, 1998. The number of shares reflected as beneficially owned by all directors and executive officers does not include the shares owned by Mr. Vahlsing. Other Beneficial Owner The following tables sets forth information, as of December 31, 1997, regarding beneficial ownership by the only other person known to the Company to own beneficially more than 5% of the outstanding Common Stock as of such date. The beneficial ownership set forth has been reported on a filing made by such beneficial owner on Schedule 13G with the Securities and Exchange Commission.
Amount and Nature of Beneficial Ownership Voting Power Investment Power Name and Address Sole Shared Sole Shared Aggregate Percent of of Beneficial Owner Class Heartland Advisors, Inc.(1) 707,800 0 780,800 0 780,000 19.1% 790 North Milwaukee Street Milwaukee, Wisconsin 53202 - ------------- (1) The filing made by Heartland Advisors, Inc. indicates that the Common Stock as to which it is deemed to be beneficial owner is held in various investment advisory accounts.
41 DESCRIPTION OF CAPITAL STOCK General The authorized capital stock of the Company consists of twenty million (20,000,000) shares of the Common Stock and three million (3,000,000) shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). The Common Stock is entitled to such dividends as may be declared from time to time by the Board of Directors of the Company in accordance with applicable law. Except as provided under Wisconsin law, and except for the voting rights of holders of Series B Preferred Stock, only the holders of the Common Stock are entitled to vote for the election of directors of the Company and on all other matters. Holders of the Common Stock are entitled to one vote for each share of the Common Stock held by them subject to section 180.1150 of the Wisconsin Statutes. (See "Certain Statutory Provisions" below). Holders of the Common Stock do not have cumulative voting rights in connection with the election of directors, which means that holders of shares entitled to exercise more than 50% of the voting power represented at any meeting of shareholders have the power to elect all of the directors to be elected at any such meeting. All shares of the Common Stock are entitled to participate equally in distributions in liquidation subject to any preferential right of holders of Preferred Stock. Except as the Board of Directors may in its discretion otherwise determine, holders of the Common Stock have no preemptive rights to subscribe for or to purchase shares of the Company's capital stock. There are no conversion rights, sinking fund, or redemption provisions applicable to the Common Stock. Section 180.0622(2)(b) of the Wisconsin Statutes and judicial interpretations thereof provide that shareholders are personally liable for debts owing to employees of the company for services performed (not to exceed six months' service in any one case). Certain Statutory Provisions Section 180.1150 of the Wisconsin Statutes provides that the voting power of shares held by any person or persons acting as a group that is greater than 20% of the voting power in the election of directors is limited to 10% of the full voting power of those shares. This restriction does not apply to shares acquired directly from the Company or in certain specified transactions or shares for which full voting power has been restored pursuant to a vote of shareholders. Sections 180.1140 to 180.1144 of the Wisconsin Statutes contain certain limitations and special voting provisions applicable to specified business combinations involving the Company and a significant shareholder, unless the Board of Directors approves the business combination or the shareholder's acquisition of shares before such shares are acquired. Similarly, sections 180.1130 to 180.1133 of the Wisconsin Statutes contain special voting provisions applicable to certain business combinations, unless specified minimum price and procedural requirements are met. Following commencement of a takeover offer, section 180.1134 of the Wisconsin Statutes imposes special voting requirements on certain share repurchases effected at a premium to the market and on certain asset sales by the Company, unless, as it relates to the potential sale of assets, the corporation has at least three independent directors and a majority of the independent directors vote not to have the provision apply to the corporation. The foregoing provisions of the Wisconsin Statutes could have the effect of delaying, deterring, or preventing a change in control of the Company. 42 Restated Articles of Incorporation Under the Restated Articles of Incorporation of the Company (the "Restated Articles of Incorporation") and Bylaws of the Company, the Board of Directors is comprised of five members who are elected by the shareholders for three year terms at the annual meeting of shareholders. The Restated Articles of Incorporation provide that any vacancies on the board of Directors are filled only by the affirmative vote of a majority of the directors in office, even if less than a quorum. Any director so elected will serve until the next election of directors and until his or her successor is duly elected and qualified. The Restated Articles of Incorporation provide that any director may be removed from office with or without cause, but only by the affirmative vote of at least sixty-six and two-thirds percent of the voting power of the then outstanding shares entitled to vote in the election of directors. The provisions of the Restated Articles of Incorporation summarized above could have the effect of delaying, deterring, or preventing a change in control of the Company. Preferred Stock The Company has the authority to issue, in one or more series, up to 3,000,000 shares of Preferred Stock. The Preferred Stock is issuable in series, each of which may vary as determined by the Board of Directors as to the designation and minimum number of shares of each series, the voting power of the holders thereof, the dividend rate, redemption terms and prices, voluntary and involuntary liquidation preferences, conversion rights and sinking fund requirements, if any. As of the date of this Prospectus, the only shares of Preferred Stock issued and outstanding are the shares of Series B Preferred Stock. Series B Preferred Stock General. The Series B Preferred Stock has been authorized as a series consisting of a maximum of five thousand (5,000) shares of which 1,785 shares are issued and outstanding. Dividends. Holders of the Series B Preferred Stock are entitled to receive cumulative preferential dividends payable quarterly in cash on January 2, April 1, July 1 and October 1 of each year at the rate of eight (8%) percent per annum. The first dividend payment date with respect to the Series B Preferred Stock shall be January 2, 1999, which dividend shall be paid on a pro rata basis for the period such shares of the Series B Preferred Stock are outstanding. Commencing with the quarterly period beginning January 2, 2002, the annual dividend rate will increase each quarterly period beginning January 2, 2002, the annual dividend rate will increase each quarterly period by two (2%) percent up to a maximum dividend of eighteen (18%) percent per annum (e.g., the annual dividend rate for the quarterly period commencing January 2, 2002 will be ten (10%) percent per annum and the annual dividend rate for the quarterly period commencing April 1, 2002 will be twelve (12%) per annum). In the event that the Company cannot, as determined by the Board of Directors in its sole discretion, pay dividends in cash on a dividend payment date, the Company shall pay dividends in shares of the Series B Preferred Stock valued at eighty (80%) percent of the lesser of : (i) $1,000 and (b) the Conversion Price (as defined in the Company's Restated Articles of Incorporation). Voting Rights. The holders of the Series B Preferred Stock shall be entitled to vote, on all matters in which holders of the Common Stock are entitled to vote, voting together with the Common Stock. The holders of the Series B Preferred Stock shall have the number of votes that they would have assuming conversion of the Series B Preferred Stock into the Common Stock as of the record date for the meeting of the Company's shareholders, with fractional shares being disregarded. The holders of the Series B Preferred Stock shall be entitled to receive all communications sent by the Company to the holders of the Common Stock. The holders of the Series B Preferred Stock are entitled to vote together as a class on the issuance of any class of equity securities which ranks equal or senior to the Series B Preferred Stock, and on any change or repeal of any of the express terms of the Series B Preferred Stock. When voting as a separate class, the affirmative vote of not less 43 than a majority of the outstanding shares of the Series B Preferred Stock shall be required for approval of such matters. Liquidation. On any liquidation, dissolution, or winding up of the Company, after payment of all creditors of the Company, the holders of the Series B Preferred Stock will have the right to receive out of the remaining assets of the Company, before the holders of any other equity interest in the Company are entitled to receive anything, the sum of one thousand dollars ($1,000) per share, plus any accrued and unpaid dividends. Voluntary Conversion. Each share of the Series B Preferred Stock is convertible, at the option of the holder, into shares of the Common Stock at any time prior to the effective date of the forced conversion or redemption at the Conversion Price, subject to adjustment, and subject to further reduction in the Conversion Price in the event that the average closing price for the Common Stock on the highest five (5) out of the last ten (10) trading days of the calendar month of January 1999 is not five and 25/100 dollars ($5.25) per share of the Common Stock or greater, then effective January 31, 1999, the Conversion Price shall be reduced to the lowest closing bid price within thirty (30) days after October 30, 1998, but in no event less than two dollars ($2.00) per share of the Common Stock, subject to adjustment. In no event shall the Conversion Price be increased as a result of the foregoing. The Company will not issue fractional shares of the Common Stock upon conversion of the Series B Preferred Stock, but will pay a cash adjustment for any such fraction. Forced Conversion. The Company shall have the right to force conversion of the Series B Preferred Stock into shares of the Common Stock at any time after issuance of the Series B Preferred Stock, provided: (i) that on the Forced Conversion Notice Date and on the Forced Conversion Date (each as defined in the Restated Articles of Incorporation) the Common Stock issuable upon conversion of the Series B Preferred Stock has been registered pursuant to the Securities Act and such registration is then currently effective; and (ii) the average of the closing bid price of the Common Stock as listed on the NASDAQ, the NYSE, the ASE or wherever the Common Stock then trades, is at least one hundred seventy-five (175%) percent of the Conversion Price for twenty (20) trading days within any thirty (30) consecutive trading day period ending no more than ten (10) days prior to the Forced Conversion Notice date. Any notice of forced conversion must be given to all holders no less than thirty (30) nor more than forty-five (45) days prior to the Forced Conversion Date. On the Forced Conversion Date, the Company shall pay to all registered holders of the Series B Preferred Stock all accrued and unpaid dividends through and including the Forced Conversion Date. In the event that the Board of Directors of the Company approves a transaction whereby the holders of Common Stock would be paid a per share price equal to or in excess of one hundred seventy-five (175%) percent of the Conversion Price (the "Sale Event") and on the Forced Conversion Notice Date and on the Forced Conversion Date the condition set forth in subsection (i) above has been satisfied, the Company can require all holders of the Series B Preferred Stock to convert their shares of the Series B Preferred Stock into shares of the Common Stock immediately prior to the closing of the Sale Event. Notwithstanding anything to the contrary, holders of the Series B Preferred Stock shall not have the right to vote together with the holders of the Common Stock or as a separate class on whether to approve the Sale Event (although a holder of the Series B Preferred Stock that converts the Series B Preferred Stock into the Common Stock prior to the record date for the shareholders' meeting to vote on the Sale Event wold be entitled to vote such shares of the Common Stock) during the one hundred fifty (150) day period following the Forced Conversion Notice Date. In the event that the foregoing does not eliminate the voting rights of the Series B Preferred Stock with respect to a Sale Event, then the holders of such Series B Preferred Stock shall be deemed to have granted to the President and Secretary of the Company (and each of them individually) an irrevocable proxy for such one hundred fifty (150) day period to vote the Series B Preferred Stock for the approval of the Sale Event. In the event that the Sale Event would result in the holders of the Series B Preferred Stock receiving securities, it is a condition to the Company's right to force conversion resulting from a Sales Event that the securities to be received by the holders of the Series B Preferred Stock are registered under the Securities Act and are freely transferable. Adjustment to Conversion Price. The shares of the Series B Preferred Stock provide for adjustment to the Conversion Price upon (i) any subdivision or reverse split of the outstanding shares of the Common Stock into a greater or lesser number of shares of the Common Stock; (ii) any declaration of a dividend or other distribution by the Company upon the Common Stock payable in shares of the Common Stock; or (iii) any capital reorganization or reclassification of the capital stock of the Company. If the Company, through either 44 a private placement or a public offering (but other than pursuant to options granted under the Company's directors' and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of the Warrants) issues shares of the Common Stock, or options to purchase the Common Stock or rights to subscribe for the Common Stock or securities convertible into or exchangeable for the Common Stock at a price (such price, if other than cash, as determined by the Company's Board of Directors) less than the then market price on the date of sale, the Conversion Price then in effect shall automatically be reduced by multiplying the then Conversion Price by a fraction, the numerator of which shall be the number of shares of the Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of the Common Stock which the aggregate consideration received or to be received by the Company for such issuance, sale or distribution would purchase at the market price per share, and the denominator of which shall be the number of shares of the Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The Company will not issue fractional shares of the Common Stock upon conversion of the Series B Preferred Stock, but will pay a cash adjustment for any such fraction. There will be no adjustment in the event that the Company pays a dividend in cash to its holders of the Common Stock; provided, however, the Company will give the holders of the Series B Preferred Stock written notice at least thirty (30) days prior to the record date for the cash dividend, that the Company intends to declare a cash dividend. Redemption. Commencing three (3) years after October 30, 1998, the Company may redeem all of the outstanding Series B Preferred Stock at any time at a redemption price of one thousand dollars ($1,000) per share, plus all accrued and unpaid dividends, if any, to the date fixed for redemption. Notice of redemption shall be on not less than thirty (30) nor more than forty-five (45) days' notice prior to the date fixed for redemption. Change in Control. When an Event (as defined in the Restated Articles of Incorporation) occurs, each holder of shares of the Series B Preferred Stock shall have the option to (i) convert the Series B Preferred Stock into shares of the Common Stock immediately prior to the Event at a price equal to the lesser of (a) the Conversion Price or (b) the price per share of the Common Stock in the Event; provided, however, that the Conversion Price shall not be reduced under this subsection (i)(b) by more than thirty (30%) percent or (ii) retain ownership of the Series B Preferred Stock, in which event appropriate provisions shall be made so that the Series B Preferred Stock will become convertible at the holder's option into shares of common stock of the surviving or acquiring entity. Restrictions on Transfer. The Series B Preferred Stock has not been registered under the Securities Act or any state securities laws. Consequently, the shares of the Series B Preferred Stock may not be offered, sold or resold unless they are (a) registered or (b) exempt from the registration requirements of the Securities Act and all applicable state securities laws. As set forth above, the Company has agreed to register the Common Stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants. Warrants In connection with the issuance of the Series B Preferred Stock, the Company issued the Warrants to purchase in the aggregate 54,714 shares of the Common Stock. The Warrants are immediately exercisable at a price of $3.60 per share, and expire on October 31, 2003. The exercise price is subject to adjustment pursuant to certain anti-dilution provisions in the event the Company takes certain actions, such as, but not limited to, a stock dividend or reclassification of the Common Stock. 45 Public Warrants In connection with the acquisition of all the common stock of Intercim Corporation, the Company issued the Public Warrants. The Public Warrants have a ten-year term and an exercise price of $6.75. Registration Rights The Company has entered into the Purchase Agreement pursuant to which the Company agreed to (i) use its reasonable best efforts to file a registration statement for a shelf offering within forty-five (45) days after October 30, 1998 (the "Shelf Registration"), (ii) use its reasonable best efforts to cause the Shelf Registration to be declared effective within one hundred eighty (180) days of October 30, 1998 and (iii) to keep such Shelf Registration continuously effective, supplemented and amended until the disposition of all registerable securities under the Shelf Registration or as otherwise provided in the Purchase Agreement. This Prospectus has been filed as part of the required Shelf Registration. If the Company proposes to file a registration statement for its own account (other than a registration statement on Form S-4 or S-8 (or any successor form thereto)), then the Company will offer the Selling Shareholders the opportunity to register the number of registerable securities as each such holder may request (a "Piggyback Registration"). If the Company is advised by an underwriter that the amount of the shares to be registered in the Piggyback Registration would adversely affect the marketability of the shares to be offered, then the Company will be able to minimize the adverse effect by reducing pro rata (based on the number of registerable securities requested to be included) the number of Piggyback shares to be registered. Shareholders participating in a Piggyback Registration may withdraw any or all of their registerable securities from the registration by giving notice to the Company prior to the effectiveness of the relevant registration statement. The Purchase Agreement also sets forth the procedures which are to be followed in effecting any registration required under the Purchase Agreement. The Company will bear all of the expenses relating to its compliance with the above-referenced agreements, including all registration and filing fees, fees and expenses of the Company's own counsel and accountants, and all delivery, printing and copying expenses. However, in the case of a Piggyback Registration, participating Selling Shareholders shall pay all underwriting discounts, commissions and transfer taxes as well as their own counsel fees. The Company will indemnify each holder of registerable securities, each affiliate of such holder, each person who controls (within the meaning of the Securities Act) such holder, and their respective officers, directors, employees, shareholders, investment advisor and agents against all losses, claims, damages, liabilities and expenses (collectively, the "Losses") caused by, resulting from or relating to any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto, or caused by any omission or alleged omission of material fact required to be stated therein or a fact necessary to make the statements therein not misleading, except where such misstatement or omission was caused by information provided to the Company by the holder or where the holder failed to deliver materials furnished to it by the Company. Each holder of registerable securities participating in an offering agrees to indemnify and hold harmless the Company, and its directors, officers, employees, advisors, agents and each person who controls (within the meaning of the Securities Act and the Exchange Act) the Company for any material misstatement or omission in the offering materials that was caused by information provided by such holder to the Company; provided, however, that the liability of any such holder will be limited to the amount of the net proceeds received by such holder in the offering giving rise to such liability. PLAN OF DISTRIBUTION The Selling Shareholders may, from time to time, sell all or a portion of the Shares on the OTC Bulletin Board (or any exchange on which the Common Stock may from time to time be trading), in privately 46 negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. The Company will receive no proceeds from this offering. The Common Stock may be sold from time to time to purchasers directly by any of the Selling Shareholders. Alternatively, any of the Selling Shareholders may from time to time, offer the Common Stock through underwriters, dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the Selling Shareholders and/or the purchasers of the Common Stock for whom they may act at agent. The Selling Shareholders and any underwriters, dealers or agents that participate in the distribution of the Common Stock may be deemed to be underwriters, and any profit on the sale of the Common Stock by them and any discounts, commissions or concessions received by any such underwriters, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. If the Company is advised that an underwriter has been engaged with respect to the sale of any the Common Stock offered hereby, or in the event of any other material change in the plan of distribution, the Company will cause appropriate amendments to the Registration Statement of which this prospectus forms a part to be filed with the Commission reflecting such engagement or other change. At the time a particular offer of the Common Stock is made, to the extent required, a Prospectus Supplement will be provided by the Company and distributed by the relevant Selling Shareholder which will set forth the aggregate amount of the Common Stock being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commission and other items constituting compensation from the Selling Shareholders and any discount, commissions or concessions allowed or reallowed or paid to dealers. The Common Stock may be sold from time to time in one or more transactions at a fixed offering price, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the Selling Shareholders or by agreement between the Selling Shareholders and underwriters or dealers. There is no established public trading market for the Common Stock, and as a result the market for the Common Stock is not particularly liquid. The price at which the Common Stock trades may fluctuate and any market for the Common Stock may be subject to disruptions that could make it difficult or impossible for the holders of the Common Stock to sell in a timely manner, if at all, or to recoup their investment in the Common Stock. See "Risk Factors -- Absence of Market for Common Stock." Under applicable rules and regulations under the Exchange Act any person engaged in a distribution of the Common Stock may not simultaneously engage in market-making activities with respect to such Common Stock for a period of nine business days prior to the commencement of such distribution and ending upon the completion of such distribution. In addition to and without limiting the foregoing, each Selling Shareholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Regulation M, which provisions may limit the timing of purchases and sales of any of the Common Stock by the Selling Shareholders. All of the foregoing may affect the marketability of the Common Stock and the ability of any person or entity to engage in market-making activities with respect to the Common Stock. Pursuant to the Purchase Agreement, the Company is obligated to pay substantially all of the expenses incident to the registration and offering of the Common Stock of the Selling Shareholders to the public other than commissions and discounts of underwriters, dealers or agents. The Selling Shareholder or Shareholders bear all selling and other expenses. The Company has agreed to indemnify in certain circumstances the Selling Shareholders against certain liabilities, including liabilities under the Securities Act. The Selling Shareholders have agreed to indemnify in certain circumstances the Company against certain liabilities, including liabilities under the Securities Act. 47 EXPERTS The consolidated financial statements of the Company as of November 30, 1997 and 1996 and for each of the three years in the period ended November 30, 1997 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as indicated in their report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS Certain legal matters in connection with the sale of the shares of the Common Stock offered hereby will be passed upon for the Company by Foley & Lardner, Milwaukee, Wisconsin. 48 INDEX TO FINANCIAL STATEMENTS EFFECTIVE MANAGEMENT SYSTEMS, INC. Audited Financial Statements Report of Independent Public Accountants............................ F-2 Consolidated Balance Sheets as of November 30, 1996 and 1997........ F-3 Consolidated Statements of Operations for the Years Ended November 30, 1995, 1996 and 1997.............. F-5 Consolidated Statements of Stockholders Equity for the Years Ended November 30, 1995, 1996 and 1997.............. F-6 Consolidated Statements of Cash Flows for the Years Ended November 30, 1995, 1996 and 1997.............. F-7 Notes to Consolidated Financial Statements for the Years Ended November 30, 1996 and 1997.................... F-9 Unaudited Interim Financial Statements Unaudited Consolidated Condensed Balance Sheets as of November 30, 1997 and August 31, 1998......................... F-21 Unaudited Consolidated Condensed Statements of Operations for the Nine Months Ended August 31, 1997 and 1998................ F-23 Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months Ended August 31, 1997 and 1998................ F-24 Notes to Unaudited Consolidated Condensed Financial Statements for the Nine Months Ended August 31, 1997 and 1998............ F-25 F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Effective Management Systems, Inc. We have audited the accompanying consolidated balance sheets of Effective Management Systems, Inc. (the Company) and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1997 These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. A - change to 1997 opinion (should go between the current 2nd and 3rd paragraphs) Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated January 16, 1998, the Company, as discussed in Note 12, has experienced significant operating losses that adversely affect the Company's current results of operations and liquidity. Note 12 describes management's plans to address these issues. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at November 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1997, in conformity with generally accepted accounting principles. /s/Ernst & Young Milwaukee, Wisconsin January 16, 1998 (except for Notes 12 and 13, as to which the date is December 14, 1998) F-2 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Balance Sheets (Dollars in Thousands) November 30 1997 1996 ---- ---- Assets Current Assets: Cash and cash equivalents $ 14 $ 866 Investment in available-for-sale securities (Note 3) -- 505 Accounts receivable: Trade, less allowance for doubtful accounts of $462--1997; $346--1996 12,370 11,146 Related parties 604 693 -------- ------- 12,988 11,839 Refundable income taxes 312 159 Inventories 280 391 Deferred income taxes (Note 10) -- 175 Prepaid expenses and other current assets 146 174 -------- ------- Total current assets 13,726 14,109 Software development costs, net 7,717 5,781 Investments in and advances to unconsolidated joint ventures 182 199 Equipment and leasehold improvements, net (Note 4) 3,917 3,961 Intangible assets, net (Note 5) 2,444 2,690 Other assets 811 706 -------- ------- Total assets $ 28,797 $27,446 ======== ======= F-3 November 30 1997 1996 ---- ---- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,272 $ 2,026 Accrued liabilities 2,773 2,846 Deferred revenue 5,887 4,605 Customer deposits 63 109 Current portion of long-term obligations (Note 7) 946 127 -------- -------- Total current liabilities 11,941 9,713 Deferred revenue and other long-term liabilities 317 453 Long-term obligations (Note 7) 3,966 2,123 Deferred income taxes (Note 10) -- 560 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, $.01 par value; authorized 3,000,000 shares, none issued or outstanding -- -- Common stock, $.01 par value; authorized 20,000,000 shares, issued 4,067,310 and 4,011,018 shares; outstanding 4,054,685 and 4,008,393 shares 41 41 Common stock warrants 4 4 Additional paid-in capital 11,328 11,137 Retained earnings 1,260 3,420 Cost of common stock in treasury (12,625 and 2,625 shares) (60) (5) -------- -------- 12,573 14,597 Total liabilities and stockholders' equity $ 28,797 $ 27,446 ======== ======== See accompanying notes. F-4 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Operations (In Thousands, except per share amounts) Year Ended November 30 1997 1996 1995 ---- ---- ---- Net revenues: Software license fees $ 21,752 $ 19,094 $ 11,534 Services 16,781 15,412 10,962 Hardware 4,112 6,751 6,528 -------- -------- -------- 42,645 41,257 29,024 Costs of products and services: Cost of third-party software license fees 3,065 2,484 1,419 Software development amortization 2,535 1,591 879 Cost of services 14,000 12,109 7,884 Cost of hardware 3,260 4,979 5,118 -------- -------- -------- 22,860 21,163 15,300 Selling and marketing expenses 15,957 14,060 9,479 General and administrative expenses 3,838 3,416 3,029 Software development expenses 2,391 2,235 1,086 -------- -------- -------- 45,046 40,874 28,894 -------- -------- -------- Income (loss) from operations (2,401) 383 130 Other income (expense): Equity in earnings (losses) of unconsolidated joint Ventures (25) 25 (31) Interest income 47 89 176 Interest expense (399) (145) (52) Other -- (87) (13) -------- -------- -------- (377) (118) 80 -------- -------- -------- Income (loss) before income taxes (2,778) 265 210 Income tax benefit (expense) 618 (112) (79) -------- -------- -------- Net income (loss) $ (2,160) $ 153 $ 131 ======== ======== ======== Net income (loss) per common share - Primary and fully diluted $ (.53) $ .04 $ .04 ======== ======== ======== Weighted average common and common equivalent shares - Primary and fully diluted 4,048 3,965 3,669 ======== ======== ======== See accompanying notes. F-5 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Stockholders' Equity (Dollars in Thousands)
Common Stock And Common Warrants Common Stock To be Paid-in Retained Treasury Shares Stock Warrants Issued Capital Earnings Stock Total ---------- ----------- ---------- ---------- ---------- ---------- --------- --------- Balance, November 30, 1994 3,545,215 $ 36 $ -- $ -- $ 7,187 $ 3,136 $ (5) $ 10,354 Issuance of common stock: Acquisitions 328,393 3 -- -- 2,338 -- -- 2,341 Stock options 30,002 -- -- -- 71 -- -- 71 Employee stock purchase Plan 18,671 -- -- -- 96 -- -- 96 Issuance of common stock Warrants for acquisitions -- -- 3 -- 970 -- -- 973 Common stock and warrants to Be issued to complete Intercim transaction -- -- -- 211 -- -- -- 211 Net income -- -- -- -- -- 131 -- 131 ---------- -------- -------- -------- ------- ------- ------- -------- Balance, November 30, 1995 3,922,281 39 3 211 10,662 3,267 (5) 14,177 Issuance of common stock: Acquisitions 24,000 -- -- -- 132 -- -- 132 Stock options 35,000 1 -- -- 60 -- -- 61 Employee stock purchase Plan 29,718 -- -- -- 113 -- -- 113 Warrants 19 -- -- -- -- -- -- -- Issuance of additional common stock and Warrants to complete Intercim transaction -- 1 1 (172) 170 -- -- -- Purchase of shares from Dissenting former Imercim shareholder -- -- -- (39) -- -- -- (39) Net income -- -- -- -- -- 153 -- 153 ---------- -------- -------- -------- ------- ------- ------- -------- Balance, November 30, 1996 4,011,018 41 4 -- 11,137 3,420 (5) 14,597 Issuance of common stock: Stock options 39,500 -- -- -- 68 -- -- 68 Employee stock purchase Plan 26,792 -- -- -- 123 -- -- 123 Purchase of treasury shares (10,000) -- -- -- -- -- (55) (55) Net loss -- -- -- -- -- (2,160) -- (2,160) ---------- -------- -------- -------- ------- ------- -------- -------- Balance, November 30, 1997 4,067,310 $ 41 $ 4 $ -- $11,328 $ 1,260 $ (60) $ 12,573 ========== ======== ======== ======== ======= ======= ======== ========
See accompanying notes. F-6 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Cash Flows (Dollars in Thousands)
Year Ended November 30 1997 1996 1995 Operating activities Net income (loss) $(2,160) $ 153 $ 131 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,234 1,037 730 Amortization, other 246 189 82 Amortization of capitalized computer software development costs 2,535 1,591 879 Equity in losses (earnings) of joint ventures 25 (25) 31 (Gain) loss on disposal of equipment and leasehold improvements -- (24) 4 Deferred income taxes (385) 202 554 Changes in operating assets and liabilities: Accounts receivable (1,135) (1,770) (297) Inventories and other current assets 100 341 265 Accounts payable and other liabilities 1,273 1,212 (464) ------- ------- ------- Total adjustments 3,893 2,753 1,784 ------- ------- ------- Net cash provided by operating activities 1,733 2,906 1,915 Investing activities Acquisition of Darwin Data Systems, net of cash received of $19 -- (51) -- Acquisition of EMS-Illinois, net of cash received of $160 -- -- (238) Acquisition of Intercim -- -- (225) Additions to equipment and leasehold improvements (1,177) (1,424) (1,430) Purchases of available-for-sale securities -- (495) -- Proceeds from sales of available-for-sale securities 505 1,247 1,584 Proceeds from sales of held-to-maturity securities -- -- 743 Proceeds from sale of equipment and leasehold Improvements 7 68 39 Increase in cash surrender value of life insurance (25) (25) (31) Software development costs capitalized (4,471) (3,372) (2,321) Other (202) (111) 29 Net cash used in investing activities (5,363) (4,163) (1,850) See accompanying notes. F-7 EFFECTIVE MANAGEMENT SYSTEMS, INC. Consolidated Statements of Cash Flows (Dollars in Thousands) Year Ended November 30 1997 1996 1995 Financing activities Proceeds from issuance stock to employees 191 174 167 Proceeds from increase in debt 2,797 1,864 -- Payments on long-term debt and capital lease obligations (155) (250) (177) Purchase of treasury stock (55) -- -- ------- ------- ------- Net cash provided by (used in) financing activities 2,778 1,788 (10) ------- ------- ------- Net increase (decrease) in cash (852) 531 55 Cash: Beginning of year 866 335 280 ------- ------- ------- End of year $ 14 $ 866 $ 335 ======= ======= ======= Supplemental cash flow information: Interest paid $ 399 $ 133 $ 52 Income taxes paid (refunded), net (172) (464) 357 Noncash transactions: Equipment recorded under capital lease obligations 20 371 --- Issuance of common stock and warrants for Acquisitions --- 132 3,525
