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 May 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 May 31, 1996
Common Stock, $.01 par value 3,962,210
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-QSB
May 31, 1996
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets at
May 31, 1996 and November 30, 1995 3
Consolidated Statements of Income for the Three and Six
Month Periods Ended May, 31, 1996 and May 31, 1995 5
Consolidated Statements of Cash Flows for the
Six Months Ended May 31, 1996 and May 31, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<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-May 30-Nov
1996 1995
CURRENT ASSETS
Cash $141 $335
Investments in available-for-sale
securities 1,500 1,263
Accounts Receivable:
Trade, less allowance for
doubtful accounts 8,684 9,402
Related Parties 819 652
Inventories 336 518
Refundable Income Taxes 385 462
Deferred Income Taxes 157 157
Prepaid Expenses and Other Current
Assets 195 197
-------- --------
TOTAL CURRENT ASSETS 12,217 12,986
LONG TERM ASSETS
Computer Software, net 4,674 4,000
Investments in and Advances to
Unconsolidated Joint Ventures 185 179
Equipment and Leasehold
Improvements, net 3,323 3,223
Intangible Assets, net 3,533 3,387
Other Assets 546 557
-------- --------
TOTAL LONG TERM ASSETS 12,261 11,346
-------- --------
TOTAL ASSETS $24,478 $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-May 30-Nov
1996 1995
CURRENT LIABILITIES
Accounts Payable $1,310 $2,076
Accrued Liabilities 1,654 2,182
Income Taxes Payable (133) -
Deferred Revenues 3,835 3,735
Customer Deposits 144 227
Current portion of:
Long-term Obligations 31 89
------- ------
TOTAL CURRENT LIABILITIES 6,841 8,309
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 492 532
Long-term Obligations 1,755 21
Deferred Income Taxes 1,293 1,293
------- -------
TOTAL LONG TERM LIABILITIES 3,540 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 3,962,210 and
3,906,105 shares; outstanding
3,959,585 and 3,903,480 shares 40 39
Common Stock Warrants 3 3
Common Stock and Warrants to be
issued - 211
Additional Paid-in Capital 10,970 10,662
Retained Earnings 3,089 3,267
Cost of Common Stock in
Treasury (2,625 shares) (5) (5)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,097 14,177
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $24,478 $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 SIX MONTHS ENDED
31-May 31-May 31-May 31-May
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES:
Software license fees $4,255 $2,612 $7,930 $4,781
Services 3,780 2,605 7,397 4,651
Hardware 1,668 1,416 4,019 2,740
------ ------ ------ ------
Total net revenues $9,703 $6,633 $19,346 $12,172
COST OF PRODUCTS AND SERVICES
Software license fees 803 401 1,665 994
Services 2,915 1,841 5,651 3,188
Hardware and other 1,275 1,101 3,088 2,206
------ ------ ------ ------
Total cost of products
and services $4,993 $3,343 $10,404 $6,388
Selling and marketing
expenses 3,417 2,233 6,514 3,984
General and administrative
expenses 961 728 1,794 1,229
Product development
expenses 490 212 967 487
------ ------ ------ ------
Total costs and
operating expenses $9,861 $6,516 $19,679 $12,088
------ ------ ------ ------
INCOME (LOSS) FROM
OPERATIONS $(158) $117 $(333) $84
Other (Income)/Expense
Equity (earnings)/loss
of unconsolidated joint
ventures 0 5 (3) (57)
Interest (income) (28) (49) (50) (82)
Interest expense 23 9 37 18
------ ------ ------ ------
(5) (35) (16) (121)
------ ------ ------ ------
INCOME (LOSS) BEFORE
INCOME TAXES $(153) $152 $(317) $205
Income Taxes Expense
(Benefit) (66) 44 (139) 37
------ ------ ------ ------
NET INCOME(LOSS) $(87) $108 $(178) $168
====== ====== ====== ======
Earnings(loss) per share ($0.02) $0.03 ($0.05) $0.05
Weighted average common
and equivalent shares
outstanding 3,950 3,702 3,941 3,670
</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)
SIX MONTHS ENDED
31-May 31-May
1996 1995
OPERATING ACTIVITIES
Net Income(Loss) $(178) $168
Adjustments to reconcile net
income(loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 551 348
Amortization of capitalized
computer software development
costs 943 428
Equity in earnings of joint
ventures - (113)
Goodwill 133 -
Changes in operating assets
and liabilities:
Accounts Receivable 754 867
Inventories and other
current assets 97 (436)
Accounts payable and other
liabilities (1,531) (1,539)
------- -------
Total adjustments 947 (445)
Net cash provided(used) by
operating activities 769 (277)
INVESTING ACTIVITIES
Additions to equipment and
leasehold inprovements (634) (821)
Proceeds from sale (purchase)
of securities (237) 1,315
Purchase of Affiliate 43 (219)
Software development costs
capitalized (1,617) (849)
Other (78) -
-------- --------
Net cash provided(used) in
investing activities (2,523) (574)
FINANCING ACTIVITIES
Proceeds from exercise of
stock options - 89
Proceeds(payments) on long-term
debt and other notes payable 1,594 620
Other (34) -
-------- -------
Net cash provided(used) by
financing activities 1,560 709
-------- -------
Net increase (decrease) in cash ($194) ($142)
Cash-beginning of period 335 280
Cash-end of period 141 138
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 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 six month periods ended May 31, 1996 and May 31, 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, of Illinois, Inc. ("EMS-ILL") not then owned by the Company. The
purchase price consisted of 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, $380,000 in cash and $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 share; and direct acquisition
costs of $225,000.
