U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED August 31, 1996
[ ] TRANSITION REPORT UNDER 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 the small business issuer 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)
414-359-9800
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class Outstanding as of August 31, 1996
Common Stock, $.01 par value 3,978,643
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-QSB
August 31, 1996
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets at
August 31, 1996 and November 30, 1995 3
Consolidated Statements of Income for the Three and Nine
Month Periods Ended August, 31, 1996 and August 31, 1995 5
Consolidated Statements of Cash Flows for the
Nine Months Ended August 31, 1996 and August 31, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1995 amounts)
ASSETS 31-Aug 30-Nov
1996 1995
CURRENT ASSETS
Cash $ 17 $ 335
Investments in available-for-sale
securities 1,010 1,263
Accounts Receivable:
Trade, less allowance for
doubtful accounts 9,515 9,402
Related Parties 796 652
Inventories 668 518
Refundable Income Taxes 385 462
Deferred Income Taxes 157 157
Prepaid Expenses and Other Current
Assets 221 197
------ ------
TOTAL CURRENT ASSETS 12,769 12,986
LONG TERM ASSETS
Computer Software, net 5,024 4,000
Investments in and Advances to
Unconsolidated Joint Ventures 193 179
Equipment and Leasehold Improvements, net 3,466 3,223
Intangible Assets, net 3,462 3,387
Other Assets 573 557
------ ------
TOTAL LONG TERM ASSETS 12,718 11,346
------ ------
TOTAL ASSETS $ 25,487 $ 24,332
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited except for November 30, 1995
amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 31-Aug 30-Nov
1996 1995
CURRENT LIABILITIES
Accounts Payable $ 1,558 $ 2,076
Accrued Liabilities 1,579 2,182
Income Taxes Payable (372) -
Deferred Revenues 4,200 3,735
Customer Deposits 42 227
Current portion of:
Long-term Obligations 26 89
------- -------
TOTAL CURRENT LIABILITIES 7,033 8,309
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 435 532
Long-term Obligations 2,896 21
Deferred Income Taxes 1,293 1,293
------- -------
TOTAL LONG TERM LIABILITIES 4,624 1,846
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized
3,000,000 shares; none issued or
outstanding - -
Common Stock, $.01 par value; authorized
20,000,000 shares; issued 3,981,268 and
3,906,105 shares; outstanding 3,978,643
and 3,903,480 shares 40 39
Common Stock Warrants 3 3
Common Stock and Warrants to be issued 211
Additional Paid- in Capital 11,035 10,662
Retained Earnings 2,757 3,267
Cost of Common Stock in Treasury
(2,625 shares) (5) (5)
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,830 14,177
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,487 $ 24,332
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) (unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
31-Aug 31-Aug 31-Aug 31-Aug
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES:
Software license fees $ 4,040 $ 2,047 $ 11,970 $ 6,828
Services 3,755 3,055 11,152 7,706
Hardware 1,278 2,128 5,297 4,868
--------- --------- --------- ---------
Total net revenues $ 9,073 $ 7,230 $ 28,419 $ 19,402
COST OF PRODUCTS AND SERVICES
Software license fees 922 664 2,587 1,658
Services 3,017 2,172 8,668 5,360
Hardware and other 844 1,573 3,932 3,779
--------- --------- --------- ---------
Total cost of products and services $ 4,783 $ 4,409 $ 15,187 $ 10,797
Selling and marketing expenses 3,311 2,412 9,825 6,396
General and administrative expenses 942 663 2,736 1,892
Product development expenses 580 353 1,547 840
--------- --------- --------- ---------
Total costs and operating expenses $ 9,616 $ 7,837 $ 29,295 $ 19,925
--------- --------- --------- ---------
INCOME(LOSS) FROM OPERATIONS $ (543) $ (607) $ (876) $ (523)
Other (Income)/ Expense
Equity (earnings)/loss of unconsolidated
joint ventures - 67 (3) 10
Interest (income) (22) (58) (72) (140)
Interest expense 45 29 82 47
--------- --------- --------- ---------
23 38 7 (83)
--------- --------- --------- ---------
INCOME(LOSS) BEFORE INCOME TAXES $ (566) $ (645) $ (883) $ (440)
Income Taxes Expense(Benefit) (233) (255) (372) (218)
--------- --------- --------- ---------
NET INCOME(LOSS) $ (333) $ (390) $ (511) $ (222)