See accompanying notes. F-8 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS November 30, 1997 (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Consolidation The accompanying consolidated financial statements include the accounts of Effective Management Systems, Inc. (the Company) and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Business and Concentration of Credit Risk The Company develops, sells, and services computer software and related hardware throughout the United States and certain foreign countries that meet the Company's credit policies. The Company performs periodic credit evaluations of its customers' financial condition and generally follows a policy to obtain deposits for sales to new customers. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue is recognized in accordance with the provisions of AICPA Statement of Position (SOP) 91-1, "Software Revenue Recognition," as follows: Software and Hardware Sales Revenue is recognized when the product is delivered. Professional Fees and Services Revenue is recognized as time and material costs are incurred. Software Support Fees Revenue is recognized ratably over the terms of the nonrefundable support contract. Annual Upgrade Fees Revenue is recognized ratably over the nonrefundable annual upgrade contact period. F-9 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ------------------------------------------------------------------- In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition," which changes the requirements for revenue recognition and supersedes SOP 91-1 effective for transactions that the Company will enter into beginning December 1, 1998. The Company intends to review the provisions of its software license contracts and make the changes necessary to have them meet the standards of the new SOP. Investments Debt securities are classified as available-for-sale and are carried at fair value, which approximates cost. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. Inventory Valuation Inventories are carried at the lower of cost or market with cost determined on a first-in, first out (FIFO) basis. Software Development Costs In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," the Company capitalizes internal costs in developing software products upon determination that technological feasibility has been established for the product, whereas costs incurred prior to the establishment of technological feasibility are charged to product development expense. When the product is available for general release to customers, capitalization ceases and such costs are amortized on a product-by-product basis based on current and future revenue with an annual minimum equal to the straight-line amortization over the remaining estimated economic useful life of the product. Capitalized software development costs, stated at the lower of cost or net realizable value, were $7,717 and $5,781 at November 30, 1997 and 1996, respectively, which is net of accumulated amortization of $7,877 and $5,342, respectively. Investment in Unconsolidated Joint Ventures Investments in unconsolidated joint ventures are accounted for on the equity method wherein the Company's share of the joint ventures' net earnings or losses is recorded as an adjustment to the investment. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost and are depreciated using the straight-line method for financial reporting purposes. The estimated useful lives used to calculate depreciation are as follows: F-10 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ------------------------------------------------------------------- Years Leasehold improvements 5 Furniture and fixtures 10 Equipment 5 Assets under capital leases are amortized on a straight-line basis over their useful lives. Intangible Assets Intangible assets are amortized using the straight-line method for financial reporting purposes over the following estimated lives: Years Customer list 15 Goodwill 12-20 Other intangibles 6-40 Income Taxes Deferred income taxes are provided for temporary differences between financial reporting and income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Net Income (Loss) Per Common Share Net income (loss) per common share is computed based on the weighted average number of common shares outstanding for the periods presented. Net income per common share includes the dilutive effect of stock options and warrants calculated using the "treasury stock" method. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is required to be adopted for periods ending after December 15, 1997. In the first quarter of fiscal 1998, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, basic earnings per share will exclude the dilutive effect of stock options and warrants. Basic earnings per share for the year ended November 30, 1997 and 1996 would have been the same as previously reported primary earnings per share. The impact of Statement No. 128 on the calculation of fully diluted earnings per share is not expected to be material. F-11 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) - ------------------------------------------------------------------- Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, related-party receivables, trade payables and debt instruments. The book values of cash and cash equivalents, marketable securities, trade receivables, related-party receivables and trade payables are considered to be representative of their respective fair values. None of the Company's debt instruments that are outstanding as of November 30, 1997, have readily ascertainable market values; however, the carrying values are considered to approximate their respective fair values. See Note 8 for the terms and carrying values of the Company's various debt instruments. Stock Compensation As is permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts for employee stock compensation (e.g., stock options) in accordance with APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25, the total compensation expense recognized is equal to the difference between the award's exercise price and the underlying stock's market price (referred to as "intrinsic value") at the measurement date, which is the first date that both the exercise price and number of shares to be issued is known. See Note 9. New Pronouncements The Company will be required to adopt SPAS No. 130, "Reporting Comprehensive Income," for years beginning after December 15, 1997. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Since this standard applies only to the presentation of comprehensive income, it will not have any impact on the Company's results of operations, financial position or cash flows. SPAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for years beginning after December 15, 1997. This statement changes the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. Management has not completed its review of SPAS No. 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. F-12 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - ACQUISITIONS Effective April 15, 1996, the Company completed the purchase of the remaining 75% of Darwin Data Systems (Darwin). Consideration for this acquisition was $303, consisting of $101 in notes payable, 24,000 shares of the Company's common stock valued at $132 and $70 of acquisition costs. Effective March 31, 1995, the Company completed the purchase for $793 of the remaining 50% of the capital stock of EMS-Illinois not then owned by the Company. The purchase price consisted of 50,200 shares of the Company's common stock valued at $395, $380 in cash and $18 of acquisition costs. On September 6, 1995, the Company acquired all of the common stock of Intercim for approximately $3,355, composed of 278,193 shares of the Company's common stock valued at $7.50 per share and 278,193 of the Company's warrants valued at $3.75 per share, and direct acquisition costs of $225. Because the average trading price (Price) of the warrants for the 15 trading days prior to April 18, 1996, was less than $3.8075, the Company was required to issue 123,719 additional warrants, which was equal to the difference between the number of warrants originally issued and the warrants which should have been issued at the Price above, had the Price been known at September 6, 1995. The acquisitions have been accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of such companies have been adjusted to their estimated fair values. The excess of cost over the net assets acquired has been allocated to goodwill. The results of operations for Darwin, EMS--Illinois and Intercim have been included in the Company's consolidated financial statements from their respective acquisition dates. The unaudited pro forma results of operations below for EMS--Illinois and Intercim assume that the acquisitions had occurred at the beginning of the period. In addition to combining the historical results of all the entities, the pro forma calculations include adjustments for amortization of various intangibles acquired in conjunction with the acquisition and elimination of intercompany transactions with EMS--Illinois. However, no adjustments hay been reflected for nonrecurring expenses as a result of the combination of the entities. Year ended November 30, 1995 (Unaudited): Total net revenue $34,174 Net income (loss) (505) Earnings per share (.13) Pro forma results have not been included for 1996 for the Darwin acquisition because the impact was not significant. F-13 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 3 - INVESTMENTS The following is a summary of investment securities at November 30, 1996: Available-for-Sale Securities Gross Unrealized Gains Estimated Obligations of states Cost (Losses) Fair Value and political subdivisions $505 $-- $505 All of the above securities were due in one year or less. During the years ended November 30, 1997 and 1996, debt available-for-sale and certain debt held-to-maturity securities with fair market value of $505 and $1,247, respectively, were sold, with proceeds received approximating cost. The sales were made to provide funding for certain acquisitions, software development and normal operations. No unrealized holding gains (losses) on available-for-sale securities, which would be included as a separate component of shareholders' equity, have been recorded as cost approximated estimated fair value as of November 30, 1996. NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consisted of the following at November 30: 1997 1996 -------- -------- Equipment $7,119 $6,090 Furniture and fixtures 1,346 1,199 Leasehold improvements 478 426 Equipment under capital leases 416 454 -------- -------- 9,359 8,169 Less accumulated depreciation and amortization (5,442) (4,208) ------ -------- Equipment and leasehold improvements, net $3,917 $3,961 ======== ======== F-14 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 5 - INTANGIBLE ASSETS Intangible assets consisted of the following at November 30: 1997 1996 -------- -------- Goodwill $1,445 $1,445 Customer list 1,400 1,400 Other 200 200 -------- -------- 3,045 3,045 Less accumulated amortization (601) (355) ======== ======== Intangible asset, net $2,444 $2,690 ======== ======== NOTE 6 - AFFILIATED COMPANY Certain of the Company's stockholders also own all of the common stock of an affiliated company, EMS Solutions, Inc. (Solutions), which develops and sells computer software ant related hardware to the food vending and food distribution industry. The Company has provided certain services to Solutions for which the Company received fees of $122, $269 and $321 in 1997, 1996 and 1995, respectively, that are recorded as an offset to general an administrative expense. The Company also sells computer hardware to Solutions that totaled $331, $851 and $926 in 1997, 1996 and 1995, respectively. Amounts due from Solutions were $404 and $445 at November 30, 1997 and 1996, respectively. Material transactions with Solutions must be approved by a majority of the Company's external directors. On July 1, 1997, Solutions moved to new facilities and no longer utilizes office space or other material services of the Company. In addition, Solutions no longer purchases computer hardware from the Company. NOTE 7 - LONG-TERM DEBT AND LEASE COMMITMENTS Long-term obligations consist of the following at November 30: 1997 1996 --------- ---------- Line of credit $3,762 $1,864 Notes payable 910 27 Capital lease obligations 240 359 --------- ---------- 4,912 2,250 Less amounts due within one year (946) (127) --------- ---------- $3,966 $2,123 ========= ========== On December 31, 1997, the Company entered into a loan and security agreement (Agreement) with Foothill Capital Corporation (Foothill), which includes a revolving line of credit facility (Revolver) providing for maximum borrowings of $6,000 and a three-year term note for $3,112. The term note calls for 36 monthly payments of $65 with the remaining balance of principal due December 30, 2000. Amounts outstanding have been classified as long-term based upon the stated maturity date and the Company's estimates that borrowings will not decrease during fiscal 1998. Interest on the Revolver is payable monthly based on the bank's base rate plus .75% (9.25% at December 31, 1997); the term note bears interest at 13.5% per year. F-15 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 7 - LONG-TERM DEBT AND LEASE COMMITMENTS(CONTINUED) Borrowings under the Agreement are secured by substantially all assets of the Company (except inventory subject to the lien of a vendor). In addition, the Agreement requires the Company to maintain compliance with various covenants, including minimum levels of tangible net worth and adjusted operating income. The Company is also required to pay a monthly commitment fee of .50% per annum on the difference between the commitment amount and balance outstanding under the Revolver in lieu of a minimum monthly interest payment. The Company leases computer and other equipment under capital leases. The Company also leases office space, automobiles, and certain other equipment under operating leases. At November 30, 1997, future payments under capital and noncancellable operating leases were as follows: Fiscal Year Ending November 30 Capital Leases Operating Leases ------------------- -------------------- 1998 $162 $1,198 1999 111 1,159 2000 -- 1,132 2001 -- 989 2002 -- 713 Thereafter -- 849 ----------- ----------- Total minimum lease obligations 273 $6,040 =========== Amounts representing interest (33) ----------- Capital lease obligations $240 =========== Amortization expense relating to assets under capital leases is included in total depreciation expense for the period. Total rent expense on all operating leases was approximately $1,663, $1,404 and $1,042 in 1997, 1996 and 1995, respectively. NOTE 8 - STOCKHOLDERS' EQUITY As of November 30, 1995, the Company had 18,801 shares of common stock and 18,801 warrants with an aggregate value of $211 that were to be issued in exchange for common stock of former Intercim stockholders. These amounts, which were classified as common stock and warrants to be issued in stockholders' equity at November 30, 1995, were substantially issued in 1996. In connection with the acquisition of Intercim (see Note 2), the Company issued common stock warrants. Each warrant entitles the holder, at any time prior to September 6, 2005, to purchase one share of the Company's common stock at $6.75 per share. NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS The Company maintains the 1986 Employees' Stock Option Plan (the 1986 Plan) pursuant to which executive officers and other key employees of the Company have received options to purchase shares of the Company's common stock. Options under the 1986 Plan were granted at exercise prices equal to the fair market value of the F-16 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED) common stock on the date of grant. Options to purchase an aggregate of 57,000 shares have previously been granted and remain outstanding at November 30, 1997. No additional options will be granted under the 1986 Plan. In December 1993, the Company's Board of Directors adopted the Effective Management Systems, Inc. 1993 Stock Option Plan (the 1993 Plan). The 1993 Plan, as amended, provides for the granting of both incentive stock options and nonqualified stock options to employees and nonqualified stock options to non-employee directors of the Company covering up to a maximum of 550,025 shares. Under the 1993 Plan, the exercise price of options granted cannot be less than 100% of the fair market value of a share of the Company's stock at the date of grant. On September 6, 1995, in conjunction with the merger of Intercim (see Note 2), the Company adopted a new stock option plan, pursuant to which the Company granted stock options to those holders who agreed to the cancellation of their Intercim stock options. The Company has also issued nonqualified stock options to certain of its executives and other nonemployee directors. These options have various vesting schedules. Information with respect to stock options granted under all plans is as follows: Weighted Number of Exercise Price Average Shares Per Share Exercise Price ----------- -------------- -------------- Outstanding at November 30, 1994 389,424 $1.57-$8.00 Granted 518,352 6.125-7.25 Exercised (29,949) 1.57-6.25 Canceled or expired (47,399) 6.25 ----------- --------------- ------------- Outstanding at November 30, 1995 830,428 1.57-8.00 Granted 124,043 4.75-7.00 Exercised (35,000) 1.71 Canceled or expired (14,569) 5.75-7.50 ----------- --------------- ------------- Outstanding at November 30, 1996 904,902 1.71-7.50 $6.13 Granted 109,938 4.63-6.75 5.73 Exercised (39,500) 1.71-1.71 1.71 Canceled or expired (54,961) 4.75-7.50 6.63 ----------- --------------- ------------- Canceled or expired Outstanding at November 30, 1997 920,379 $2.29-$8.25 $6.24 =========== =============== ============= At November 30, 1997, options to purchase 513,287 shares were exercisable under all plans, at a weighted average exercisable price of $6.29 and a weighted average contractual life of 7.3 years. F-17 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED) In determining the effect of FASB Statement No. 123, the Black-Scholes option pricing model was used with the following weighted-average assumptions for 1997: risk-free interest rates of 5.36%, dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of .92, and a weighted-average expected life of the options of 4.93 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company's pro forma information, as if these options had been expensed in accordance with FASB Statement No. 123, follows: 1997 1996 ---- ---- Pro forma net income (loss) $(2,286) $114 Pro forma earnings (loss) per share (.56) .03 In December 1993, the Board of Directors adopted the 1994 Employee Stock Purchase Plan (Stock Purchase Plan), which permits employees to purchase shares of the Company's common stock during six-month periods beginning on June 1 and December 1 of each year. The purchase price of such shares will be equal to the lesser of 85% of the fair market value of the stock at the beginning or end of each six-month offering period. During fiscal 1997 and 1996, 26,792 and 29,718 shares, respectively, were purchased under the Stock Purchase Plan. The maximum cumulative number of shares that may be purchased under the Stock Purchase Plan is 100,240. The Company has reserved 1,508,813 shares of its common stock for potential conversion of common stock warrants and issuance under the stock option and purchase plans described above. NOTE 10 - INCOME TAXES Income tax expense (credit) in the consolidated statement of operations consists of the following: Year ended November 30 1997 1996 1995 -------------- --------------- --------------- Current: Federal $(233) $(170) $(485) State -- 80 10 -------------- --------------- --------------- (233) (90) (475) Deferred (385) 202 554 -------------- --------------- --------------- $(618) $112 $ 79 ============== =============== =============== F-18 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 10 - INCOME TAXES(CONTINUED) The reconciliation of income tax expense (benefit) computed at the U.S. federal statutory rate to income tax expense (benefit) is: Year ended November 30 1997 1996 1995 ------------ -------------- -------------- Tax at U.S. statutory rate of 34% $(945) $ 90 $ 71 State income taxes, net of federal benefit -- 14 7 Nondeductible items -- 112 82 Tax-exempt investment income -- (13) (32) General business credits -- (98) (69) Change in valuation allowance 329 -- 22 Other (2) 7 (2) ------------ -------------- -------------- $(618) $112 $ 79 ============ ============== ============== The significant components of the deferred tax accounts recognized for financial reporting purposes at November 30 were as follows: 1997 1996 --------------- ------------- Deferred tax liabilities: Capitalized computer software costs $3,087 $2,341 Depreciation 342 328 Other, net 16 15 --------------- ------------- Total deferred tax liabilities 3,445 2,684 Deferred tax assets: Net operating loss carryforwards 2,902 1,578 Allowance for doubtful accounts 185 108 Deferred revenue 127 72 Inventory 30 40 General business credit carryforwards 442 448 Other, net 88 53 --------------- ------------- Total deferred tax assets 3,774 2,299 Valuation allowance (329) -- Net deferred tax liabilities $ -- $ 385 =============== ============ F-19 EFFECTIVE MANAGEMENT SYSTEMS, INC. - -------------------------------------------------------------------------------- NOTE 10 - INCOME TAXES(CONTINUED) At November 30, 1997, the Company had net federal and state operating loss carryforward (NOLs) of approximately $6.8 million and $8.3 million, respectively, available to offset future federal and state taxable income. The utilization of $2,730,000 of the NOLs is subject to an annual limitation of approximately $182,000 annually and expires in the year 2010. The carryforwards resulted from the Company's acquisition of Intercim Corp. (Intercim) in 1995 and net operating losses. In addition, the Company has general business credits totaling $442,000 which can be used to reduce federal taxable income through 2011. In 1997, a valuation allowance equal to 100% of the net deferred tax assets has been recognized based on uncertainty regarding realization of such assets. NOTE 11 - SAVINGS PLAN The Company has a defined contribution 401(k) savings plans that covers substantially all employees meeting certain minimum eligibility requirements. Participating employees can elect to defer a portion of their compensation and contribute it to the plan on a pretax basis The Company also matches certain amounts and/or provides additional discretionary contributions, as defined. The Company's contributions to the various plans were $310, $345 and $246 for 1997, 1996 and 1995, respectively. NOTE 12 - LIQUIDITY AND MANAGEMENT'S PLAN The Company has experienced significant recurring losses and negative cash flow since November 30, 1997. As of August 31, 1998, current liabilities exceeded current assets by $1,575. In April 1998, management approved a major restructuring plan and recorded a restructuring charge of approximately $6.8 million. The restructuring included entering into a new distribution arrangement with Baan for manufacturing software and various cost reductions aimed at improving the Company's financial performance. In connection with the restructuring, the Company closed facilities both in the United States and internationally and decreased it's workforce, particularly in development, marketing and administration. In October, 1998, the Company amended its credit facility to reset certain covenants. The amendment also increased the term loan facility by $777. Management believes that operations and additional sources of financing will generate sufficient cash flow to fund its operations in fiscal 1999. The Company is investigating alternative sources of financing. Accordingly, the financial statements have been prepared on the basis of a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. NOTE 13 - SUBSEQUENT EVENT The Company is a party to various legal proceedings arising in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial condition or results of operations. In December, 1998, a judgement was issued in a legal proceeding that resulted in the Company being ordered to pay $212. F-20 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited except for November 30, 1997 amounts) ASSETS 31-Aug 30-Nov 1998 1997 - --------------------------------------- -------------------- ------------------- CURRENT ASSETS Cash $8 $14 Accounts receivable: trade, less allowance for doubtful accounts 8,254 12,370 Related parties 785 604 Inventories 334 280 Refundable income taxes 0 312 Deferred income taxes 0 0 Prepaid expenses and other Current assets 338 146 -------------------- ------------------- TOTAL CURRENT ASSETS 9,719 13,726 LONG TERM ASSETS Computer software, net 3,917 7,717 Investments in and advances to Unconsolidated joint ventures 182 182 Equipment and leasehold Improvements, net 3,312 3,917 Intangible assets, net 2,269 2,444 Other assets 284 811 -------------------- ------------------- TOTAL LONG TERM ASSETS 9,964 15,071 -------------------- ------------------- TOTAL ASSETS $19,683 $28,797 The accompanying notes are an integral part of these consolidated financial statements. F-21 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited except for November 30, 1997 amounts) LIABILITIES AND STOCKHOLDERS' EQUITY 31-Aug 30-Nov 1998 1997 - ------------------------------------------------ ---------------- -------------- CURRENT LIABILITIES Accounts payable $2,301 $2,272 Accrued liabilities 1,881 2,773 Deferred revenues 5,810 5,887 Customer deposits 290 63 Current portion of long-term obligations 1,012 946 ---------------- -------------- TOTAL CURRENT LIABILITIES 11,294 11,941 LONG-TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 887 317 Long-term Obligations 3,961 3,966 Deferred Income Taxes 0 0 ---------------- -------------- TOTAL LONG TERM LIABILITIES 4,848 4,283 Commitments and Contingencies 0 0 STOCKHOLDERS' EQUITY Preferred Stock, $.0l par value; authorized 3,000,000 shares, of which 7,000 shares are designated as Series A 8% Convertible Redeemable Preferred Stock ("Series A") 1005 shares of Series A issued and outstanding (liquidation preference at $1,000 per share) 826 0 Common Stock, $.01 par value; authorized 20,000,000 shares; issued 4,102,486 and 4,067,408 shares; outstanding 4,089,861 and 4,054,783 shares 41 41 Common Stock Warrants 77 4 Additional Paid- in Capital 11,418 11,328 Retained Earnings (Deficit) (8,761) 1,260 Cost of Common Stock in Treasury (12,625 shares) (60) (60) ---------------- -------------- TOTAL STOCKHOLDERS' EQUITY 3,541 12,573 ---------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,683 $28,797 The accompanying notes are an integral part of these consolidated financial statements. F-22 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED 31-Aug 31-Aug 31-Aug 31-Aug 1998 1997 1998 1997 NET REVENUES: Software license fees $3,866 $4,963 $13,573 $14,491 Services 3,977 4,095 12,748 12,361 Hardware 339 624 1,455 2,687 ------ ----- ------ ------ Total net revenues 8,182 9,682 27,776 29,539 COST OF PRODUCTS AND SERVICES Software license fees 1,059 1,321 4,163 3,983 Services 3,581 3,387 10,175 10,584 Hardware 232 468 1,112 2,074 ------ ----- ------ ------ Total cost of products and services 4,872 5,176 15,450 16,641 Selling and marketing expenses 3,017 4,259 10,043 11,103 General and administrative expenses 624 631 2,837 2,993 Product development expenses 597 621 2,118 1,817 Restructuring and other charges 0 0 6,836 0 ------ ----- ------ ------ Total costs and operating expenses 9,110 10,687 37,284 32,554 ------ ----- ------ ------ LOSS FROM OPERATIONS (928) (1,005) (9,508) (3,015) Other (Income)/Expense Equity in (earnings)/loss of unconsolidated joint ventures 0 (55) (1) (57) Interest (income) (19) (13) (39) (41) Interest expense 184 107 521 274 ------ ----- ------ ------ 165 39 481 176 ------ ----- ------ ------ LOSS BEFORE INCOME TAXES (1,093) (1,044) (9,989) (3,191) Income tax (benefit) expense 0 0 33 (883) ------ ----- ------ ------ NET LOSS ($1,093) ($1,044) ($10,022) ($2,308) ------ ----- ------ ------ Loss per share - basic and diluted ($0.27) ($0.26) ($2.45) ($0.57)
The accompanying notes are an integral part of these consolidated financial statements. F-23 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) NINE MONTHS ENDED 31-Aug 31-Aug 1998 1997 OPERATING ACTIVITIES Net loss ($10,022) ($ 2,308) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,044 862 Amortization of capitalized computer software development costs 2,277 2,077 Equity in earnings of joint ventures -- -- Goodwill amortization 176 170 Deferred income taxes -- -- Restructuring and other charges 6,836 Changes in operating assets and liabilities: Accounts receivable 3,054 1,226 Inventories and other current assets (25) (1,266) Accounts payable and other liabilities (1,684) (921) -------- -------- Total adjustments 11,678 2,148 -------- -------- Net cash provided by (used in) operating activities 1,656 (160) INVESTING ACTIVITIES Additions to equipment and leasehold improvements (439) (1,101) Proceeds from sale of securities -- 504 Software development costs capitalized (2,800) (3,207) Other 527 (97) -------- -------- Net cash used in investing activities (2,712) (3,901) FINANCING ACTIVITIES Proceeds on long-term debt and other notes payable 61 3,466 Additional paid-in capital 90 -- Proceeds from sale of stock 899 136 -------- -------- Net cash provided by financing activities 1,050 3,602 -------- -------- Net decrease in cash (6) (459) Cash-beginning of period 14 866 -------- -------- Cash-end of period $ 8 $ 407 The accompanying notes are an integral part of these consolidated financial statements. F-24 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 1998 (Unaudited) (In Thousands) Note 1- Basis of Presentation The accompanying consolidated interim financial statements included herein have been prepared by Effective Management Systems, Inc. (the "Company") without an audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the information furnished for the three and nine month periods ended August 31, 1998 and August 31, 1997 includes all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the nine months ended August 31, 1998 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending November 30, 1998. It is suggested that the interim financial statements be read in conjunction with the audited consolidated financial statements for the year ended November 30, 1997 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2 - Additional Financial Disclosure Equipment and leasehold improvements consisted of the following: 31-August-1998 30-Nov-1997 ------------------ ---------------- Gross $9,798 $9,359 Less: Accumulated depreciation ( 6,486 ) ( 5,442) ------------------ ---------------- Net $3,312 $3,917 ================== ================ Allowance for doubtful accounts consisted of the following: 31-August-1998 30-Nov-1997 ------------------ ---------------- Balance $ 547 $ 462 Provision for doubtful accounts consisted of the following: 31-August-1998 30-Nov-1997 ----------------- ----------------- $ 82 $ 17 F-25 Note 3 - Net Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended August 3l, 1998 1997 ------------- ---------------- ------------- ---------------- Denominator Denominator for basic earnings per share - weighted average common shares 4,098 4,054 Effect of dilutive securities - stock options and warrants 0 0 Effect of dilutive securities - preferred stock 0 0 ------------- ---------------- Denominator for diluted earnings per share - adjusted weighted average common shares 4,098 4,054 ============= ================ Nine Months Ended August 31, 1998 1997 ------------- ---------------- Denominator Denominator for basic earnings per share - weighted average common shares 4,084 4,038 Effect of dilutive securities - stock options and warrants 0 0 Effect of dilutive securities - preferred stock 0 0 ------------- ---------------- Denominator for diluted earnings per share - adjusted weighted average common shares 4,084 4,038 ============= ================ Note 4 - Restructuring and Other Charges The Company recorded charges for a restructuring in the second quarter of fiscal 1998 totaling $6.8 million, of which $6.6 million was paid or expensed as of August 31, 1998. The Company anticipates the remaining liability of $.2 million to be paid in the fourth quarter of fiscal 1998, which will be financed through working capital. Note 5 - Preferred Stock On August 28, 1998, the Company issued 1,005 shares of Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"). Legal and investment banking fees of $101,000 were deducted from the total proceeds. The Series A Preferred Stock accrues cumulative dividends at an 8% rate per annum (using a liquidation value of $1,000 per share), and all dividends in arrears must be paid prior to any payment of dividends on common stock. Dividends, if declared by the board of directors, generally must be paid in cash. The Series A Preferred Stock is convertible into common stock at the preferred shareholders' option at the initial conversion price of $3.50 per share, subject to adjustment, with each share of Series A Preferred Stock valued at $1,000 for purposes of conversion. An adjustment to the conversion rate may be made upon any of the following circumstances: subdivision or reverse split of the outstanding shares of common stock into a greater or lesser F-26 number of shares of common stock, declaration of a dividend or other distribution by the Company upon the common stock payable in common stock, capital reorganization or reclassification of the common stock of the Company, and in certain other instances. The Company may force conversion of the Series A Preferred Stock under certain conditions. The holders of the Series A Preferred Stock shall be entitled to vote and shall receive the number of votes they would have assuming full conversion of the Series A Preferred Stock into common stock. There are 7,000 shares of Series A Preferred Stock authorized for issuance, with 1,005 shares being issued and outstanding. The Company has 3,000,000 shares of Preferred Stock authorized for issuance. Such shares may be issued in separate series. The Series A Preferred Stock is currently the only series of Preferred Stock authorized, issued and outstanding. F-27 ==================================== ========================================== No person has been authorized to give any information or make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been Effective Management authorized. This Prospectus does not Systems, Inc. constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or Common Stock solicitation is unlawful. Neither (par value $.01 per share) the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. ------------------- TABLE OF CONTENTS Page Forward-Looking Statements..... Prospectus Summary............. ___________________ Risk Factors................... The Company.................... Use of proceeds................ Market for Common Stock........ Dividend Policy................ PROSPECTUS Capitalization................. Selected Consolidated Financial and Operating Data............ Management's Discussion and ___________________ Analysis of Financial Condition and Results of Operations at and for the Three and Nine Months Ended August 31, 1998............... Management's Discussion and Analysis of Financial Condition and Results of Operations at and for the Fiscal Years Ended ....... Business....................... Management..................... Principal Shareholders......... Description of Certain Indebtedness.................. Description of Capital Stock... Plan of Distribution........... Experts........................ Legal Matters.................. Additional Information......... Index to Financial Statements..F-1 ==================================== ========================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. Securities and Exchange Commission filing fee............ $551 Accountants' fees and expenses........................... * Legal fees and expenses.................................. * Miscellaneous............................................ * Total........................................... * ------------------------ * To be filed by amendment. The foregoing costs and expenses will be paid by the Company. Other than the Securities and Exchange Commission filing fee, all fees and expenses are estimated. Item 14. Indemnification of Directors and Officers. Pursuant to the provisions of the Wisconsin Business Corporation Law and the Registrant's Bylaws, directors and officers of the Registrant are entitled to mandatory indemnification from the Registrant against certain liabilities and expenses (i) to the extent such officers or directors are successful in the defense of a proceeding and (ii) in proceedings in which the director or officer is not successful in defense thereof, unless (in the latter case only) it is determined that the director or officer breached or failed to perform his or her duties to the Registrant and such breach or failure constituted: (a) a willful failure to deal fairly with the Registrant or its shareholders in connection with a matter in which the director or officer had a material conflict of interest; (b) a violation of the criminal law unless the director or officer had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; (c) a transaction from which the director or officer derived an improper personal profit; or (d) willful misconduct. It should be noted that the Wisconsin Business Corporation Law specifically states that it is the public policy of Wisconsin to require or permit indemnification in connection with a proceeding involving securities regulation, as described therein, to the extent required or permitted as described above. Additionally, under the Wisconsin Business Corporation Law, directors of the Registrant are not subject to personal liability to the Registrant, its shareholders or any person asserting rights on behalf thereof for certain breaches or failures to perform any duty resulting solely from their status as directors, except in circumstances paralleling those outlined in (a) through (d) above. Expenses for the defense of any action for which indemnification may be available may be advanced by the Company under certain circumstances. The indemnification provided by the Wisconsin Business Corporation Law and the Registrant's Bylaws is not exclusive of any other rights to which a director or officer of the Registrant may be entitled. The Company maintains a liability insurance policy for its directors and officers as permitted by Wisconsin law which may extend to, among other things, liability arising under the Securities Act of 1933, as amended. Item 15. Recent Sales of Unregistered Securities. Series A Preferred Stock On August 28, 1998, the Company sold 1,005 shares of its Series A 8% Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), in a non-public offering exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) and Rule 506 of Regulation D thereunder. The Series A Preferred Stock was sold at a price of $1,000 per share to accredited investors, as such term is defined in Rule 501(a) under the Securities Act. All shares of II-1 the Series A Preferred Stock were subsequently exchanged for shares of the Series B 8% Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and no shares of the Series A Preferred Stock remain outstanding. Series B Preferred Stock On October 27, 1998, the Company issued 780 shares of the Series B Preferred Stock, in a non-public offering exempt from registration pursuant to Section 4(2) of the Securities Act, and Rule 506 of Regulation D thereunder. The Series B Preferred Stock was sold at a price of $1,000 per share to accredited investors, as such term is defined in Rule 501(a) under the Securities Act. On October 27, 1998, as part of the Company's offering of its Series B Preferred Stock, the Company issued to (i) certain warrants to purchase 28,714 shares of common stock, par value $.01 per share (the "Common Stock") and (ii) certain warrants to purchase 26,000 shares of the Common Stock. The warrants are immediately exercisable for a five year period at a price of $3.60 per share, subject to certain adjustment as provided in the warrant agreement. On October 30, 1998, the Company exchanged, on a one-for-one basis, 1,005 shares of the Series A Preferred Stock for 1,005 shares of its Series B Preferred Stock. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits. The exhibits filed herewith are as specified on the Exhibit Index included herein. (b) Financial Statement Schedules. The schedules filed herewith are as specified on the Index to Schedules included herein. Item 17. Undertakings. The undersigned Registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (1) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (i) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (ii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement II-2 relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Milwaukee, State of Wisconsin, on this 14th day of December, 1998. EFFECTIVE MANAGEMENT SYSTEMS, INC. By /s/ Michael D. Dunham Michael D. Dunham President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below as of this 14th day of December, 1998 by the following persons in the capacities indicated. Each person whose signature appears below constitutes and appoints Michael D. Dunham and Jeffrey J. Fossum, and each of them individually, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any additional registration statement to be filed pursuant to rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title /s/ Michael D. Dunham President and Director Michael D. Dunham (Principal Executive Officer) /s/ Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer Jeffrey J. Fossum (Principal Financial and Accounting Officer) /s/ Helmut M. Adam Director Helmut M. Adam /s/ Robert E. Weisenberg Director Robert E. Weisenberg /s/ Scott J. Mermel Director Scott J. Mermel /s/ Thomas M. Dykstra Director Thomas M. Dykstra II-4 EXHIBIT INDEX EFFECTIVE MANAGEMENT SYSTEMS, INC. Exhibit Number Exhibit 2.1 Agreement and Plan of Merger, dated as of February 17, 1995 among Effective Management Systems, Inc., EMS Acquisition Corp. and Intercim Corporation [Incorporated by reference to Exhibit 2.1 to Effective Management Systems, Inc.'s Registration Statement on Form S-4 (Registration No. 33-95338)]. 2.2 Amendment No. 1 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of June 30, 1995 [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc. Registration Statement on Form S-4 (Registration No. 33-95338)]. 2.3 Amendment No. 2 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of July 31, 1995 [Incorporated by reference to Exhibit 2.3 to Effective Management Systems, Inc. Registration Statement on Form S-4 (Registration No. 33-95338)]. 2.4 Agreement of Merger, dated as of March 22, 1995, among Effective Management Systems, Inc., EMS Illinois Acquisition Corp., Effective Management Systems of Illinois, Inc., Richard W. Grelck and Daniel E. Long [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 28, 1995]. 3.1 Amendment to Restated Articles of Incorporation for the Series B Preferred Stock. 3.2 Restated Articles of Incorporation of Effective Management Systems, Inc., as amended 3.4 Bylaws of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 4.1 Article 4 of the Restated Articles of Incorporation of Effective Management Systems, Inc., as amended. [See exhibit 3.2]. 4.2 Loan and Security Agreement by and between Foothill Capital Corporation and Effective Management Systems, Inc EMS-East, Inc. and Effective Management Systems of Illinois, Inc. dated December 31, 1997 [Incorporated by reference to Exhibit 4.14 to Effective Management Systems, Inc.'s Form 10-K for the year ended November 30, 1997]. 4.3 Waiver and First Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc. and Effective Management Systems of Illinois, Inc., dated May 8, 1998 [Incorporated by reference to Exhibit 4.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 4.4 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated July 13, 1998 [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. II-5 4.5 Waiver and Second Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated August, 1988 [Incorporated by reference to Exhibit 4.1 to Effective Management System, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1998]. 4.6 Third Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated October 6, 1998 [Incorporated by reference to Exhibit 4.2 to Effective Management System, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1998]. 4.7 Form of Common Stock Warrant Issued in Connection With the Sale of the Series A Preferred Stock. 4.8 Form of Common Stock Warrant Issued in Connection With the Sale of the Series B Preferred Stock. 5.1 Opinion of Foley & Lardner. 10.1 Business Agreement by and between Digital Equipment Corporation and Effective Management Systems, Inc., effective as of February 8, 1994 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.2 Addendum to Business Agreement by and between Digital Equipment Corporation and Effective Management Systems, Inc., effective as of February 8, 1994 [Incorporated by reference to Exhibit 10.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.3 Value Added Reseller Agreement by and between Digital Information Systems Corporation and Effective Management Systems, Inc., effective as of November 9, 1992 [Incorporated by reference to Exhibit 10.3 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 registration No. 33-73354)]. 10.4 Domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of march 4, 1991 [Incorporated by reference to Exhibit 10.4 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.5 Amendment No. 1 to Domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of October 29, 1991 [Incorporated by reference to Exhibit 10.5 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.6 Amendment No. 2 to Domestic Value Added Reseller Agreement between Intermec Corporation and Effective Management Systems, Inc., dated as of June 11, 1993 [Incorporated by reference to Exhibit 10.6 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. II-6 10.7 Software Supplier Agreement dated August 6, 1994, by and between Effective Management Systems, Inc. and Hewlett Packard Company [Incorporated by reference to Exhibit 10.7 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994]. 10.8 Joint Venture Agreement, dated September 15, 1985, by and between Effective Management Systems, Inc. and Joseph H. Schlanser, Aurinee M. Schansler and Barton R. Benjamin [Incorporated by reference to Exhibit 10.9 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.9 International Marketing Agreement, dated July 5, 1994, by and between Effective Management Systems, Inc. Systems, Inc. and Systems Technology Management Corporation [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994]. 10.10 Lease by and between Effective Management Systems, Inc. and Milwaukee Park Place Limited Partnership, as amended [Incorporated by reference to Exhibit 10.10 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.11 Effective Management Systems, Inc. 1986 Employee's Stock Option Plan [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.12 Warrant Agreement between Effective Management Systems, Inc. and American Stock Transfer & Trust Company, dated as of September 6, 1995 [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Current Report on Form 8-K dated September 6, 1995]. 10.13 Stock Option Agreement by and between Helmut M. Adam and Effective Management Systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.13 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)]. 10.14 Stock Option Agreement by and between Scott J. Mermel and Effective Management Systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.14 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.15 Bonus Arrangement by and between Thomas G. Allen and Effective Management Systems, Inc. [Incorporated by reference to Exhibit 10.16 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994]. 10.16 IBM Business Partner Agreement between International Business Machines Corporation and Effective Management Systems, Inc., dated as of March 3, 1995 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 28, 1995]. II-7 10.17 Software Reseller Agreement between International Business Machines corporation and Effective Management Systems, Inc., dated as of September 6, 1995 [Incorporated by reference to Exhibit 10.18 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1995]. 10.18 Distributor Agreement with Pioneer Standard Electronics, Inc. [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1997]. 10.19 IBM Market Development Program Agreement dated September 3, 1997 [Incorporated by reference to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1997]. 10.20 Relationship Agreement with CIMX, an Ohio Limited Liability Company and Effective Management Systems, Inc. dated December 31, 1997 [Incorporated by reference to Exhibit 10.20 to Effective Management Systems, Inc.'s Form 10-K for the year ended November 30, 1997]. 