-----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, VOJJOFX75ERygo29TUV5/PwaEFu4hO8HxZWn4UiqikGjKj4nM6ePWkZJjernHl+h qKdbkqcxQlZCxvS4Dk3L9Q== 0000897069-99-000378.txt : 19990716 0000897069-99-000378.hdr.sgml : 19990716 ACCESSION NUMBER: 0000897069-99-000378 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFFECTIVE MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000853372 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 391292200 STATE OF INCORPORATION: WI FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23438 FILM NUMBER: 99665047 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10-Q 1 FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO ____________ Commission file number 0-23438 Effective Management Systems, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-1292200 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12000 West Park Place, Milwaukee, WI 53224 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 359-9800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X___ No _______ Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding as of May 31, 1999 - ------------------------------------ ---------------------------------------- Common Stock, $.01 par value 4,118,486 EFFECTIVE MANAGEMENT SYSTEMS, INC. Form 10-Q May 31, 1999 INDEX PART 1 - FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1 Financial Statements Consolidated Balance Sheets at May 31, 1999 and November 30, 1998 3 Consolidated Statements of Operations - Three and Six Months Ended May 31, 1999 and May 31, 1998 5 Consolidated Statements of Cash Flows - Six 6 Months Ended May 31, 1999 and May 31, 1998 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19 PART II - OTHER INFORMATION Item 2 Changes in Securities and Use of Proceeds 20 Item 4 Submission of Matters to a Vote of Security Holders 21 Item 6 Exhibits and Reports on Form 8-K 22 SIGNATURES 23 2 PART I Financial Information Item 1 Financial Statements EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) - -------------------------------------------------------------------------------- ASSETS 31-May 30-Nov 1999 1998 ================================================================================ CURRENT ASSETS Cash $ 1 $ 21 Accounts Receivable: Trade, less allowance for doubtful accounts 6,694 12,871 Related Parties 443 426 Inventories 278 275 Prepaid Expenses and Other Current Assets 309 225 ----------------------------- TOTAL CURRENT ASSETS 7,725 13,818 LONG TERM ASSETS Computer Software, net 5,009 4,373 Investments in and Advances to Unconsolidated Joint Ventures 291 291 Equipment and Leasehold Improvements, net 2,764 3,202 Intangible Assets, net 2,019 2,129 Other Assets 376 347 ----------------------------- TOTAL LONG TERM ASSETS 10,459 10,342 ----------------------------- TOTAL ASSETS $18,184 $24,160 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. 3 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 31-May 30-Nov 1999 1998 =========================================================================================================== CURRENT LIABILITIES Accounts Payable $ 4,447 $ 3,662 Accrued Liabilities 1,755 2,937 Deferred Revenues 6,159 6,522 Customer Deposits 100 113 Current portion of Long-term Obligations 5,323 6,194 ------------------------------- TOTAL CURRENT LIABILITIES 17,784 19,428 LONG TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 642 858 Long-term Obligations 274 242 ------------------------------- TOTAL LONG TERM LIABILITIES 916 1,100 Commitments and Contingencies STOCKHOLDERS' EQUITY Preferred Stock, $.01 par value; authorized 3,000,000 shares of which 5,000 shares are designated as Series B 8% Convertible Redeemable Preferred Stock ("Series B"); 1,875.37 shares of Series B are issued and outstanding,(liquidation preference of $1000 per share) 1,370 1411 Common Stock, $.01 par value; authorized 20,000,000 shares; issued 4,118,486 and 4,106,377 shares; outstanding 4,105,861 and 4,093,752 shares 41 41 Common Stock Warrants 144 144 Additional Paid- in Capital 11,489 11,426 Retained Earnings (Deficit) (13,500) (9,330) Cost of Common Stock in Treasury(12,625 shares) (60) (60) ------------------------------- TOTAL STOCKHOLDERS' EQUITY (516) 3,632 ------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,184 $24,160 =========================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
4
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) - ----------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED 31-May 31-May 31-May 31-May 1999 1998 1999 1998 ======================================================================================================================== NET REVENUES: Software license fees $ 3,454 $ 4,372 $ 6,610 $ 9,707 Services 4,934 4,532 8,928 8,771 Hardware 232 444 558 1,116 -------- -------- ------- ------- Total net revenues 8,620 9,348 16,096 19,594 COST OF PRODUCTS AND SERVICES Software license fees 1,013 1,381 1,929 3,104 Services 4,200 3,374 8,011 6,594 Hardware 180 353 461 880 -------- -------- ------- ------- Total cost of products and services 5,393 5,108 10,401 10,578 Selling and marketing expenses 2,980 3,401 5,801 7,026 General and administrative expenses 1,217 1,019 2,001 2,213 Product development expenses 838 684 1,719 1,521 Restructuring and other charges 0 6,836 0 6,836 -------- -------- ------- ------- Total costs and operating expenses 10,428 17,048 19,922 28,174 -------- -------- ------- ------- LOSS FROM OPERATIONS (1,808) (7,700) (3,826) (8,580) Other (Income)/ Expense Equity in (earnings)/loss of unconsolidated joint ventures 0 (1) 0 (1) Interest (income) 0 (10) (8) (20) Interest expense 178 184 352 337 -------- -------- ------- ------- 178 173 344 316 -------- -------- ------- ------- LOSS BEFORE INCOME TAXES (1,986) (7,873) (4,170) (8,896) Income tax (benefit) expense 9 0 0 33 -------- -------- ------- ------- NET LOSS ($1,995) ($ 7,873) ($4,170) ($8,929) ======== ======== ======= ======= Loss per share - basic ($ 0.48) ($ 1.93) ($1.01) ($ 2.19) Loss per share - diluted ($ 0.48) ($ 1.93) ($1.01) ($ 2.19) ======================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
5
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) - -------------------------------------------------------------------------------- SIX MONTHS ENDED 31-May 31-May 1999 1998 ============================================================================================================== OPERATING ACTIVITIES Net Loss ($4,170) ($8,929) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 689 693 Amortization of capitalized computer software development costs 972 1891 Equity in earnings of joint ventures 0 0 Goodwill Amortization 109 117 Restructuring and Other Charges 0 6836 Changes in operating assets and liabilities: Accounts Receivable 6271 2251 Inventories and other current assets (198) (560) Accounts payable and other liabilities (991) (1106) ------------------------- Total adjustments 6852 10122 ------------------------- Net cash provided by operating activities 2682 1193 INVESTING ACTIVITIES Additions to equipment and leasehold improvements (251) (254) Software development costs capitalized (1608) (2063) Other (28) 17 ------------------------- Net cash used in investing activities (1887) (2300) FINANCING ACTIVITIES Proceeds on long-term debt and other notes payable (837) 1283 Additional paid-in capital 22 41 Preferred stock dividend 0 0 ------------------------- Net cash provided (used) by financing activities (815) 1324 ------------------------- Net increase (decrease) in cash ($ 20) $ 217 Cash-beginning of period $ 21 $ 14 ========================= Cash-end of period $ 1 $ 231 ============================================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
6 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1999 (Unaudited) (In Thousands) Note 1 - Basis of Presentation The accompanying consolidated interim financial statements included herein have been prepared by Effective Management Systems, Inc. (the "Company"), without an audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the information furnished for the three and six month periods ended May 31, 1999 and May 31, 1998 includes all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the three months ended May 31, 1999 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending November 30, 1999. It is suggested that the interim financial statements be read in conjunction with the audited consolidated financial statements for the year ended November 30, 1998 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the following: 31-May-1999 30-Nov-1998 ----------- ----------- Gross $ 10,163 $ 9,913 Less: Accumulated Depreciation ( 7,400) ( 6,711) ----------- ----------- Net $ 2,763 $ 3,202 Allowance for doubtful accounts consisted of the following: 31-May-1999 30-Nov-1998 ----------- ----------- Balance $ 147 $ 506 Provision for doubtful accounts consisted of the following: 31-May-1999 30-Nov-1998 ----------- ----------- $ 244 $ 17
7 Note 3 - Net Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended May 31, 1999 1998 ---- ---- Denominator Denominator for basic earnings per share - weighted average common shares 4,118 4,080 Effect of dilutive securities - stock options and warrants 5 0 Effect of dilutive securities - preferred stock 0 0 --------------------- ------------------- Denominator for diluted earnings per share - adjusted weighted average common shares 4,123 4,080 ===================== =================== Six Months Ended May 31, 1999 1998 ---- ---- Denominator Denominator for basic earnings per share - weighted average common shares 4,116 4,077 Effect of dilutive securities - stock options and warrants 6 0 Effect of dilutive securities - preferred stock 0 0 --------------------- ------------------- Denominator for diluted earnings per share - adjusted weighted average common shares 4,122 4,077 ===================== ===================