========= ========= ========= =========
Earnings(Loss) per share ($0.08) ($0.11) ($0.13) ($0.06)
Weighted average common and 3,973 3,634 3,952 3,591
equivalent shares outstanding
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
NINE MONTHS ENDED
31-August 31-August
1996 1995
OPERATING ACTIVITIES
Net Income(Loss) $ (511) $ (222)
Adjustments to reconcile net income(loss) to
net cash provided(used) by operating activities:
Depreciation and amortization 1,010 554
Amortization of capitalized computer software
development costs 1,407 627
Equity in earnings of joint ventures - (41)
Changes in operating assets and liabilities:
Accounts Receivable 3 893
Inventories and other current assets (353 140
Accounts payable and other liabilities (1,431) (1,644)
-------- -------
Total adjustments 671 529
Net cash provided(used) by operating activities 160 307
INVESTING ACTIVITIES
Additions to equipment and leasehold inprovement (1,056) (1,122)
Proceeds from sale (purchase) of securities 253 1,817
Purchase of Affiliate 20 (219)
Software development costs capitalized (2,431) (1,299)
Other (29) -
-------- -------
Net cash provided(used) in investing activities (3,243) (823)
FINANCING ACTIVITIES
Proceeds from exercise of stock options - 116
Proceeds(payments) on long-term debt and
other notes payable 2,734 177
Additional paid in capital 31 -
-------- -------
Net cash provided(used) by financing activities 2,765 293
-------- -------
Net increase (decrease) in cash $ (318) $ (223)
Cash-beginning of period 335 280
Cash-end of period 17 57
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1996
(Unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated interim financial statements included
herein have been prepared by Effective Management Systems, Inc. (the
"Company"), without an audit, in accordance with generally accepted
accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
made are adequate to make the information presented not misleading.
In the opinion of management, the information furnished for the three
and nine month periods ended August 31, 1996 and 1995 include all
adjustments, consisting solely of normal recurring accruals, necessary for
a fair presentation of the financial results for the respective interim
periods and is not necessarily indicative of the results of operations to
be expected for the entire fiscal year ending November 30, 1996. It is
suggested that the interim financial statements be read in conjunction
with the audited consolidated financial statements for the year ended
November 30, 1995 included in the Company's Form 10-KSB filed with the
Securities and Exchange Commission.
Note 2 - Acquisitions
Effective March 31, 1995, the Company completed the purchase for
$793,000 of the remaining 50% of the capital stock of Effective Management
Systems, Inc of Illinois ("EMS-ILL") not then owned by the Company. The
purchase price consisted of (a) 50,200 shares of the Company's common
stock valued at $395,000 which were exchanged for 9,200 shares of the
capital stock of EMS-ILL, (b) $380,000 in cash and (c) $18,000 of
acquisition costs.
On September 6, 1995, the Company acquired all of the common stock of
Intercim Corporation for approximately $3,355,000 comprised of 278,193
shares of the Company's common stock valued at $7.50 per share; 278,193 of
the Company's warrants valued at $3.75 per warrant; and direct acquisition
costs of $225,000.
On May 18, 1996, the Company issued additional warrants pursuant to
the Agreement and Plan of Merger, dated as of February 17, 1995, by and
among the Company, EMS Acquisition Corporation and Intercim Corporation.
As of the record date of April 18, 1996, each holder of a warrant was
entitled to receive .4459 additional warrants. A total of 123,719
additional warrants were issued.
The acquisition of the remaining interest in EMS-ILL and the
acquisition of Intercim Corporation have been accounted for under the
purchase method of accounting. Accordingly, the assets and liabilities of
EMS-ILL and Intercim Corporation have been adjusted to their estimated
fair values. The excess of cost over the net assets acquired has been
allocated to goodwill ($395,000 for EMS-ILL and $1,437,000 for Intercim
Corporation).