10.21 Reseller Agreement and Addendum Number One by and between Baan Midmarket Solutions, LLC and Effective Management Systems, Inc., dated April 9, 1998 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.22 Distribution Agreement between EMS Asia Pacific Limited and Effective Management Systems, Inc. dated May 29, 1988 [Incorporated by reference to Exhibit 10.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.23 Effective Management Systems, Inc. 1993 Stock Option Plan, as amended [Incorporated by reference to Exhibit 10.3 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.24 Preferred Stock Placement Agreement, dated as of August 28, 1998 between Effective Management Systems, Inc. and Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended August 31, 1998]. 10.25 Loan Agreement by and between EMS Solutions, Inc. and Effective Management Systems, Inc. dated January 1, 1998 [Incorporated by reference to Exhibit 10.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.26 Special Compensation and Separation Agreement by and between Jeffrey J. Fossum and Effective Management Systems, Inc. effective January 1, 1998 [Incorporated by reference to Exhibit 10.3 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.27 Special Compensation and Separation Agreement by and between Wayne T. Wedell and Effective Management Systems, Inc. effective January 1, 1998 [Incorporated by reference to Exhibit 10.4 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 1998]. 10.28 Series B Preferred Stock Placement Agreement, dated as of October 27, 1998 between Effective Management Systems, Inc. and Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated. II-8 10.29 Series B Preferred Stock Purchase Agreement. 21 List of Subsidiaries of Effective Management Systems, Inc. 23 Consent of Ernst & Young, LLP. EX-3 2 ARTICLES OF AMENDMENT EXHIBIT 3.1 ARTICLES OF AMENDMENT Relating to SERIES B 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK of EFFECTIVE MANAGEMENT SYSTEMS, INC. Pursuant to Sections 180.0602 and 180.1002 of the Wisconsin Business Corporation Law I, Michael D. Dunham, President of Effective Management Systems, Inc., a corporation organized and existing under the Wisconsin Business Corporation Law (the "Corporation"), in accordance with the provisions of Sections 180.0602 and 180.1002 thereof, DO HEREBY CERTIFY: 1. That, pursuant to the authority conferred upon the Board of Directors by the Restated Articles of Incorporation of the Corporation and in accordance with Sections 180.0602 and 180.1002 of the Wisconsin Business Corporation Law, the Board of Directors of the Corporation adopted a resolution creating a series of shares of preferred stock, $.01 par value, of the Corporation, designated as Series B 8% Convertible Redeemable Preferred Stock. 2. That said resolution of the Board of Directors of the Corporation creating the series designated as Series B 8% Convertible Redeemable Preferred Stock, provides that said series shall have such designation and number of shares and such relative rights, preferences and limitations as are set forth below, which shall constitute Paragraph (6) of Section A of Article 4 of the Corporation's Restated Articles of Incorporation: (6) Series B 8% Convertible Redeemable Preferred Stock (i) Designation and Amount. There is hereby created a series of Preferred Stock which shall be designated as the "Series B 8% Convertible Redeemable Preferred Stock" (hereinafter referred to as the "Series B"); the number of shares constituting such series shall be 5,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series B to a number less than the number of shares then outstanding. (ii) Dividends. (a) Cumulative Dividends. From and after the date of issuance of any shares of Series B, the holders of the Series B shall be entitled to receive in cash, cumulative preferential dividends at the rate of eight (8%) percent per annum, payable quarterly on January 2, April 1, July 1, and 1 October 1 of each year to holders of record of Series B as of the fifteenth (15th) day of the month immediately preceding the month in which a quarterly dividend is due (each a "Dividend Record Date"). The first dividend payment date with respect to the Series B shall be January 2, 1999, which dividend shall be paid on a pro rata basis for the period such shares of Series B are outstanding. In the event that the corporation cannot, as determined by the corporation's Board of Directors in its sole discretion, pay dividends in cash on any dividend payment date, the corporation shall pay dividends in shares of Series B valued at eighty (80%) percent of the lesser of: (i) $1,000 and (ii) the Market Price (as defined below) of the Common Stock (as defined below) on the relevant Dividend Record Date multiplied by the quotient of (a) $1,000 and (b) the Conversion Price (as defined below). Commencing with the quarterly period beginning January 2, 2002, the annual dividend rate will increase each quarterly period by 2% up to a maximum annual dividend rate of 18% (e.g., the annual dividend rate for the quarterly period commencing January 2, 2002 will be 10% and the annual dividend rate for the quarterly period commencing April 1, 2002 will be 12%). (b) Preference of Dividends. In the event that dividends shall not have been fully paid, or declared and set apart for payment on all shares of Series B, the amount of the deficiency (without interest) shall be fully paid before any dividends shall be declared or paid on any shares of the corporation's Common Stock, $.01 par value per share (the "Common Stock"), or any other equity security which is junior to the Series B. If any dividends are paid on any of the Series B at any time in an aggregate amount less than the total dividends then accumulated and payable on all shares of Series B entitled to dividends then outstanding, the amount to be distributed shall be paid on each share of Series B entitled to dividends in the proportion that the dividends then accumulated and payable on each such share bears to the total dividends accumulated and payable on all outstanding shares of Series B entitled to dividends. (c) Date of Payment. In any case where the due date for the payment of dividends on the Series B shall be on a day on which banking institutions in the United States are authorized or obligated by law to close, the payment of dividends need not be made on such date, but may be made on the next succeeding day which is not a day on which banking institutions are authorized or obligated by law to close, with the same force and effect as if made on the date of such payment, and dividends shall accrue and be paid for the period through and including the date of payment. (iii) Priority. All shares of the Series B shall rank on a parity with each other and shall be preferred to the Common Stock and, other than the corporation's Series 2 A 8% Convertible Redeemable Preferred Stock (the "Series A"), which shall rank on a parity with the Series B, and except as expressly provided below in this Section (iii), any other class of stock of the corporation, as to the payment of dividends and the distribution of assets upon the liquidation, dissolution or winding up of the corporation. The corporation shall have the right to create other classes of Preferred Stock which shall rank below the Series B without the consent of the holders of the Series B. The holders of the Series B (together with the holders of Series A) shall be entitled to vote as a separate class on the issuance of any class of equity securities which ranks equal to or senior to the Series A and Series B; provided, however, that should the corporation issue and sell prior to October 30, 1998 at least 700 shares of Series B and, at any time thereafter through October 30, 1998, subject to the terms of the Series A and the right of the corporation and its placement agent to extend such date by up to an additional thirty (30) days, the corporation and its placement agent agree in writing to sell equity securities for an aggregate sale price equal to or less than the difference between $2.75 million and the aggregate purchase price for the number of shares of Series B sold, with different terms than the Series B (the "Other Securities"), the corporation shall have the right, without the approval of the holders of the Series B, to sell the Other Securities and to have such Other Securities rank equal in priority to the Series B. (iv) Voluntary Conversion Rights. (a) Voluntary Conversion. Each holder of Series B shall have the right, at any time and from time to time, at the holder's option, to convert all or any portion of such holder's shares of Series B into fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) shares of Common Stock at the Conversion Price in effect at the time of conversion, each share of the Series B being taken at $1,000 per share for the purposes of such conversion. The initial Conversion Price is $3.00 per share of Common Stock (the "Initial Conversion Price"). Notwithstanding anything to the contrary contained in the terms of the Series B, in the event that the average closing price for the corporation's Common Stock on the highest five (5) out of the last ten (10) trading days of the calendar month of January 1999 is not $5.25 per share of Common Stock or greater, then effective January 31, 1999, the Initial Conversion Price shall automatically be reduced to the lowest closing bid price within thirty (30) days after the date that the last sale of the Series B occurs, but in no event less than $2.00 per share of Common Stock. In no event shall the Initial Conversion Price be increased as a result of the foregoing. The Initial Conversion Price shall be further adjusted as provided for below in Section (vi) (the Initial Conversion Price and the Initial Conversion Price as thereafter then adjusted shall be referred to as the "Conversion Price"). Upon each adjustment of the Conversion Price, the holders of the Series B shall thereafter be entitled to receive upon conversion, at the Conversion 3 Price, the number of shares of Common Stock obtained by multiplying $1,000 times the number of shares of Series B being converted and dividing such product by the Conversion Price. (b) Method of Conversion. In order to convert shares of the Series B into Common Stock, the holder thereof shall surrender the certificates representing the Series B to be converted, duly endorsed in blank, at the principal office of the corporation or its transfer agent, if any, or at such other office or offices, located in the United States as the Board of Directors may designate by written notice to all holders of Series B shares, and give written notice to the corporation at said office that the holder elects to convert said shares of Series B. Shares of the Series B shall be deemed to have been converted as of the date (hereinafter called the "Conversion Date") of receipt by the corporation of the surrendered shares of Series B for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. As soon as practicable on or after the Conversion Date but in no event more than five (5) business days thereafter, the corporation will deliver by Federal Express or other nationally recognized overnight delivery service to the address of the holder who submitted the Series B for conversion, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with cash in lieu of any fraction of a share, as hereinafter provided, to the person or persons entitled to receive the same and a check representing all accrued and unpaid dividends on the Series B so converted through the Conversion Date. (v) Forced Conversion. The corporation shall have the right to force conversion of all, but not less than all, of the Series B into shares of Common Stock; provided, however, that on the day that notice of forced conversion is given (the "Forced Conversion Notice Date") and on the Forced Conversion Date (as defined below) the following conditions are satisfied: (a) the Common Stock issued and/or issuable upon conversion of the Series B has been registered for resale pursuant to the Securities Act of 1933, as amended (the "Act"), and such registration is then currently effective; and (b) the average of the closing bid price of the Common Stock as listed on the National Association of Securities Dealers Automated Quotation System, the New York Stock Exchange, the American Stock Exchange or wherever the Common Stock then trades (hereinafter, the "Market"), is at least 175% of the Conversion Price for twenty (20) trading days within any thirty (30) consecutive trading day period ending no more than ten (10) days prior to the Forced Conversion Notice Date. Any notice of forced conversion must be given to all holders no less than thirty (30) days nor more than forty-five (45) days prior to the date set forth for conversion (the "Forced Conversion Date"). On the Forced Conversion Date, the corporation shall pay to all registered holders of the Series B all accrued and 4 unpaid dividends through and including the Forced Conversion Date. In the event that the Board of Directors of the corporation approves a transaction whereby the holders of the Common Stock would be paid a per share price equal to or in excess of 175% of the Conversion Price (the "Sale Event") and on the Forced Conversion Notice Date and on the Forced Conversion Date the condition set forth in Section (v)(a) above has been satisfied, the corporation can require all holders of the Series B to convert their shares of Series B into shares of Common Stock immediately prior to the closing of the Sale Event. Notwithstanding anything to the contrary, holders of Series B shall not have the right to vote together with the holders of Common Stock, or as a separate class, on whether to approve the Sale Event (although a holder of Series B that voluntarily converts shares of Series B into Common Stock prior to the record date for the shareholders' meeting to vote on the Sale Event would be entitled to vote such shares of Common Stock) during the 150-day period following the Forced Conversion Notice Date because it shall be deemed for all purposes relating to the approval of the Sale Event, including for purposes of the Wisconsin Business Corporation Law, that the Series B is no longer outstanding during such period and that the only rights of the Series B shall be to receive shares of Common Stock upon consummation of the forced conversion. In the event that the foregoing sentence is determined not to eliminate the voting rights of the Series B (either class voting rights or the right to vote with the Common Stock) with respect to a Sale Event, the holders of the Series B shall be deemed to have granted the President and the Secretary of the corporation (and each of them individually) an irrevocable proxy for such 150-day period to vote the Series B held by each such holder for the approval of the Sale Event. In the event that the Sale Event would result in the holders of the Series B receiving securities, it is a condition to the corporation's right to force conversion resulting from a Sale Event that the securities to be received by the holders of the Series B are registered under the Act and are freely transferable. (vi) Adjustments to Conversion Price. The Conversion Price shall be adjusted as follows: (a) Amendment to the Restated Articles of Incorporation. In the case of any amendment to the Restated Articles of Incorporation of the corporation to change the designation of the Common Stock or the rights, privileges, restrictions or conditions in respect to the Common Stock or to provide for a division of the Common Stock, the Series B shall be adjusted so as to provide that upon conversion thereof the holder shall receive, in lieu of shares of Common Stock theretofore issuable upon such conversion, the kind and amount of shares, other securities, money and property receivable upon such designation, change or division by such holder issuable upon such conversion had the conversion occurred immediately prior to such designation, change or division. The Series B shall be deemed thereafter to provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this 5 Section (vi). The provisions of this Section (vi)(a) shall apply in the same manner to successive reclassifications, changes, consolidations and mergers. (b) Stock Splits; Stock Dividends. If the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or declare a dividend or make any other distribution upon the Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision or dividend or other distribution shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (c) Issuance of Additional Securities. In case the corporation shall, through either a private placement or a public offering (but other than pursuant to options granted under the corporation's directors' and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of warrants outstanding on October 22, 1998), issues shares of Common Stock, or options to purchase Common Stock or rights to subscribe for Common Stock or securities convertible into or exchangeable for Common Stock at a price (such consideration, if other than cash, as determined by the Board of Directors) less than the then Market Price on the date of sale, the Conversion Price then in effect shall automatically be reduced by multiplying the then Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of Common Stock which the aggregate consideration received or to be received by the corporation for such issuance, sale or distribution would purchase at the Market Price per share, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The term "Market Price" shall mean the average closing bid price on the Market for the ten (10) consecutive trading days immediately prior to the date in question. Notwithstanding the foregoing, in no event shall the Conversion Price ever be increased as a result of this Section (vi)(c). (d) Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the corporation, or any consolidation or merger of the corporation with another corporation or other entity, or the sale of all or substantially all of the corporation's assets to another corporation or other entity shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive 6 stock, securities, other evidence of equity ownership or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section (vi)(d)), lawful and adequate provisions shall be made whereby the holders of Series B shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, such shares of stock, securities, other evidence of equity ownership or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series B had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price and the number of shares of Common Stock receivable upon the conversion of Series B) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, other evidence of equity ownership or assets thereafter deliverable upon the exercise hereof (including an immediate adjustment, by reason of such consolidation or merger, of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation or merger; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(d) by more than thirty (30%) percent). Subject to the terms of the Series B, in the event of a merger or consolidation of the corporation with or into another corporation or other entity as a result of which the number of shares of common stock of the surviving corporation or other entity issuable to holders of Common Stock is greater or lesser than the number of shares of Common Stock of the corporation outstanding immediately prior to such merger or consolidation, then the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation or other entity (if other than the corporation) resulting from such consolidation or merger or the corporation or other entity purchasing such assets shall assume by written instrument executed and mailed or delivered to the holders, the obligation to deliver to such holders such shares of stock, securities, other evidence of equity ownership or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive or otherwise acquire. If a purchase tender or exchange offer is made to and accepted by the holders of more than fifty (50%) percent of the 7 outstanding shares of Common Stock, the corporation shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the holders of Series B shall have been given a reasonable opportunity to then elect to receive upon the conversion of Series B, the amount of stock, securities, other evidence of equity ownership or assets then issuable with respect to the number of shares of Common Stock of the corporation in accordance with such offer. (e) Change of Control. In case the corporation shall, at any time prior to conversion of the shares of Series B, consolidate or merge with any other corporation or other entity (where the corporation is not the surviving entity) or transfer all or substantially all of its assets to any other corporation or other entity, then the corporation shall, as a condition precedent to such transaction, cause effective provision to be made so that the holders of the Series B upon the conversion of the Series B after the effective date of such transaction shall be entitled to receive the kind and amount of shares, evidences of indebtedness and/or other securities or property receivable on such transaction by a holder of the number of shares of Common Stock as to which each share of Series B was convertible immediately prior to such transaction (without giving effect to any restriction upon such conversion); and, in any such case, appropriate provision shall be made with respect to the rights and interest of the holders of Series B to the end that the provisions of the Series B shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness or other securities or assets thereafter deliverable upon conversion of the Series B. Upon the occurrence of any event described in this Section (vi)(e), the holders of the Series B shall have the right to (i) convert into shares of Common Stock immediately prior to such event at a Conversion Price equal to the lesser of (1) the then Conversion Price or (2) the price per share of Common Stock paid in such event; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(e)(i)(2) by more than thirty (30%) percent, or (ii) retain ownership of the shares of Series B, in which event, appropriate provisions shall be made so that the shares of Series B shall be convertible at the holder's option into shares of stock, securities or other equity ownership of the surviving or acquiring entity. (f) Record of Conversion Price. Whenever the shares of Common Stock or other types of securities or assets receivable upon conversion of the Series B shall be adjusted as provided in this Section (vi), the corporation shall forthwith obtain and file with its corporate records a certificate or letter from a firm of independent public accountants of recognized standing setting forth the computation and the adjusted 8 number of shares of Common Stock or other securities or assets resulting from such adjustments, and a copy of such certificate or letter shall be mailed to the holders of the Series B. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available for inspection by any holders of the Series B on any day during normal business hours. (g) Notice. In case: i. the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in Common Stock; or ii. the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in cash; or iii. any reclassification of Common Stock or any consolidation, merger, conveyance of the property of the corporation as an entirety, or substantially as an entirety, dissolution, liquidation or winding up shall be effected by the corporation; then the corporation shall mail, or cause to be mailed by the corporation's transfer agent, if any, for the Series B to the holders of record of the outstanding shares of the Series B, at least thirty (30) days, but not more than sixty (60) days, prior to the applicable record date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or right are to be determined, or (B) the date on which such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange the certificates representing their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up. (vii) Reservation of Shares of Common Stock. (a) Reservation of Shares. The corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the shares of the Series B, the full number of shares of Common Stock then deliverable upon the conversion of all shares of the Series B then outstanding. If shares of the Common Stock of the corporation are listed on any securities exchange, the corporation shall make application for the listing thereon, on notice of issuance, of the shares of Common Stock deliverable upon the conversion of the outstanding shares of the Series B and shall use its best efforts to effect such listing. 9 (b) Fractional Shares. No fractional shares of Common Stock are to be issued upon conversion. The corporation shall pay a cash adjustment in respect to any fraction of a share which would otherwise be issuable, in an amount equal to the fair market value of the Common Stock which shall be the same fraction of the closing bid price per share at which the Common Stock was sold on the Market prior to the opening of business on the Conversion Date, or if no sale of such stock takes place on such day on the Market, the average of the closing bid and asked prices on such day as officially quoted on the Market. If the Common Stock is not then publicly traded, fair market value shall be determined in good faith by the corporation's Board of Directors. (c) Transfer Taxes. The corporation will pay any and all transfer taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of shares of the Series B pursuant hereto. The corporation shall not, however, be required to pay any tax which may be payable in respect of transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of the Series B so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established, to the satisfaction of the corporation, that such tax has been paid. (d) Common Stock. For the purpose of this Section (vii), the term "Common Stock" shall include any stock of any class of the corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, and which is not subject to redemption by the corporation. Shares of Common Stock shall be only such shares which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation and which are not subject to redemption by the corporation. (e) Status of Common Stock. All Common Stock that may be issued upon conversion of the Series B will, upon issuance, be duly issued, fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) and free from all taxes, liens and charges with respect to the issuance thereof (except to the extent resulting from the holder's own circumstances, actions or omissions). (viii) Voting. (a) Voting. The holders of the Series B shall be entitled to vote, on all matters in which holders of Common Stock are entitled to vote, voting together with the Common Stock and the Series A and Other Securities, -10- if any, without regard to class. The holders of the Series B shall have the number of votes that they would have had assuming conversion of the Series B into Common Stock as of the record date for the meeting of the holders of Common Stock with fractional shares being disregarded. The holders of the Series B shall be entitled to receive all communications sent by the corporation to the holders of Common Stock. Except as provided in Section (viii)(c) below or by the Wisconsin Business Corporation Law, holders of shares of the Series B shall not be entitled to vote as a separate class. (b) No Cumulative Voting. The holders of shares of the Series B shall not have the right of cumulative voting in an election of directors. (c) Voting as a Separate Class. The corporation shall not, without the consent (given by vote at a meeting called for that purpose or by written consent) of the holders of a majority of the shares of the Series B, the Series A and Other Securities, if any, then outstanding, voting together as a separate class: i. create, authorize or issue any stock or other equity security ranking equal to or senior to the Series B, the Series A and the Other Securities as to dividends or distributions, or any obligation or security convertible into shares of any such senior stock; or ii. amend, alter, change, or repeal any of the express terms of the Series B, the Series A or the Other Securities. (ix) Redemption. (a) Redemption. Commencing three (3) years following the last issuance of the shares of Series B, the corporation may redeem the Series B in whole at any time at the option of the corporation by resolution of its Board of Directors, at a redemption price of $1,000 per share, plus accrued and unpaid dividends, if any, to the date fixed for redemption. (b) Notice of Redemption. Notice of redemption of the shares of the Series B shall be given by certified mail, return receipt requested, postage prepaid, not less than thirty (30) nor more than forty-five (45) days prior to the date fixed for redemption, to each holder of the Series B, at each holder's last address appearing on the books of the corporation; but no failure to receive such a notice by any holder, so long as mailed in accordance with the provisions herein, shall affect the validity of the proceedings for the redemption of any shares of the Series B so to be redeemed. Each notice of redemption of shares of the Series B shall state: -11- i. the redemption date, ii. the redemption price, iii. the Conversion Price on the date of the notice, iv. that on the redemption date the redemption price will become due and payable upon each share of the Series B to be redeemed and the right to convert each such share shall cease as of the close of business on the redemption date, unless default shall be made in the payment of the redemption price, and v. the place or places where certificates for such shares of the Series B to be redeemed are to be surrendered for conversion or for payment of the redemption price. (c) Conversion Prior to the Redemption. At any time prior to the redemption date, each holder of the Series B shall be entitled to convert all or any portion of such holder's Series B into Common Stock based on the Conversion Price. (d) Rights Following Redemption. If notice of redemption shall have been duly given as provided in Section (ix)(b), and if, on the redemption date, funds necessary for such redemption have been deposited in trust with a bank or trust company, or have been set aside, in trust, by the corporation, for the purpose of redeeming shares of the Series B, the shares of the Series B called for redemption shall, as of the close of business on the redemption date, no longer be transferable on the books of the corporation and shall no longer be deemed to be outstanding, the right to receive dividends thereon shall cease to accrue, and all rights with respect to such shares so called for redemption shall terminate, except only the right of the holders thereof to receive the redemption price, without interest thereon, upon surrender of the certificates for such shares. (e) Cancellation of Shares. Shares of the Series B redeemed pursuant to this Section (ix) or otherwise reacquired by the corporation shall be deemed cancelled and thereafter shall constitute authorized and unissued shares of Preferred Stock, undesignated as to series, subject to reissuance by the corporation as shares of any series of Preferred Stock. (x) Liquidation. (a) Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation (hereinafter collectively called "liquidation"), before any amount shall be paid to or set aside for, or any assets shall be distributed among, the holders of -12- shares of Common Stock or of any other equity security of the corporation other than the Series A and the Other Securities, each holder of a share of the Series B shall be entitled to receive out of the assets of the corporation or the proceeds thereof, a preferential payment in an amount equal to $1,000 per share, plus the amount of accrued and unpaid dividends on such share, if any, and no more. (b) Proportional Rights. In the event the amount available for distribution as liquidation preference payments to holders of the Series B and any other stock ranking on a parity therewith (including the Series A and the Other Securities, if any) is insufficient to pay the full amount of their respective preferences, such amount shall be divided among and paid to such holders ratably in proportion to the respective amounts which would be payable to such holders if their respective liquidation preferences were to be paid in full. (c) Insufficient Funds. In the event any liquidation preference payment to be made on the shares of the Series B shall amount in the aggregate to less than $1,000 per share plus accrued and unpaid dividends, the corporation in its discretion may require the surrender of certificates for shares of the Series B and issue a replacement certificate or certificates, or it may require the certificates evidencing the shares in respect of which such payments are to be made to be presented to the corporation, or its agent, for notation thereon of the amounts of the liquidation preference payments made in respect of such shares. In the event a certificate for shares of the Series B on which payment of one or more partial liquidation preferences has been made is presented for exchange or transfer, such new certificate shall bear an appropriate notation as to the aggregate amount of liquidation preference payments theretofore made in respect thereof. (d) Merger or Sale. Neither the consolidation or merger of the corporation with or into any other corporation or other entity, nor the sale or transfer by the corporation of all or any part of its assets, shall be deemed to be a liquidation of the corporation for the purposes of this Section (x). (xi) Replacement Certificates. (a) Mutilated Certificate. If any mutilated certificate of Series B is surrendered to the corporation, the corporation shall execute and deliver in exchange therefor a new certificate for Series B of like tenor and principal amount, bearing a number not contemporaneously outstanding. (b) Destroyed, Lost or Stolen Certificate. If there is delivered to the corporation (i) evidence to its reasonable satisfaction of the destruction, loss or theft of any certificate of Series B and (ii) such reasonable -13- security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the corporation that such certificate of Series B has been acquired by a bona fide purchaser, the corporation shall execute and deliver in lieu of any such destroyed, lost or stolen certificate of Series B, a new certificate of Series B of like tenor and principal amount and bearing a number not contemporaneously outstanding. (c) Status of New Certificate. Upon the issuance of any new certificate of Series B under this Section (xi), the corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. Every new certificate of Series B issued pursuant to this Section (xi), in lieu of any destroyed, lost or stolen certificate of Series B, shall constitute an original additional contractual obligation of the corporation, whether or not the destroyed, lost or stolen certificate of Series B shall be at any time enforceable by anyone. Any new certificate for Series B delivered pursuant to this Section (xi), shall be so dated that neither gain nor loss in interest shall result from such exchange. The provisions of this Section (xi) are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen certificates of Series B. * * * 3. That none of the shares of Series B 8% Convertible Redeemable Preferred Stock have been issued. 4. That the amendment creating the Series B 8% Convertible Redeemable Preferred Stock was adopted by the Board of Directors of the Corporation in accordance with Section 180.1002 of the Wisconsin Business Corporation Law, and shareholder action was not required. IN WITNESS WHEREOF, I have executed and subscribed these Articles of Amendment on behalf of the Corporation and do affirm the foregoing as true this ____ day of October, 1998. By: ___________________________________ Michael D. Dunham President and Chief Executive Officer This instrument was drafted by, and should be returned to, Jay O. Rothman of the firm of Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. -14- EX-3.1 3 RESTATED ARTICLES OF INCORPORATION RESTATED ARTICLES OF INCORPORATION OF EFFECTIVE MANAGEMENT SYSTEMS, INC. Pursuant to Section 180.1007 of the Wisconsin Business Corporation Law, these Restated Articles of Incorporation shall supersede and take the place of the corporation's heretofore existing Articles of Incorporation and all amendments thereto. ARTICLE 1 The name of the corporation is Effective Management Systems, Inc. ARTICLE 2 The period of existence of the corporation shall be perpetual. ARTICLE 3 The purpose of the corporation is to engage in any lawful business or purpose whatever for which corporations may be organized under the Wisconsin Business Corporation Law. ARTICLE 4 The aggregate number of shares which the corporation shall have the authority to issue shall be 23,000,000 shares, consisting of: (i) 20,000,000 shares of a class designated as "Common Stock," with a par value of $.01 per share; and (ii) 3,000,000 shares of a class designated as "Preferred Stock," with a par value of $.01 per share. Upon the effectiveness of these Restated Articles of Incorporation, each issued and outstanding share of Common Stock, $.20 par value per share, of the corporation held of record by each shareholder of the corporation immediately prior to such effectiveness and each share held in the corporation's treasury shall automatically and without need of any further action on the part of any shareholder be reclassified into thirty-five (35) shares of Common Stock, with a par value of $.01 per share. The designation, relative rights, preferences and limitations of the shares of each class and the authority of the Board of Directors of the corporation to establish and to designate series of Preferred Stock and to fix variations in the relative rights, preferences and limitations as between such series, shall be as set forth herein. A. Preferred Stock. (1) Series and Variations Between Series. The Board of Directors of the corporation is authorized, to the full extent permitted under the Wisconsin Business Corporation Law and the provisions of this Section A, to provide for the issuance of the Preferred Stock in series, each of such series to be distinctively designated, and to have such redemption rights, dividend rights, rights on dissolution or distribution of assets, conversion or exchange rights, voting powers, designations, preferences and relative participating, optional or other special rights, if any, and such qualifications, limitations or restrictions thereof as shall be provided by the Board of Directors of the corporation consistent with the provisions of this Article 4. (2) Dividends. Before any dividends shall be paid or set apart for payment upon shares of Common Stock, the holders of each series of Preferred Stock shall be entitled to receive dividends at the rate (which may be fixed or variable) and at such times as specified in the particular series. The holders of shares of Preferred Stock shall have no rights to participate with the holders of shares of Common Stock in any distribution of dividends in excess of the preferential dividends, if any, fixed for such Preferred Stock. (3) Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of each series of Preferred Stock shall be entitled to receive out of the assets of the corporation in money or money's worth the preferential amount, if any, specified in the particular series for each share at the time outstanding together with all accrued but unpaid dividends thereon, before any of such assets shall be paid or distributed to holders of Common Stock. The holders of Preferred Stock shall have no rights to participate with the holders of Common Stock in the assets of the corporation available for distribution to shareholders in excess of the preferential amount, if any, fixed for such Preferred Stock. (4) Voting Rights. The holders of Preferred Stock shall have only such voting rights as are fixed for shares of each series by the Board of Directors pursuant to this Section A or are provided, to the extent applicable, by the Wisconsin Business Corporation Law. (5) Series A 8% Convertible Redeemable Preferred Stock. (i) Designation and Amount. There is hereby created a series of Preferred Stock which shall be designated as the "Series A 8% Convertible Redeemable Preferred Stock" (hereinafter referred to as the "Series A"); the number of shares constituting such series shall be 7,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A to a number less than the number of shares then outstanding. (ii) Dividends. (a) Cumulative Dividends. From and after the date of issuance of any shares of Series A, the holders of the Series A shall be entitled to receive in cash, cumulative preferential dividends at the rate of eight (8%) percent per annum, payable quarterly on January 2, April 1, July 1, and October 1 of each year to holders of record of Series A as of the fifteenth (15th) day of the month immediately preceding the month in which a quarterly dividend is due (each a "Dividend Record Date"). Notwithstanding the foregoing, the first dividend payment date with respect to the Series A shall be January 2, 1999, which -2- dividend shall be paid on a pro rata basis for the period such shares of Series A are outstanding. In the event that the corporation cannot, as determined by the corporation's Board of Directors in its sole discretion, pay dividends in cash on any dividend payment date, the corporation shall pay dividends in shares of Series A valued at eighty (80%) percent of the lesser of: (i) $1,000 and (ii) the Market Price (as defined below) of the Common Stock (as defined below) on the relevant Dividend Record Date multiplied by the quotient of (a) $1,000 and (b) the Conversion Price (as defined below). Commencing with the quarterly period beginning January 2, 2002, the annual dividend rate will increase each quarterly period by 2% up to a maximum annual dividend rate of 18% (e.g., the annual dividend rate for the quarterly period commencing January 2, 2002 will be 10% and the annual dividend rate for the quarterly period commencing April 1, 2002 will be 12%). (b) Preference of Dividends. In the event that dividends shall not have been fully paid, or declared and set apart for payment on all shares of Series A, the amount of the deficiency (without interest) shall be fully paid before any dividends shall be declared or paid on any shares of the corporation's Common Stock, $.01 par value per share (the "Common Stock"), or any