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company incurred a 7.8% decrease in net revenues and a net loss of $1,995,000 for the second quarter of fiscal 1999 compared with a net loss of $7,873,000 for the second quarter of fiscal 1998. The Company incurred a 17.9% decrease in net revenues and a net loss of $4,170,000 for the first half of fiscal 1999 compared with a net loss of $8,929,000 for the first half of fiscal 1998. All periods presented do not reflect a tax benefit relating to the loss since for book purposes the Company is in a loss carry-forward position. Software revenues were down 21.0% in the second quarter of fiscal 1999 compared to the same period in the prior year and were down 31.9% in the first half of 1999 compared to the same period in the prior year. Management believes this decrease in software revenues was mainly the result of a general industry decline in demand for Enterprise Resource Planning ("ERP") software, a decline in the Company's proprietary TCM product revenues due to recent prospect focus on the Company's poor financial results, and reduced revenues from restructured operations for the first half of 1999. Revenues in fiscal 1999 were also negatively impacted by lower than expected revenues for the Baan products distributed by the Company. The Company did experience an increase in revenues from its Intercim division both in the second quarter of 1999 and in the first half of fiscal 1999 as compared with the similar periods of 1998. The Company also reduced its level of personnel through attrition and several April, 1999 terminations (mostly administrative related) in order to reduce its expense levels to more appropriate levels. The Company expects its expense levels to decrease by $87,000 per month from previous levels. Although the Company has taken various actions with the objective of returning the Company to profitability, no assurance can be given that these measures will actually result in the achievement of this objective. In addition, as a result of the recent losses, the Company has been required to obtain waivers from its primary lender for covenant violations. In the event that, in the near term, the Company's financial performance does not improve or if it is unable to secure additional investment capital or sell assets to bolster its financial position, the Company will continue to require additional covenant relief. In the event that such covenant relief cannot be obtained, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund current operations. The Company's ability to borrow additional funds under its existing credit facility remains limited. As a result of its financial situation, all of the Company's debt has been classified as short-term and its fiscal 1998 audit report contains an explanatory paragraph for going concern uncertainty, pursuant to which the auditors expressed substantial doubt as to our ability to continue as a going concern. 9 The Company's on-going operations are also dependent on its ability to attract and retain a highly qualified sales, development and service staff. The Company has recently experienced attrition at rates higher than historical levels. The Company has taken steps to curtail the attrition, but no assurance can be given that these steps will be successful or that further attrition will not materially impact the Company's financial performance. Results of Operations Total Revenues Net revenues decreased to $8,620,000 for the three months ended May 31, 1999, which represented a 7.8% decrease from the $9,348,000 in revenues for the same quarter in the previous year. Net revenues decreased to $16,096,000 for the six months ended May 31, 1999, which represented a 17.9% decrease from the $19,594,000 in revenues for the same period in the previous year. The mix of revenues comparing software, services, and hardware revenues as a percentage of net revenues was 40.1%, 57.2%, and 2.7%, respectively, in the second quarter of fiscal 1999, as compared with 46.8%, 48.5%, and 4.7%, respectively, in the second quarter of fiscal 1998. The mix of revenues comparing software, services and hardware revenues as a percentage of net revenues was 41.1%, 55.5%, and 3.4%, respectively, in the first half of fiscal 1999, as compared with 49.5%, 44.8%, and 5.7%, respectively, in the first half of fiscal 1998. International revenues represented less than 10% of net revenues for all periods presented. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer orders and market acceptance of new products. The Company has historically operated with little backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees decreased 21.0% to $3,454,000 in the second quarter of fiscal 1999 from $4,372,000 in the second quarter of fiscal 1998. Software license fees decreased 31.9% to $6,610,000 in the first half of fiscal 1999 from $9,707,000 in the first half of fiscal 1998. Management believes this decrease in software revenues was mainly the result of a general industry decline in demand for ERP software, a decline in the Company's proprietary TCM product revenues due to recent prospect 11 focus on the Company's poor financial results (a trend the Company expects to continue), and reduced revenues from restructured operations (a reduction of $275,000 from the second quarter of 1998 and $524,000 from the first half of 1998). Revenues in fiscal 1999 were also negatively impacted by lower than expected revenues for the Baan products distributed by the Company. Software revenues for the Companys' Intercim division increased $381,000 to $1,174,00 in the second quarter of 1999 as compared to $793,000 the corresponding period of 1998 and increased $447,000 to $2,439,000 in the first half of 1999 as compared to $1,992,000 the corresponding period of 1998. Service Revenues The Company offers a number of optional services to its customers, including such services as a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues increased to $4,934,000 for the three months ended May 31, 1999, as compared with $4,532,000 for the same period of the prior year. Service revenues increased to $8,928,000 for the six months ended May 31, 1999, as compared with $8,771,000 for the same period of the prior year. The increase in revenues was mainly the result of an increase in Baan service revenues on new accounts ( an increase of $727,000 compared to the second quarter of 1998 and an increase of $1,142,000 compared to the first half of 1998) , and an increase in revenues related to rising Intercim product sales ( an increase of $411,000 compared to the second quarter of 1998 and an increase of $562,000 compared to the first half of 1998). Hardware Revenues Hardware revenues decreased 47.8% to $232,000 in the second quarter of fiscal 1999 compared with $444,000 for the corresponding period of 1998. Hardware revenues decreased 50.0% to $558,000 in the first half of fiscal 1999 compared with $1,116,000 for the corresponding period of 1998. This decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware. Several years ago, the Company decided to reduce, over time, its sales of commodity-priced hardware products and those which require specific expertise beyond the scope of the Company's product focus. As an alternative, the Company has developed relationships with various system integrators which sell the hardware and provide these value-added hardware services. Management expects the trend of declining hardware sales to continue due to the increasing sales of software licenses operating on the Microsoft Windows NT platform. Hardware used with the Microsoft Windows NT platform is either generally already in 11 place at the customer site or readily available from local suppliers who can also provide local support. Cost of Software License Fees The cost of software license fees as a percentage of related revenue was 29.3% for the second quarter of fiscal 1999, a decrease from 31.6% for the corresponding period of 1998. The cost of software license fees as a percentage of related revenue was 29.2% for the first half of fiscal 1999, a decrease from 32.0% for the corresponding period of 1998. Cost of software license fees is composed of both amortization of past investment in software development and the third party costs associated with the software revenues. Software amortization is related to past investment in software development and does not vary consistently with variations in software revenues. The Company wrote off a substantial portion of its past investment in software development in conjunction with its restructuring in the quarter ended May 31, 1998. Software amortization decreased $ 277,000 in the second quarter of fiscal 1999 and decreased $756,000 in the first half of 1999 as compared to the same periods of 1998 mainly as a result of the amounts written off of previously capitalized development costs in the restructuring. The cost of software license fees is also dependent on the level of third party costs associated with certain software revenues and includes such items as purchased licenses and other components. Cost of Services The cost of services as a percentage of related revenue increased to 85.1% for the three months ended May 31, 1999, as compared with 74.5% for the same quarter in the previous year. The cost of services as a percentage of related revenue increased to 89.7% for the six months ended May 31, 1999, as compared with 75.2% for the same period in the previous year. The increase was mainly due to additional compensation for current personnel, lower levels of productivity for new personnel, higher costs of outside-sourced labor, and additional warranty work associated with new versions of the Company's software. The Company has also organized a group dedicated to the implementation of the Baan software, which activity has raised the level of training costs and other initial non-billable matters. In addition, the Company has been implementing a new call management system for the hot line telephone support area which has also temporarily raised costs. The Company has raised the billing rates for its services in line with industry practice, but the effects will not be fully realized until the third quarter of the 1999 fiscal year. 12 Cost of Hardware The cost of hardware as a percentage of related revenue decreased to 77.6% in the second quarter of fiscal 1999 from 79.5% in the second quarter of fiscal 1998. The cost of hardware as a percentage of related revenue increased to 82.6% in the first half of fiscal 1999 from 78.8% in the first half of fiscal 1998. The cost of hardware as a percentage of related revenue varies with the size of the system, the margin mix of items comprising the system being sold, and the competitive pressure of the customer sale. Selling and Marketing Expenses Selling and marketing expenses decreased $421,000, or 12.4%, from $3,401,000 in the second quarter of fiscal 1998 to $2,980,000 in the second quarter of fiscal 1999. Selling and marketing expenses decreased $1,225,000, or 17.4%, from $7,026,000 in the first half of fiscal 1998, to $5,801,000 in the first half of fiscal 1999. This decrease in selling and marketing expense was mainly due to reduced levels of personnel through attrition, and reduced levels of expense resulting from the Company's restructuring. As a percentage of total revenues, selling and marketing expense was 34.6% in the second quarter of fiscal 1999 compared to 36.4% in the corresponding period of 1998. As a percentage of total revenues, selling and marketing expense was 36.0% in the first half of fiscal 1999 compared to 35.9% in the corresponding period of 1998. General and Administrative Expenses General and administrative expense increased $198,000, or 19.4%, from $1,019,000 in the second quarter of fiscal 1998 to $1,217,000 in the second quarter of fiscal 1999. The increase in general and administrative expense was mainly related to higher levels of expense supporting the Company's efforts to secure alternative sources of capital and an increase in the reserve for doubtful accounts. General and administrative expense decreased $212,000, or 9.6%, from $2,213,000 in the first half of fiscal 1998 to $2,001,000 in the first half of fiscal 1999. The decrease in general and administrative expenses was mainly due to reduced expense levels as a result of the Company's restructuring and attrition. As a percentage of net revenues, general and administrative expense was 14.1% and 10.9% in the second quarter and 12.4% and 11.3% in the first half of fiscal 1999 and 1998, respectively. The increases were due to decreased levels of revenues. 