Note 3 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the
following:
8-31-1996 11-30-1995
Gross $7,490,000 $6,416,000
Less: Accumulated Depreciation <4,024,000> <3,193,000>
----------- -----------
Net $3,466,000 $3,223,000
Allowance for doubtful accounts consisted
of the following:
8-31-1996 11-30-1995
Balance $ 239,000 $ 312,000
Provision for doubtful accounts consisted
of the following:
8-31-1996 11-30-1995
Balance $ 60,000 $ 26,000
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company continued its growth in revenues (25.5%) along with a
corresponding growth in costs and expenses to produce a smaller net loss
for the third quarter of 1996 compared to the third quarter of 1995. The
Company experienced a strong expansion in software revenues (97.4%) which
was offset in part by a reduction in low margin hardware revenues (-40.0%)
in the third quarter of 1996 as compared with the same period in 1995. The
increase in software revenues was mainly due to expansion of the existing
distribution channels and from the acquisition of two entities mentioned
below. The reduction in hardware revenues was primarily the result of
"software only" sales whereby the customer elects not to purchase hardware
from the Company because of hardware already in place, or because the
customer decides to purchase hardware through a third party vendor. On a
year to date basis, total revenues grew 46.5% with a corresponding
growth in costs and revenues which resulted in a larger net loss for the
first three quarters of 1996 compared to the same period of 1995. The
corresponding rise in costs and expenses resulted, for the most part, from
a continued high level of strategic investments in product development,
field service infrastructure, and expanded distribution channels.
Management believes these strategic investments have the potential to
positively enhance future revenues and profitability.
The 1996 year-to-date consolidated financial statements reflect the
operating results of Effective Management Systems of Illinois, Inc.("EMS-
ILL") and Intercim Corporation ("Intercim") for both the third quarter of
1996 and for the first three quarters of 1996. The Company acquired the
remaining interest in EMS-ILL effective March 31, 1995. EMS-ILL was the
exclusive distributor of the Company's products in Illinois and Indiana.
Intercim, acquired on September 6, 1995, designs, builds, integrates, and
supports factory floor information systems to assist companies with the
control and management of their manufacturing process for the purpose of
improving quality, productivity, and efficiency. The results of EMS-ILL
and Intercim have been included since the respective dates of acquisition
and, accordingly, are not reflected in the operating results of the third
quarter of 1995 (except for EMS-ILL after March 31, 1995). The two
acquisitions are hereafter referred to as the "1995 Acquisitions".
Results of Operations
Total Revenues
Net revenues increased to $9,073,000 for the three months ended August 31,
1996, which was an increase of 25.5% from the $7,230,000 for the same
quarter in the previous year. The 1995 Acquisitions accounted for
$1,284,000 of the third quarter increase in revenues. Net revenues grew
to $28,419,000 for the nine months ended August 31, 1996, which was an
increase of 46.5% from the $19,402,000 for the same quarter in the
previous year. The 1995 Acquisitions accounted for $6,154,000 of the
increase in revenues for the first three quarters of 1996. The mix of
revenues comprising software, services, and low margin hardware revenues
as a percentage of total revenues improved to 44.5%, 41.4%, and 14.1%,
respectively, in the third quarter of 1996 as compared with 28.3%, 42.3%,
and 29.4%, respectively, in the third quarter of 1995. This improvement
in the mix of revenues was mainly due to strong growth of software sales
made on a "software only" basis. The Company offers its products on a
"software only" basis for those customers who already have hardware or who
may wish to purchase it from other vendors. The mix of revenues comprising
software, services, and hardware revenues as a percentage of total
revenues improved to 42.2%, 39.2%, and 18.6%, respectively, in the first
three quarters of 1996 as compared with 35.2%, 39.7%, and 25.1% ,
respectively, in the first three quarters of 1995. International
revenues represented less than 10% of total 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 increased 97.4% to
$4,040,000 in the third quarter of 1996 from $2,047,000 in the third
quarter of 1995. Of this increase, $932,000 was attributable to the 1995
Acquisitions. Software license fees increased 75.3% to $11,970,000 in
the first three quarters of 1996 from $6,828,000 in the first three
quarters of 1995. Of this increase, $3,301,000 was attributable to the
1995 Acquisitions. The remaining increase in software license fees was
attributable to both the impact of increased levels of sales personnel and
increased productivity of existing sales personnel. Between August 31,
1995 and August 31,1996, the Company added 7 sales personnel through the
1995 Acquisitions and 11 through new hiring. The Company also continued
its strategic plan to undertake efforts to incorporate new technologies
into its products and to integrate certain products into its product lines
from its acquisition of Intercim. These activities are intended to be
completed at various times in the future, and management believes that the
successful completion of these steps will ultimately provide the Company
with significant competitive differentiation.