other equity security which is junior to the Series A. If any dividends are paid on any of the Series A at any time in an aggregate amount less than the total dividends then accumulated and payable on all shares of Series A entitled to dividends then outstanding, the amount to be distributed shall be paid on each share of Series A entitled to dividends in the proportion that the dividends then accumulated and payable on each such share bears to the total dividends accumulated and payable on all outstanding shares of Series A entitled to dividends. (c) Date of Payment. In any case where the due date for the payment of dividends on the Series A shall be on a day on which banking institutions in the United States are authorized or obligated by law to close, the payment of dividends need not be made on such date, but may be made on the next succeeding day which is not a day on which banking institutions are authorized or obligated by law to close, with the same force and effect as if made on the date of such payment, and dividends shall accrue and be paid for the period through and including the date of payment. (iii) Priority. All shares of the Series A shall rank on a parity with each other and shall be preferred to the Common Stock and, except as expressly provided below in this Section (iii), any other class of stock of the corporation, as to the payment of dividends and the distribution of assets upon the liquidation, dissolution or winding up of the corporation. The corporation shall have the right to create other classes of Preferred Stock which shall rank below the Series A without the consent of the holders of the Series A. The holders of the Series A shall be entitled to vote as a separate class on the issuance of any class of equity securities which ranks equal to or senior to the Series A; provided, however, that should the corporation issue and sell prior to September 30, 1998 at least 1,000 shares of Series A and, at any time thereafter through September 30, 1998, subject to the right of the corporation and its placement agent to extend such date by up to an additional thirty (30) days, the corporation and its placement agent agree in writing to sell equity securities for an aggregate sale price equal to or less than the difference between $5 million and the aggregate purchase price for the number of shares of Series A sold, with different terms than the Series -3- A (the "Other Securities"), the corporation shall have the right, without the approval of the holders of the Series A, to sell the Other Securities and to have such Other Securities rank equal in priority to the Series A. (iv) Voluntary Conversion Rights. (a) Voluntary Conversion. Each holder of Series A shall have the right, at any time and from time to time, at the holder's option, to convert all or any portion of such holder's shares of Series A into fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) shares of Common Stock at the Conversion Price in effect at the time of conversion, each share of the Series A being taken at $1,000 per share for the purposes of such conversion. The initial Conversion Price is $3.50 per share of Common Stock ("Initial Conversion Price"). The Initial Conversion Price shall be adjusted as provided for below in Section (vi) (the Initial Conversion Price and the Initial Conversion Price as thereafter then adjusted shall be referred to as the "Conversion Price"). Upon each adjustment of the Conversion Price, the holders of the Series A shall thereafter be entitled to receive upon conversion, at the Conversion Price, the number of shares of Common Stock obtained by multiplying $1,000 times the number of shares of Series A being converted and dividing such product by the Conversion Price. (b) Method of Conversion. In order to convert shares of the Series A into Common Stock, the holder thereof shall surrender the certificates representing the Series A to be converted, duly endorsed in blank, at the principal office of the corporation or its transfer agent, if any, or at such other office or offices, located in the United States as the Board of Directors may designate by written notice to all holders of Series A shares, and give written notice to the corporation at said office that the holder elects to convert said shares of Series A. Shares of the Series A shall be deemed to have been converted as of the date (hereinafter called the "Conversion Date") of receipt by the corporation of the surrendered shares of Series A for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. As soon as practicable on or after the Conversion Date but in no event more than five (5) business days thereafter, the corporation will deliver by Federal Express or other nationally recognized overnight delivery service to the address of the holder who submitted the Series A for conversion, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with cash in lieu of any fraction of a share, as hereinafter provided, to the person or persons entitled to receive the same and a check representing all accrued and unpaid dividends on the Series A so converted through the Conversion Date. (v) Forced Conversion. The corporation shall have the right to force conversion of all, but not less than all, of the Series A into shares of Common Stock; provided, however, that on the day that notice of forced conversion is given (the "Forced Conversion Notice Date") and on the Forced Conversion Date (as defined below) the following conditions are satisfied: (a) the Common Stock issued and/or issuable upon conversion of the Series A has been registered for resale pursuant to the Securities Act of 1933, as amended (the "Act"), and such registration is then currently effective; and (b) the -4- average of the closing bid price of the Common Stock as listed on the National Association of Securities Dealers Automated Quotation System, the New York Stock Exchange, the American Stock Exchange or wherever the Common Stock then trades (hereinafter, the "Market"), is at least 175% of the Conversion Price for twenty (20) trading days within any thirty (30) consecutive trading day period ending no more than ten (10) days prior to the Forced Conversion Notice Date. Any notice of forced conversion must be given to all holders no less than thirty (30) days nor more than forty-five (45) days prior to the date set forth for conversion (the "Forced Conversion Date"). On the Forced Conversion Date, the corporation shall pay to all registered holders of the Series A all accrued and unpaid dividends through and including the Forced Conversion Date. In the event that the Board of Directors of the corporation approves a transaction whereby the holders of the Common Stock would be paid a per share price equal to or in excess of 175% of the Conversion Price (the "Sale Event") and the Forced Conversion Notice Date and on the Forced Conversion Date the condition set forth in Section (v)(a) above has been satisfied, the corporation can require all holders of the Series A to convert their shares of Series A into shares of Common Stock immediately prior to the closing of the Sale Event. Notwithstanding anything to the contrary, holders of Series A shall not have the right to vote together with the holders of Common Stock, or as a separate class, on whether to approve the Sale Event (although a holder of Series A that voluntarily converts shares of Series A into Common Stock prior to the record date for the shareholders' meeting to vote on the Sale Event would be entitled to vote such shares of Common Stock) during the 150-day period following the Forced Conversion Notice Date because it shall be deemed for all purposes relating to the approval of the Sale Event, including for purposes of the Wisconsin Business Corporation Law, that the Series A is no longer outstanding during such period and that the only rights of the Series A shall be to receive shares of Common Stock upon consummation of the forced conversion. In the event that the foregoing sentence is determined not to eliminate the voting rights of the Series A (either class voting rights or the right to vote with the Common Stock) with respect to a Sale Event, the holders of the Series A shall be deemed to have granted the President and the Secretary of the corporation (and each of them individually) an irrevocable proxy for such 150-day period to vote the Series A held by each such holder for the approval of the Sale Event. In the event that the Sale Event would result in the holders of the Series A receiving securities, it is a condition to the corporation's right to force conversion resulting from a Sale Event that the securities to be received by the holders of the Series A are registered under the Act and are freely transferable. (vi) Adjustments to Conversion Price. The Conversion Price shall be adjusted as follows: (a) Amendment to the Restated Articles of Incorporation. In the case of any amendment to the Restated Articles of Incorporation of the corporation to change the designation of the Common Stock or the rights, privileges, restrictions or conditions in respect to the Common Stock or to provide for a division of the Common Stock, the Series A shall be adjusted so as to provide that upon conversion thereof the holder shall receive, in lieu of shares of Common Stock theretofore issuable upon such conversion, the kind and amount of shares, other securities, money and property receivable upon such designation, change or division by such holder issuable upon such conversion had the conversion occurred immediately prior to such designation, change or division. The Series A -5- shall be deemed thereafter to provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section (vi). The provisions of this Section (vi)(a) shall apply in the same manner to successive reclassifications, changes, consolidations and mergers. (b) Stock Splits; Stock Dividends. If the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or declare a dividend or make any other distribution upon the Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision or dividend or other distribution shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (c) Issuance of Additional Securities. In case the corporation shall, through either a private placement or a public offering (but other than pursuant to options granted under the corporation's directors' and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of warrants outstanding on August 19, 1998), issues shares of Common Stock, or options to purchase Common Stock or rights to subscribe for Common Stock or securities convertible into or exchangeable for Common Stock at a price (such consideration, if other than cash, as determined by the Board of Directors) less than the then Market Price (as defined below) on the date of sale, the Conversion Price then in effect shall automatically be reduced by multiplying the then Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of Common Stock which the aggregate consideration received or to be received by the corporation for such issuance, sale or distribution would purchase at the Market Price per share, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The term "Market Price" shall mean the average closing bid price on the Market for the ten (10) consecutive trading days immediately prior to the date in question. Notwithstanding the foregoing, in no event shall the Conversion Price ever be increased as a result of this Section (vi)(c). (d) Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the corporation, or any consolidation or merger of the corporation with another corporation or other entity, or the sale of all or substantially all of the corporation's assets to another corporation or other entity shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, other evidence of equity ownership or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section (vi)(d)), lawful and adequate provisions shall be made whereby the holders of Series A shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, such shares of stock, securities, other evidence of equity ownership or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common -6- Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series A had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price and the number of shares of Common Stock receivable upon the conversion of Series A) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, other evidence of equity ownership or assets thereafter deliverable upon the exercise hereof (including an immediate adjustment, by reason of such consolidation or merger, of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation or merger; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(d) by more than thirty (30%) percent). Subject to the terms of the Series A, in the event of a merger or consolidation of the corporation with or into another corporation or other entity as a result of which the number of shares of common stock of the surviving corporation or other entity issuable to holders of Common Stock is greater or lesser than the number of shares of Common Stock of the corporation outstanding immediately prior to such merger or consolidation, then the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation or other entity (if other than the corporation) resulting from such consolidation or merger or the corporation or other entity purchasing such assets shall assume by written instrument executed and mailed or delivered to the holders, the obligation to deliver to such holders such shares of stock, securities, other evidence of equity ownership or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive or otherwise acquire. If a purchase tender or exchange offer is made to and accepted by the holders of more than fifty (50%) percent of the outstanding shares of Common Stock, the corporation shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the holders of Series A shall have been given a reasonable opportunity to then elect to receive upon the conversion of Series A, the amount of stock, securities, other evidence of equity ownership or assets then issuable with respect to the number of shares of Common Stock of the corporation in accordance with such offer. (e) Change of Control. In case the corporation shall, at any time prior to conversion of the shares of Series A, consolidate or merge with any other corporation or other entity (where the corporation is not the surviving entity) or transfer all or substantially all of its assets to any other corporation or other entity, then the corporation shall, as a condition precedent to such transaction, cause effective provision to be made so that the holders of the Series A upon the conversion of the Series A after the effective date of such transaction shall be entitled to receive the kind and amount of shares, evidences of indebtedness and/or other securities or property receivable on such transaction by a holder of the number of shares of Common Stock as to which each share of Series A was convertible immediately prior to such transaction (without giving effect to any restriction upon such -7- conversion); and, in any such case, appropriate provision shall be made with respect to the rights and interest of the holders of Series A to the end that the provisions of the Series A shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness or other securities or assets thereafter deliverable upon conversion of the Series A. Upon the occurrence of any event described in this Section (vi)(e), the holders of the Series A shall have the right to (i) convert into shares of Common Stock immediately prior to such event at a Conversion Price equal to the lesser of (1) the then Conversion Price or (2) the price per share of Common Stock paid in such event; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(e)(2) by more than thirty (30%) percent, or (ii) retain ownership of the shares of Series A, in which event, appropriate provisions shall be made so that the shares of Series A shall be convertible at the holder's option into shares of stock, securities or other equity ownership of the surviving or acquiring entity. (f) Record of Conversion Price. Whenever the shares of Common Stock or other types of securities or assets receivable upon conversion of the Series A shall be adjusted as provided in this Section (vi), the corporation shall forthwith obtain and file with its corporate records a certificate or letter from a firm of independent public accountants of recognized standing setting forth the computation and the adjusted number of shares of Common Stock or other securities or assets resulting from such adjustments, and a copy of such certificate or letter shall be mailed to the holders of the Series A. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available for inspection by any holders of the Series A on any day during normal business hours. (g) Notice. In case: i the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in Common Stock; or ii the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in cash; or iii any reclassification of Common Stock or any consolidation, merger, conveyance of the property of the corporation as an entirety, or substantially as an entirety, dissolution, liquidation or winding up shall be effected by the corporation; then the corporation shall mail, or cause to be mailed by the corporation's transfer agent, if any, for the Series A to the holders of record of the outstanding shares of the Series A, at least thirty (30) days, but not more than sixty (60) days, prior to the applicable record date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as -8- of which the holders of Common Stock of record to be entitled to such dividend, distribution or right are to be determined, or (B) the date on which such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange the certificates representing their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up. (vii) Reservation of Shares of Common Stock. (a) Reservation of Shares. The corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the shares of the Series A, the full number of shares of Common Stock then deliverable upon the conversion of all shares of the Series A then outstanding. If shares of the Common Stock of the corporation are listed on any securities exchange, the corporation shall make application for the listing thereon, on notice of issuance, of the shares of Common Stock deliverable upon the conversion of the outstanding shares of the Series A and shall use its best efforts to effect such listing. (b) Fractional Shares. No fractional shares of Common Stock are to be issued upon conversion. The corporation shall pay a cash adjustment in respect to any fraction of a share which would otherwise be issuable, in an amount equal to the fair market value of the Common Stock which shall be the same fraction of the closing bid price per share at which the Common Stock was sold on the Market prior to the opening of business on the Conversion Date, or if no sale of such stock takes place on such day on the Market, the average of the closing bid and asked prices on such day as officially quoted on the Market. If the Common Stock is not then publicly traded, fair market value shall be determined in good faith by the corporation's Board of Directors. (c) Transfer Taxes. The corporation will pay any and all transfer taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of shares of the Series A pursuant hereto. The corporation shall not, however, be required to pay any tax which may be payable in respect of transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of the Series A so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established, to the satisfaction of the corporation, that such tax has been paid. (d) Common Stock. For the purpose of this Section (vii), the term "Common Stock" shall include any stock of any class of the corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, and which is not subject to redemption by the corporation. Shares of Common Stock shall be only such shares which have no preference in respect of dividends or of amounts payable in the event of any voluntary -9- or involuntary liquidation, dissolution, or winding up of the corporation and which are not subject to redemption by the corporation. (e) Status of Common Stock. All Common Stock that may be issued upon conversion of the Series A will, upon issuance, be duly issued, fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) and free from all taxes, liens and charges with respect to the issuance thereof (except to the extent resulting from the holder's own circumstances, actions or omissions). (viii) Voting. (a) Voting. The holders of the Series A shall be entitled to vote, on all matters in which holders of Common Stock are entitled to vote, voting together with the Common Stock and the Other Securities, if any, without regard to class. The holders of the Series A shall have the number of votes that they would have had assuming conversion of the Series A into Common Stock as of the record date for the meeting of the holders of Common Stock with fractional shares being disregarded. The holders of the Series A shall be entitled to receive all communications sent by the corporation to the holders of Common Stock. Except as provided in Section (viii)(c) below or by the Wisconsin Business Corporation Law, holders of shares of the Series A shall not be entitled to vote as a separate class. (b) No Cumulative Voting. The holders of shares of the Series A shall not have the right of cumulative voting in an election of directors. (c) Voting as a Separate Class. The corporation shall not, without the consent (given by vote at a meeting called for that purpose or by written consent) of the holders of a majority of the shares of the Series A and the Other Securities, if any, then outstanding, voting together as a separate class: i create, authorize or issue any stock or other equity security ranking equal to or senior to the Series A and the Other Securities as to dividends or distributions, or any obligation or security convertible into shares of any such senior stock, except as set forth in Section (ii) above; or ii amend, alter, change, or repeal any of the express terms of the Series A or the Other Securities. (iv) Redemption. (a) Redemption. Commencing three (3) years following the last issuance of the shares of Series A, the corporation may redeem the Series A in whole at any time at the option of the corporation by resolution of its Board of Directors, at a redemption price of $1,000 per share, plus accrued and unpaid dividends, if any, to the date fixed for redemption. -10- (b) Notice of Redemption. Notice of redemption of the shares of the Series A shall be given by certified mail, return receipt requested, postage prepaid, not less than thirty (30) nor more than forty-five (45) days prior to the date fixed for redemption, to each holder of the Series A, at each holder's last address appearing on the books of the corporation; but no failure to receive such a notice by any holder, so long as mailed in accordance with the provisions herein, shall affect the validity of the proceedings for the redemption of any shares of the Series A so to be redeemed. Each notice of redemption of shares of the Series A shall state: (i) the redemption date, (ii) the redemption price, (iii) the Conversion Price on the date of the notice, (iv) that on the redemption date the redemption price will become due and payable upon each share of the Series A to be redeemed and the right to convert each such share shall cease as of the close of business on the redemption date, unless default shall be made in the payment of the redemption price, and (v) the place or places where certificates for such shares of the Series A to be redeemed are to be surrendered for conversion or for payment of the redemption price. (c) Conversion Prior to the Redemption. At any time prior to the redemption date, each holder of the Series A shall be entitled to convert all or any portion of such holder's Series A into Common Stock based on the Conversion Price. (d) Rights Following Redemption. If notice of redemption shall have been duly given as provided in Section (ix)(b), and if, on the redemption date, funds necessary for such redemption have been deposited in trust with a bank or trust company, or have been set aside, in trust, by the corporation, for the purpose of redeeming shares of the Series A, the shares of the Series A called for redemption shall, as of the close of business on the redemption date, no longer be transferable on the books of the corporation and shall no longer be deemed to be outstanding, the right to receive dividends thereon shall cease to accrue, and all rights with respect to such shares so called for redemption shall terminate, except only the right of the holders thereof to receive the redemption price, without interest thereon, upon surrender of the certificates for such shares. (e) Cancellation of Shares. Shares of the Series A redeemed pursuant to this Section (ix) or otherwise reacquired by the corporation shall be deemed cancelled and thereafter shall constitute authorized and unissued shares of Preferred Stock, -11- undesignated as to series, subject to reissuance by the corporation as shares of any series of Preferred Stock. (x) Liquidation. (a) Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation (hereinafter collectively called "liquidation"), before any amount shall be paid to or set aside for, or any assets shall be distributed among, the holders of shares of Common Stock or of any other equity security of the corporation other than the Other Securities, each holder of a share of the Series A shall be entitled to receive out of the assets of the corporation or the proceeds thereof, a preferential payment in an amount equal to $1,000 per share, plus the amount of accrued and unpaid dividends on such share, if any, and no more. (b) Proportional Rights. In the event the amount available for distribution as liquidation preference payments to holders of the Series A and any other stock ranking on a parity therewith (including the Other Securities, if any) is insufficient to pay the full amount of their respective preferences, such amount shall be divided among and paid to such holders ratably in proportion to the respective amounts which would be payable to such holders if their respective liquidation preferences were to be paid in full. (c) Insufficient Funds. In the event any liquidation preference payment to be made on the shares of the Series A shall amount in the aggregate to less than $1,000 per share plus accrued and unpaid dividends, the corporation in its discretion may require the surrender of certificates for shares of the Series A and issue a replacement certificate or certificates, or it may require the certificates evidencing the shares in respect of which such payments are to be made to be presented to the corporation, or its agent, for notation thereon of the amounts of the liquidation preference payments made in respect of such shares. In the event a certificate for shares of the Series A on which payment of one or more partial liquidation preferences has been made is presented for exchange or transfer, such new certificate shall bear an appropriate notation as to the aggregate amount of liquidation preference payments theretofore made in respect thereof. (d) Merger or Sale. Neither the consolidation or merger of the corporation with or into any other corporation or other entity, nor the sale or transfer by the corporation of all or any part of its assets, shall be deemed to be a liquidation of the corporation for the purposes of this Section (x). (xi) Replacement Certificates. (a) Mutilated Certificate. If any mutilated certificate of Series A is surrendered to the corporation, the corporation shall execute and deliver in exchange therefor a new certificate for Series A of like tenor and principal amount, bearing a number not contemporaneously outstanding. (b) Destroyed, Lost or Stolen Certificate. If there is delivered to the corporation (i) evidence to its reasonable satisfaction of the destruction, loss or -12- theft of any certificate of Series A and (ii) such reasonable security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the corporation that such certificate of Series A has been acquired by a bona fide purchaser, the corporation shall execute and deliver in lieu of any such destroyed, lost or stolen certificate of Series A, a new certificate of Series A of like tenor and principal amount and bearing a number not contemporaneously outstanding. (c) Status of New Certificate. Upon the issuance of any new certificate of Series A under this Section (xi), the corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. Every new certificate of Series A issued pursuant to this Section (xi), in lieu of any destroyed, lost or stolen certificate of Series A, shall constitute an original additional contractual obligation of the corporation, whether or not the destroyed, lost or stolen certificate of Series A shall be at any time enforceable by anyone. Any new certificate for Series A delivered pursuant to this Section (xi), shall be so dated that neither gain nor loss in interest shall result from such exchange. The provisions of this Section (xi) are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen certificates of Series A. (6) Series B 8% Convertible Redeemable Preferred Stock. (i) Designation and Amount. There is hereby created a series of Preferred Stock which shall be designated as the "Series B 8% Convertible Redeemable Preferred Stock" (hereinafter referred to as the "Series B"); the number of shares constituting such series shall be 5,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series B to a number less than the number of shares then outstanding. (ii) Dividends. (a) Cumulative Dividends. From and after the date of issuance of any shares of Series B, the holders of the Series B shall be entitled to receive in cash, cumulative preferential dividends at the rate of eight (8%) percent per annum, payable quarterly on January 2, April 1, July 1, and October 1 of each year to holders of record of Series B as of the fifteenth (15th) day of the month immediately preceding the month in which a quarterly dividend is due (each a "Dividend Record Date"). The first dividend payment date with respect to the Series B shall be January 2, 1999, which dividend shall be paid on a pro rata basis for the period such shares of Series B are outstanding. In the event that the corporation cannot, as determined by the corporation's Board of Directors in its sole discretion, pay dividends in cash on any dividend payment date, the corporation shall pay dividends in shares of Series B valued at eighty (80%) percent of the lesser of: (i) $1,000 and (ii) the Market Price (as defined below) of the Common Stock (as defined below) on the relevant Dividend Record Date multiplied by the quotient of (a) $1,000 and (b) the Conversion Price (as defined below). Commencing with the quarterly period beginning January 2, 2002, the annual dividend rate will increase each quarterly period by 2% up to a maximum annual -13- dividend rate of 18% (e.g., the annual dividend rate for the quarterly period commencing January 2, 2002 will be 10% and the annual dividend rate for the quarterly period commencing April 1, 2002 will be 12%). (b) Preference of Dividends. In the event that dividends shall not have been fully paid, or declared and set apart for payment on all shares of Series B, the amount of the deficiency (without interest) shall be fully paid before any dividends shall be declared or paid on any shares of the corporation's Common Stock, $.01 par value per share (the "Common Stock"), or any other equity security which is junior to the Series B. If any dividends are paid on any of the Series B at any time in an aggregate amount less than the total dividends then accumulated and payable on all shares of Series B entitled to dividends then outstanding, the amount to be distributed shall be paid on each share of Series B entitled to dividends in the proportion that the dividends then accumulated and payable on each such share bears to the total dividends accumulated and payable on all outstanding shares of Series B entitled to dividends. (c) Date of Payment. In any case where the due date for the payment of dividends on the Series B shall be on a day on which banking institutions in the United States are authorized or obligated by law to close, the payment of dividends need not be made on such date, but may be made on the next succeeding day which is not a day on which banking institutions are authorized or obligated by law to close, with the same force and effect as if made on the date of such payment, and dividends shall accrue and be paid for the period through and including the date of payment. (iii) Priority. All shares of the Series B shall rank on a parity with each other and shall be preferred to the Common Stock and, other than the corporation's Series A 8% Convertible Redeemable Preferred Stock (the "Series A"), which shall rank on a parity with the Series B, and except as expressly provided below in this Section (iii), any other class of stock of the corporation, as to the payment of dividends and the distribution of assets upon the liquidation, dissolution or winding up of the corporation. The corporation shall have the right to create other classes of Preferred Stock which shall rank below the Series B without the consent of the holders of the Series B. The holders of the Series B (together with the holders of Series A) shall be entitled to vote as a separate class on the issuance of any class of equity securities which ranks equal to or senior to the Series A and Series B; provided, however, that should the corporation issue and sell prior to October 30, 1998 at least 700 shares of Series B and, at any time thereafter through October 30, 1998, subject to the terms of the Series A and the right of the corporation and its placement agent to extend such date by up to an additional thirty (30) days, the corporation and its placement agent agree in writing to sell equity securities for an aggregate sale price equal to or less than the difference between $2.75 million and the aggregate purchase price for the number of shares of Series B sold, with different terms than the Series B (the "Other Securities"), the corporation shall have the right, without the approval of the holders of the Series B, to sell the Other Securities and to have such Other Securities rank equal in priority to the Series B. -14- (iv) Voluntary Conversion Rights. (a) Voluntary Conversion. Each holder of Series B shall have the right, at any time and from time to time, at the holder's option, to convert all or any portion of such holder's shares of Series B into fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) shares of Common Stock at the Conversion Price in effect at the time of conversion, each share of the Series B being taken at $1,000 per share for the purposes of such conversion. The initial Conversion Price is $3.00 per share of Common Stock (the "Initial Conversion Price"). Notwithstanding anything to the contrary contained in the terms of the Series B, in the event that the average closing price for the corporation's Common Stock on the highest five (5) out of the last ten (10) trading days of the calendar month of January 1999 is not $5.25 per share of Common Stock or greater, then effective January 31, 1999, the Initial Conversion Price shall automatically be reduced to the lowest closing bid price within thirty (30) days after the date that the last sale of the Series B occurs, but in no event less than $2.00 per share of Common Stock. In no event shall the Initial Conversion Price be increased as a result of the foregoing. The Initial Conversion Price shall be further adjusted as provided for below in Section (vi) (the Initial Conversion Price and the Initial Conversion Price as thereafter then adjusted shall be referred to as the "Conversion Price"). Upon each adjustment of the Conversion Price, the holders of the Series B shall thereafter be entitled to receive upon conversion, at the Conversion Price, the number of shares of Common Stock obtained by multiplying $1,000 times the number of shares of Series B being converted and dividing such product by the Conversion Price. (b) Method of Conversion. In order to convert shares of the Series B into Common Stock, the holder thereof shall surrender the certificates representing the Series B to be converted, duly endorsed in blank, at the principal office of the corporation or its transfer agent, if any, or at such other office or offices, located in the United States as the Board of Directors may designate by written notice to all holders of Series B shares, and give written notice to the corporation at said office that the holder elects to convert said shares of Series B. Shares of the Series B shall be deemed to have been converted as of the date (hereinafter called the "Conversion Date") of receipt by the corporation of the surrendered shares of Series B for conversion as provided above, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on such date. As soon as practicable on or after the Conversion Date but in no event more than five (5) business days thereafter, the corporation will deliver by Federal Express or other nationally recognized overnight delivery service to the address of the holder who submitted the Series B for conversion, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with cash in lieu of any fraction of a share, as hereinafter provided, to the person or persons entitled to receive the same and a check representing all accrued and unpaid dividends on the Series B so converted through the Conversion Date. (v) Forced Conversion. The corporation shall have the right to force conversion of all, but not less than all, of the Series B into shares of Common Stock; provided, however, that on the day that notice of forced conversion is given (the "Forced Conversion Notice Date") and on the Forced Conversion Date (as defined below) the -15- following conditions are satisfied: (a) the Common Stock issued and/or issuable upon conversion of the Series B has been registered for resale pursuant to the Securities Act of 1933, as amended (the "Act"), and such registration is then currently effective; and (b) the average of the closing bid price of the Common Stock as listed on the National Association of Securities Dealers Automated Quotation System, the New York Stock Exchange, the American Stock Exchange or wherever the Common Stock then trades (hereinafter, the "Market"), is at least 175% of the Conversion Price for twenty (20) trading days within any thirty (30) consecutive trading day period ending no more than ten (10) days prior to the Forced Conversion Notice Date. Any notice of forced conversion must be given to all holders no less than thirty (30) days nor more than forty-five (45) days prior to the date set forth for conversion (the "Forced Conversion Date"). On the Forced Conversion Date, the corporation shall pay to all registered holders of the Series B all accrued and unpaid dividends through and including the Forced Conversion Date. In the event that the Board of Directors of the corporation approves a transaction whereby the holders of the Common Stock would be paid a per share price equal to or in excess of 175% of the Conversion Price (the "Sale Event") and on the Forced Conversion Notice Date and on the Forced Conversion Date the condition set forth in Section (v)(a) above has been satisfied, the corporation can require all holders of the Series B to convert their shares of Series B into shares of Common Stock immediately prior to the closing of the Sale Event. Notwithstanding anything to the contrary, holders of Series B shall not have the right to vote together with the holders of Common Stock, or as a separate class, on whether to approve the Sale Event (although a holder of Series B that voluntarily converts shares of Series B into Common Stock prior to the record date for the shareholders' meeting to vote on the Sale Event would be entitled to vote such shares of Common Stock) during the 150-day period following the Forced Conversion Notice Date because it shall be deemed for all purposes relating to the approval of the Sale Event, including for purposes of the Wisconsin Business Corporation Law, that the Series B is no longer outstanding during such period and that the only rights of the Series B shall be to receive shares of Common Stock upon consummation of the forced conversion. In the event that the foregoing sentence is determined not to eliminate the voting rights of the Series B (either class voting rights or the right to vote with the Common Stock) with respect to a Sale Event, the holders of the Series B shall be deemed to have granted the President and the Secretary of the corporation (and each of them individually) an irrevocable proxy for such 150-day period to vote the Series B held by each such holder for the approval of the Sale Event. In the event that the Sale Event would result in the holders of the Series B receiving securities, it is a condition to the corporation's right to force conversion resulting from a Sale Event that the securities to be received by the holders of the Series B are registered under the Act and are freely transferable. (vi) Adjustments to Conversion Price. The Conversion Price shall be adjusted as follows: (a) Amendment to the Restated Articles of Incorporation. In the case of any amendment to the Restated Articles of Incorporation of the corporation to change the designation of the Common Stock or the rights, privileges, restrictions or conditions in respect to the Common Stock or to provide for a division of the Common Stock, the Series B shall be adjusted so as to provide that upon conversion thereof the holder shall receive, in lieu of shares of Common Stock theretofore issuable upon such conversion, the -16- kind and amount of shares, other securities, money and property receivable upon such designation, change or division by such holder issuable upon such conversion had the conversion occurred immediately prior to such designation, change or division. The Series B shall be deemed thereafter to provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section (vi). The provisions of this Section (vi)(a) shall apply in the same manner to successive reclassifications, changes, consolidations and mergers. (b) Stock Splits; Stock Dividends. If the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or declare a dividend or make any other distribution upon the Common Stock payable in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision or dividend or other distribution shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (c) Issuance of Additional Securities. In case the corporation shall, through either a private placement or a public offering (but other than pursuant to options