13 Product Development Expense Product development expense increased 22.5% from $684,000 in the second quarter of fiscal 1998 to $838,000 in the second quarter of fiscal 1999. Product development expense increased 13.0% from $1,521,000 in the first half of fiscal 1998 to $1,719,000 in the first half of fiscal 1999. This increase primarily related to a decrease in the amount of software capitalized. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $789,000 of product development costs in the second quarter of fiscal 1999 compared to $979,000 in the second quarter of fiscal 1998. The Company capitalized $1,608,000 of product development costs in the first half of fiscal 1999 compared to $1,987,000 in the first half of fiscal 1998. As a percentage of software license fees, the total amount invested in software development was 47.0% and 39.3% in the second quarter of fiscal 1999 and fiscal 1998, respectively, and was 49.5% and 36.4% in the first half of fiscal 1999 and 1998, respectively. These increases as a percentage of software license fees were mainly due to a reduced level of software revenues. Restructuring Charges In the second quarter of fiscal 1998, the Company recorded a restructuring charge of $6,836,000 related to entering into a new distributor arrangement for the Baan manufacturing software, and a reduction of costs focused on improving the Company's financial performance. The full amount of the restructuring charge has been paid or expensed as of May 31, 1999. Other Income\Expense-Net Other income\expense-net was $173,000 of expense for the second quarter of fiscal 1998 compared to $178,000 of expense for the second quarter of fiscal 1999. Other income\expense-net was $316,000 of expense for the first half of fiscal 1998 compared to $344,000 of expense for the first half of fiscal 1999. The increase in the level of expense was mainly the result of an increase in interest expense as a result of increased borrowings under the Company's borrowing facilities. Income Tax A tax expense of $9,000 (for state and local taxes) and no income tax benefit was recorded for the second quarter of fiscal 1999 compared to no tax expense for the second quarter of fiscal 1998. The tax expense for the first half of 1999 netted to $0 (for state and local taxes) and no income tax benefit was recorded for the first half of fiscal 1999 compared to $33,000 of tax expense for the first half of fiscal 1998. For some time, the Company, 14 for book purposes, has been in a tax loss carryforward position. Generally accepted accounting principles prohibit the Company from recording a tax benefit under these circumstances. Liquidity and Capital Resources At May 31, 1999, the Company had cash and marketable securities aggregating $1,000. During the first half of fiscal 1999, the Company's operating activities provided $2,682,000 of cash compared to providing $1,193,000 of cash for the same period of the prior year. This increase in the cash provided was mainly attributable to the Company's improved collection of accounts receivable and a reduction of operating losses due to the restructuring in the second quarter of 1998. Investing activities used cash of $1,887,000 in the first half of fiscal 1999 compared to $2,300,000 of cash in the first half of fiscal 1998. The principal use of the cash in the first half of fiscal 1999 was $1,608,000 for capitalized product development. The principal uses of cash in the first half of fiscal 1998 included $2,063,000 for capitalized product development. Financing activities used $815,000 of cash in the first half of fiscal 1999 compared with providing $1,324,000 in the first half of fiscal 1998. The cash used in fiscal 1999 mainly reflected payments on the Company's borrowing facilities. As of May 31, 1999, the Company had $ 590,000 of availability under its $7,000,000 line of credit, which is based on the level of eligible accounts receivable. The Company's credit agreement with Foothill Capital Corporation contains certain restrictive covenants relating to income (EBITDA), tangible net worth, and level of capital expenditures. On May 25, 1999 the Company obtained an amendment from the lender raising the maximum revolving available amount to $7,000,000 subject to collateral availability and, also, granted an "Additional Availability Amount" of $750,000 in addition to the standard amount available under the existing collateral calculation. On July 14, 1999, the Company also obtained a waiver from the lender as a result of its failure to meet the tangible net worth and EBITDA covenants. In order to meet financial covenants in the future and to meet short term operational needs, the Company will need positive operational results in the short term. In the event that the Company's performance does not improve in the short term, the Company will need to secure additional waivers and/or alternative sources of financing or capital which could include the sale of assets, restructuring of the business, or other business transactions beneficial to the capital structure. The Company is continuing its review of alternative sources of financing and other strategic alternatives to deal with its current financial status. Although management believes that waivers and/or additional financing can be obtained, if needed, no assurance can be given that waivers or such additional financing will be available to the Company on acceptable terms. In the event that the 15 Company is unable to secure necessary waivers or additional financing, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund continuing operations at current levels. The Company currently has past due amounts with certain vendors. The Company has secured extended payment arrangements with some of these vendors and is in the process of securing similar arrangements with other vendors. There can be no assurance that the Company will be successful in extending these amounts owed to other vendors or that funds will be available to pay obligations as they arise. The Company is dependent on success in its selling efforts to build additional collateral that would allow for increased borrowing to meet these obligations. A lack of success in this endeavor could substantially impact the Company's ability to operate. As a result of its current financial situation, the Company, in accordance with generally accepted accounting principles, has reclassified all of its outstanding debt under its credit facility as short-term debt. All debt pertaining to the credit facility having cross-default provisions has been so reclassified regardless of whether or not covenant violations have occurred or are anticipated. The Company's report from its independent accountants for the year ended November 30, 1998, contains a going concern explanatory paragraph, pursuant to which the auditors expressed substantial doubt as to the Company's ability to continue as a going concern. Market Risk Due to the variable rate paid on the revolver portion of its credit facility, the Company is exposed to market risk from changes in interest rates. Generally, if the base rate on the revolver averaged 2% more in fiscal 1999 than in fiscal 1998, the Company's interest expense would increase by $45,000. This amount is determined by considering the impact of the hypothetical interest rate on the Company's borrowing cost, but does not consider the effects of the reduced level of economic activity that could exist in such an environment. The Company has not historically used financial instruments to hedge interest rate exposure and does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Year 2000 Compliance The Company faces "Year 2000" compliance issues similar to other companies in the manufacturing software industry. The problem relates to software systems and programs that use only two digits, rather than four digits, to represent a year. This does not allow processing of dates beyond the year 1999 and may result in incorrect calculations, reports or other information. Additionally, this may cause system failures from processors that are embedded in a multitude of devices. 16 To address the Year 2000 problem, the Company established a corporate readiness program which began in fiscal 1994 with a detailed analysis of the Company's software products sold to its customers. The Company had originally started addressing the changes to the program code of its software products for Year 2000 issues in 1985. The Company later, in 1998, added the analysis of internal systems and third party suppliers of both software and any other goods that may have Year 2000 problems. The Company has completed its detailed assessment plan and will submit it to the Board of Directors at the next session. State of Readiness Company's Products The Company's current products have been designed and tested for Year 2000 compliance. However, due to the complexity of software products, there can be no absolute assurance that the Company's software products contain all the necessary date code changes. The Company's versions of the software prior to version 5.1.2 in 1994 are known to contain code that is not Year 2000 compliant. In 1996, the Company notified customers of prior versions of this non-compliance and customers were offered upgrades and implementation assistance to migrate to a Year 2000 compliant version. The Company's agreements with the customers since 1992 do not expressly obligate the Company to furnish an updated version of the software that is Year 2000 compliant. The Company's analysis of contracts prior to 1992 indicate an immaterial level of Company obligation to furnish updated software. Internal Systems The Company is in the process of assessing the Year 2000 readiness of its internal computer information system and non-computer systems , such as telecommunications equipment, network equipment, etc., to determine whether such systems are Year 2000 compliant. A list of all mission critical items has been identified, and the Company expects to complete deployment of Year 2000 corrections on or around September of 1999. Third Party Reseller and Key Suppliers The Company has completed a comprehensive list of its resellers and key suppliers. With respect to certain of its most significant resellers and suppliers, the Company has already made inquiries to assess their readiness and has obtained published information indicating that they are in compliance. The Company expects to totally complete its assessment of all its resellers and key suppliers on or about September, 1999. 17 Costs The Company estimates the historical costs to remediate the Year 2000 issues have totaled $977,000 and future costs to remediate will be approximately $250,000. The Company expects to fund the future costs of remediation from operations. Risk Failure to correct critical Year 2000 issues could cause a serious interruption in business operations of the Company's customers and/or internal systems. Such interruptions could have a material impact on the Company's results of operations, liquidity, and financial condition. The Company is taking actions to minimize these risks, but no assurance can be given that all potential issues can be eliminated. Additionally, the effects of potential litigation can not be estimated and could also have a material effect on the results of operations. Finally, factors outside the Company's control could also cause disruption of business activities which could materially affect the results of operations. Contingency Plans The Company is in the process of evaluating contingency plans to handle the controllable risks regarding Year 2000 compliance. Certain of the risks such as lengthy power outages or communication failures may not be circumvented. A detailed plan of controllable risks is expected to be available in September, 1999. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DESCRIBED IN THE SECTION CAPTIONED "BUSINESS RISK FACTORS" IN ITEM 1 OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998, WHICH INCLUDE, BUT ARE NOT LIMITED TO, "FINANCIAL RESULTS FOR THE LAST THREE YEARS," "FINANCIAL 18 COVENANTS AND LIMITATIONS; LIQUIDITY," "SUCCESS OF RECENT RESTRUCTURING," "DEPENDENCE ON PRINCIPAL PRODUCTS," "BAAN RELATIONSHIP; DEPENDENCE ON THIRD PARTY SOFTWARE," "DEPENDENCE ON KEY EMPLOYEES" AND "CONTROL BY MANAGEMENT." Item 3. Quantitative and Qualitative Disclosure About Market Risk Reference is made to the information in Item 2 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation - Market Risk," which information is incorporated herein by reference. 19 Part II - Other Information Item 2. Changes in Securities and Use of Proceeds Pursuant to the terms of the Company's Series B 8% Convertible Redeemable Preferred Stock (the "Series B"), the Company was obligated to pay cumulative preferential dividends to the holders of the Series B on January 2, 1999, April 1, 1999 and July 1, 1999. With respect to each of the above-referenced dividend payment dates, the Board of Directors of the Company, in accordance with the terms of the Series B, having reviewed the cash situation of the Company, determined that the Company would pay the dividends in shares of Series B. Thus, on (i) January 2, 1999, in accordance with and pursuant to the terms of the Series B, 34.74 shares of the Series B were issued in payment of the dividends due the holders of the Series B, (ii) on April 1, 1999, in accordance with and pursuant to the terms of the Series B, 55.63 shares of the Series B were issued in payment of the dividends due the holders of the Series B and (iii) on July 1, 1999 in accordance with and pursuant to the terms of the Series B, 61.23 shares were issued in payment of the dividends due the holders of the Series B. Such shares of Series B were issued in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. 20 Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders held on May 4, 1999, Scott J. Mermel and Robert E. Weisenberg were elected as directors of the Company for terms expiring at the annual meeting in 2002. The following table sets forth certain information with respect to the election of Messrs. Mermel and Weisenberg as directors at the annual meeting: Name of Nominee Shares Voted For Shares Withholding Authority --------------- ---------------- ---------------------------- Scott J. Mermel 3,183,454 74,142 Robert E. Weisenberg 3,181,540 76,056 The following table sets forth the other directors of the Company whose terms continued after the 1999 annual meeting: Name of Nominee Term Expires --------------- ------------ Thomas M. Dykstra 2000 Elliot Wassarman 2000 Helmut M. Adam 2001 Michael D. Dunham 2001 21 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 4.1 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated April 13, 1999. 4.2 Fourth Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated May 25, 1999 4.3 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated July 14, 1999 10.1 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Michael D. Dunham and Effective Management Systems, Inc. effective March 19, 1999 10.2 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Thomas M. Dykstra and Effective Management Systems, Inc. effective March 19, 1999 10.3 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Richard W. Grelck and Effective Management Systems, Inc. effective March 19, 1999 10.4 Letter Agreement relating to employment of Jeffrey J. Fossum, dated May 4, 1999 27 Financial Data Schedule [EDGAR version only] (b) Reports on Form 8-K None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EFFECTIVE MANAGEMENT SYSTEMS, INC. July 14, 1999 By: /s/ MICHAEL D. DUNHAM Michael D. Dunham President (principal executive officer) By: /s/JEFFREY J. FOSSUM Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer (principal financial and accounting officer) 23 EXHIBIT INDEX EFFECTIVE MANAGEMENT SYSTEMS, INC. Exhibit Number Exhibits - -------------- ------- 4.1 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated April 13, 1999. 4.2 Fourth Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated May 25, 1999 4.3 Waiver to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated July 14, 1999 10.1 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Michael D. Dunham and Effective Management Systems, Inc. effective March 19, 1999 10.2 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Thomas M. Dykstra and Effective Management Systems, Inc. effective March 19, 1999 10.3 Employment, Confidentiality, Non-competition, and Severance Agreement by and between Richard W. Grelck and Effective Management Systems, Inc. effective March 19, 1999 10.4 Letter Agreement relating to employment of Jeffrey J. Fossum, dated May 4, 1999 27 Financial Data Schedule [EDGAR version only] 24 EX-4.1 2 WAIVER Exhibit 4.1 WAIVER THIS WAIVER (this "Waiver") is entered into as of April 13, 1999, among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of Illinois, Inc. (EMS-Illinois"), an Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement dated as of December 30, 1997, as amended (the "Loan Agreement"); WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net Worth (as defined in the Loan Agreement) for the fiscal quarter ended February 28, 1999 is approximately negative Six Million Seven Hundred Nineteen Thousand Dollars (-$6,719,000); WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined in the Loan Agreement) for the three month period ending February 28, 1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand Dollars (-$2,175,000); WHEREAS, as a result of the foregoing, Borrowers have breached Sections 7.20(a) and 7.20(b) of the Loan Agreement and Events of Default exist under Section 8.2 of the Loan Agreement; WHEREAS, Borrowers have requested that Lender waive the foregoing Events of Default and Lender has agreed to do so subject to the terms hereof; NOW THERFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Waiver. Subject to the reaffirmation by each Borrower of its representations and warranties under the Loan Agreement and its representations and warranties set forth herein and receipt by Lender of the waiver fee referred to below, Lender hereby waives the Events of Default arising solely as a result of the (i) Tangible Net Worth of Borrowers not being at least Four Million Dollars ($4,000,000) for the fiscal quarter ended February 28, 1999 and (ii) EBITDA of Borrowers not being at least negative Five Hundred Thousand Dollars (-$5,00,000) for the three month period ending February 28, 1999. The foregoing waiver shall not constitute a waiver of any other Event of Default that may exist, or a waiver of any future Event of Default that may occur (including, without limitation, any Event of Default occurring as a result of a breach of Section 7.20(a) or Section 7.20(b) as of any date or for any period ending after February 28, 1999). 3. Representations. In order to induce Lender to enter into this Waiver, Borrower hereby represents and warrants to Lender that: (a) The representations and warranties of each Borrower contained in the Loan Agreement, are true and correct as of the date hereof as if made on the date hereof; (b) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof (other than as described in Section 2 above); (c) The Tangible Net Worth of Borrowers as of February 28, 1999 is approximately negative Six Million Seven Hundred Nineteen Thousand Dollars (-$6,719,000); and (d) The EBITDA of Borrowers for the three month ending February 28, 1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand Dollars (-$2,175,000). 4. Waiver Fee. In consideration of the waiver described above, Borrowers agree to pay Lender a waiver fee of Five Thousand Dollars ($5,000) on the date hereof. The remainder of the page is intentionally left blank. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By ------------------------------------------- ------------------------------------------- Its President ------------------------------------------- EMS-EAST, Inc., a Massachusetts corporation By ------------------------------------------- ------------------------------------------- Its Treasurer ------------------------------------------- EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By ------------------------------------------- ------------------------------------------- Its Secretary ------------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By ------------------------------------------- ------------------------------------------- Its Vice President ------------------------------------------- EX-4.2 3 FOURTH AMENDMENT TO LOAN AGREEMENT Exhibit 4.2 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT (this "Amendment") is entered into as of May 25, 1999, among Effective Management systems, Inc. (EMS"), a Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems, of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement dated as of December 30, 1997 (the "Loan Agreement"); WHEREAS, Borrowers have requested that Lender amend the Loan Agreement, and Lender has agreed to do so subject to the terms and conditions contained herein; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 5 hereof, the Loan Agreement is amended as follows: (a) The definition of Maximum Amount" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated as follows: "Maximum Amount" means, as of any date of determination, the sum of (a) the Maximum Revolving Amount and (b) the then outstanding principal balance of the Term Loan; provided, that during the period commencing May 25, 1999 and ending July 31, 1999, the Maximum Amount shall not exceed $9,500,000. (b) The definition of "Maximum Revolving Amount" set forth in Section 1.1 of the Loan Agreement is hereby amended and restated as follows: "Maximum Revolving Amount" means (a) $7,000,000 during the period commencing May 25, 1999 and ending July 31, 1999 and (b) $5,000,000 at all times on and after August 1, 1999. (c) Section 2.1(a) of the Loan Agreement is hereby amended and restated in its entirety, as follows: (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrowers in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Revolving Amount less the outstanding balance of all undrawn or unreimbursed Letters of Credit, or (ii) the Borrowing Base less (A) the aggregate amount of all undrawn or unreimbursed Letters of Credit. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (x) the lesser of (I) 80% of Eligible Accounts of Borrowers, less the amount, if any, of the Dilution Reserve, and (ii) an amount equal to Borrowers' Collections with respect to Accounts of Borrowers for the immediately preceding 100 day period (provided, that such period may be adjusted for seasonality in Foothill's reasonable credit judgment), minus (y) the aggregate amount of reserves, if any, established by Foothill under Section 2.1(b), plus (z) the " Additional Availability Amount" (as defined below). The "Additional Availability Amount" means (i) during the period commencing on May 25, 1999 and ending on July 31, 1999 an amount equal to $750,000 and (ii) at all times on and after August 1, 1999 an amount equal to zero. (d) Section 2.1(c) of the Loan Agreement is hereby amended and restated in its entirety as follows: (c) Foothill shall have no obligation to make Advances hereunder to the extent they would cause (i) the outstanding Obligations (other than under the Term Loan) to exceed the Maximum Revolving Amount or (ii) the outstanding Obligations to exceed the Maximum Amount. 3. Ratification. This Amendment, subject to satisfaction of the conditions provided below, shall constitute amendments to the Loan Agreement and all of the Loan Documents as appropriate to express the agreements contained herein. In all other respects, the Loan Agreement and the Loan Documents shall remain unchanged and in full force and effect in accordance with their original terms. 4. Conditions to Effectiveness. Subject to Section 6 below, the amendments to the Loan Agreement set forth in this Amendment shall become effective as of the date of this Amendment and upon the satisfaction of the following conditions precedent in form and substance satisfactory to Lender: (a) Modification Fee. Borrower shall pay to Lender a modification fee equal to Twenty Thousand Dollars ($20,000). (b) No Default. No Event of Default or event which, with the giving of notice or the passage of time, or both, would become an Event of Default, shall have occurred and be continuing, and, after giving effect to the amendments contained herein, no Event of Default or event which, with the giving of notice or the passage of time, or both, would become an Event of Default, shall have occurred and be continuing. 5. Miscellaneous. (a) Warranties and Absence of Defaults. In order to induce Lender to enter into this Amendment, each Borrower hereby warrants to Lender, as of the date hereof, that: (i) The warranties of such Borrower contained in the Loan Agreement, as herein amended, are true and correct as of the date hereof as if made on the date hereof. (ii) All information, reports and other papers and data heretofore furnished to Lender by such Borrower in connection with this Amendment, the Loan Agreement and the other Loan Documents are accurate and correct in all material respects and complete insofar as may be necessary to give Lender true and accurate knowledge of the subject matter thereof. Such Borrower has disclosed to Lender every fact of which it is aware which would reasonably be expected to materially and adversely affect the business, operations or financial condition of such Borrower or the ability of such Borrower to perform its obligations under this Amendment, the Loan Agreement or under any of the other Loan Documents. None of the information furnished to Lender by or on behalf of such Borrower contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. (iii) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof. (b) Expenses. Borrowers agree to pay on demand all costs and expenses of Lender (including the reasonable fees and expenses of outside counsel for Lender) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. In addition, Borrowers agree to pay, and save Lender harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement, as amended hereby, and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided in this Section 6 (b) shall survive any termination of this Amendment and the Loan Agreement as amended hereby. (c) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of California. (d) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. (e) Reference to Loan Agreement. On and after the effectiveness of the amendment to the Loan Agreement accomplished hereby, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference to the Loan Agreement in any Loan Documents, or other agreements, documents or other instruments executed and delivered pursuant to the Loan Agreement, shall mean and be a reference to the Loan Agreement, as amended by this Amendment. (f) Successors. This Amendment shall be binding upon Borrowers, Lender and their respective successors and assigns, and shall inure to the benefit of Borrowers, Lender and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By ------------------------------------------- ------------------------------------------- Title President ------------------------------------------- EMS-EAST, Inc., a Massachusetts corporation By ------------------------------------------- ------------------------------------------- Title Treasurer ------------------------------------------- EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By ------------------------------------------- ------------------------------------------- Title Secretary ------------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By ---------------------------------------------- ---------------------------------------------- Title Vice President ---------------------------------------------- EX-4.3 4 WAIVER Exhibit 4.3 WAIVER THIS WAIVER (this "Waiver") is entered into as of July 14, 1999, among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement dated as of December 30, 1997, as amended (the "Loan Agreement"); WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net Worth (as defined in the Loan Agreement) for the fiscal quarter ended May 31, 1999 is approximately negative Eight Million Nine Hundred Sixty-Three Thousand Dollars (-$8,963,000); WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined in the Loan Agreement) for the three month period ending May 31, 1999 is approximately negative One Million Nine Hundred Forty-One Thousand Dollars (-$1,941,000); WHEREAS, as a result of the foregoing, Borrowers have breached Sections 7.20(a) and 7.20(b) of the Loan Agreement and Events of Default exist under Section 8.2 of the Loan Agreement; WHEREAS, Borrowers have requested that Lender waive the foregoing Events of Default and Lender has agreed to do so subject to the terms hereof; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Waiver. Subject to the reaffirmation by each Borrower of its representations and warranties under the Loan Agreement and its representations and warranties set forth herein and receipt by Lender of the waiver fee referred to below, Lender hereby waives the Events of Default arising solely as a result of the (i) Tangible Net Worth of Borrowers not being at least negative Three Million Five Hundred Thousand Dollars (-$3,500,000) plus the Equity Infusion Amount for the fiscal quarter ended May 31, 1999 and (ii) EBITDA of Borrowers not being at least Five Hundred Thousand Dollars ($500,000) for the three month period ending May 31, 1999. The foregoing waiver shall not constitute a waiver of any other Event of Default that may exist, or a wavier of any future Event of Default that may occur (including, without limitation, any Event of Default occurring as a result of a breach of Section 7.20(a) or Section 7.20(b) as of any date or for any period ending after May 31, 1999). 3. Representations. In order to induce Lender to enter into this Waiver, Borrower hereby represents and warrants to Lender that: (a) The representations and warranties of each Borrower contained in the Loan Agreement, are true and correct as of the date hereof as if made on the date hereof; (b) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof (other than as described in Section 2 above); (c) The Tangible Net Worth of Borrowers as of May 31, 1999 is approximately negative Eight Million Eight Hundred Eighty-Three Thousand Dollars (-$8,963,000); and (d) The EBITDA of Borrowers for the three month ending May 31, 1999 is approximately negative One Million Six Hundred Forty Thousand Dollars (-$1,941,000). 4. Waiver Fee. In consideration of the waiver described above, Borrowers agree to pay Lender a waiver fee of Two Thousand Five Hundred Dollars ($2,500) on the date hereof. The remainder of the page is intentionally left blank IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By____________________________________________________ Its___________________________________________________ EMS-EAST, INC., a Massachusetts corporation By____________________________________________________ Its___________________________________________________ EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By____________________________________________________ Its___________________________________________________ FOOTHILL CAPITAL CORPORATION By____________________________________________________ Its___________________________________________________ EX-10.1 5 AGREEMENT Exhibit 10.1 Employment, Confidentiality, Non-competition, and Severance Agreement (Agreement) 1. Recitations and Date. This Agreement is entered into by and between Effective Management Systems, Inc. (EMS) and Michael D. Dunham, its President and Chief Executive Officer (Executive) as of the 19th day of March, 1999. It is entered into in recognition and acknowledgement of the significant, crucial, and continuing beneficial and valuable services being performed by Executive at the request of EMS. 2. Employment. EMS hereby agrees to employ Executive and Executive agree to continue his employment with EMS. The term of this Agreement shall run from this date until the Separation Date as hereafter defined, unless the parties mutually agree otherwise (Term). 3. Duties. During the Term, Executive shall continue to perform the duties of the position he now has, as reasonably determined by the Board, consistent with the level of authority and responsibility he now has (Duties). 4. Compensation. Executive's base salary shall not, during the Term, be reduced from its current level unless there is a corporate wide reduction applicable to all executives of EMS, in which case his then current base salary shall be proportionally reduced for the duration of such reduction. Executive shall receive such bonuses and stock options as are determined by the Compensation Committee of the Board. 5. Benefits. Executive shall continue to receive benefits equivalent to those he presently receives, including health, dental, life, disability, auto, and MAC membership, and such other benefits as are generally made available to employees and executives of EMS. 6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive acknowledges the ongoing obligation he has to EMS to disclose and assign inventions as well as maintain the confidentiality of proprietary and sensitive business information pursuant to the agreement presently in effect between the parties dated 2/12/81, a copy of which is attached hereto for reference purposes. 7. No Prior Agreements. Except as set forth in paragraph 6, the parties acknowledge that this is the sole agreement between them with respect to these subject matters and, to the extent any such prior agreements exist, whether verbal or written, they are hereby revoked. 