Service Revenues
The Company offers a number of optional services to its customers. Such
services include a telephone support program, systems integration, custom
software development, implementation consulting, and formal classroom and
on-site training. Service revenues increased 22.9% to $3,755,000 for the
three months ended August 31, 1996 from $3,055,000 for the same period of
the prior year. The 1995 Acquisitions provided an increase of $431,000
in service revenues in the third quarter of 1996. Service revenues
increased 44.7% to $11,152,000 for the nine months ended August 31, 1996
from $7,706,000 for the same period of the prior year. The 1995
Acquisitions provided $2,174,000 of increases in service revenues in the
first three quarters of 1996. In addition to the impact of the 1995
Acquisitions, the increase in service revenues was mainly the result of
the needs of new customers as well as the needs of the established customer
base.
Hardware Revenues
Hardware revenues declined 39.9% to $1,278,000 in the third quarter of
1996 compared with $2,128,000 for the corresponding period of 1995. The
decrease in hardware revenues for the third quarter was mainly
attributable to a larger number of "software only" sales. Hardware
revenues rose 8.8% to $5,297,000 in the first three quarters of 1996
compared with $4,868,000 for the corresponding period of 1995. The 1995
Acquisitions contributed $686,000 of the increase in hardware revenues for
the first three quarters of 1996. In addition to the 1995 Acquisitions,
the remaining increase was due to increased sales of software on platforms
for which the Company frequently supplies hardware. The amount of
hardware revenues is generally impacted by three major influences. First,
and most significantly, management has decided to focus its efforts on
sales of higher margin software and services. The Company offers its
software on a "software only basis" (no hardware) for those customers who
already have hardware or who may wish to purchase it from other vendors.
Many customers, however, utilize the Company as their hardware supplier in
order to secure a fully integrated system environment. The Company
provides a full range of integration services to satisfy most customer
needs. Second, as the volume of business grows, hardware revenues
generally increase correspondingly. Finally, hardware revenues are
related to the number of hardware manufacturers represented at any one
time by the Company. The fluctuation of the above factors in regard to
hardware sales can be offsetting, but, over a three year period, have
generally resulted in a long-term decline in hardware sales as a
percentage of revenue.
Cost of Software License Fees
Cost of software license fees as a percentage of related revenue was 22.8%
for the third quarter of 1996, a decrease from 32.4% for the
corresponding period of 1995. Cost of software license fees as a
percentage of related revenue was 21.6% for the first three quarters of
1996, a decrease from 24.3% for the corresponding period of 1995. This
decrease was mainly due to the revenue growth exceeding the relatively
fixed growth in software amortization. Software amortization is related
to past investment in software development and is not consistent with
variations in software revenues on a quarter by quarter basis. The cost
of software license fees is also dependent on the level of third party
software revenues and their associated costs, which has a direct
relationship with changes in revenue levels. In the third quarter of
1996, the third party revenues and associated costs were up in comparison
to the associated revenues for the third quarter of 1995. In the first
three quarters of 1996, the third party revenues and associated costs were
down in comparison to the associated revenues for the first three quarters
of 1995. Third party revenues can vary by both the number of users sold
and the number of systems sold. Additional costs relating to the 1995
Acquisitions did not materially affect the cost of software license fees
as a percentage of related revenue in all periods presented.
Cost of Services
Cost of services as a percentage of related revenue increased to 80.4% for
the three months ended August 31, 1996 as compared with 71.1% for the same
quarter in the previous year. Cost of services as a percentage of related
revenue increased to 77.7% for the nine months ended August 31, 1996 as
compared with 69.6% for the same period in the previous year. The
increases were mainly due to both the startup and training costs
associated with newly hired personnel and additional costs related to the
building of a service infrastructure ($332,000 year to date, 3.0% of
service revenues) for both ongoing business growth and the establishment
of new third party selling relationships. The service infrastructure costs
include investments to strengthen the support of national and
international third party suppliers of service in conjunction with the
continued expansion of distribution channels. The cost of services as a
percentage of related revenues was also negatively impacted by the
issuance of the new 5.3 version of the Company's software. Typically,
both new versions of the software and the amount of changes made to that
software ( the Company has raised investment in new software
significantly), raise service costs in the short run. Extra service
costs include the training of service personnel and the non-bill
activities associated with the learning and enhancing of the software as
additional on-site experience is accumulated. Additional costs relating
to the 1995 Acquisitions had no material impact on all periods presented.