granted under the corporation's directors' and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of warrants outstanding on October 22, 1998), issues shares of Common Stock, or options to purchase Common Stock or rights to subscribe for Common Stock or securities convertible into or exchangeable for Common Stock at a price (such consideration, if other than cash, as determined by the Board of Directors) less than the then Market Price on the date of sale, the Conversion Price then in effect shall automatically be reduced by multiplying the then Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of Common Stock which the aggregate consideration received or to be received by the corporation for such issuance, sale or distribution would purchase at the Market Price per share, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The term "Market Price" shall mean the average closing bid price on the Market for the ten (10) consecutive trading days immediately prior to the date in question. Notwithstanding the foregoing, in no event shall the Conversion Price ever be increased as a result of this Section (vi)(c). (d) Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the corporation, or any consolidation or merger of the corporation with another corporation or other entity, or the sale of all or substantially all of the corporation's assets to another corporation or other entity shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, other evidence of equity ownership or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section (vi)(d)), lawful and adequate provisions shall be made whereby the holders of Series B shall thereafter -17- have the right to receive upon the basis and upon the terms and conditions specified herein, such shares of stock, securities, other evidence of equity ownership or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series B had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the holders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price and the number of shares of Common Stock receivable upon the conversion of Series B) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, other evidence of equity ownership or assets thereafter deliverable upon the exercise hereof (including an immediate adjustment, by reason of such consolidation or merger, of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation or merger; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(d) by more than thirty (30%) percent). Subject to the terms of the Series B, in the event of a merger or consolidation of the corporation with or into another corporation or other entity as a result of which the number of shares of common stock of the surviving corporation or other entity issuable to holders of Common Stock is greater or lesser than the number of shares of Common Stock of the corporation outstanding immediately prior to such merger or consolidation, then the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation or other entity (if other than the corporation) resulting from such consolidation or merger or the corporation or other entity purchasing such assets shall assume by written instrument executed and mailed or delivered to the holders, the obligation to deliver to such holders such shares of stock, securities, other evidence of equity ownership or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive or otherwise acquire. If a purchase tender or exchange offer is made to and accepted by the holders of more than fifty (50%) percent of the outstanding shares of Common Stock, the corporation shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the holders of Series B shall have been given a reasonable opportunity to then elect to receive upon the conversion of Series B, the amount of stock, securities, other evidence of equity ownership or assets then issuable with respect to the number of shares of Common Stock of the corporation in accordance with such offer. (e) Change of Control. In case the corporation shall, at any time prior to conversion of the shares of Series B, consolidate or merge with any other corporation or other entity (where the corporation is not the surviving entity) or transfer all or substantially all of its assets to any other corporation or other entity, then the corporation shall, as a condition precedent to such transaction, cause effective provision to be made so that the holders of the Series B upon the conversion of the Series B after the effective date of such transaction shall be entitled to receive the kind and amount of shares, evidences of -18- indebtedness and/or other securities or property receivable on such transaction by a holder of the number of shares of Common Stock as to which each share of Series B was convertible immediately prior to such transaction (without giving effect to any restriction upon such conversion); and, in any such case, appropriate provision shall be made with respect to the rights and interest of the holders of Series B to the end that the provisions of the Series B shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness or other securities or assets thereafter deliverable upon conversion of the Series B. Upon the occurrence of any event described in this Section (vi)(e), the holders of the Series B shall have the right to (i) convert into shares of Common Stock immediately prior to such event at a Conversion Price equal to the lesser of (1) the then Conversion Price or (2) the price per share of Common Stock paid in such event; provided, however, that the Conversion Price shall not be reduced under this Section (vi)(e)(i)(2) by more than thirty (30%) percent, or (ii) retain ownership of the shares of Series B, in which event, appropriate provisions shall be made so that the shares of Series B shall be convertible at the holder's option into shares of stock, securities or other equity ownership of the surviving or acquiring entity. (f) Record of Conversion Price. Whenever the shares of Common Stock or other types of securities or assets receivable upon conversion of the Series B shall be adjusted as provided in this Section (vi), the corporation shall forthwith obtain and file with its corporate records a certificate or letter from a firm of independent public accountants of recognized standing setting forth the computation and the adjusted number of shares of Common Stock or other securities or assets resulting from such adjustments, and a copy of such certificate or letter shall be mailed to the holders of the Series B. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available for inspection by any holders of the Series B on any day during normal business hours. (g) Notice. In case: i the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in Common Stock; or ii the corporation shall declare a dividend (or any other distribution) on its Common Stock payable in cash; or iii any reclassification of Common Stock or any consolidation, merger, conveyance of the property of the corporation as an entirety, or substantially as an entirety, dissolution, liquidation or winding up shall be effected by the corporation; then the corporation shall mail, or cause to be mailed by the corporation's transfer agent, if any, for the Series B to the holders of record of the outstanding shares of the Series B, at least -19- thirty (30) days, but not more than sixty (60) days, prior to the applicable record date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or right are to be determined, or (B) the date on which such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange the certificates representing their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding up. (vii) Reservation of Shares of Common Stock. (a) Reservation of Shares. The corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the shares of the Series B, the full number of shares of Common Stock then deliverable upon the conversion of all shares of the Series B then outstanding. If shares of the Common Stock of the corporation are listed on any securities exchange, the corporation shall make application for the listing thereon, on notice of issuance, of the shares of Common Stock deliverable upon the conversion of the outstanding shares of the Series B and shall use its best efforts to effect such listing. (b) Fractional Shares. No fractional shares of Common Stock are to be issued upon conversion. The corporation shall pay a cash adjustment in respect to any fraction of a share which would otherwise be issuable, in an amount equal to the fair market value of the Common Stock which shall be the same fraction of the closing bid price per share at which the Common Stock was sold on the Market prior to the opening of business on the Conversion Date, or if no sale of such stock takes place on such day on the Market, the average of the closing bid and asked prices on such day as officially quoted on the Market. If the Common Stock is not then publicly traded, fair market value shall be determined in good faith by the corporation's Board of Directors. (c) Transfer Taxes. The corporation will pay any and all transfer taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of shares of the Series B pursuant hereto. The corporation shall not, however, be required to pay any tax which may be payable in respect of transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of the Series B so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established, to the satisfaction of the corporation, that such tax has been paid. (d) Common Stock. For the purpose of this Section (vii), the term "Common Stock" shall include any stock of any class of the corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, and which is not subject -20- to redemption by the corporation. Shares of Common Stock shall be only such shares which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation and which are not subject to redemption by the corporation. (e) Status of Common Stock. All Common Stock that may be issued upon conversion of the Series B will, upon issuance, be duly issued, fully paid and non-assessable (except as otherwise provided by the Wisconsin Business Corporation Law) and free from all taxes, liens and charges with respect to the issuance thereof (except to the extent resulting from the holder's own circumstances, actions or omissions). (vii) Voting. (a) Voting. The holders of the Series B shall be entitled to vote, on all matters in which holders of Common Stock are entitled to vote, voting together with the Common Stock and the Series A and Other Securities, if any, without regard to class. The holders of the Series B shall have the number of votes that they would have had assuming conversion of the Series B into Common Stock as of the record date for the meeting of the holders of Common Stock with fractional shares being disregarded. The holders of the Series B shall be entitled to receive all communications sent by the corporation to the holders of Common Stock. Except as provided in Section (viii)(c) below or by the Wisconsin Business Corporation Law, holders of shares of the Series B shall not be entitled to vote as a separate class. (b) No Cumulative Voting. The holders of shares of the Series B shall not have the right of cumulative voting in an election of directors. (c) Voting as a Separate Class. The corporation shall not, without the consent (given by vote at a meeting called for that purpose or by written consent) of the holders of a majority of the shares of the Series B, the Series A and Other Securities, if any, then outstanding, voting together as a separate class: (i) create, authorize or issue any stock or other equity security ranking equal to or senior to the Series B, the Series A and the Other Securities as to dividends or distributions, or any obligation or security convertible into shares of any such senior stock; or (ii) amend, alter, change, or repeal any of the express terms of the Series B, the Series A or the Other Securities. (iv) Redemption. (a) Redemption. Commencing three (3) years following the last issuance of the shares of Series B, the corporation may redeem the Series B in whole -21- at any time at the option of the corporation by resolution of its Board of Directors, at a redemption price of $1,000 per share, plus accrued and unpaid dividends, if any, to the date fixed for redemption. (b) Notice of Redemption. Notice of redemption of the shares of the Series B shall be given by certified mail, return receipt requested, postage prepaid, not less than thirty (30) nor more than forty-five (45) days prior to the date fixed for redemption, to each holder of the Series B, at each holder's last address appearing on the books of the corporation; but no failure to receive such a notice by any holder, so long as mailed in accordance with the provisions herein, shall affect the validity of the proceedings for the redemption of any shares of the Series B so to be redeemed. Each notice of redemption of shares of the Series B shall state: i the redemption date, ii the redemption price, iii the Conversion Price on the date of the notice, iv that on the redemption date the redemption price will become due and payable upon each share of the Series B to be redeemed and the right to convert each such share shall cease as of the close of business on the redemption date, unless default shall be made in the payment of the redemption price, and v the place or places where certificates for such shares of the Series B to be redeemed are to be surrendered for conversion or for payment of the redemption price. (c) Conversion Prior to the Redemption. At any time prior to the redemption date, each holder of the Series B shall be entitled to convert all or any portion of such holder's Series B into Common Stock based on the Conversion Price. (d) Rights Following Redemption. If notice of redemption shall have been duly given as provided in Section (ix)(b), and if, on the redemption date, funds necessary for such redemption have been deposited in trust with a bank or trust company, or have been set aside, in trust, by the corporation, for the purpose of redeeming shares of the Series B, the shares of the Series B called for redemption shall, as of the close of business on the redemption date, no longer be transferable on the books of the corporation and shall no longer be deemed to be outstanding, the right to receive dividends thereon shall cease to accrue, and all rights with respect to such shares so called for redemption shall terminate, except only the right of the holders thereof to receive the redemption price, without interest thereon, upon surrender of the certificates for such shares. -22- (e) Cancellation of Shares. Shares of the Series B redeemed pursuant to this Section (ix) or otherwise reacquired by the corporation shall be deemed cancelled and thereafter shall constitute authorized and unissued shares of Preferred Stock, undesignated as to series, subject to reissuance by the corporation as shares of any series of Preferred Stock. (x) Liquidation. (a) Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation (hereinafter collectively called "liquidation"), before any amount shall be paid to or set aside for, or any assets shall be distributed among, the holders of shares of Common Stock or of any other equity security of the corporation other than the Series A and the Other Securities, each holder of a share of the Series B shall be entitled to receive out of the assets of the corporation or the proceeds thereof, a preferential payment in an amount equal to $1,000 per share, plus the amount of accrued and unpaid dividends on such share, if any, and no more. (b) Proportional Rights. In the event the amount available for distribution as liquidation preference payments to holders of the Series B and any other stock ranking on a parity therewith (including the Series A and the Other Securities, if any) is insufficient to pay the full amount of their respective preferences, such amount shall be divided among and paid to such holders ratably in proportion to the respective amounts which would be payable to such holders if their respective liquidation preferences were to be paid in full. (c) Insufficient Funds. In the event any liquidation preference payment to be made on the shares of the Series B shall amount in the aggregate to less than $1,000 per share plus accrued and unpaid dividends, the corporation in its discretion may require the surrender of certificates for shares of the Series B and issue a replacement certificate or certificates, or it may require the certificates evidencing the shares in respect of which such payments are to be made to be presented to the corporation, or its agent, for notation thereon of the amounts of the liquidation preference payments made in respect of such shares. In the event a certificate for shares of the Series B on which payment of one or more partial liquidation preferences has been made is presented for exchange or transfer, such new certificate shall bear an appropriate notation as to the aggregate amount of liquidation preference payments theretofore made in respect thereof. (d) Merger or Sale. Neither the consolidation or merger of the corporation with or into any other corporation or other entity, nor the sale or transfer by the corporation of all or any part of its assets, shall be deemed to be a liquidation of the corporation for the purposes of this Section (x). (xi) Replacement Certificates. (a) Mutilated Certificate. If any mutilated certificate of Series B is surrendered to the corporation, the corporation shall execute and deliver in -23- exchange therefor a new certificate for Series B of like tenor and principal amount, bearing a number not contemporaneously outstanding. (b) Destroyed, Lost or Stolen Certificate. If there is delivered to the corporation (i) evidence to its reasonable satisfaction of the destruction, loss or theft of any certificate of Series B and (ii) such reasonable security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the corporation that such certificate of Series B has been acquired by a bona fide purchaser, the corporation shall execute and deliver in lieu of any such destroyed, lost or stolen certificate of Series B, a new certificate of Series B of like tenor and principal amount and bearing a number not contemporaneously outstanding. (c) Status of New Certificate. Upon the issuance of any new certificate of Series B under this Section (xi), the corporation may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. Every new certificate of Series B issued pursuant to this Section (xi), in lieu of any destroyed, lost or stolen certificate of Series B, shall constitute an original additional contractual obligation of the corporation, whether or not the destroyed, lost or stolen certificate of Series B shall be at any time enforceable by anyone. Any new certificate for Series B delivered pursuant to this Section (xi), shall be so dated that neither gain nor loss in interest shall result from such exchange. The provisions of this Section (xi) are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen certificates of Series B. B. Common Stock. (1) Dividends. Subject to the provisions of this Article 4, the Board of Directors of the corporation may, in its sole discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends on the Common Stock. (2) Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, after there shall have been paid to or set aside for the holders of Preferred Stock the full preferential amounts, if any, to which they are entitled, the holders of outstanding shares of Common Stock shall be entitled to receive pro rata, according to the number of shares held by each, the remaining assets of the corporation available for distribution. (3) Voting Rights. Except as otherwise provided by the Wisconsin Business Corporation Law, and except as may be determined by the Board of Directors with respect to Preferred Stock pursuant to Section A of this Article 4, only the holders of Common Stock shall be entitled to vote for the election of directors of the corporation and for all other corporate purposes. Upon any such vote the holders of Common Stock shall, except as otherwise provided by law, be entitled to one vote for each share of Common Stock held by them respectively. -24- ARTICLE 5 A. General Powers, Number, Classification and Tenure of Directors. The general powers, number, classification and tenure of the directors of the corporation shall be as set forth in Section 3.01 of Article III of the By-laws of the corporation (and as such Section shall exist from time to time). Such Section 3.01 of the By-laws, or any provision thereof, may only be amended, altered, changed or repealed by the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of all classes of capital stock of the corporation generally possessing voting rights in the election of directors, considered for this purpose as a single class; provided, however, that the Board of Directors, by resolution adopted by the Requisite Vote (as hereinafter defined), may amend, alter, change or repeal Section 3.01 of the By-laws, or any provision thereof, without a vote of the shareholders. As used herein, the term "Requisite Vote" shall mean the affirmative vote of at least two-thirds of the directors then in office plus one director. B. Removal of Directors. Any director may be removed from office with or without cause, but only by the affirmative vote of holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of stock of the voting group of shareholders that elected the director to be removed; provided, however, that if the Board of Directors by resolution adopted by the Requisite Vote shall have recommended removal of a director, then the shareholders may remove such director from office with or without cause by a majority vote of such outstanding shares. C. Vacancies. Any vacancy occurring in the Board of Directors, including a vacancy created by the removal of a director or an increase in the number of directors, shall be filled by the affirmative vote of a majority of the directors then in office, although less than a quorum of the Board of Directors; provided, however, that if the vacant office was held by a director elected by a voting group of shareholders, only the remaining directors elected by that voting group shall fill the vacancy. For purposes of this Article 5, a director elected by directors to fill a vacant office pursuant to this Section C shall be deemed to be a director elected by the same voting group of shareholders that elected the director(s) who voted to fill the vacancy. Any director elected pursuant to this Section C shall serve until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. D. Amendments. (1) Notwithstanding any other provision of these Restated Articles of Incorporation, the provisions of this Article 5 may be amended, altered, changed or repealed only by the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of all classes of capital stock of the corporation generally possessing voting rights in the election of directors, considered for this purpose as a single class. -25- 2. Notwithstanding the foregoing and any provisions in the By-laws of the corporation, whenever the holders of any one or more series of Preferred Stock issued by the corporation pursuant to Article 4 hereof shall have the right, voting separately as a class or by series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filing of vacancies and other features of such directorships shall be governed by the terms of the series of Preferred Stock applicable thereto, and such directors so elected shall not be divided into classes unless expressly provided by the terms of the applicable series. ARTICLE 6 The address of the registered office of the corporation shall be 12000 West Park Place, Milwaukee, Wisconsin 53224. ARTICLE 7 The name of the registered agent of the corporation at such address shall be Michael D. Dunham. ARTICLE 8 No holder of shares of any class of capital stock of the corporation shall have a preemptive right to acquire unissued shares or securities convertible into unissued shares or conveying a right to subscribe for or acquire shares, unless otherwise determined by the Board of Directors. ARTICLE 9 These Restated Articles of Incorporation may be amended solely as authorized herein and by law at the time of amendment. -26- EX-4.7 4 COMMON STOCK WARRANT EXHIBIT 4.7 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR ANY STATE SECURITIES LAWS AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. EFFECTIVE MANAGEMENT SYSTEMS, INC. Common Stock Purchase Warrant to Purchase _______ Shares of Common Stock This Common Stock Purchase Warrant is issued to: ------------------------ c/o Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated 100 Wall Street 10th Floor New York, NY 10005 by EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation (hereinafter called the "Company", which term shall include its successors and assigns). FOR VALUE RECEIVED and subject to the terms and conditions hereinafter set out, the registered holder of this Warrant as set forth on the books and records of the Company (the "Holder") is entitled upon surrender of this Warrant to purchase from the Company _________________________________________________ fully paid and nonassessable (except as otherwise provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law) shares of Common Stock, $ .01 par value (the "Common Stock"), at the Exercise Price (as defined below) per share. This Warrant shall expire at the close of business on October 31, 2003. 1. (a) The right to purchase shares of Common Stock represented by this Warrant may be exercised by the Holder, in whole or in part, by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company at 12000 West Park Place, Milwaukee, Wisconsin 53224 (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), and upon payment to the Company, by cash or by certified check or bank draft, of the Exercise Price for such shares. The Company agrees that the shares of Common Stock so purchased shall be deemed to be issued to the Holder as the record owner of such shares of Common Stock as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares of Common Stock as aforesaid. Certificates for the shares of Common Stock so purchased (together with a cash adjustment in lieu of any fraction of a share) shall be delivered to the Holder within a reasonable time, not exceeding five (5) business days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares of Common Stock, if any, with respect to which this Warrant shall not then have been exercised, in all other respects identical with this Warrant, shall also be issued and delivered to the Holder within such time, or, at the request of the Holder, appropriate notation may be made on this Warrant and the same returned to the Holder. (b) This Warrant may be exercised to acquire, from and after the date hereof, the number of shares of Common Stock set forth on the first page hereof; provided, however, the right hereunder to purchase such shares of Common Stock shall expire at the close of business on October 31, 2003. 2. This Warrant is being issued by the Company to Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated ("Taglich Brothers"), or its designee (provided that such designee is an "accredited investor" as defined in the rules and regulations of the Securities and Exchange Commission promulgated under the 1933 Act), pursuant to a Preferred Stock Placement Agreement between the Company and Taglich Brothers dated as of August 28, 1998 (the "Placement Agreement"). This Warrant is being issued today pursuant to the terms of the Company's Confidential Private Placement Memorandum dated October 22, 1998 (the "Memorandum") pursuant to which the Company agreed to issue, in the aggregate, warrants to purchase 28,714 shares of common stock at $3.60 per share, as partial compensation for the sale by Taglich Brothers of 1,005 shares of the Company's Series A Preferred Stock. 3. The Company covenants and agrees that all Common Stock upon issuance against payment in full of the Exercise Price by the Holder pursuant to this Warrant will be validly issued, fully paid and nonassessable (except as otherwise provided by Section 180.0622(2)(b) of the Wisconsin Business Corporation Law) and free from all taxes, liens and charges with respect to the issue thereof (except to the extent resulting from the Holder=s own circumstances, actions or omissions); and, without limiting the generality of the foregoing, the Company covenants and agrees that it will take from time to time all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the then effective Exercise Price. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will have at all times authorized, and reserved for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant, and will procure at its sole expense upon each such reservation of shares the listing thereof (subject to issuance or notice of issuance) on all stock exchanges on which the Common Stock is then listed or inter-dealer trading systems on which the Common Stock is then traded. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock may be listed or inter-dealer trading system on which the Common Stock is then traded. The Company will not take any action which would result in any adjustment in the number of shares of Common Stock purchasable hereunder if the total number of shares of Common Stock issuable pursuant to the terms of this Warrant after such action upon full exercise of this Warrant and, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and other rights to purchase shares of Common Stock then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Restated Articles of Incorporation, as then amended. 4. The Initial Exercise Price is $3.60 per share of Common Stock ("Initial Exercise Price"). The Initial Exercise Price shall be adjusted as provided for below in this Section 4 (the Initial Exercise Price, and the Initial Exercise Price, as thereafter then adjusted, shall be referred to as the "Exercise Price") and the Exercise Price from time to time shall be further adjusted as provided for below in this Section 4. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to receive upon exercise of this Warrant, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock obtained by (i) multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment, and (ii) dividing the product thereof by the Exercise Price resulting from such adjustment. The Exercise Price shall be adjusted as follows: (i) In the case of any amendment to the Company's Restated Articles of Incorporation of the Company to change the designation of the Common Stock or the rights, privileges, restrictions or conditions in respect to the Common Stock or division of the Common Stock, this Warrant shall be adjusted so as to provide that upon exercise thereof, the Holder shall receive, in lieu of each Common Stock theretofore issuable upon such exercise, the kind and amount of shares, other securities, money and property receivable upon such designation, change or division by the Holder issuable upon such exercise had the exercise occurred immediately prior to such designation, change or division. This Warrant shall be deemed thereafter to provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Subsection 4(i) shall apply in the same manner to successive reclassifications, changes, consolidations and mergers. (ii) If the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or declare a dividend or make any other distribution upon the Common Stock payable in shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or dividend or other distribution shall be proportionately reduced, and conversely, in case -3- the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (iii) If case the Company shall, through either a private placement or a public offering (but other than pursuant to options granted under the Company=s directors= and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of warrants outstanding on October 22, 1998 and other than warrants granted to Taglich Brothers and/or its designees) issues shares of Common Stock, or options to purchase Common Stock or rights to subscribe for Common Stock or securities convertible into or exchangeable for Common Stock at a price (such price, if other than cash, as determined by the Board of the Board of Directors) less than 120% of the then Market Price (as defined below) on the date of sale, the Exercise Price then in effect shall automatically be reduced by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for such issuance, sale or distribution would purchase at 120% of the Market Price per share, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The term "Market Price" shall mean the average closing bid price for the ten (10) consecutive trading days immediately prior to the date of sale. Notwithstanding the foregoing, in no event shall the Exercise Price ever be increased as a result of this Subsection 4(iii). There will be no adjustment in the event that the Company pays a dividend in cash to its holders of Common Stock; provided, however, the Company will give the holder of this Warrant written notice at least thirty (30) days prior to the record date for the cash dividend, that the Company intends to declare a cash dividend. (iv) If any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation or entity, or the sale of all or substantially all of the Company's assets to another corporation or other entity shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, other evidence of equity ownership or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section 4), lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, such shares of stock, securities, other evidence of equity ownership or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of this Warrant under this -4- Section 4 had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares of Common Stock receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, other evidence of equity ownership or assets thereafter deliverable upon the exercise hereof (including an immediate adjustment, by reason of such consolidation or merger, of the Exercise Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation or merger; provided, however, that the Exercise Price shall not be reduced under this Section 4(iv) by more than thirty (30%) percent). Subject to the terms of this Warrant, in the event of a merger or consolidation of the Company with or into another corporation or other entity as a result of which the number of shares of common stock of the surviving corporation or other entity issuable to holders of Common Stock, is greater or lesser than the number of shares of Common Stock outstanding immediately prior to such merger or consolidation, then the Exercise Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock. The Company shall not effect any such consolidation, merger or sale, unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to the Holder, the obligation to deliver to the Holder such shares of stock, securities, other evidence of equity ownership or assets as, in accordance with the foregoing provisions, the Holder may be entitled to receive or otherwise acquire. If a purchase, tender or exchange offer is made to and accepted by the holders of more than fifty (50%) percent of the outstanding shares of Common Stock, the Company shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the Holder of this Warrant shall have been given a reasonable opportunity to then elect to receive upon the exercise of this Warrant the amount of stock, securities, other evidence of equity ownership or assets then issuable with respect to the number of shares of Common Stock in accordance with such offer. (v) In case the Company shall, at any time prior to exercise of this Warrant, consolidate or merge with any other corporation or other entity (where the Company is not the surviving entity) or transfer all or substantially all of its assets to any other corporation or other entity, then the Company shall, as a condition precedent to such transaction, cause effective provision to be made so that the Holder of this Warrant upon the exercise of this Warrant after the effective date of such transaction shall be entitled to receive the kind and amount of shares, evidences of indebtedness and/or other securities or property receivable on such transaction by a holder -5- of the number of shares of Common Stock as to which Warrant was exercisable immediately prior to such transaction (without giving effect to any restriction upon such exercise); and, in any such case, appropriate provision shall be made with respect to the rights and interest of the Holder of this Warrant to the end that the provisions of this Warrant shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness or other securities or assets thereafter deliverable upon exercise of this Warrant. Upon the occurrence of any event described in this Section 4(v), the holder of this Warrant shall have the right to (i) exercise this Warrant immediately prior to such event at a Exercise Price equal to lesser of (1) the then Exercise Price or (2) 120% of the price per share of Common Stock paid in such event; provided, however, that the Exercise Price shall not be reduced under this Section 4(v) (2) by more than thirty (30%) percent, or (ii) retain ownership of this Warrant, in which event, appropriate provisions shall be made so that the Warrant shall be exercisable at the Holder's option into shares of stock, securities or other equity ownership of the surviving or acquiring entity. Whenever the Exercise Price shall be adjusted pursuant to this Section 4, the Company shall issue a certificate signed by its President or Vice President and by its Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company made any determination hereunder), and the Exercise Price after giving effect to such adjustment, and shall cause copies of such certificates to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. The Company shall make such certificate and mail it to the Holder promptly after each adjustment. No fractional Common Stock shall be issued in connection with any exercise of this Warrant, but in lieu of such fractional shares, the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the Exercise Price then in effect. 5. In the event the Company grants rights (other than rights granted pursuant to a shareholder rights or poison pill plan) to all shareholders to purchase Common Stock, the Holder shall have the same rights as if this Warrant had been exercised immediately prior to such grant. 6. The Holder shall, with respect to the shares of Common Stock issuable upon the exercise of this Warrant, have the registration rights and "piggy back" registration rights set forth in the Placement Agreement. Such registration rights and "piggy back" registration rights are incorporated herein by this reference as if such provisions had been set forth herein in full. 7. This Warrant need not be changed because of any change in the Exercise Price or in the number of shares of Common Stock purchased hereunder. 8. The terms defined in this paragraph, whenever used in this Warrant, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. The term "Common -6- Stock shall mean and include the Company's Common Stock, $.01 par value per share, authorized on the date of the original issue of this Warrant and shall also include in case of any reorganization, reclassification, consolidation, merger or sale of assets of the character referred to in paragraph 4 hereof, the stock, securities or assets provided for in such paragraph. The term "Company" shall also include any successor corporation to EFFECTIVE MANAGEMENT SYSTEMS, INC. by merger, consolidation or otherwise. The term "outstanding" when used with reference to Common Stock shall mean at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company. The term "1933 Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission, or any other Federal agency then administering the 1933 Act, thereunder, all as the same shall be in effect at the time. 9. This Warrant is exchangeable, upon the surrender hereby by the Holder at the office or agency of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares of Common Stock as shall be designated by the Holder at the time of such surrender. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any such new Warrants and, in the case of any such loss, theft, or destruction, upon delivery of a bond of indemnity, reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender or cancellation of this Warrant or such new Warrants, the Company will issue to the Holder a new Warrant of like tenor, in lieu of this Warrant or such new Warrants, representing the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder. 10. The Company agrees to use its best efforts to file timely all reports required to be filed by it pursuant to Sections 13 or 15 of the Securities Exchange Act of 1934, as amended, and to provide such information as will permit the Holder to sell this Warrant or any shares of Common Stock acquired upon exercise of this Warrant in accordance with Rule 144 under the 1933 Act. 11. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. This Warrant shall not entitle the Holder to any voting rights or any rights as a shareholder of the Company. The rights and obligations of the Company, of the Holder, and of any holder of shares of Common Stock issuable hereunder, shall survive the exercise of this Warrant. 12. This Warrant sets forth the entire agreement of the Company and the Holder of the Common Stock issuable upon the exercise of this Warrant with respect to the rights of the Holder and the Common Stock issuable upon the exercise of this Warrant, notwithstanding the knowledge of such Holder of any other agreement or the provisions of any agreement, whether or not known to the Holder, and the Company represents that there are no agreements inconsistent with the terms hereof or which purport in any way to bind the Holder of this Warrant or the Common Stock. -7- 13. The validity, interpretation and performance of this Warrant and each of its terms and provisions shall be governed by the laws of the State of New York. -8- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer under its corporate seal and dated as of October __, 1998. EFFECTIVE MANAGEMENT SYSTEMS, INC. By:_______________________________________ Name: Jeffrey Fossum Title: Chief Financial Officer [CORPORATE SEAL] -9- EX-4.8 5 COMMON STOCK WARRANT EXHIBIT 4.8 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT") OR ANY STATE SECURITIES LAWS AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR CONSIDERATION, BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS COUNSEL OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL FOR THE COMPANY, IN EITHER CASE, TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS. EFFECTIVE MANAGEMENT SYSTEMS, INC. Common Stock Purchase Warrant to Purchase _______ Shares of Common Stock This Common Stock Purchase Warrant is issued to: ------------------------ c/o Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated 100 Wall Street 10th Floor New York, NY 10005 by EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation (hereinafter called the "Company", which term shall include its successors and assigns). FOR VALUE RECEIVED and subject to the terms and conditions hereinafter set out, the registered holder of this Warrant as set forth on the books and records of the Company (the "Holder") is entitled upon surrender of this Warrant to purchase from the Company ________________________________________________ fully paid and nonassessable (except as otherwise provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law) shares of Common Stock, $ .01 par value (the "Common Stock"), at the Exercise Price (as defined below) per share. This Warrant shall expire at the close of business on October 31, 2003. 