8. Non-Solicitation of Employees. For a period equal to the longer of one year from the Separation Date, regardless of cause or initiating party, or the length of the Severance period thereafter, Executive shall not, directly or indirectly, induce or attempt to induce any employee of EMS, including its presently existing Affiliates (at least 50% of the voting stock owned by EMS), to leave the employ of EMS. 9. Non-competition Period. During the Term of this Agreement, and for a period equal to the length of any Severance period thereafter, Executive shall not directly or indirectly, own any interest in (other than not more than 5% passive stock ownership in a publicly traded company), participate in, consult with, or render any services for any business which is planning, considering, or does develop, market, or service ERP software anywhere in the world in the mid-market segment (businesses with up to $100 million in annual revenue). 10. Separation Date. Separation Date is the date either party elects to terminate this Agreement. the consequences of such termination depend on the party initiating the termination and the circumstances associated with such termination. a. If Executive quits for a non Event reason or is terminated for Cause, there shall be no Severance (each term as hereafter defined) and Executive shall receive only such benefits and compensation as any terminating employee would be entitled to such as accrued vacation pay and earned but not yet paid compensation. b. If EMS terminates Executive without Cause at any time hereafter, Executive shall be entitled to receive Severance for a period of time depending on whether the termination i) preceded a Change in Control, ii) followed an Asset Change in Control, or iii) followed a Shareholder Change in Control. If circumstance i) applies, the Severance period shall be 12 months, if ii), the Severance period shall be 18 months, and if iii), the Severance period shall be 15 months. c. If EMS materially changes the Duties of Executive at any time after the date of this Agreement (an Event), Executive may elect to treat such action as a termination under b) above and the appropriate Severance shall apply depending on whether circumstance i), ii), or iii) is present, except that, in the event of an Asset Change in Control, the consequent change in authority and responsibility solely resulting from such reduction in business operations, shall not be deemed an Event without the requisite Board change. 11. Definitions. a. Cause shall mean i) a final non-appealable felony conviction which substantially impairs employee's ability to perform his duties or ii) intentional bad faith conduct which causes demonstrable serious financial injury to EMS evidenced by a binding final judgement, order, or decree. b. Change in Control shall mean the acquisition by any corporation or group of associated persons acting in concert, excluding Affiliates, if any, of EMS as of this date, of an aggregate of more than i) 25% of the outstanding shares of voting stock of EMS coupled with or followed by the election as directors of EMS of persons who were not directors at the time of such acquisition and such persons shall become a majority of the Board (Shareholder Change in Control) or ii) 50% of the assets of EMS (as reasonably determined by EMS' auditors according to generally acceptable accounting principles) coupled with the same director change as in i) (Asset Change in Control). c. Severance shall mean the making in advance of payments to Executive (without any withholdings), equivalent to his gross monthly base salary amount, for 9 months with a lump sum payment of any remaining salary equivalent payments due for the duration of Severance at the 10th month. Severance shall also include continuation for the entire Severance period of health, dental, group life, and disability as then in effect but not less than in effect as of this date. Severance shall also include, regardless of Severance period duration, 6 months continuing use of his company car, car phone, lap top, company voice and email, and MAC membership and six months (6) executive outplacement with R I Thompson or equivalent. Severance shall also effect an amendment to any outstanding option grants immediately accelerating the vesting of all then unvested options and extending the time to exercise all vested options to 12 months from such date. 12. Legal Interpretation. If any provision of this Agreement is found to be in conflict with provisions of any applicable law, the parties desire that such conflict not invalidate the entire Agreement and that it be construed to invalidate only the conflicting provisions and, where possible, to reduce the duration or scope of a conflicting provision to the maximum permitted by law. This Agreement shall be governed by the laws of the State of Wisconsin without giving effect to any choice of law or conflict of law rules or provisions. 13. Other Terms. Both parties agree that any public announcement of any separation, except for Cause, shall require their mutual consent as to the content, subject only to SEC or equivalent requirements. The parties also agree not to, at any time, make any comments concerning the other to media, prospective or actual employers, employees, customers, or prospects which could be reasonably construed as being in any way derogatory or negative of the other. 14. Costs of Enforcement. In an enforcement action relating to this Agreement, the prevailing party, whether claimant or respondent, following a final non-appealable decision, shall be immediately reimbursed by the other party for all its reasonable out-of-pocket costs incurred during such action including attorneys' fees. 15. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns, heirs, executors, and administrators of the parties except that Executive may not assign or delegate his duties hereunder. 16. Termination. This Agreement may be terminated only upon mutual written agreement of the parties. Signed at Milwaukee, WI upon the date set forth above. Effective Management Systems, Inc. Executive By: _________________________ By: ___________________________ Title an individual Witness: ___________________ Witness: ______________________ EX-10.2 6 AGREEMENT Exhibit 10.2 Employment, Confidentiality, Non-competition, and Severance Agreement (Agreement) 1. Recitations and Date. This Agreement is entered into by and between Effective Management Systems, Inc. (EMS) and Thomas M. Dykstra, its Vice President, Secretary, and Treasurer (Executive) as of the 19th day of March, 1999. It is entered into in recognition and acknowledgement of the significant, crucial, and continuing beneficial and valuable services being performed by Executive at the request of EMS. 2. Employment. EMS hereby agrees to employ Executive and Executive agree to continue his employment with EMS. The term of this Agreement shall run from this date until the Separation Date as hereafter defined, unless the parties mutually agree otherwise (Term). 3. Duties. During the Term, Executive shall continue to perform the duties of the position he now has, as reasonably determined by the Board, consistent with the level of authority and responsibility he now has (Duties). 4. Compensation. Executive's base salary shall not, during the Term, be reduced from its current level unless there is a corporate wide reduction applicable to all executives of EMS, in which case his then current base salary shall be proportionally reduced for the duration of such reduction. Executive shall receive such bonuses and stock options as are determined by the Compensation Committee of the Board. 5. Benefits. Executive shall continue to receive benefits equivalent to those he presently receives, including health, dental, life, disability, and auto, and such other benefits as are generally made available to employees and executives of EMS. 6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive acknowledges the ongoing obligation he has to EMS to disclose and assign inventions as well as maintain the confidentiality of proprietary and sensitive business information pursuant to the agreement presently in effect between the parties dated February 12, 1981, a copy of which is attached hereto for reference purposes. 7. No Prior Agreements. Except as set forth in paragraph 6, the parties acknowledge that this is the sole agreement between them with respect to these subject matters and, to the extent any such prior agreements exist, whether verbal or written, they are hereby revoked. 8. Non-Solicitation of Employees. For one year from the Separation Date, regardless of cause or initiating party, Executive shall not, directly or indirectly, induce or attempt to induce any employee of EMS, including its presently existing Affiliates (at least 50% of the voting stock owned by EMS), to leave the employ of EMS. 9. Noncompetition. During the Term of this Agreement and for a period equal to the length of any Severance period thereafter, Executive shall not directly or indirectly, own any interest in (other than not more than 5% passive stock ownership in a publicly traded company), participate in, consult with, or render any services for any business which is planning, considering, or does develop, market, or service ERP software anywhere in the United States in the mid-market segment (businesses with up to $100 million in annual revenue). Notwithstanding the above, this restriction shall not apply to Executive becoming employed by the Synergex Corporation after an Asset Change in Control involving the Synergex Corporation. 10. Separation Date. Separation Date is the date either party elects to terminate this Agreement. the consequences of such termination depend on the party initiating the termination and the circumstances associated with such termination. a. If Executive quits for a non Event reason or is terminated for Cause, there shall be no Severance (each term as hereafter defined) and Executive shall receive only such benefits and compensation as any terminating employee would be entitled to such as accrued vacation pay and earned but not yet paid compensation. b. If EMS terminates Executive without Cause at any time hereafter, Executive shall be entitled to receive Severance for a period of 9 months, whether the termination i) preceded a Change in Control, ii) followed an Asset Change in Control, or iii) followed a Shareholder Change in Control. c. If EMS materially changes the Duties of Executive at any time after the date of this Agreement (an Event), Executive may elect to treat such action as a termination under b) above and the appropriate Severance shall apply depending on whether circumstance i), ii), or iii) is present, except that in the event of an Asset Change in Control, the consequent change in authority and responsibility solely resulting from such reduction in business operations, shall not be deemed an Event without the requisite Board change. 