Cost of Hardware
The cost of hardware as a percentage of related revenue decreased from
73.9% in the third quarter of 1995 to 66.0% in the third quarter of 1996.
The cost of hardware as a percentage of related revenue decreased from
77.6% in the first three quarters of 1995 to 74.2% in the first three
quarters of 1996. The cost of hardware as a percentage of related revenue
varies with the size of the system, the manufacturer of the equipment, and
the competitive pressure of the customer sale. Additionally, the cost of
hardware as a percentage of hardware revenues can vary due to amount of
lower margin sales (cost plus 11%) to affiliated joint ventures, which
were $227,000 and $295,000 in the third quarter of 1996 and 1995,
respectively, and $1,040,000 and $833,000 in the first three quarters of
1996 and 1995, respectively. As of January 1, 1996, the Company charges
11% over cost on hardware sales to EMS Solutions, Inc., an affiliated
entity, to match similar terms of the Company's joint ventures. These
charges were $9,000 in the third quarter of 1996, and $43,000 in the first
three quarters of 1996.
Selling and Marketing Expenses
Selling and marketing expenses increased $899,000 (37.3%) from $2,412,000
in the third quarter of 1995 to $3,311,000 in the third quarter of 1996.
The 1995 Acquisitions accounted for $412,000 of the third quarter
increase. The remainder of the third quarter increase was attributable to
additional increases in sales and marketing expenses corresponding to
growth in total sales margin (total net revenues minus total cost of
products and services). Selling and marketing expenses increased
$3,429,000 (53.6%) from $6,396,000 in the first three quarters of 1995 to
$9,825,000 in the first three quarters of 1996. The 1995 Acquisitions
accounted for $1,224,000 of the first three quarters increase. The
additional increases in sales and marketing expenses corresponded to
growth in total sales margin (total net revenues minus total cost of
products and services).
General and Administrative Expenses
General and administrative expenses increased $279,000 (42.1%) from
$663,000 in the third quarter of 1995 to $942,000 in the third quarter of
1996. The 1995 Acquisitions accounted for $136,000 of the third quarter
increase. General and administrative expenses increased $844,000 (44.6%)
from $1,892,000 in the first three quarters of 1995 to $2,736,000 in the
first three quarters of 1996. The 1995 Acquisitions accounted for $467,000
of the increase in the first three quarters of 1996. The remainder of the
increase related to expenses that corresponded with revenue growth,
including personnel costs, and telephone and insurance expenses. As a
percent of total revenues, general and administrative expenses were 10.4%
and 9.2% in the third quarter of 1996 and 1995, respectively; and were
9.6% and 9.8% in the first three quarters of 1996 and 1995, respectively.
The Company also provides office space, accounting and administrative
services, computer processing time, and other miscellaneous services to
EMS Solutions, Inc., an affiliated entity. The amounts received by the
Company for these items were $65,000 in the third quarter of 1996, as
compared with $80,000 in the third quarter of 1995 and were $203,000 in
the first three quarters of 1996, as compared with $242,000 in the first
three quarters of 1995. Amounts received from EMS Solutions, Inc. are
recorded as reductions in general and administrative expenses.
Product Development Expense
Product development expense increased from $353,000 in the third quarter
of 1995 to $580,000 in the third quarter of 1996. Product development
expense increased from $840,000 in the first three quarters of 1995 to
$1,547,000 in the first three quarters of 1996. The 1995 Acquisitions
accounted for $67,000 of the increase in the third quarter and $367,000
of the increase in the first three quarters of 1996. The Company
capitalizes costs in accordance with Statement of Financial Accounting
Standard (SFAS) No. 86. The Company capitalized $814,000 in the third
quarter of 1996 compared to $449,000 in the third quarter of 1995. In the
first three quarters of 1996, the Company capitalized $2,431,000 compared
to $1,299,000 in the corresponding period of 1995. As a percent of
software license fees, the total amount invested in software development
was 34.5% and 39.2% in the third quarter of 1996 and 1995, respectively,
and was 33.2% and 31.3% in the first three quarters of 1996 and 1995,
respectively. These increases were focused mainly on the development of
a pre-integrated factory workstation system, including the integration of
engineering, customer service, production control, quality, and machine
controls. Additional expenditures were made to increase the Company's
investment in the development of future products, including the
incorporation of various new technologies into the Company's software
products.