1. (a) The right to purchase shares of Common Stock represented by this Warrant may be exercised by the Holder, in whole or in part, by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company at 12000 West Park Place, Milwaukee, Wisconsin 53224 (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), and upon payment to the Company, by cash or by certified check or bank draft, of the Exercise Price for such shares. The Company agrees that the shares of Common Stock so purchased shall be deemed to be issued to the Holder as the record owner of such shares of Common Stock as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares of Common Stock as aforesaid. Certificates for the shares of Common Stock so purchased (together with a cash adjustment in lieu of any fraction of a share) shall be delivered to the Holder within a reasonable time, not exceeding five (5) business days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares of Common Stock, if any, with respect to which this Warrant shall not then have been exercised, in all other respects identical with this Warrant, shall also be issued and delivered to the Holder within such time, or, at the request of the Holder, appropriate notation may be made on this Warrant and the same returned to the Holder. (b) This Warrant may be exercised to acquire, from and after the date hereof, the number of shares of Common Stock set forth on the first page hereof; provided, however, the right hereunder to purchase such shares of Common Stock shall expire at the close of business on October 31, 2003. 2. This Warrant is being issued by the Company to Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated ("Taglich Brothers"), or its designee (provided that such designee is an "accredited investor" as defined in the rules and regulations of the Securities and Exchange Commission promulgated under the 1933 Act), pursuant to a Series B Preferred Stock Placement Agreement between the Company and Taglich Brothers dated as of October 27, 1998 (the "Placement Agreement"), whereby the Company agreed to issue a five (5) year warrant exercisable at the Exercise Price per share to Taglich Brothers, or its designee, equal to ten (10%) percent of the total number of shares of Common Stock issuable upon the conversion of the Company's Series B 8% convertible redeemable preferred stock sold for cash by Taglich Brothers in a Private Placement pursuant to the Company's Confidential Private Placement Memorandum dated October 22, 1998 (the "Memorandum"). 3. The Company covenants and agrees that all Common Stock upon issuance against payment in full of the Exercise Price by the Holder pursuant to this Warrant will be validly issued, fully paid and nonassessable (except as otherwise provided by Section 180.0622(2)(b) of the Wisconsin Business Corporation Law) and free from all taxes, liens and charges with respect to the issue thereof (except to the extent resulting from the Holder's own circumstances, actions or omissions); and, without limiting the generality of the foregoing, the Company covenants and agrees that it will take from time to time all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the then effective Exercise Price. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will have at all times authorized, and reserved for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant, and will procure at its sole expense upon each such reservation of shares the listing thereof (subject to issuance or notice of issuance) on all stock exchanges on which the Common Stock is then listed or inter-dealer trading systems on which the Common Stock is then traded. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock may be listed or inter-dealer trading system on which the Common Stock is then traded. The Company will not take any action which would result in any adjustment in the number of shares of Common Stock purchasable hereunder if the total number of shares of Common Stock issuable pursuant to the terms of this Warrant after such action upon full exercise of this Warrant and, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and other rights to purchase shares of Common Stock then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Restated Articles of Incorporation, as then amended. 4. The Initial Exercise Price is $3.60 per share of Common Stock ("Initial Exercise Price"). The Initial Exercise Price shall be adjusted as provided for below in this Section 4 (the Initial Exercise Price, and the Initial Exercise Price, as thereafter then adjusted, shall be referred to as the "Exercise Price") and the Exercise Price from time to time shall be further adjusted as provided for below in this Section 4. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to receive upon exercise of this Warrant, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock obtained by (i) multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable hereunder immediately prior to such adjustment, and (ii) dividing the product thereof by the Exercise Price resulting from such adjustment. The Exercise Price shall be adjusted as follows: (i) In the case of any amendment to the Company's Restated Articles of Incorporation of the Company to change the designation of the Common Stock or the rights, privileges, restrictions or conditions in respect to the Common Stock or division of the Common Stock, this Warrant shall be adjusted so as to provide that upon exercise thereof, the Holder shall receive, in lieu of each Common Stock theretofore issuable upon such exercise, the kind and amount of shares, other securities, money and property receivable upon such designation, change or division by the Holder issuable upon such exercise had the exercise occurred immediately prior to such designation, change or division. This Warrant shall be deemed thereafter to provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Subsection 4(i) shall apply in the same manner to successive reclassifications, changes, consolidations and mergers. (ii) If the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or declare a dividend or make any other distribution upon the Common Stock payable in shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or -3- dividend or other distribution shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. (iii) If case the Company shall, through either a private placement or a public offering (but other than pursuant to options granted under the Company's directors' and employee stock option and stock purchase plans or shares or options issued in an acquisition or shares issuable pursuant to the exercise of warrants outstanding on October 22, 1998 and other than warrants granted to Taglich Brothers and/or its designees) issues shares of Common Stock, or options to purchase Common Stock or rights to subscribe for Common Stock or securities convertible into or exchangeable for Common Stock at a price (such price, if other than cash, as determined by the Board of the Board of Directors) less than 120% of the then Market Price (as defined below) on the date of sale, the Exercise Price then in effect shall automatically be reduced by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance, sale or distribution plus the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for such issuance, sale or distribution would purchase at 120% of the Market Price per share, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such issuance, sale or distribution. The term "Market Price" shall mean the average closing bid price for the ten (10) consecutive trading days immediately prior to the date of sale. Notwithstanding the foregoing, in no event shall the Exercise Price ever be increased as a result of this Subsection 4(iii). There will be no adjustment in the event that the Company pays a dividend in cash to its holders of Common Stock; provided, however, the Company will give the holder of this Warrant written notice at least thirty (30) days prior to the record date for the cash dividend, that the Company intends to declare a cash dividend. (iv) If any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation or entity, or the sale of all or substantially all of the Company's assets to another corporation or other entity shall be effected in such a way that holders of shares of Common Stock shall be entitled to receive stock, securities, other evidence of equity ownership or assets with respect to or in exchange for shares of Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale (except as otherwise provided below in this Section 4), lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein, such shares of stock, securities, other evidence of equity ownership or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of Common Stock immediately -4- theretofore purchasable and receivable upon the exercise of this Warrant under this Section 4 had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares of Common Stock receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities, other evidence of equity ownership or assets thereafter deliverable upon the exercise hereof (including an immediate adjustment, by reason of such consolidation or merger, of the Exercise Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation or merger; provided, however, that the Exercise Price shall not be reduced under this Section 4(iv) by more than thirty (30%) percent). Subject to the terms of this Warrant, in the event of a merger or consolidation of the Company with or into another corporation or other entity as a result of which the number of shares of common stock of the surviving corporation or other entity issuable to holders of Common Stock, is greater or lesser than the number of shares of Common Stock outstanding immediately prior to such merger or consolidation, then the Exercise Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock. The Company shall not effect any such consolidation, merger or sale, unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed or delivered to the Holder, the obligation to deliver to the Holder such shares of stock, securities, other evidence of equity ownership or assets as, in accordance with the foregoing provisions, the Holder may be entitled to receive or otherwise acquire. If a purchase, tender or exchange offer is made to and accepted by the holders of more than fifty (50%) percent of the outstanding shares of Common Stock, the Company shall not effect any consolidation, merger or sale with the person having made such offer or with any affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the Holder of this Warrant shall have been given a reasonable opportunity to then elect to receive upon the exercise of this Warrant the amount of stock, securities, other evidence of equity ownership or assets then issuable with respect to the number of shares of Common Stock in accordance with such offer. (v) In case the Company shall, at any time prior to exercise of this Warrant, consolidate or merge with any other corporation or other entity (where the Company is not the surviving entity) or transfer all or substantially all of its assets to any other corporation or other entity, then the Company shall, as a condition precedent to such transaction, cause effective provision to be made so that the Holder of this Warrant upon the exercise of this Warrant after the effective date of such transaction shall be entitled to receive the kind and amount of shares, evidences of indebtedness -5- and/or other securities or property receivable on such transaction by a holder of the number of shares of Common Stock as to which Warrant was exercisable immediately prior to such transaction (without giving effect to any restriction upon such exercise); and, in any such case, appropriate provision shall be made with respect to the rights and interest of the Holder of this Warrant to the end that the provisions of this Warrant shall thereafter be applicable (as nearly as may be practicable) with respect to any shares, evidences of indebtedness or other securities or assets thereafter deliverable upon exercise of this Warrant. Upon the occurrence of any event described in this Section 4(v), the holder of this Warrant shall have the right to (i) exercise this Warrant immediately prior to such event at a Exercise Price equal to lesser of (1) the then Exercise Price or (2) 120% of the price per share of Common Stock paid in such event; provided, however, that the Exercise Price shall not be reduced under this Section 4(v) (2) by more than thirty (30%) percent, or (ii) retain ownership of this Warrant, in which event, appropriate provisions shall be made so that the Warrant shall be exercisable at the Holder's option into shares of stock, securities or other equity ownership of the surviving or acquiring entity. Whenever the Exercise Price shall be adjusted pursuant to this Section 4, the Company shall issue a certificate signed by its President or Vice President and by its Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company made any determination hereunder), and the Exercise Price after giving effect to such adjustment, and shall cause copies of such certificates to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. The Company shall make such certificate and mail it to the Holder promptly after each adjustment. No fractional Common Stock shall be issued in connection with any exercise of this Warrant, but in lieu of such fractional shares, the Company shall make a cash payment therefor equal in amount to the product of the applicable fraction multiplied by the Exercise Price then in effect. 5. In the event the Company grants rights (other than rights granted pursuant to a shareholder rights or poison pill plan) to all shareholders to purchase Common Stock, the Holder shall have the same rights as if this Warrant had been exercised immediately prior to such grant. 6. The Holder shall, with respect to the shares of Common Stock issuable upon the exercise of this Warrant, have the registration rights and "piggy back" registration rights set forth in the Placement Agreement. Such registration rights and "piggy back" registration rights are incorporated herein by this reference as if such provisions had been set forth herein in full. 7. This Warrant need not be changed because of any change in the Exercise Price or in the number of shares of Common Stock purchased hereunder. -6- 8. The terms defined in this paragraph, whenever used in this Warrant, shall, unless the context otherwise requires, have the respective meanings hereinafter specified. The term "Common Stock shall mean and include the Company's Common Stock, $.01 par value per share, authorized on the date of the original issue of this Warrant and shall also include in case of any reorganization, reclassification, consolidation, merger or sale of assets of the character referred to in paragraph 4 hereof, the stock, securities or assets provided for in such paragraph. The term "Company" shall also include any successor corporation to EFFECTIVE MANAGEMENT SYSTEMS, INC. by merger, consolidation or otherwise. The term "outstanding" when used with reference to Common Stock shall mean at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company. The term "1933 Act" shall mean the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission, or any other Federal agency then administering the 1933 Act, thereunder, all as the same shall be in effect at the time. 9. This Warrant is exchangeable, upon the surrender hereby by the Holder at the office or agency of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares of Common Stock as shall be designated by the Holder at the time of such surrender. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any such new Warrants and, in the case of any such loss, theft, or destruction, upon delivery of a bond of indemnity, reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender or cancellation of this Warrant or such new Warrants, the Company will issue to the Holder a new Warrant of like tenor, in lieu of this Warrant or such new Warrants, representing the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for and purchased hereunder. 10. The Company agrees to use its best efforts to file timely all reports required to be filed by it pursuant to Sections 13 or 15 of the Securities Exchange Act of 1934, as amended, and to provide such information as will permit the Holder to sell this Warrant or any shares of Common Stock acquired upon exercise of this Warrant in accordance with Rule 144 under the 1933 Act. 11. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. This Warrant shall not entitle the Holder to any voting rights or any rights as a shareholder of the Company. The rights and obligations of the Company, of the Holder, and of any holder of shares of Common Stock issuable hereunder, shall survive the exercise of this Warrant. 12. This Warrant sets forth the entire agreement of the Company and the Holder of the Common Stock issuable upon the exercise of this Warrant with respect to the rights of the Holder and the Common Stock issuable upon the exercise of this Warrant, notwithstanding the knowledge of such Holder of any other agreement or the provisions of any agreement, whether or not known -7- to the Holder, and the Company represents that there are no agreements inconsistent with the terms hereof or which purport in any way to bind the Holder of this Warrant or the Common Stock. 13. The validity, interpretation and performance of this Warrant and each of its terms and provisions shall be governed by the laws of the State of New York. -8- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer under its corporate seal and dated as of October __, 1998. EFFECTIVE MANAGEMENT SYSTEMS, INC. By:_______________________________________ Name: Jeffrey Fossum Title: Chief Financial Officer [CORPORATE SEAL] -9- EX-5.1 6 OPINION LETTER F O L E Y & L A R D N E R CHICAGO FIRSTAR CENTER SACRAMENTO DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE MADISON FACSIMILE (414) 297-4900 TAMPA MILWAUKEE WASHINGTON, D.C. ORLANDO WEST PALM BEACH December 14, 1998 Effective Management Systems, Inc. 12000 West Park Place Milwaukee, Wisconsin 53224 Gentlemen: We have acted as counsel for Effective Management Systems, Inc., a Wisconsin corporation (the "Company"), with respect to the preparation of a Registration Statement on Form S-1 (the "Registration Statement"), including the prospectus constituting a part thereof (the "Prospectus"), to be filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the proposed sale of up to 947,214 shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), issuable upon the exercise of certain warrants (the "Warrants") or in connection with the conversion of the Company's Series B 8% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock"), by certain selling shareholders listed therein (the "Selling Shareholders"). In connection with our representation, we have examined: (a) the Registration Statement, including the Prospectus; (b) the exhibits (including those incorporated by reference) constituting a part of said Registration Statement; (c) the Restated Articles of Incorporation and By-Laws of the Company, as amended to date; (d) resolutions of the Company's Board of Directors relating to the authorization of the issuance of the securities subject to the Registration Statement; and (e) such other proceedings, documents and records as we have deemed necessary to enable us to render this opinion. Based upon the foregoing, we are of the opinion that: 1. The Company is a corporation validly existing under the laws of the State of Wisconsin. 2. The shares of Common Stock subject to sale by the Selling Shareholders as contemplated by the Registration Statement, when issued upon exercise of the Warrants or FOLEY & LARDNER Effective Management Systems, Inc. December 14, 1998 Page 2 upon conversion of the Series B Preferred Stock, as the case may be, and upon receipt of the consideration contemplated upon the exercise or conversion thereof, will be validly issued, fully paid and nonassessable, except with respect to wage claims of, or other debts owing to, employees of the Company for services performed, but not exceeding six months' service in any one case, as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law and as such section may be interpreted by a court of law. We consent to the use of this opinion as an exhibit to the Registration Statement and to the references to our firm therein. In giving our consent, we do not admit that we are "experts" within the meaning of Section 11 of the Securities Act or within the category of persons whose consent is required by Section 7 of the Securities Act. Very truly yours, FOLEY & LARDNER EX-10.28 7 SERIES B PREFERRED STOCK PLACEMENT AGREEME EXHIBIT 10.28 SERIES B PREFERRED STOCK PLACEMENT AGREEMENT SERIES B PREFERRED STOCK PLACEMENT AGREEMENT ("Agreement") dated as of the 27th day of October, 1998, by and between EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation (the "Company") and TAGLICH BROTHERS, D=AMADEO, WAGNER & COMPANY, INCORPORATED ("Placement Agent"). W I T N E S S E T H : WHEREAS, in reliance upon the representations, warranties, terms and conditions hereinafter set forth, Placement Agent will use its best efforts to privately place a minimum of 700 and a maximum of 2,750 shares of Series B 8% convertible redeemable preferred stock (the "Series B Preferred Stock") at $1,000 per share of Series B Preferred Stock (the "Purchase Price") for an amount of $700,000 in aggregate gross cash proceeds ("Minimum Amount") and a maximum of $2,750,000 in the aggregate ("Maximum Amount"), with each share of the Series B Preferred Stock being convertible into shares of common stock, $.01 par value per share (the "Common Stock"), of the Company at a price, subject to adjustment, of $3.00 per share, and the persons and entities so purchasing the Series B Preferred Stock from time to time and the number of shares of Series B Preferred Stock being so purchased being as listed on Exhibit A to this Agreement (such persons and entities being referred to individually as "Purchaser" and collectively, as "Purchasers"); and WHEREAS, the shares of Series B Preferred Stock are being issued pursuant to the Company's Confidential Private Placement Memorandum and Exhibits thereto dated October 22, 1998, as the same may be amended and/or supplemented from time to time (collectively, the "Memorandum"); and WHEREAS, on August 28, 1998, the Company sold 1,005 shares of Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") for an aggregate gross sales price of $1,005,000; and WHEREAS, pursuant to the Memorandum, the holders of the Series A Preferred Stock may purchase the Series B Preferred Stock by tendering their shares of Series A Preferred Stock to the Company, with each share of Series A Preferred Stock being valued at $1,000 per share (the "Exchange Offer"); and WHEREAS, the shares of Series B Preferred Stock are being issued and the Exchange Offer is occurring pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"). NOW, THEREFORE, in consideration of the premises and the respective promises hereinafter set forth, the Company and the Placement Agent hereby agree as follows: 1. Sale and Purchase of Series B Preferred Stock and Exchange Offer. (a) Subject to the terms and conditions of this Agreement, the Company shall sell to the Purchasers a minimum of 700 and a maximum of 2,750 shares of Series B Preferred Stock at the Purchase Price per share for an aggregate purchase price of not less than the Minimum Amount nor greater than the Maximum Amount, respectively. The form of the Series B Preferred Stock is included in the Memorandum. The Company will execute each certificate of Series B Preferred Stock. (b) The initial sale and purchase described in Paragraph 1(a) of this Agreement shall take place at a closing (the "Closing") at the offices of ROBINSON SILVERMAN PEARCE ARONSOHN & BERMAN, LLP, 1290 Avenue of the Americas, New York, New York 10104 or such other place as shall be acceptable to the Company and Placement Agent on such date or dates as Placement Agent shall advise the Company on two (2) business days notice or such shorter notice as shall be reasonably acceptable to the Company. In no event shall the Initial Closing (as defined below) occur unless the Minimum Amount is sold. Subsequent sale and purchase of Series B Preferred Stock up to the Maximum Amount shall take place at one or more Closings held on such dates as the Company and Placement Agent shall mutually determine. All Closings pursuant to this Agreement shall occur not later than October 30, 1998 unless, to the extent permitted by the terms of the Series A Preferred Stock, such date is extended by the Company and the Placement Agent to a date no later than November 29, 1998. The initial Closing hereunder shall be referred to as "Initial Closing", the final Closing hereunder shall be referred to as "Final Closing" and the date of the Final Closing shall be referred to as the "Final Closing Date". (c) As provided in the Memorandum, the Purchase Price for the Series B Preferred Stock is $1,000 per share with a minimum purchase price of $20,000 per subscriber. As provided in the Memorandum, any holder of Series A Preferred Stock may subscribe to purchase Series B Preferred Stock by tendering to the Company all or a portion of the holder=s Series A Preferred Stock. (d) All defined terms used in this Agreement which are not otherwise defined shall have the meanings ascribed to them in the Memorandum. 2. Payment and Exchange Offer. At each Closing, the Company shall deliver to Placement Agent, on behalf of the Purchasers, the original executed Series B Preferred Stock certificates being purchased by the Purchasers, against its receipt of payment therefor by delivery to the Company of (i) the original Series A Preferred Stock certificates, if any, duly endorsed for transfer and subject to the Exchange Offer, and (ii) certified or bank checks drawn on a bank located in the United States, or by Federal wire transfer, in the amount of the aggregate cash purchase price for the Series B Preferred Stock being sold for cash, less the amount of fees payable to Placement Agent pursuant to Paragraph 10(a) of this Agreement. All Series B Preferred Stock being purchased by the Purchasers shall be issued in the respective names of the Purchasers in accordance with instructions provided by Placement Agent not later than the day of Closing. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to and covenants and agrees with the Placement Agent, as of the date hereof and as of the date of each Closing, as follows: (a) The Company is a corporation duly organized and validly existing under the laws of the State of Wisconsin and is qualified and in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted by the Company or the property owned or leased by the Company requires such qualification, except where the failure to be so qualified has not had or will not have a material adverse effect on the business, financial condition or results of operations of the Company or its subsidiaries, taken as a whole ("Material Adverse Effect"). The Company has no subsidiaries and does not own any equity interest and has not made any loans or advances to or guarantees of indebtedness to any person, corporation, partnership or other entity, except for EMS-East, Inc., Effective Management Systems of Illinois, Inc. and EMS-China, Ltd, which are wholly-owned subsidiaries, Total Management Systems, Inc., a 50% owned subsidiary (collectively, the "Subsidiaries") and EMS-Asia Pacific, Ltd., a 20% owned corporation. Each Subsidiary is, to the extent applicable, a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and, to the extent applicable, each Subsidiary is qualified and in good standing as a foreign corporation in each jurisdiction in which the nature of its business or the property owned or leased by the Subsidiary requires such qualification, except where the failure to be so qualified has not had or will not have a Material Adverse Effect. Except as disclosed in the Memorandum, no Subsidiary has any subsidiary and no Subsidiary owns any equity interest in any other entity and no Subsidiary has made any loans or advances to or guarantees of indebtedness to any person, corporation, partnership or other entity. Except as indicated in this Section 3(b), the Company owns all of the issued and outstanding shares of common stock of each of the Subsidiaries free and clear of any lien, claim, encumbrance, pre-emptive rights or contractual rights of first refusal. (b) The authorized capital of the Company consists of 20,000,000 shares of Common Stock and 3,000,000 shares of preferred stock, of which 7,000 shares have been designated as Series A Preferred Stock and of which 5,000 shares have been designated as Series B Preferred Stock. As of the date of this Agreement, (i) 4,105,986 shares of Common Stock are -3- issued and outstanding, (ii) 12,625 shares of Common Stock are held in treasury, (iii) 1,005 shares of Series A Preferred Stock are issued and outstanding (no other shares of preferred stock being issued and outstanding other than as may be issued at any prior Closing pursuant to the Memorandum), and (iv) 1,530,192 shares of Common Stock have been reserved for issuance upon exercise of outstanding debentures, options, warrants and other rights to acquire Common Stock and upon the exercise of options granted pursuant to the Company's stock option plans and pursuant to other agreements, excluding the shares of Common Stock (the "Conversion Shares") issuable upon conversion of the Series B Preferred Stock and the shares of Common Stock (the "PAW Exercise Shares") issuable upon exercise of the Placement Agent Warrants (as defined below) and excluding shares of Common Stock reserved for issuance upon the conversion of the Series A Preferred Stock. Except as set forth in the Memorandum, the Company is not a party to any agreement to issue, nor has it issued, any warrants, options or rights or preferred stock, notes or other evidence of indebtedness or other securities, instruments or agreements upon the exercise or conversion of which or pursuant to the terms of which additional shares of capital stock of the Company may become issuable. No holder of any of the Company's securities has preemptive rights or contractual rights of first refusal. (c) The Company has the full right, power and authority to execute, deliver and perform under this Agreement, the Series B Preferred Stock, the Exchange Offer and the Placement Agent Warrants. This Agreement has been duly executed by the Company and, at each Closing, the Series B Preferred Stock and the Placement Agent Warrants being issued will have been duly executed by the Company, and this Agreement, the Series B Preferred Stock, the Exchange Offer and the Placement Agent Warrants and the transactions contemplated by this Agreement, the Series B Preferred Stock, the Exchange Offer and Placement Agent Warrants have been duly authorized by all necessary corporate action and each constitute, the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms. (d) All of the issued and outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable (except as otherwise provided by Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law), with no personal liability attaching to the holders thereof (except as otherwise provided in Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law), and such shares of Common Stock have not been issued in violation of the preemptive rights or rights of first refusal of any holder of securities of the Company. All of the issued and outstanding shares of Common Stock of the Company have been issued pursuant to either a current effective registration statement under the 1933 Act or an exemption from the registration requirements of the 1933 Act and were issued in accordance with all applicable Federal and state securities laws. All of the issued and outstanding shares of common stock of each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable (except as otherwise provided by Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law), with no personal liability attaching to the Company (except as otherwise provided by Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law). -4- (e) The shares of Common Stock included in the Conversion Shares and the PAW Exercise Shares have been validly authorized for issuance and, when issued pursuant to this Agreement and the terms of the Series B Preferred Stock and the Placement Agent Warrants, as the case may be, will be duly and validly authorized and issued, fully paid and nonassessable (except as otherwise provided by Section 180.0622 (2)(b) of the Wisconsin Business Corporation Law) and free from preemptive rights or rights of first refusal held by any person. (f) The following financial statements of the Company (hereinafter collectively, the "Financial Statements") are included in the Memorandum (i) consolidated balance sheets as at November 30, 1997 and 1996, and consolidated statements of operations, shareholders' equity and cash flows for the fiscal years ended November 30, 1997 and 1996, and the related notes thereto, which have been audited by Ernst & Young LLP, independent certified public accountants, (ii) unaudited balance sheets as at February 28, May 31 and August 31, 1998, and (iii) unaudited statements of operations and cash flows for the fiscal quarters ended February 28, May 31 and August 31, 1998, and the related notes thereto, which have been prepared by the Company. The Financial Statements, which are included in the Company's Annual Report on Form 10-K for the year ended November 30, 1997 ("Form 10-K"), were prepared in accordance with generally accepted accounting principles consistently applied and present and reflect fairly the financial position of the Company at the respective balance sheet dates and the results of its operations, changes in stockholders' equity and cash flows for the periods then ended. During the period of Ernst & Young LLP=s engagement as the Company's independent certified public accountants, there has been no material disagreements between the accounting firm and the Company on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure and no reportable events relating to the relationship between the Company and the accounting firm. (g) The Company has good and marketable title to all of its material property and assets and, except as set forth in the Memorandum or the Financial Statements, none of such property or assets of the Company is subject to any lien, mortgage, pledge, encumbrance or other security interest, other than such liens, mortgages, pledges, encumbrances or other security interests which in the aggregate would not have a Material Adverse Effect. (h) Except as may be disclosed in the Memorandum, since November 30, 1997, there has not been any material adverse change in the financial condition or in the operations, or business of the Company or any of the Subsidiaries from that shown in the Financial Statements or any damage or destruction, not covered by insurance, which materially affects the business, property or assets of the Company or any of the Subsidiaries. (i) Except as set forth in the Exhibits to the Memorandum, the Company has not filed any Current Reports on Form 8-K or other reports filed with the Securities and Exchange Commission (the "SEC") subsequent to November 30, 1997. -5- (j) Neither the execution or delivery of this Agreement, the Series B Preferred Stock or the Placement Agent Warrants by the Company nor the performance by the Company of the transactions contemplated by this Agreement, the Series B Preferred Stock or the Placement Agent Warrants nor the consummation of the Exchange Offer: (i) requires the consent, waiver, approval, license or authorization of or filing with or notice to any person, entity or public authority (except any filings required by Federal or state securities laws); (ii) violates or constitutes a default under or breach of any law, rule or regulation applicable to the Company; or (iii) conflicts with or results in a breach or termination of any provision of, or constitutes a default under, or will result in the creation of any lien, charge or encumbrance upon any of the property or assets of the Company with or without the giving of notice, the passage of time or both, pursuant to (A) the Company's restated articles of incorporation or by-laws, (B) any mortgage, deed of trust, indenture, note, loan agreement, security agreement, contract, lease, license, alliance agreement, joint venture agreement, or other agreement or instrument, or (C) any order, judgment, decree, statute, regulation or any other restriction of any kind or character to which the Company is a party or by which any of the assets of the Company may be bound, except in any case set forth above where the failure to obtain such consent or the like, or such violation or breach would not have a Material Adverse Effect. (k) Except as set forth in the Memorandum, neither the Company nor any of the Subsidiaries (other than for inter-company debt) has any indebtedness to any officer, director, 5% stockholder or other Affiliate (as defined in the Rules and Regulations of the SEC under the 1933 Act) of the Company. (l) The Company and each of the Subsidiaries is in compliance with all laws, rules and regulations of all Federal, state and local government agencies having jurisdiction over the Company and each of the Subsidiaries or affecting the business, assets or properties of the Company or any of the Subsidiaries, except where the failure to comply has not and will not have a Material Adverse Effect. The Company and each of the Subsidiaries possess all licenses, permits, consents, approvals and agreements which are required to be issued by any and all applicable Federal, state or local authorities necessary for the operation of their respective business and/or in connection with their respective assets or properties, except where the failure to possess such licenses, permits, consents, approvals or agreements has not and will not have a Material Adverse Effect. (m) Neither the Company nor any of the Subsidiaries is in default under any note, loan agreement, security agreement, mortgage, contract, franchise agreement, distribution agreement, lease, alliance agreement, joint venture agreement, agreement, license, permit, consent, approval or instrument to which it is a party, and no event has occurred which, with or without the lapse of time or giving of notice, or both, would constitute such default thereof by the Company or any of the Subsidiaries or would cause acceleration of any obligation of the Company or any of the Subsidiaries or would adversely affect the business, operations or financial condition of the Company or any of the Subsidiaries, except where such default or event, whether with or without the lapse of time or giving of notice, or both, has not and will not have a Material Adverse Effect. To the best of the knowledge of the Company and except for the cases in which it would -6- not have a Material Adverse Effect, no party to any note, loan agreement, security agreement, mortgage, contract, franchise agreement, distribution agreement, lease, alliance agreement, joint venture agreement, agreement, license, permit, consent, approval or instrument with or given to the Company or any of the Subsidiaries is in default thereunder and no event has occurred with respect to such party, which, with or without the lapse of time or giving of notice, or both, would constitute a default by such party or would cause acceleration of any obligations of such party. (n) To the best of the Company's knowledge, except as set forth in the Memorandum, no officer, director or 5% stockholder of the Company and no Affiliate of any such person either (i) holds any interest in any corporation, partnership, business, trust, sole proprietorship or any other entity which is engaged in a business substantially similar to that conducted by the Company or any of the Subsidiaries (other than a passive immaterial interest in a public company engaged in any such business) or (ii) engages in business with the Company or any of the Subsidiaries. (o) Except as set forth in the Memorandum, there are no material (i.e., involving an asserted liability that reasonably could be expected to result in a judgement in excess of four hundred thousand dollars ($400,000)) claims, actions, suits, proceedings or labor disputes, inquiries or investigations (whether or not purportedly on behalf of the Company or any of the Subsidiaries), pending or, to the best of the Company's knowledge, threatened, against the Company or any of the Subsidiaries, at law or in equity or by or before any Federal, state, county, municipal or other governmental department, SEC, National Association of Securities Dealers Automated Quotation System ("NASDAQ"), board, bureau, agency or instrumentality, domestic or foreign, whether legal or administrative or in arbitration or mediation, nor is there any basis for any such action or proceeding. Neither the Company, any of the Subsidiaries nor any of their respective assets are subject to, nor is the Company or any of the Subsidiaries in default with respect to, any order, writ, injunction, judgment or decree that could have a Material Adverse Effect. (p) The accounts receivable of the Company and the Subsidiaries represent receivables generated from the sale of goods and services in the ordinary course of business. The Company knows of no material disputes concerning accounts receivable of the Company and the Subsidiaries not disclosed in the Memorandum. (q) Except as set forth in the Memorandum, neither the Company nor any of the Subsidiaries has (i) any written employment contracts and no oral employment contracts not terminable at will by the Company or any Subsidiary, as applicable, with any 5% percent