11. Definitions. a. Cause shall mean i) a final non-appealable felony conviction which substantially impairs employee's ability to perform his duties or ii) intentional bad faith conduct which causes demonstrable serious financial injury to EMS evidenced by a binding final judgement, order, or decree. b. Change in Control shall mean the acquisition by any corporation or group of associated persons acting in concert, excluding Affiliates, if any, of EMS as of this date, of an aggregate of more than i) 25% of the outstanding shares of voting stock of EMS coupled with or followed by the election as directors of EMS of persons who were not directors at the time of such acquisition and such persons shall become a majority of the Board (Shareholder Change in Control) or ii) 50% of the assets of EMS (as reasonably determined by EMS' auditors according to generally accepted accounting principles) coupled with the same director change as in i) (Asset Change in Control) except that a sale of EMS' installed base assets to Synergex Corporation, whether or not 50% of the assets and with or without the director change, shall be deemed an Asset Change in Control. c. Severance shall mean the making in advance of payments to Executive (without any withholdings), equivalent to his gross monthly base salary amount, for 9 months with a lump sum payment of any remaining payments due for the duration of Severance at the 10th month. Severance shall also include continuation for the entire Severance period of health, dental, group life, and disability as then in effect but not less than in effect as of this date. Severance shall also include, regardless of Severance period duration, 6 months continuing use of his company car, car phone, lap top, and company voice and email, and 6 months executive outplacement with R I Thompson or equivalent. Severance shall also effect an amendment to any outstanding option grants immediately accelerating the vesting of all then unvested options and extending the time to exercise all vested options to 12 months from such date. In the case of a Synergex Asset Change in Control, the severance payments period shall be 8 months and include a payment equivalent to the forgiveness of Executive's personal debt to EMS of approximately $35,000 plus payment of the difference, as reasonably determined by EMS, to gross up the total to cover applicable state and federal taxes from the forgiveness, which forgiveness shall occur and gross up payment shall be made at the closing date of such transaction. 12. Legal Interpretation. If any provision of this Agreement is found to be in conflict with provisions of any applicable law, the parties desire that such conflict not invalidate the entire Agreement and that it be construed to invalidate only the conflicting provisions and where possible to reduce the duration or scope of a conflicting provision to the maximum permitted by law. This Agreement shall be governed by the laws of the State of Wisconsin without giving effect to any choice of law or conflict of law rules or provisions. 13. Other Terms. Both parties agree that any public announcement of any separation, except for Cause, shall require their mutual consent as to the content, subject only to SEC or equivalent requirements. The parties also agree not to, at any time, make any comments concerning the other to media, prospective or actual employers, employees, customers, or prospects which could be reasonably construed as being in any way derogatory or negative of the other. 14. Costs of Enforcement In an enforcement action relating to this Agreement, the prevailing party, whether claimant or respondent, following a final non-appealable decision, shall be immediately reimbursed by the other party for all its reasonable out-of-pocket costs incurred during such action including attorneys' fees. 15. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns, heirs, executors, and administrators of the parties except that Executive may not assign or delegate his duties hereunder. 16. Termination. This Agreement may be terminated only upon mutual written agreement of the parties. Signed at Milwaukee, WI upon the date set forth above. Effective Management Systems, Inc. Executive By: _________________________ By: ___________________________ Title an individual Witness: ___________________ Witness: ______________________ EX-10.3 7 AGREEMENT Exhibit 10.3 Employment, Confidentiality, Non-competition, and Severance Agreement (Agreement) 1. Recitations and Date. This Agreement is entered into by and between Effective Management Systems, Inc. (EMS) and Richard W. Grelck, its Chief Operating Officer (Executive) as of the 19th day of March, 1999. It is entered into in recognition and acknowledgement of the significant, crucial and continuing beneficial and valuable services being performed by Executive at the request of EMS. 2. Employment. EMS hereby agrees to employ Executive and Executive agree to continue his employment with EMS. The term of this Agreement shall run from this date until the Separation Date as hereafter defined, unless the parties mutually agree otherwise (Term). 3. Duties. During the Term, Executive shall continue to perform the duties of the position he now has, as reasonably determined by the Board, consistent with the level of authority and responsibility he now has (Duties). 4. Compensation. Executive's base salary shall not, during the Term, be reduced from its current level unless there is a corporate wide reduction applicable to all executives of EMS, in which case his then current base salary shall be proportionally reduced for the duration of such reduction. Executive shall receive such bonuses and stock options as are determined by the Compensation Committee of the Board. 5. Benefits. Executive shall continue to receive benefits equivalent to those he presently receives, including health, dental, life, disability, and auto, and such other benefits as are generally made available to employees and executives of EMS. 6. Reaffirmation of Inventions and Non-disclosure Agreement. Executive acknowledges the ongoing obligation he has to EMS to disclose and assign inventions as well as maintain the confidentiality of proprietary and sensitive business information pursuant to the agreement presently in effect between the parties dated 7/2/87, a copy of which is attached hereto for reference purposes. 7. No Prior Agreements. Except as set forth in paragraph 6, the parties acknowledge that this is the sole agreement between them with respect to these subject matters and, to the extent any such prior agreements exist, whether verbal or written, they are hereby revoked. 8. Non-Solicitation of Employees. For one year from the Separation Date, regardless of cause or initiating party, Executive shall not, directly or indirectly, induce or attempt to induce any employee of EMS, including its presently existing Affiliates (at least 50% of the voting stock owned by EMS), to leave the employ of EMS. 9. Noncompetition. During the Term of this Agreement, and for a period equal to the length of any Severance period thereafter, Executive shall not directly or indirectly, own any interest in (other than not more than 5% passive stock ownership in a publicly traded company), participate in, consult with, or render any services for any business which is planning, considering, or does develop, market, or service ERP software anywhere in the United States in the mid-market segment (businesses with up to $100 million in annual revenue). 10. Separation Date. Separation Date is the date either party elects to terminate this Agreement. the consequences of such termination depend on the party initiating the termination and the circumstances associated with such termination. a. If Executive quits for a non Event reason or is terminated for Cause, there shall be no Severance (each term as hereafter defined) and Executive shall receive only such benefits and compensation as any terminating employee would be entitled to such as accrued vacation pay and earned but not yet paid compensation. b. If EMS terminates Executive without Cause at any time hereafter, Executive shall be entitled to receive Severance for a period of time depending on whether the termination i) preceded a Change in Control, ii) followed an Asset Change in Control, or iii) followed a Shareholder Change in Control. If circumstance i) applies, the Severance period shall be 9 months, and if ii) or iii), the Severance period shall be 12 months. c. If EMS materially changes the Duties of Executive at any time after the date of this Agreement (an Event), Executive may elect to treat such action as a termination under b) above and the appropriate Severance shall apply depending on whether circumstance i), ii), or iii) is present except that, in the event of an Asset Change in Control, the consequent change in authority and responsibility solely resulting from such reduction in business operations, shall not be deemed an Event without requisite Board change. 11. Definitions. a. Cause shall mean i) a final non-appealable felony conviction which substantially impairs employee's ability to perform his duties or ii) intentional bad faith conduct which causes demonstrable serious financial injury to EMS evidenced by a binding final judgement, order, or decree. b. Change in Control shall mean the acquisition by any corporation or group of associated persons acting in concert, excluding Affiliates, if any, of EMS as of this date, of an aggregate of more than i) 25% of the outstanding shares of voting stock of EMS coupled with or followed by the election as directors of EMS of persons who were not directors at the time of such acquisition and such persons shall become a majority of the Board (Shareholder Change in Control) or ii) 50% of the assets of EMS (as reasonably determined by EMS' auditors according to generally accepted accounting principles) coupled with the same director change as in i) (Asset Change in Control). c. Severance shall mean the making in advance of payments to Executive (without any withholdings), equivalent to his gross monthly base salary amount, for 9 months with a lump sum payment of any remaining payments due for the duration of Severance at the 10th month. Severance shall also include continuation for the entire Severance period of health, dental, group life, and disability as then in effect but not less than in effect as of this date. Severance shall also include, regardless of Severance period duration, 6 months continuing use of his company car, car phone, lap top, and company voice and email, and six (6) months executive outplacement with R I Thompson or equivalent. Severance shall also effect an amendment to any outstanding option grants immediately accelerating the vesting of all then unvested options and extending the time to exercise all vested options to 12 months from such date. 12. Legal Interpretation. If any provision of this Agreement is found to be in conflict with provisions of any applicable law, the parties desire that such conflict not invalidate the entire Agreement and that it be construed to invalidate only the conflicting provisions and, where possible, to reduce the duration or scope of a conflicting provision to the maximum permitted by law. This Agreement shall be governed by the laws of the State of Wisconsin without giving effect to any choice of law or conflict of law rules or provisions. 