Other Income\Expense-Net
Other income\expense-net was $38,000 of expense for the third quarter of
1995 compared to $23,000 of expense for the third quarter of 1996. Other
income\expense-net was $83,000 of income for the first three quarters of
1995 compared to $7,000 of income for the first three quarters of 1996.
This decrease was mainly the result of a reduction in the amount of
interest income and an increase in the amount of interest expense as the
Company has borrowed under its bank line of credit to continue its
investment strategy in product development, field service infrastructure,
and expanded distribution channels.
Income Tax
The effective income tax rate provided a benefit of 41.2% for the third
quarter of 1996 compared to a benefit of 39.5% for the third quarter of
1995. The effective income tax rate provided a benefit of 42.1% for the
first three quarters of 1996 compared to a benefit of 49.5% for the first
three quarters of 1995. The change in the effective rate was mainly the
result of operating losses and the effect of investments in tax-exempt
securities.
Liquidity and Capital Resources
At August 31, 1996, the Company had cash and marketable securities
aggregating $1,027,000, including $1,010,000 of available-for-sale
securities. During the first three quarters of 1996, the Company's
operating activities provided $160,000 of cash. This positive operating
cash flow was primarily due to non-cash charges to the income statement of
$2,417,000 less a working capital increase of $1,746,000. During the
first three quarters of 1995, the Company's operating activities provided
$307,000 of cash. This positive operating cash flow was primarily due to
non-cash charges to the income statement of $1,140,000 less a working
capital increase of $611,000.
Investing activities used cash of $3,243,000 in the first three quarters
of 1996 compared to using $823,000 of cash in the first three quarters of
1995. The principal uses of the cash for the first three quarters of 1996
were $2,431,000 for capitalized product development and $1,056,000 for
purchases of equipment and furniture. The principal uses of the cash for
the first three quarters of 1995 were $1,299,000 for capitalized product
development and $1,122,000 for purchases of equipment and furniture.
Financing activities provided $2,734,000 of cash in the first three
quarters of 1996 compared with $293,000 in the first three quarters of
1995. The cash provided in 1996 reflected borrowings under the Company's
bank line of credit. The cash provided in 1995 reflected sales of
investment securities. As of August 31, 1996, the Company had $395,000 of
availability under its $3,000,000 line of credit based on the level of the
eligible accounts receivable. The Company also arranged for a short term
master draw note, dated August 5, 1996, in the amount of $500,000 which
expires on November 4, 1996.
The Company believes its cash flows from operations, funds available under
its line of credit, funds available from investment securities and, to
the extent necessary, funds available from other capital financing that
the Company is in the process of obtaining, will be adequate to finance
capital expenditures and working capital requirements for the next twelve
months.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
(27) Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the third
quarter of 1996.
<PAGE>
SIGNATURES
In accordance with the requirements of 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.
October 11, 1996 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF
AND FOR THE NINE MONTHS ENDED AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 17
<SECURITIES> 1,010
<RECEIVABLES> 10,550
<ALLOWANCES> 239
<INVENTORY> 668
<CURRENT-ASSETS> 12,769
<PP&E> 7,490
<DEPRECIATION> 4,024
<TOTAL-ASSETS> 25,487
<CURRENT-LIABILITIES> 7,033
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 13,790
<TOTAL-LIABILITY-AND-EQUITY> 25,487
<SALES> 5,297
<TOTAL-REVENUES> 28,419
<CGS> 3,932
<TOTAL-COSTS> 29,295
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> (10)
<INCOME-PRETAX> (883)
<INCOME-TAX> (372)
<INCOME-CONTINUING> (511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (511)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not required to be calculated in accordance with generally accepted accounting
principles.
</FN>
</TABLE>