shareholder, officer or director of the Company or any Subsidiary, as applicable, (ii) any consulting agreement or other compensation agreement with any 5% percent shareholder, officer or director of the Company or any Subsidiary, as applicable, or (iii) any agreement or contract with any 5% percent shareholder, officer or director of the Company or any Subsidiary, as applicable, that will result in the payment by the Company or any Subsidiary, as applicable, or the creation of any commitment or obligation (absolute or contingent), of the Company or any -7- Subsidiary, as applicable, to pay any severance, termination, "golden parachute", or similar payment to any present or former personnel of the Company or any Subsidiary, as applicable, following termination of employment. No director or executive officer of the Company or any Subsidiary, as applicable, has advised the Company that he or she intends to resign as director and/or executive officer of the Company or any Subsidiary, as applicable, or to terminate his or her employment with the Company or the Subsidiary, as applicable. (r) The accounts payable of the Company and the Subsidiaries represent bona fide payables to third parties incurred in the ordinary course of business and represent bona fide debts for services and/or goods provided to the Company and the Subsidiaries. (s) Except as set forth in the Memorandum, neither the Company nor any of the Subsidiaries is a party to a labor agreement with respect to any of their respective employees with any labor organization, union, group or association and there are no employee unions (nor any similar labor or employee organizations). There is no labor strike or labor stoppage or slowdown pending, or, to the best knowledge of the Company, threatened against the Company or any of the Subsidiaries nor has the Company or any of the Subsidiaries experienced in the last five (5) years any work stoppage or other labor difficulty. The Company is in compliance with all applicable laws, rules and regulations regarding employment practices, employee documentation, terms or conditions of employment and wage and hours and the Company is not engaged in any unfair labor practices, except where the failure to comply has not and will not have a Material Adverse Effect. There are no unfair labor practices charges or complaints against the Company or any of the Subsidiaries pending before the National Labor Relations Board or any other governmental agency. (t) Except as disclosed in the Memorandum, there are no employee pension, retirement or other benefit plans, maintained, contributed to or required to be contributed to by the Company or any of the Subsidiaries covering any employee or former employee of the Company or any of the Subsidiaries. Neither the Company nor any of the Subsidiaries has any material liability or obligation of any kind or nature, whether accrued or contingent, matured or unmatured, known or unknown, under any provision of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or any provision of the Internal Revenue Code of 1986, as amended, specifically relating to persons subject to ERISA. (u) The Company and each of the Subsidiaries has timely filed with the appropriate taxing authorities all returns in respect of taxes required to be filed through the date hereof and each has timely paid all taxes that each is required to pay or has established an adequate reserve therefor, except where the Company or the Subsidiary, as applicable, has timely filed for extensions. There are no pending or, to the best knowledge of the Company, threatened audits, investigations or claims for or relating to any liability of the Company or any of the Subsidiaries in respect of taxes. -8- (v) There are no finder's fees or brokerage commissions payable with respect to the transactions contemplated by this Agreement, except as provided in Paragraph 10 of this Agreement, and the Company agrees to indemnify and hold harmless the Placement Agent from and against any and all cost, damage, liability, judgment and expense (including reasonable fees and expenses of counsel) arising out of or relating to claims for such fees or commissions. (w) Except as set forth in the Memorandum, the Company is not currently and has not during the past four (4) months been engaged in substantive negotiations (as compared with informal discussions) with respect to: (i) any merger or consolidation of the Company where the Company would not be the surviving entity; or (ii) the sale of the Company, any of its Subsidiaries or any of their assets other than sales in the ordinary course of business. (x) The Company and each of the Subsidiaries has the right to conduct their respective business in the manner in which their respective business has been heretofore conducted. To the best knowledge of the Company, the conduct of such businesses by the Company and each of the Subsidiaries does not violate or infringe upon the patent, copyright, trade secret or other proprietary rights of any third party, other than any such violation or infringement that would not have a Material Adverse Effect, and neither the Company nor any of the Subsidiaries has received any notice of any claim of any such violation or infringement. (y) The Company and each of the Subsidiaries are currently in compliance in all respects with all applicable Environmental Laws (as defined below), including, without limitation, obtaining and maintaining in effect all permits, licenses, consents and other authorizations required by applicable Environmental Laws and the Company and each Subsidiary are each currently in compliance with all such permits, licenses, consents and other authorizations, except where the failure to comply has not and will not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has received notice from any property owner, landlord, tenant or Governmental Authority (as defined below) that Hazardous Wastes (as defined below) are being improperly used, stored or disposed of at any property currently or formerly owned or leased by the Company or any of its Subsidiaries or that any soil or ground water contamination has emanated from any such property. For purposes hereof, the term "Environmental Laws" means, collectively, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, the Toxic Substances Act, as amended, the Clean Air Act, as amended, the Clean Water Act, as amended, any other "Superfund" or "Superlien" law or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. For purposes hereof, the term "Governmental Authority" shall mean the Federal Government of the United States of America, any state or any political subdivision of the Federal Government or any state, including but not limited to courts, departments, commissions, boards, bureaus, agencies, ministries or other instrumentalities. For purposes hereof, the term "Hazardous Waste" shall mean any regulated quantity of hazardous substances as listed by the United States Environmental Protection -9- Agency ("EPA") and the list of toxic pollutants designated by the United States Congress and/or the EPA or defined by any other Federal, state or local statute, law, ordinance, code, rule, regulation, order, or decree regulating, relating to or imposing liability for standards of conduct concerning any hazardous, toxic substance or material. (z) The information contained in the Financial Statements and the Memorandum, taken together, does not contain any misstatement of a material fact or omit to state a material fact necessary to make the information not misleading. (aa) Except as set forth in the Memorandum, the Common Stock is currently traded on the NASDAQ National Market System. NASDAQ has advised that as of May 31, 1998, the Company failed to satisfy the $4 million minimum net tangible asset test imposed by NASDAQ for continued listing on the National Market System and/or initial listing on the SmallCap Market. The Company also currently fails to satisfy the $5 million market value of public float requirement imposed by NASDAQ. A hearing was held by NASDAQ on September 25, 1998 regarding the continued listing of the Common Stock. As of the date of this Agreement, the Company has not received either oral or written confirmation from NASDAQ that the Common Stock has been delisted. In the even that the Common Stock is delisted, the Company will use its best efforts to have the Common Stock traded on the OTC Bulletin Board System. 4. Survival of Representations and Warranties and Indemnification. The representations and warranties of the Company set forth in Section 3 of this Agreement shall survive the execution and delivery of the Series B Preferred Stock. The indemnification obligations of the Company as set forth in the indemnification rider annexed hereto as Exhibit B shall apply and be applicable to, among other things, all representations and warranties of the Company contained herein. 5. Use of Proceeds. The net proceeds from the sale of the Series B Preferred Stock will be used by the Company as disclosed in the Memorandum. 6. Unregistered Securities. Neither the Series B Preferred Stock, Conversion Shares, Placement Agent Warrants nor PAW Exercise Shares have been registered under the 1933 Act, in reliance upon the applicability of Section 3(b), 4(2), 4(6) and/or Regulation D of the 1933 Act to the transactions contemplated hereby. The certificates representing the Series B Preferred Stock and Placement Agent Warrants will bear an investment legend and the certificates representing the Conversion Shares and PAW Exercise Shares issued prior to their respective registration under Section 3 of the Series B Preferred Stock Purchase Agreement (a copy of which is annexed as an exhibit to the Memorandum) and Section 7 below will also bear investment legends. 7. Registration Rights and "Piggy-Back" Registration Rights. (a) As soon as possible after the Final Closing Date, but in no event later than forty-five (45) days after the Final Closing Date (regardless of whether the maximum number of shares of Series B Preferred Stock shall have been sold), the Company shall, at its sole cost and -10- expense, file a registration statement on the appropriate form with the SEC covering all of the PAW Exercise Shares and such additional shares of Common Stock that may be issued pursuant to the anti-dilution rights contained in the Placement Agent Warrants and as set forth below in this Section 7(a) (collectively, the "Registrable Securities"), time being of the essence. The Company will use its best efforts to have such registration statement declared effective as soon as possible after filing, and shall keep such registration statement current and effective for at least three (3) years from the effective date thereof or until such earlier date as all of the Registrable Securities registered pursuant to such registration statement shall have been sold. Notwithstanding anything to the contrary contained herein, if such registration statement shall not be filed with the SEC within forty-five (45) days after the Final Closing Date or the Registration Statement shall not be declared effective within one hundred eighty (180) days after the Final Closing Date (regardless of whether the maximum number of shares of Series B Preferred Stock shall have been sold), then the exercise price for the Placement Agent Warrants shall be reduced by the percentage resulting from multiplying 3% by the number of thirty (30) day periods, or any part thereof, beyond said forty-five (45) day or one hundred eighty (180) day period, as applicable, until the initial registration statement described herein covering the Registrable Securities is filed or declared effective, as applicable. The maximum reduction pursuant to this provision shall be eighteen (18%) percent. (b) In the event the Company effects any registration under the 1933 Act of any Registrable Securities pursuant to Paragraphs 7(a) above or 7(g) below, the Company shall indemnify, to the extent permitted by law, and hold harmless any registered holder whose Registrable Securities are included in such registration statement (each, a "Seller"), any underwriter, any officer, director, employee or agent of any Seller or underwriter, and each other person, if any, who controls any Seller or underwriter within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, judgment, fines, penalties, costs and expenses, joint or several, or actions in respect thereof (collectively, the "Claims"), to which each such indemnified party becomes subject, under the 1933 Act or otherwise, insofar as such Claims arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or any amendment or supplement thereto or any document filed under a state securities or blue sky law (collectively, the "Registration Documents") or insofar as such Claims arise out of or are based upon the omission or alleged omission to state in any Registration Document a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in investigating or defending any such Claim; provided that the Company shall not be liable in any such case to a particular indemnified party to the extent such Claim is based upon an untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in any Registration Document in reliance upon and in conformity with written information furnished to the Company by or on behalf of such indemnified party specifically for use in the preparation of such Registration Document. -11- (c) In connection with any registration statement in which any Seller is participating, each Seller, severally and not jointly, shall indemnify, to the extent permitted by law, and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each other person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, each other Seller and each underwriter, any officer, director, employee or agent of any such other Seller or underwriter and each other person, if any, who controls such other Seller or underwriter within the meaning of Section 15 of the 1933 Act against any Claims to which each such indemnified party may become subject under the 1933 Act or otherwise, insofar as such Claims (or actions in respect thereof) are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Document, or insofar as any Claims are based upon the omission or alleged omission to state in any Registration Document a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in investigating or defending any such claim; provided, however, that such indemnification or reimbursement shall be payable only if, and to the extent that, any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Registration Document in reliance upon and in conformity with written information furnished to the Company by the Seller specifically for use in the preparation thereof. (d) Any person entitled to indemnification under Paragraphs 7(b) or 7(c) above shall notify promptly the indemnifying party in writing of the commencement of any Claim if a claim for indemnification in respect thereof is to be made against an indemnifying party under this Paragraph 7(d), but the omission of such notice shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under Paragraph 7(b) or 7(c) above, except to the extent that such failure shall materially adversely affect any indemnifying party or its rights hereunder. In case any action is brought against the indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it chooses, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; and, after notice from the indemnifying party to the indemnified party that it so chooses, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that (i) if the indemnifying party fails to take reasonable steps necessary to defend diligently the Claim within twenty (20) days after receiving notice from the indemnified party that the indemnified party believes it has failed to do so; (ii) if the indemnified party who is a defendant in any action or proceeding which is also brought against the indemnifying party reasonably shall have concluded that there are legal defenses available to the indemnified party which are not available to the indemnifying party; or (iii) if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct, the indemnified party shall have the right to assume or continue its own defense as set forth above (but with no more than one firm of counsel for all indemnified parties, except to the extent any indemnified party or parties reasonably shall have concluded that there are legal defenses available to such party or parties which are not available to the other -12- indemnified parties or to the extent representation of all indemnified parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct) and the indemnifying party shall be liable for any reasonable expenses therefor; provided, that no indemnifying party shall be subject to any liability for any settlement of a Claim made without its consent (which may not be unreasonably withheld, delayed or conditioned). If the indemnifying party assumes the defense of any Claim hereunder, such indemnifying party shall not enter into any settlement without the consent of the indemnified party if such settlement attributes liability to the indemnified party. (e) If for any reason the indemnity provided in Paragraphs 7(b) or 7(c) above is unavailable, or is insufficient to hold harmless, an indemnified party, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of any Claim in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other from the transactions contemplated by this Agreement. If, however, the allocation provided in the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim. Notwithstanding the foregoing, no underwriter or controlling person thereof, if any, shall be required to contribute, in respect of such underwriter's participation as an underwriter in the offering, any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligation of any underwriters to contribute pursuant to this paragraph (e) shall be several in proportion to their respective underwriting commitments and not joint. (f) The provisions of Paragraphs 7(b) through 7(e) of this Agreement shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of the Registrable Securities by any such party. -13- (g) The Sellers shall have certain "piggy-back" registration rights with respect to the Registrable Securities as hereinafter provided: A. If at any time after the Final Closing Date and prior to the date that the Registered Securities are registered under the 1933 Act pursuant to Section 7(a) above, the Company shall file with the SEC a registration statement under the 1933 Act (other than a registration statement on Form S-4 or Form S-8 or any successor thereof, or filed in connection with an exchange offer or an offer of securities solely to the Company=s existing shareholders or with respect to securities issuable upon conversion of the Series A Preferred Stock) registering any shares of Common Stock, the Company shall give written notice to each Seller thereof prior to such filing. B. Within fifteen (15) days after such notice from the Company, each Seller shall give written notice to the Company whether or not the Seller desires to have all of the Seller's Registrable Securities included in the registration statement. If a Seller fails to give such notice within such period, such Seller shall not have the right to have Seller's Registrable Securities registered pursuant to such registration statement. If a Seller gives such notice, then the Company shall include such Seller's Registrable Securities in the registration statement, at the Company's sole cost and expense, subject to the remaining terms of this Paragraph 7(g); provided, however, that each Seller shall pay all underwriting discounts, commissions, and transfer taxes relating to the sale of such Seller=s Registered Securities, as well as his, her or its own counsel fees, if any, relating to the sale of the Seller=s Registered Securities. C. If the registration statement relates to an underwritten offering, and the underwriter in its sole discretion shall determine in writing that the total number of shares of Common Stock to be included in the offering, including the Registrable Securities, shall exceed the amount which the underwriter in its sole discretion deems to be appropriate for the offering, the number of shares of the Registrable Securities shall be reduced pro rata (based on the number of Registered Securities requested to be included). The Sellers shall enter into such agreements as may be reasonably required by the underwriters. D. The holders of Placement Agent Warrants shall have two (2) opportunities to have the Registrable Securities registered under this Paragraph 7(g). E. Seller shall furnish in writing to the Company such information as the Company shall reasonably require in connection with a registration statement. F. The Company may, at any time and in its sole discretion, decide not to proceed with the filing of a registration statement which may have given rise to "piggy-back" rights under this Section 7(g) or may at any time terminate or suspend such registration, in which event each Seller=s rights under this Section 7 as to the number of opportunities to "piggy-back" shall be reset. -14- (h) If and whenever the Company is required by the provisions of Paragraph 7(a) to use its best efforts to register any Registrable Securities under the 1933 Act, the Company shall, as expeditiously as possible under the circumstances and subject to the terms of this Section 7: A. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective as soon as possible after filing and remain effective. B. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement current and effective and to comply with the provisions of the 1933 Act, and any regulations promulgated thereunder, with respect to the sale or disposition of all Registrable Securities covered by the registration statement required to effect the distribution of the securities, but in no event shall the Company be required to do so for a period of more than three (3) years following the effective date of the registration statement. C. Furnish to the Sellers participating in the offering, copies (in reasonable quantities) of summary, preliminary, final, amended or supplemented prospectuses, in conformity with the requirements of the 1933 Act and any regulations promulgated thereunder, and other documents as reasonably may be required in order to facilitate the disposition of the securities, but only while the Company is required under the provisions hereof to keep the registration statement current. D. Use its best efforts to register or qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions of the United States as the Sellers participating in the offering shall reasonably request, and do any and all other acts and things which may be reasonably necessary to enable each participating Seller to consummate the disposition of the Registrable Securities in such jurisdictions. E. Notify each Seller selling Registrable Securities, at any time when a prospectus relating to any such Registrable Securities covered by such registration statement is required to be delivered under the 1933 Act, of the Company's becoming aware that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and promptly prepare and furnish to each such Seller selling Registrable Securities a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. -15- F. As soon as practicable after the effective date of the registration statement, and in any event within eighteen (18) months thereafter, make generally available to Sellers participating in the offering an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the effective date of the registration statement which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act, including, at the Company's option, Rule 158 thereunder. To the extent that the Company files such information with the SEC in satisfaction of the foregoing, the Company need not deliver the above referenced earnings statement to Sellers. G. Upon request, deliver promptly to counsel of each Seller participating in the offering copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement and permit each such Seller to do such investigation at such Seller's sole cost and expense, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary. Each Seller agrees that it will use its best efforts not to interfere unreasonably with the Company's business when conducting any such investigation and each Seller shall keep any such information received pursuant to this Paragraph 7(h)G confidential. H. Provide a transfer agent located in the United States for all such Registrable Securities covered by such registration statement not later than the effective date of such registration statement. I. List the Registrable Securities covered by such registration statement on such exchanges and/or on the NASDAQ as the Common Stock is then currently listed upon. J. Pay all Registration Expenses (as defined below) incurred in connection with a registration of Registrable Securities, whether or not such registration statement shall become effective; provided that each Seller shall pay all underwriting discounts, commissions and transfer taxes, and their own counsel fees, if any, relating to the sale or disposition of such Seller's Registrable Securities pursuant to a registration statement. As used herein, "Registration Expenses" means any and all reasonable and customary expenses incident to performance of or compliance with the registration rights set forth herein, including, without limitation, (i) all SEC and stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses of complying with state securities or blue sky laws (including reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities but no other expenses of the underwriters or their counsel), (iii) all printing, messenger and delivery expenses, and (iv) the reasonable fees and disbursements of counsel for the Company and the Company's independent public accountants. (i) The Company acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Paragraph 7 and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Paragraph 7 may be specifically enforced. In the event that the Company shall fail to file -16- such registration statement when required pursuant to Paragraph 7(a) above or to keep any registration statement effective as provided in this Paragraph or otherwise fails to comply with its obligations and agreements in this Paragraph 7, then, in addition to any other rights or remedies Sellers may have at law or in equity, including without limitation, the right of rescission, the Company shall indemnify and hold harmless each holder of Placement Agent Warrants from and against any and all manner or loss which they may incur as a result of such failure. In addition, the Company shall also reimburse such holders for any and all reasonable legal fees and expenses incurred by them in successfully enforcing their rights pursuant to this Paragraph 7, regardless of whether any litigation was commenced; provided, however, that the Company shall not be liable for the fees and expenses of more than one law firm, which firm shall be designated by the Placement Agent. 8. Conditions. The following obligations of the Company shall be satisfied or fulfilled on or prior to the date of each Closing, unless otherwise agreed to in writing by the Placement Agent: (a) The Company shall have delivered to the Placement Agent, at the Initial Closing, (i) a currently-dated long-form good standing or comparable certificate or telegram from the Secretary of State or other appropriate authority where the Company and each U.S.- based Subsidiary is incorporated and each other jurisdiction in which the Company and any of the Subsidiaries is qualified to do business as a foreign corporation; (ii) the certificate of incorporation of the Company and each Subsidiary, as currently in effect, certified by the Secretary of State or other appropriate authority of the state where the Company and each Subsidiary is incorporated; (iii) a certified copy of the filed Articles of Amendment setting forth the designation, preference rights, qualifications, limitations or restrictions of the Series B Preferred Stock; (iv) by-laws of the Company certified by the secretary of the Company; and (v) certified resolutions of the Board of Directors of the Company approving this Agreement, the execution of the Series B Preferred Stock, the Exchange Offer and the Placement Agent Warrants, the registration of the Registerable Securities and the other transactions contemplated by the Series B Preferred Stock. (b) There shall have occurred no material adverse event affecting the Company or the Subsidiaries or any of their respective businesses or assets or the Company's securities since the date of this Agreement which has had or will have a Material Adverse Effect. (c) No litigation or administrative proceeding shall have been threatened or commenced against the Company or any of the Subsidiaries which (i) seeks to enjoin or otherwise prohibit or restrict the consummation of the transactions contemplated by this Agreement or (ii) if adversely determined, would have a Material Adverse Effect or have a material adverse effect on the Company's securities. (d) The Company shall have delivered to the Placement Agent a certificate of its principal executive and financial officers as to the matters set forth in Paragraphs 8(a), (b) and (c) of this Agreement and to the further effect that (i) neither the Company nor any Subsidiary is in default, in any respect, under any note, loan agreement, security agreement, mortgage, deed of trust, indenture, contract, alliance agreement, lease, license, joint venture agreement, agreement -17- or other instrument to which it is a party, except as disclosed in the Financial Statements or the Memorandum and except where such default has not and will not have a Material Adverse Effect; (ii) the Company's representations and warranties contained in this Agreement are true and correct in all material respects on such date with the same force and effect as if made on such date; (iii) there has been no amendment or changes to the Company's or Subsidiaries= charter or by-laws or authorizing resolutions from those delivered pursuant to Paragraph 8(a) of this Agreement; and (iv) no event has occurred which, with or without the lapse of time or giving of notice, or both, would constitute a material breach or default thereof by the Company or any Subsidiary or would cause acceleration of any material obligation of the Company or any Subsidiary, or could materially and adversely affect the business, operations or financial condition of the Company. (e) The Placement Agent shall have received the opinion of Foley & Lardner, counsel for the Company, dated as of the closing date in form and substance reasonably satisfactory to the Placement Agent and its counsel. (f) The Company shall have prepared and filed or delivered to counsel for filing with the SEC and any states in which such filing is required, a Form D relating to the sale of the Series B Preferred Stock and such other documents and certificates as are required. (g) Subscriptions for at least the Minimum Amount of Series B Preferred Stock shall have been accepted by the Company. (h) In addition to the right of the Placement Agent to terminate this Agreement and not consummate the transactions contemplated by this Agreement as a result of the failure of the Company to comply with any of its obligations set forth in this Agreement, this Agreement may be terminated by the Placement Agent by written notice to the Company at any time prior to the Initial Closing if, in the Placement Agent's sole judgment, (i) the Company and/or Subsidiaries shall have sustained a loss that is material to the Company or its Subsidiaries, taken as a whole, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree; (ii) trading in securities on any exchange or system shall have been suspended or limited either generally or specifically with respect to the Common Stock; (iii) material governmental restrictions have been imposed on trading in securities generally or specifically with respect to the Common Stock (not in force and effect on the date of this Agreement); (iv) a banking moratorium shall have been declared by Federal or New York State authorities; (v) an outbreak of major international hostilities or other national or international calamity shall have occurred; (vi) the Congress of the United States or any state legislative body shall have passed or taken any action or measure, or such bodies or any governmental body or any authoritative accounting institute, or board, or any governmental executive shall have adopted any orders, rules or regulations, which the Placement Agent reasonably believes is likely to have a material adverse effect on the business, financial condition or financial statements of the Company or the market for the Series B Preferred Stock; (vii) the Common Stock shall have been delisted from NASDAQ and the Company has failed to use its best efforts to cause the Common Stock to be traded over the bulletin board; or (viii) there shall have -18- been, in the Placement Agent's judgment, a material decline in the Dow Jones Industrial Index or the market price of the Common Stock at any time subsequent to the date of this Agreement. 9. Covenants of the Company. The Company agrees at all times as long as the Series B Preferred Stock and the Placement Agent Warrants may be converted or exercised, to keep reserved from the authorized and unissued Common Stock, such number of shares of Common Stock as may be, from time to time, issuable upon conversion of the Series B Preferred Stock and exercise of the Placement Agent Warrants. 10. Fees. (a) Upon the receipt by the Company of the payments from the Purchasers, the Company shall pay to the Placement Agent a fee equal to 8% of the aggregate gross cash proceeds from the Series B Preferred Stock sold pursuant to this Agreement, a portion of which may be paid by the Placement Agent to other registered broker-dealers; provided, however, that the Company shall have no obligation with respect to payments that may be due such broker-dealers. Such amount may be deducted by the Placement Agent from the payment being made to the Company pursuant to Paragraph 2 of this Agreement. Notwithstanding the foregoing, no fee or commission shall be payable to the Placement Agent as a result of the sale of shares of Series B Preferred Stock in the Exchange Offer. In addition, the Company shall issue at the Final Closing, five (5) year warrants to purchase an amount of Common Stock at $3.60 per share equal to 10% times the gross cash proceeds received by the Company divided by the Conversion Price, subject to adjustment (the "Placement Agent Warrants"), a portion of which may be allotted by the Placement Agent to other registered broker-dealers; provided, however, that the Company shall have no obligation with respect to the allocation of the Placement Agents Warrants to such broker-dealers. The exercise price of the Placement Agent Warrants will be equal to 120% of the Conversion Price. The persons in whose name the Placement Agent Warrants are issued shall all be "accredited investors" as defined in the regulations promulgated under the 1933 Act and such persons shall acquire such warrants for investment purposes only and not with a view towards the redistribution thereof. The Company shall reimburse the Placement Agent for up to $5,000 of its reasonable costs and expenses, including the reasonable fees and expenses of counsel to the Placement Agent, if and when a closing occurs. (b) The Company shall pay any fees required in connection with the qualification of the sale of the Series B Preferred Stock under the state securities or blue sky laws of any state which the Placement Agent reasonably deems necessary and any other out-of-pocket expenses incurred by the Company in connection with the transaction contemplated by this Agreement. (c) All payments in connection with the sale of the Series B Preferred Stock shall be made pursuant to the terms and conditions of the escrow agreement dated as of August 17, 1998 between Placement Agent and American Stock Transfer & Trust Company, an executed copy of which has been delivered to and acknowledged by the Company. -19- 11. Notices. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger against receipt thereof or sent by registered or certified mail, return receipt requested, or by facsimile transmission, if confirmed by mail as provided in this Paragraph 11. Notices shall be deemed to have been received on the date of personal delivery or facsimile or, if sent by certified or registered mail, return receipt requested, shall be deemed to be delivered on the third business day after the date of mailing. Notices shall be sent to the following addresses: To the Company: EFFECTIVE MANAGEMENT SYSTEMS, INC. 12000 West Park Place Milwaukee, WI 53224 Telecopier: (414) 359-9011 Attention: Michael D. Dunham Jeffrey J. Fossum With a copy to: FOLEY & LARDNER 777 East Wisconsin Avenue Milwaukee, WI 53202-5367 Telecopier: (414) 297-4900 Attention: Jay O. Rothman, Esq. To Placement Agent: TAGLICH BROTHERS, D'AMADEO, WAGNER & COMPANY, INCORPORATED 100 Wall Street New York, NY 10005 Telecopier: (212) 509-6587 Attention: Mr. Michael N. Taglich With a copy to: ROBINSON SILVERMAN PEARCE ARONSOHN & BERMAN LLP 1290 Avenue of the Americas New York, New York 10104 Telecopier: (212) 541-4630 Attention: Robert G. Leonard, Esq. -20- or to such other address as any party shall designate in the manner provided in this Paragraph 11. 12. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof, superseding any and all prior or contemporaneous oral and prior written agreements and understandings. This Agreement may not be modified or amended nor may any right be waived except by a writing which expressly refers to this Agreement, states that it is a modification, amendment or waiver and is signed by all parties with respect to a modification or amendment or the party granting the waiver with respect to a waiver. No course of conduct or dealing and no trade custom or usage shall modify any provisions of this Agreement. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such state. Each party hereby consents to the exclusive jurisdiction of the Federal and State Courts situated in New York County, New York in connection with any action arising out of or based upon this Agreement and the transaction contemplated by this Agreement. (c) This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective personal representatives, successors and permitted assigns. (d) In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. (e) Each party shall, without payment of any additional consideration by any other party, at any time on or after the date of any Closings take such further action and execute such other and further documents and instruments as the other party may request in order to provide the other party with the benefits of this Agreement. (f) The captions and headings contained herein are solely for convenience and reference and do not constitute a part of this Agreement. (g) All references to any gender shall be deemed to include the masculine, feminine or neuter gender, the singular shall include the plural and the plural shall include the singular. (h) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. -21- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first aforesaid. EFFECTIVE MANAGEMENT TAGLICH BROTHERS, D'AMADEO, WAGNER SYSTEMS, INC. & COMPANY, INCORPORATED By:_______________________________ By:_______________________________________ Name: Name: Richard Oh Title: Title: Vice President EXHIBIT A Names, Addresses and Social Security or Number of Employer Identification Shares of Numbers of Purchasers Series B Preferred Stock EXHIBIT B Indemnification Rider (a) Effective Management Systems, Inc. (the "Company") shall indemnify and hold harmless: (I) TAGLICH BROTHERS, D=AMADEO, WAGNER & COMPANY, INCORPORATED (the "Placement Agent"), (II) each person and entity that directly, or indirectly though one or more intermediaries, controls or is controlled by, or is under common control with, the Placement Agent (each, an "Affiliate"), and (III) the Placement Agent's and each Affiliate's respective officers, directors, affiliates, shareholders, agents and employees (collectively, the "Other Parties" and individually "Other Party") from and against any loss, claim, penalty, fine, judgment, damage or liability, joint or several of any sort of kind, and any action in respect thereof, to which the Placement Agent, any Affiliate or any Other Party may become subject, under the Securities Act of 1933, as amended ("1933 Act"), the Securities Exchange Act of 1934, as amended ("1934 Act"), any state law or otherwise, insofar as such loss, claim, penalty, fine, judgment, damage, liability or action relates to or arises out of (i) any alleged untrue statement of a material fact contained in any information or documents issued or supplied by the Company regarding the sale of its securities as contemplated by the Series B Preferred Stock Placement Agreement between the Company and the Placement Agent (the PSP Agreement) to which this Exhibit B is annexed, including the Company's Confidential Private Placement Memorandum and all exhibits thereto (collectively, the "Offering Information"), or the alleged omission to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (ii) any transaction contemplated by the PSP Agreement or the engagement of the Placement Agent pursuant to, and the performance by the Placement Agent of the services contemplated by, the PSP Agreement, (iii) any breach by the Company of the representations, warranties or covenants contained in the: (1) PSP Agreement; (2) certificate of designation or other document filed by the Company with the appropriate authorities in the state of its incorporation which sets forth the rights, qualifications, preferences, designations, powers and restrictions of the securities to be sold as contemplated by the PSP Agreement; and/or (3) preferred stock purchase agreement to be entered into between the Company and each investor acquiring the securities being offered; and shall reimburse the Placement Agent, any Affiliate and each Other Party for any legal or other expenses reasonably incurred by the Placement Agent, any Affiliate and/or such Other Party in connection with investigating or defending any such loss, claim, penalty, fine, judgment, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, penalty, fine, judgment, damage, liability or action relates to or arises out of any alleged untrue statement or alleged omission contained therein relating to the Placement Agent, any Affiliate or such Other Party or that was made in reliance upon and in conformity with information furnished to the Company in writing by the Placement Agent, any Affiliate or such Other Party, in any such case expressly for use in the Offering Information or, provided, further, that the Company will not be liable under clause (ii) above for any loss, claim, penalty, fine, judgment, damage, liability or action (or expenses relating thereto) that are finally judicially determined by a court of competent jurisdiction to have resulted from: (A) the bad faith, negligence, or willful misconduct of the Placement Agent; or (B) the breach by the Placement Agent of any agreement contained in the PSP Agreement that results from the negligence or willful misconduct of the Placement Agent. The foregoing indemnity is in addition to any liability, which the Company may otherwise have to the Placement Agent, any Affiliate and/or any Other Party. In the event the Placement Agent, any Affiliate or any Other Party is requested or required to appear as a witness in any action brought by or on behalf of or against the Company or any participant in a transaction covered hereby in which the Placement Agent, any Affiliate or such Other Party is not named as a defendant, the Company agrees to reimburse the Placement Agent, Affiliate and/or such Other Party for all out of pocket expenses reasonably incurred by it in connection with such party's appearing and preparing to appear as a witness, including, without limitation the reasonable fees and disbursements of its legal counsel. (b) The Placement Agent shall indemnify and hold harmless the Company and its officers, directors, affiliates, agents and employees and any person who controls the Company within the meaning of the 1933 Act or the 1934 Act from and against any loss, claim, penalty, fine, judgment, damage or liability, joint or several, or any action in respect thereof, to which the Company or any officer, director, affiliates, agents, employee or person who controls the Company or any of them may become subject under the 1933 Act, the 1934 Act, any state law or otherwise, insofar as such loss, claim, penalty, fine, judgment, damage, liability or action relates to or arises out of (i) the bad faith, negligence or willful misconduct of the Placement Agent, any Affiliate or Other Party or the breach by the Placement Agent of any agreement contained in the PSP Agreement that results from the negligence or willful misconduct of the Placement Agent; or (ii) any alleged untrue statement of a material fact that relates to the Placement Agent, any Affiliate or Other Party contained in the Offering Information or that was made in reliance upon and in conformity with the information furnished to the Company in writing by the Placement Agent, any Affiliate or Other Party, in any such case expressly for use therein or the omission or alleged omission to state therein a material fact that relates to the Placement Agent, any Affiliates or Other Party or that was made in reliance upon and in conformity with information furnished to the Company in writing by the Placement Agent, any Affiliate or Other Party, in any such case expressly for use in the written Offering Information necessary to make the statements therein, in the light of the circumstances under which they were made not misleading, and the Placement Agent shall reimburse the Company and each such party for any legal or other expenses reasonably incurred by the Company, or such indemnified party in connection with investigating or defending any such loss, claim, penalty, fine, judgment, damage, liability or action. The only information provided to the Company by the Placement Agent, any Affiliate or Other Party is the Placement Agent=s name. The foregoing indemnity is in addition to any liability, which the Placement Agent may otherwise have to the Company, or such indemnified party. (c) Promptly after receipt by an indemnified party under this Exhibit B of notice of any claim or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Exhibit B, notify such indemnifying party in writing of the claim or the commencement of that action provided that the failure to notify the indemnifying party will not relieve it from any liability which it may have to an indemnified party otherwise than under this Exhibit B. If any such claim or action is brought against any indemnified party, and it shall notify an indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified party, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified party (which shall not, except with the consent of the indemnified party, be counsel to the indemnifying party, which consent may not be unreasonably withheld). After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Exhibit B for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable out-of-pocket costs of investigation incurred prior to the indemnifying party assuming the defense thereof. With respect to any such claim or action for which the indemnifying party does not assume the defense thereof, the indemnifying party shall not be obligated to pay the reasonable fees and expenses of more than one counsel for the indemnified party or parties. (d) If the indemnification provided for in this Exhibit B shall for any reason be unavailable to an indemnified party under subsections (a) or (b) herein in respect of any loss, claim, penalty, fine, judgment, damage or liability, or any action in respect thereof, referred to therein, then the indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, penalty, fine, judgment, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Placement Agent on the other from the private placement of the securities by the Company pursuant to the Offering Information, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Placement Agent on the other with respect to the statements or omissions which resulted in such loss, claim, penalty, fine, judgment, damage, or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Placement Agent on the other with respect to the private placement of the securities shall be deemed to be in the same proportion as the total net proceeds received by the Company from the private placement (before deducting expenses) bears to the total compensation received by the Placement Agent with respect to the private placement, provided, that in no event shall liability of the Placement Agent or any Affiliate exceed the aggregate placement fees paid to the Placement Agent. The relative fault shall be determined be reference to: (i) whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Placement Agent, on the other, (ii) whether there was a breach of a representation, warranty or covenant by the Company, or (iii) the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement, omission or breach. The parties agree that it would not be just and equitable if contributions pursuant to this subsection (d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, penalty, fine, judgment, damage, or liability, or action in respect thereof, referred to above in this subsection (d) shall be deemed to include, for purposes of this subsection (d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. EX-10.29 8 SERIES B PREFERRED STOCK PURCH AGREEMENT EXHIBIT 10.29 EFFECTIVE MANAGEMENT SYSTEMS, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT SERIES B PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") made as of this ____ day of ________, 1998 between EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation, with its principal offices at 12000 West Park Place, Milwaukee, WI 53224 (the "Company") and the undersigned (the "Subscriber"). W I T N E S S E T H : WHEREAS, the Company desires to issue shares of its Series B 8 % Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") at $1,000 per share with a minimum aggregate purchase price of $700,000 in gross cash proceeds and, in one or more tranches, a maximum aggregate purchase price of $2,750,000; and WHEREAS, each share of Series B Preferred Stock is convertible into shares of the Company's Common Stock, $.01 par value (the "Common Stock") per share, at the price per share, subject to adjustment (the "Conversion Price") as set forth in the Company's Confidential Private Placement Memorandum dated October 22, 1998, together with all exhibits thereto, as same may thereafter be supplemented and/or amended (collectively, the "Memorandum"); and WHEREAS, on August 28, 1998, the Company sold 1,005 shares of Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") for an aggregate gross sales price of $1,005,000; and WHEREAS, pursuant to the Memorandum, the holders of the Series A Preferred Stock may purchase the Series B Preferred Stock by tendering their shares of Series A Preferred Stock to the Company, with each share of Series A Preferred Stock being valued at $1,000 per share (the "Exchange Offer"); and WHEREAS, the Series B Preferred Stock is being issued and the Exchange Offer is occurring pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, Subscriber desires to acquire shares of Series B Preferred Stock having an aggregate purchase price set forth on the signature page hereof (the "Purchase Price"). NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows: 1. SUBSCRIPTION FOR SECURITIES AND REPRESENTATIONS AND COVENANTS BY SUBSCRIBER. 1.1 Subject to the terms and conditions hereinafter set forth, the Subscriber hereby subscribes for and agrees to purchase from the Company for $1,000 per share, shares of Series B Preferred Stock aggregating the Purchase Price and the Company agrees to sell such Series B Preferred Stock to the Subscriber for the Purchase Price, subject to the Company's right to sell to the Subscriber such lesser amount of Series B Preferred Stock as it may, in its sole discretion, deem necessary or desirable. The Purchase Price is payable by wire transfer or by check, subject to collection, as set forth in the "INSTRUCTIONS TO SUBSCRIBERS" contained in the Subscription Documents Booklet of which this Agreement is a part. Subscribers that are holders of Series A Preferred Stock shall, rather than submitting a check or wire transfer to the Escrow Agent, shall tender to the Company by delivery to the Placement Agent their original certificate (duly endorsed for transfer) for the Series A Preferred Stock. 1.2 The Subscriber recognizes that the purchase of the Series B Preferred Stock involves a high degree of risk in that (i) no public market exists for the Series B Preferred Stock; (ii) the shares of Common Stock issuable upon conversion of the Series B Preferred Stock (the "Conversion Shares") have not been registered under the 1933 Act, and the Company has no obligation to register the Conversion Shares, except as set forth in Section 3 below; (iii) an investment in the Series B Preferred Stock is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Series B Preferred Stock; (iv) the Subscriber may not be able to liquidate the Subscriber's investment; and (v) the Subscriber could sustain the loss of Subscriber's entire investment. Such risks are more fully set forth in the Memorandum. 1.3 The private placement of the Series B Preferred Stock by the Company (the "Offering") and the Exchange Offer pursuant to the Memorandum shall continue for a period commencing on the date of the Memorandum and ending on the date set forth in the Memorandum. 1.4 The Subscriber represents as follows: (a) The Subscriber represents that the Subscriber is an Accredited Investor (as defined in Rule 501 of Regulation D promulgated under the 1933 Act) as indicated by the Subscriber's responses to the Confidential Investor Questionnaire, a copy of which is included in the Subscription Documents Booklet, and that the Subscriber is able to bear the economic risk of an investment in the Series B Preferred Stock. (b) The Subscriber acknowledges that the Subscriber has significant prior investment experience, including investment in non-listed and non-registered securities. The Subscriber recognizes the highly speculative nature of this investment. The Subscriber acknowledges that the Subscriber has carefully read the Memorandum, including but not -2- limited to, the Company's Form 10-K for the fiscal year ended November 30, 1997, the Company's Form 10-Qs for the fiscal quarters ended February 28, May 31, and August 31, 1998, and the terms and conditions of the Series B Preferred Stock and fully understands the contents thereof. (c) The Subscriber hereby acknowledges that this Offering, the Series B Preferred Stock and the Memorandum have not been reviewed by the United States Securities and Exchange Commission ("SEC") or by any state securities regulator because it is intended to be a nonpublic offering pursuant to Sections 3(a), 4(2) and 4(6) of the 1933 Act and Rule 506 of Regulation D promulgated thereunder. The Subscriber represents that the Series B Preferred Stock is being purchased for the Subscriber's own account, for investment purposes only and not for distribution or resale to others. The Subscriber agrees that the Subscriber will not sell or otherwise transfer the Series B Preferred Stock or Conversion Shares unless they are registered under the 1933 Act or unless an exemption from such registration is available. (d) The Subscriber understands that the Series B Preferred Stock has not been registered under the 1933 Act by reason of a claimed exemption under the provisions of the 1933 Act which depends, in part, upon the Subscriber's investment intention. In this connection, the Subscriber understands that it is the position of the SEC that the statutory basis for such exemption would not be present if the Subscriber's representation merely meant that the Subscriber's present intention was to hold the Series B Preferred Stock (and/or the Conversion Shares) for a short period, such as the capital gains period of tax statutes, for a deferred sale, for a market rise, assuming that a market develops, or for any other fixed period. The Subscriber realizes that, in the view of the SEC, a purchase now with an intent to resell after a pre-determined amount of time would represent a purchase with an intent inconsistent with the Subscriber's representation to the Company, and the SEC might regard such a sale or disposition as a deferred sale to which such exemptions are not available. (e) The Subscriber understands that Rule 144 (the "Rule") promulgated by the SEC under the 1933 Act requires, among other conditions, a one year holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the 1933 Act. The Subscriber understands that the Company makes no representation or warranty regarding its fulfillment in the future of any reporting requirements under the Securities Exchange Act of 1934, as amended, or its dissemination to the public of any current financial or other information concerning the Company, as is required by the Rule as one of the conditions of its availability. The Subscriber understands and hereby acknowledges that the Company is the only entity that can register the Conversion Shares under the 1933 Act and that the Company is under no obligation to register the Series B Preferred Stock or Conversion Shares under the 1933 Act, with the exception of certain registration rights set forth in Section 3 below. The Subscriber acknowledges that the Company may, if it desires, permit the transfer of the Series B Preferred Stock or the Conversion Shares out of the Subscriber's name only when the Subscriber's request for transfer is accompanied by an opinion of counsel reasonably satisfactory to the Company that neither the sale nor the proposed transfer results in a violation of -3- the 1933 Act or any applicable state "blue sky" laws and subject to the provisions of Section 1.4(f) hereof. (f) The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Series B Preferred Stock and the Conversion Shares stating that they have not been registered under the 1933 Act and under applicable state securities laws and setting forth or referring to the restrictions on transferability and sale thereof. (g) The Subscriber understands that the Company will review this Agreement and the Confidential Investor Questionnaire; and it is further agreed that the Company reserves the unrestricted right to reject or limit any subscription and to close the Offering at any time. (h) The Subscriber hereby represents that the address of Subscriber furnished by the Subscriber at the end of this Agreement is the Subscriber's principal residence, if the Subscriber is an individual, or its principal business address, if the Subscriber is a corporation or other entity. (i) The Subscriber has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the Offering, and all such questions, if any, have been answered to the full satisfaction of the Subscriber; and the Company shall provide Subscriber with the opportunity to ask additional questions of and receive answers (all of which information shall be limited to information in the public realm) from the Company concerning the Company during the period which the Subscriber owns the Series B Preferred Stock. (j) The Subscriber has such knowledge and expertise in financial and business matters that the Subscriber is capable of evaluating the merits and risks involved in an investment in the Series B Preferred Stock. (k) The Subscriber has full power and authority to execute and deliver this Agreement and to perform the obligations of the undersigned hereunder; and this Agreement is a legally binding obligation of the undersigned enforceable in accordance with its terms. (l) Except as set forth in this Agreement, the Series B Preferred Stock, the Memorandum and the public documents of the Company (e.g., the fiscal 1997 Form 10-K, the Form 10-Qs for the first three quarters of fiscal 1998, the fiscal 1997 Annual Report and the 1998 Proxy Statement; collectively, the "Public Documents"), no representations or warranties have been made to the Subscriber by the Company, the Placement Agent (as defined in the Memorandum) or any of their respective agents, employees or affiliates, and in entering into this transaction, the Subscriber is not relying on any information, other than that contained in the Series B Preferred Stock, the Memorandum, the Public Documents and the results of an independent investigation by the Subscriber. -4- (m) The Subscriber agrees that he, she or it will not sell or otherwise transfer the Series B Preferred Stock or Conversion Shares unless they are registered under the 1933 Act and applicable state "blue sky" laws or unless an exemption from such registration is available. The Subscriber represents that (i) the Subscriber has adequate means of providing for the Subscriber's current needs and possible personal contingencies, (ii) the Subscriber has no need for liquidity in this investment, (iii) the Subscriber is able to bear the substantial economic risk of an investment in the Series B Preferred Stock for an indefinite period, and (iv) at the present time the Subscriber could afford a complete loss of such investment. (n) It is understood that all documents, records and books pertaining to this investment have been made available for the inspection by the Subscriber's attorney and/or accountant and the Subscriber. 1.5 If the Subscriber is participating in the Exchange Offer, the Subscriber represents and warrants to the Company that the Subscriber owns the Series A Preferred Stock subject to the Exchange Offer, that the Series A Preferred Stock subject to the Exchange Offer is free and clear of all liens, claims and encumbrances and that the Subscriber has the right, power and authority to enter into the Exchange Offer. 1.6 The Subscriber agrees not to sell the Company's Common Stock short from the Initial Closing Date (as defined in the Memorandum) through and including January 31, 1999. 1.7 The Subscriber, in the event of Forced Conversion, as defined in Paragraph (6) of Section A of Article 4 of the Company's Restated Articles of Incorporation (the "Restated Articles"), hereby constitutes and appoints the President and Secretary of the Company, with power of substitution, attorney and proxy for and in the name and place of the Subscriber, to appear and vote with the same effect as the Subscriber, as a holder of the Company's Series B Preferred Stock for approval of the Sale Event (as defined in the Restated Articles), such proxy to be irrevocable (since it is coupled with an interest) for the 150-day period provided for in the Restated Articles, all shares of the Series B the Subscriber is entitled to vote. 2. TERMS OF SUBSCRIPTION. The Offering of the Series B Preferred Stock is being made on a "best efforts" basis as more particularly set forth in the Memorandum. 3. REGISTRATION RIGHTS. (a) As soon as possible after the Final Closing Date (as defined in the Memorandum), but in no event later than forty-five (45) days after the Final Closing Date (regardless of whether the maximum number of shares of Series B Preferred Stock shall have been sold), the Company shall, at its sole cost and expense, file a registration statement on the appropriate form under the 1933 Act with the SEC covering all of the Conversion Shares and such additional shares of Common Stock that may be issued as a result of any adjustment to the Conversion Price as set forth in the Memorandum and as set forth below (collectively, the "Registrable Securities") for all -5- holders of the Series B Preferred Stock and Registrable Securities (collectively, the "Registered Holders"), time being of the essence. Such registration statement may also include securities issuable upon conversion of the Series A Preferred Stock. The Company will use its best efforts to have such registration statement declared effective as soon as possible after filing, and shall keep such registration statement current and effective for at least three (3) years from the effective date thereof or until such earlier date as all of the Registrable Securities registered pursuant to such registration statement shall have been sold. Notwithstanding anything to the contrary contained herein, if such registration statement shall not be filed with the SEC within forty-five (45) days after the Final Closing Date or if the registration statement shall not be declared effective within one hundred eighty (180) days after the Final Closing Date (regardless of whether the maximum number of shares of Series B Preferred Stock shall have been sold), then the Conversion Price shall be reduced (and concomitantly the number of shares of Common Stock issuable upon the conversion of the Series B Preferred Stock shall increase) by the percentage resulting from multiplying three (3%) percent by the number of thirty (30) day periods, or any part thereof, beyond said forty-five (45) or one hundred eighty (180) day period, as applicable, until the initial registration statement described herein covering the Registrable Securities is filed or declared effective, as applicable. The maximum reduction pursuant to this provision shall be eighteen (18%) percent. (b) In the event the Company effects any registration under the 1933 Act of any Registrable Securities pursuant to Section 3(a) above or 3(g) below, the Company shall indemnify, to the extent permitted by law, and hold harmless any person or entity whose Registrable Securities are included in such registration statement (each, a "Seller"), any underwriter, any officer, director, affiliate, shareholder, employee or agent of any Seller or underwriter, and each other person, if any, who controls any Seller or underwriter within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages, liabilities, judgment, fines, penalties, costs and expenses, joint or several, or actions in respect thereof (collectively, the "Claims"), to which each such indemnified party becomes subject, under the 1933 Act or otherwise, insofar as such Claims arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or any amendment or supplement thereto or any document filed under a state securities or blue sky law (collectively, the "Registration Documents") or insofar as such Claims arise out of or are based upon the omission or alleged omission to state in any Registration Document a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in investigating or defending any such Claim; provided that the Company shall not be liable in any such case to a particular indemnified party to the extent such Claim is based upon an untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in any Registration Document in reliance upon and in conformity with written information furnished to the Company by or on behalf of such indemnified party specifically for use in the preparation of such Registration Document. (c) In connection with any registration statement in which any Seller is participating, each Seller, severally and not jointly, shall indemnify, to the extent permitted by law, and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each other person, if any, who controls the Company within the meaning of -6- Section 15 of the 1933 Act, each other Seller and each underwriter, any officer, director, affiliate, shareholder, employee or agent of any such other Seller or underwriter and each other person, if any, who controls such other Seller or underwriter within the meaning of Section 15 of the 1933 Act against any Claims to which each such indemnified party may become subject under the 1933 Act or otherwise, insofar as such Claims (or actions in respect thereof) are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Document, or insofar as any Claims are based upon the omission or alleged omission to state in any Registration Document a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse any such indemnified party for any legal or other expenses reasonably incurred by such indemnified party in investigating or defending any such Claim; provided, however, that such indemnification or reimbursement shall be payable only if, and to the extent that, any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Registration Document in reliance upon and in conformity with written information furnished to the Company by the Seller specifically for use in the preparation thereof. (d) Any person entitled to indemnification under Section 3(b) or 3(c) above shall notify promptly the indemnifying party in writing of the commencement of any Claim if a claim for indemnification in respect thereof is to be made against an indemnifying party under this Section 3(d), but the omission of such notice shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under Section 3(b) or 3(c) above, except to the extent that such failure shall materially adversely affect any indemnifying party or its rights hereunder. In case any action is brought against the indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it chooses, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; and, after notice from the indemnifying party to the indemnified party that it so chooses, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that (i) if the indemnifying party fails to take reasonable steps necessary to defend diligently the Claim within twenty (20) days after receiving notice from the indemnified party that the indemnified party believes it has failed to do so; (ii) if the indemnified party who is a defendant in any action or proceeding which is also brought against the indemnifying party reasonably shall have concluded that there are legal defenses available to the indemnified party which are not available to the indemnifying party; or (iii) if representation of both parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct, the indemnified party shall have the right to assume or continue its own defense as set forth above (but with no more than one firm of counsel for all indemnified parties, except to the extent any indemnified party or parties reasonably shall have concluded that there are legal defenses available to such party or parties which are not available to the other indemnified parties or to the extent representation of all indemnified parties by the same counsel is otherwise inappropriate under applicable standards of professional conduct) and the indemnifying party shall be liable for any reasonable expenses therefor; provided, that no indemnifying party shall be subject to any liability for any settlement of a Claim made without its consent (which may not be unreasonably withheld, delayed or conditioned). If the indemnifying party assumes the defense of any Claim hereunder, -7- such indemnifying party shall not enter into any settlement without the consent of the indemnified party if such settlement attributes liability to the indemnified party. (e) If for any reason the indemnity provided in Section 3(b) or 3(c) above is unavailable, or is insufficient to hold harmless, an indemnified party, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of any Claim in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other from the transactions contemplated by this Agreement. If, however, the allocation provided in the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable in respect of any Claim shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such Claim. Notwithstanding the foregoing, no underwriter or controlling person thereof, if any, shall be required to contribute, in respect of such underwriter's participation as an underwriter in the offering, any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligation of any underwriters to contribute pursuant to this paragraph (e) shall be several in proportion to their respective underwriting commitments and not joint. (f) The provisions of Section 3(b) through 3(e) of this Agreement shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party and shall survive the transfer of the Registrable Securities by any such party. (g) The Registered Holders shall have certain "piggy-back" registration rights with respect to the Registrable Securities as hereinafter provided: A. If at any time after the date of the Final Closing Date and prior to the date that the Registrable Securities are registered under the 1933 Act pursuant to Section 3(a) above, the Company shall file with the SEC a registration statement under the 1933 Act (other than a registration statement on Form S-4 or Form S-8, or any successor thereto, or filed in connection with an exchange offer or an offering of securities solely to the Company's existing shareholders or with respect to securities issuable upon conversion of the Series A Preferred Stock) -8- registering any shares of Common Stock, the Company shall give written notice to each Registered Holder thereof prior to such filing. B. Within fifteen (15) days after such notice from the Company, each Registered Holder shall give written notice to the Company whether or not the Registered Holder desires to have all of the Registered Holder's Registrable Securities included in the registration statement. If a Registered Holder fails to give such notice within such period, such Registered Holder shall not have the right to have such Registered Holder's Registrable Securities registered pursuant to such registration statement. If a Registered Holder gives such notice, then the Company shall include such Registered Holder's Registrable Securities in the registration statement, at the Company's sole cost and expense, subject to the remaining terms of this Section 3(g); provided, however, that each Registered Holder shall pay all underwriting discounts, commissions and transfer taxes as well as his, her or its own counsel fees, if any, relating to the sale of such Registered Holder's Registrable Securities. C. If the registration statement relates to an underwritten offering, and the underwriter shall determine in writing that the total number of shares of Common Stock to be included in the offering, including the Registrable Securities, shall exceed the amount which the underwriter in its sole discretion deems to be appropriate for the offering, the number of shares of the Registrable Securities shall be reduced pro rata (based on the number of Registrable Securities requested to be included). The Registered Holders participating in the offering shall enter into such agreements as may be reasonably required by the underwriters. D. The Registered Holders shall have two (2) opportunities to have the Registrable Securities registered under this Section 3(g); provided however that their Registrable Securities are not sooner registered under the 1933 Act pursuant to Section 3(a) above. E. The Registered Holder shall furnish in writing to the Company such information as the Company shall reasonably require in connection with a registration statement. F. The Company may, at any time and in its sole discretion, decide not to proceed with the filing of a registration statement which may have give rise to "piggy back" rights under this Section 3(g) or may at any time terminate or suspend such registration, in which event each Registered Holder's rights under this Section 3(g) as to the number of opportunities to "piggy-back" shall be reset. T (h) If and whenever the Company is required by the provisions of this Section 3(a) to use its best efforts to register any Registrable Securities under the 1933 Act, the Company shall, as expeditiously as possible under the circumstances and subject to the terms of this Section 3: -9- A. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective as soon as possible after filing and remain effective. B. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement current and effective and to comply with the provisions of the 1933 Act, and any regulations promulgated thereunder, with respect to the sale or disposition of all Registrable Securities covered by the registration statement required to effect the distribution of the securities, but in no event shall the Company be required to do so for a period of more than three (3) years following the effective date of the registration statement. C. Furnish to the Sellers participating in the offering, copies (in reasonable quantities) of summary, preliminary, final, amended or supplemented prospectuses, in conformity with the requirements of the 1933 Act and any regulations promulgated thereunder, and other documents as reasonably may be required in order to facilitate the disposition of the securities, but only while the Company is required under the provisions hereof to keep the registration statement current. D. Use its best efforts to register or qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions of the United States as the Sellers participating in the offering shall reasonably request, and do any and all other acts and things which may be reasonably necessary to enable each participating Seller to consummate the disposition of the Registrable Securities in such jurisdictions. E. Notify each Seller selling Registrable Securities, at any time when a prospectus relating to any such Registrable Securities covered by such registration statement is required to be delivered under the 1933 Act, of the Company's becoming aware that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and promptly prepare and furnish to each such Seller selling Registrable Securities a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. F. As soon as practicable after the effective date of the registration statement, and in any event within eighteen (18) months thereafter, make generally available to Sellers participating in the offering an earnings statement (which need not be audited) covering a period of at least twelve (12) consecutive months beginning after the effective date of the registration statement which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act, including, at the Company's option, Rule 158 thereunder. To the extent that the Company files such information with the SEC in satisfaction of the foregoing, the Company need not deliver the above referenced earnings statement to Seller. -10- G. Upon request, deliver promptly to counsel of each Seller participating in the offering copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement and permit each such Seller to do such investigation at such Seller's sole cost and expense, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary. Each Seller agrees that it will use its best efforts not to interfere unreasonably with the Company's business when conducting any such investigation and each Seller shall keep any such information received pursuant to this Section confidential. H. Provide a transfer agent located in the United States for all such Registrable Securities covered by such registration statement not later than the effective date of such registration statement. I. List the Registrable Securities covered by such registration statement on such exchanges and/or on the NASDAQ as the Common Stock is then currently listed upon. J. Pay all Registration Expenses incurred in connection with a registration of Registrable Securities, whether or not such registration statement shall become effective; provided that each Seller shall pay all underwriting discounts, commissions and transfer taxes, and their own counsel fees, if any, relating to the sale or disposition of such Seller's Registrable Securities pursuant to a registration statement. As used herein, "Registration Expenses" means any and all reasonable and customary expenses incident to performance of or compliance with the registration rights set forth herein, including, without limitation, (i) all SEC and stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses of complying with state securities or blue sky laws (including reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities but no other expenses of the underwriters or their counsel), (iii) all printing, messenger and delivery expenses, and (iv) the reasonable fees and disbursements of counsel for the Company and the Company's independent public accountants. (i) The Company acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section 3 and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section 3 may be specifically enforced. In the event that the Company shall fail to file such registration statement when required pursuant to Section 3(a) above or to keep any registration statement effective as provided in this Section 3 or otherwise fails to comply with its obligations and agreements in this Section 3, then, in addition to any other rights or remedies the Registered Holders may have at law or in equity, including without limitation, the right of rescission, the Issuer shall indemnify and hold harmless the Registered Holders from and against any and all manner or loss which they may incur as a result of such failure. In addition, the Issuer shall also reimburse the Registered Holders for any and all reasonable legal fees and expenses incurred by them in -11- successfully enforcing their rights pursuant to this Section 3, regardless of whether any litigation was commenced. 4. MISCELLANEOUS. 4.1 All notices, consents and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) one business day after the business day of transmission if sent by telecopier (with receipt confirmed), provided that a copy is mailed by certified mail, return receipt requested, or (c) one business day after the business day of deposit with the carrier, if sent for next business day delivery by Express Mail, Federal Express or other recognized express delivery service (receipt requested), in each case addressed to the Company at the address indicated on the first page of this Agreement marked "Attention: Jeffrey Fossum, Chief Financial Officer", and to the Subscriber at the Subscriber's address indicated on the last page of this Agreement (or to such other addresses, the telecopier numbers as a party may designate as to itself by notice to the other parties). 4.2 This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 4.3 This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, legal representatives, successors and assigns. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter thereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. 4.4 Notwithstanding the place where this Agreement may be executed by any of the parties hereto, the parties expressly agree that all the terms and provisions hereof shall be construed in accordance with and governed by the laws of the State of New York. The parties hereby agree that any dispute which may arise between them arising out of or in connection with this Agreement shall be adjudicated before a court located in New York and they hereby submit to the exclusive jurisdiction of the courts of the State of New York and of the federal courts in New York with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any such action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Agreement or any acts or omissions relating to the sale of the securities hereunder, and consent to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in case of the address set forth below or such other address as the undersigned shall furnish in writing to the other. 4.5 This Agreement may be executed in counterparts. Upon the execution and delivery of this Agreement by the Subscriber, this Agreement shall become a binding obligation of the Subscriber with respect to the purchase of the Series B Preferred Stock as herein provided; subject, however, to the right hereby reserved to the Company to enter into the same agreements with other subscribers and to add and/or to delete other persons as subscribers. -12- 4.6 The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 4.7 It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party. 4.8 The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. -13- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. TO BE COMPLETED BY SUBSCRIBER ------------------------------------- Print Name Signature for Individual Subscriber Signature of Subscriber Other than Individual _____________________________ By:__________________________________ Signature Name: Title: ------------------------------------- Address ------------------------------------- City State Zip Code ------------------------------------- Aggregate Purchase Price for Series B Preferred Stock ------------------------------------- Social Security or Employer Identification Number Aggregate Purchase Price being paid as follows: (please check applicable box) __Cash __ Tender of shares of Series A Preferred Stock SUBSCRIPTION ACCEPTED: EFFECTIVE MANAGEMENT SYSTEMS, INC. By:_______________________________________ Name: Title: Date:_____________________________________ -14- EX-21 9 SUBSIDIARIES EXHIBIT 21 Subsidiaries of Effective Management Systems, Inc. 1. Effective Management Systems of Illinois, Inc. 2. EMS-East, Inc. 3. Total Management Systems, Inc. EX-23 10 CONSENT OF ERNST & YOUNG Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 16, 1998 (except notes 12 and 13, as to which the date is December 14, 1998) in the Registration Statement (Form S-1) and the related Prospectus of Effective Management Systems, Inc. for the registration of 947,214 shares of its common stock. ERNST & YOUNG LLP Milwaukee, Wisconsin December 14, 1998 -----END PRIVACY-ENHANCED MESSAGE-----