13. Other Terms. Both parties agree that any public announcement of any separation, except for Cause, shall require their mutual consent as to the content, subject only to SEC or equivalent requirements. The parties also agree not to, at any time, make any comments concerning the other to media, prospective or actual employers, employees, customers, or prospects which could be reasonably construed as being in any way derogatory or negative of the other. 14. Costs of Enforcement. In an enforcement action relating to this Agreement, the prevailing party, whether claimant or respondent, following a final non-appealable decision, shall be immediately reimbursed by the other party for all its reasonable out-of-pocket costs incurred during such action including attorneys' fees. 15. Successors. This Agreement shall inure to the benefit of and be binding upon the successors and assigns, heirs, executors, and administrators of the parties except that Executive may not assign or delegate his duties hereunder. 16. Termination. This Agreement may be terminated only upon mutual written agreement of the parties. Signed at Milwaukee, WI upon the date set forth above. Effective Management Systems, Inc. Executive Effective Management Systems, Inc. Executive By: _________________________ By: ___________________________ Title an individual Witness: ___________________ Witness: ______________________ EX-10.4 8 LETTER AGREEMENT Exhibit 10.4 May 4, 1999 Jeff Fossum Effective Management Systems, Inc. 12000 W. Park Place Milwaukee, WI 53224 Dear Jeff: This letter outlines the agreement we have reached concerning your employment at EMS during the next two years. This agreement replaces in total the Special Compensation and Separation Agreement between you and EMS dated January 1, 1998. o Your employment will not be terminated by EMS, except for gross misconduct, during the period of March 1, 1999 through February 28, 2001, providing you lend your best efforts to achieve the following two assignments: 1) Support an orderly transition as you phase out of your current position as CFO into your new position as a pre-sales consultant in the Baan Sales & Marketing Group. a) The transition period will begin on April 15, 1999 and continue through July 15th 1999. The approximate time dedicated to your CFO duties is as follows: i) April 15th through April 30th: 8 work days ii) May 1st through May 31st: 14 days iii) June 1st through June 30th: 8 days iv) July1st through July 15th: 5 days You will make schedule provisions to assist at monthly and quarterly closings and be available to lead the preparation of the 10Q report due on July 15, 1999. You also may be called upon to assist in merger or sale of product line negotiations during this period. During this period, this will take precedence over the above schedule at the discretion of the President. Aside from this, your major assignment in this period is to assist the COO in reorganizing the corporate finance and accounting functions to: o Create a corporate headquarters function at the Naperville office. o Retain a stable accounting group at the Milwaukee office to support TCM operations o Assist in revising our banking and auditing relationships as appropriate to the requirements of any corporate restructuring ensuing from merger or sale of a product line. 2) Lend your best efforts to perform as a pre-sales consultant in the Baan Sales & Marketing Group according to the EMS Pre-Sales Consultant 1999 Compensation Plan attached as exhibit A. o Your base salary will be increased to $110,000 per annum effective November 1, 1998. Retroactive pay will be made on March 15, 1998 for the period of November 1, 1998 through February 28, 1999. o Your base salary will be adjusted to $60,000 for the period of July 16, 1999 through July 15, 2000 when you have fully transitioned to the position of pre-sales consultant. o Your base will be increased to $110,000 on July 16, 2000. o You will receive a payment for your accrued 1998 vacation of 3 weeks minus 2-1/2 days on March 31, 1999. o Beginning on July 16, 1999, you will be entitled to Gross Margin Commission Payments according to the EMS Pre-Sales Consultant 1999 Compensation Plan attached as exhibit A. You will be offered opportunities to earn commissions on an equal basis to other pre-sales consultants. o You were granted 25,000 options to purchase EMS common stock. The options have a 10 year term. They vest as follows: 30% immediately, 60% at the end of the first year and 100% at the end of the second year. The options were issued April 8, 1999 at the then current market value of a share of EMS common stock. Sincerely, Richard W. Grelck COO Memorandum To: Pre-Sales Consultant From: Manager CC: Human resources Date: re: Your EMS Pre-Sales Consultant 1999 Compensation Plan Pre-Sales Consulting Role As an EMS Pre-Sales Consultant, you, together with each Sales Representative, play a vital role in generating significant sales revenue and gross margin for EMS. During the sales process with prospects and customers, your responsibilities are to assess the degree of application fit, to help set good customer expectations, to present application software in the context of needs of the prospect, and to convey how the application will benefit the customer. Working as a team with the Sales Representatives and Managers, you play a key role in bringing in good, profitable business for EMS. Pre-Sales Consulting Tasks Generating significant sales revenue and gross margin is facilitated through sales consulting activities including: Conducting prospect surveys to identify key business issues Relating key business issues to Baan functionality Preparing and presenting compelling "Proof of Concept" product demonstrations Assisting the Sales Representatives in developing Sales Strategy Conducting prospect seminars Innovating and applying new approaches and techniques A strong desire to work as a team with Sales Representatives andother Consultants Continually embracing new functional and technological products Pre-Sales Consulting Compensation At plan, your annual compensation is $ . The fixed portion consists of an annual salary of $ paid semi-monthly and effective . The variable portion, a commission based entirely upon the gross margin you generate, is targeted at $60,000 annually, paid on a monthly basis in the month following shipment, with commission credit beginning as of December 1, 1998. Because of your proven sales consulting abilities, you are entitled to use of a company car, assuming you maintain a satisfactory driving record. When you elect to acquire a company car, the company will cover up to the standard lease allowance, currently at $425/month. If the car you select costs more, then you must pay the difference. If the car you select costs less, then the company will only pay the amount of the lease payment. Given you recently signed a private lease agreement for a car, until you decide to acquire a company car, EMS will reimburse you for your existing lease cost up to the rate of $425/month (submitted on monthly expenses). You are also entitled to reimbursement for routine maintenance not covered under warrantee. With your own car, you will remain responsible for all other operating expenses and insurance. EMS will reimburse you for all gasoline, less the standard deduction for personal use, currently at $60.00/month. (This, of course, means that you may no longer expense EMS for mileage.) We do recommend that you keep track of business use for tax records, if needed. You will be reimbursed for routine business expenses subject to EMS prevailing policies. You are eligible for EMS profit sharing and employee benefits, as defined by the prevailing EMS policies. Leveraged Commission Rates Your monthly gross margin objective is $ , or $ for the fiscal year. You are paid a commission rate of 5% for all gross margin earned up to $ . As an added reward, you will be paid at a higher, 7% rate for all gross margin generated over $ for the fiscal year. Gross Margin Commission Payment Rules Commissions are payable to you in the month following shipment to a customer in whose sale you contributed toward. Commissions are calculated for all gross margin generated by you, as credited to the EMS Baan Division, for all software and hardware, at net price less actual cost. Commissions are calculated for the first year of upgrade and support plans at price less 35% of list price. Because shipments are sometimes staggered, commission payment is calculated for any shipments of these types of products for that customer, for the first 6 months after the date of the first shipment. Subject to management review, credit will also be provided for additional users/phases that were identified on the original contract, but shipped later without the need for additional pre-sales effort. Commissions already paid on an order which later becomes uncollectable is credited back on the commission statement at the end of the month in which the charge-back occurred. Gross Margin Splits When you work the deal alone, you earn commission based upon 100% of the gross margin. When multiple consultants are involved in performing the demo, then a gross margin split percentage is determined, with the total credit application being 120%. For example, when you work the deal alone, but others assisted with net meeting demos, you still receive 100%. When you contribute with a netmeeting demo on someone else's deal, you receive 20% gross margin credit. When you lead the deal, and another assisted on-site, then a gross margin split is mutually determined. It may be a 80%/40% split. If both contributed equally, it would be a 60%/60% split. Note that helping others to prepare, training others, and completing RFP's are tasks expected of everyone, and commission credit is not applied. Payments After Termination If employment termination is initiated by either party, an immediate freeze on commission payments will be placed by the Accounting Department. Sixty days after the date of termination, a calculation of commissions due the employee or owed to the company will be made as follows: + Commissions Earned, but Unpaid - Commissions Unearned, but Paid ------------------------------------------------------------------------- = Commission Amount Due or Owed Back I look forward to an exciting and productive year of working together to achieve our goals and help EMS succeed in its sales mission. Acceptance Each party has read this plan, understands its contents and agrees to be bound by it. This plan must be signed in order to receive commission payments. EMS reserves the right to change this plan at any time. Signature__________________________ Signature ________________________ Date __________________________ Date ________________________ EX-27 9 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF AND FOR THE THREE MONTHS ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS NOV-30-1999 NOV-30-1998 MAY-31-1999 1 0 6,841 (147) 278 7,725 10,163 (7,400) 18,184 17,784 0 0 1,370 41 (1,927) 18,184 558 16,096 461 19,922 344 244 352 (4,170) 0 (4,170) 0 0 0 (4,170) (1.01) 0 Not required to be calculated in accordance with generally accepted accounting principles.
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