On May 18, 1996, the Compay issued additional warrants pursuant to the
Agreement and Plan of Merger, dated as of February 17, 1995, by and among
the Company and 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 Acquisitions of the remaining interest in EMS-ILL and 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:
5-31-1996 11-30-1995
Gross $ 7,086,000 $ 6,416,000
Less: Account Depreciation <3,745,000> <3,193,000>
--------- ---------
Net $ 3,323,000 $ 3,223,000
Allowance for doubtful accounts and notes consisted of the following:
5-31-1996 11-30-1995
Balance $ 372,000 $ 312,000
Provision for doubtful accounts and notes consisted of the following:
5-31-1996 11-30-1995
Balance $ 91,000 $ 26,000
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company recorded an increase in revenues (46.3%) and a decline in net
income for the second quarter of 1996 compared with the second quarter of
1995. The Company also recorded an increase in revenues (58.9%) and a
decline in net income for the first half of 1996 compared with the first
half of 1995. The growth in sales reflected both the acquisition of two
entities mentioned below and increased sales of the Company's products and
services. The decline in net income resulted, for the most part, from a
continued high level of strategic investments in product development,
field service infrastructure, and expanded distribution channels. These
investments , in turn, have elevated the growth rate in both operating
costs and expenses which currently exceed the growth rate in operating
revenues. 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 second
quarter of 1996 and for the first half of 1996. The Company acquired the
remaining interest in EMS-ILL effective March 31, 1995, who 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 second
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 $9,703,000 for the three months ended May 31,
1996, which was an increase of 46.3% from the $6,633,000 for the same
quarter in the previous year. The 1995 Acquisitions accounted for
$1,881,000 of the second quarter increase in revenues. Net revenues grew
to $19,346,000 for the six months ended May 31, 1996, which was an
increase of 58.9% from the $12,172,000 for the same quarter in the
previous year. The 1995 Acquisitions accounted for $4,869,000 of the
increase in the first half revenues. The mix of revenues comparing
software, services, and hardware revenues as a percentage of total
revenues improved to 43.9%, 39.0%, and 17.1%, respectively, in the second
quarter of 1996 as compared with 39.4%, 39.3%, and 21.3% , respectively,
in the second quarter of 1995. The mix of revenues comparing software,
services, and hardware revenues as a percentage of total revenues remained
generally consistent at 41.0%, 38.2%, and 20.8%, respectively, in the
first half of 1996 as compared with 39.3%, 38.2%, and 22.5%, respectively,
in the first half of 1995.
The Company introduced version 5.3 of its products on May 3,1996. This
version of the Company's software enhances interfaces with a variety of
engineering functions and provided extensive factory-automation
capabilities. The version also continues the evolution of the Company's
software products with a Microsoft Windows user interface. 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 62.9% to
$4,255,000 in the second quarter of 1996 from $2,612,000 in the second
quarter of 1995. Of this increase , $1,018,000 was attributable to the
1995 Acquisitions. Software license fees increased 65.9% to $7,930,000
in the first half of 1996 from $4,781,000 in the first half of 1995. Of
this increase , $2,368,000 was attributable to the 1995 Acquisitions. The
remaining increase in software license fees was attributable to increased
levels of sales personnel. Between May 31, 1995 and May 31,1996 the
Company added 32 sales personnel through the 1995 Acquisitions and 14
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 recent
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 45.1% to $3,780,000 for the
three months ended May 31, 1996 from $2,605,000 for the same period of the
prior year. The 1995 Acquisitions provided an increase of $662,000 in
service revenues in the second quarter of 1996. Service revenues
increased 59.0% to $7,397,000 for the six months ended May 31, 1996 from
$4,651,000 for the same period of the prior year. The 1995 Acquisitions
provided $1,700,000 of increases in service revenues in the first half
quarter of 1996. In addition to the impact of the 1995 Acquisitions, the
increase in service revenues was mainly the result of new customers, as
well as requirements of the established customer base.
Hardware Revenues
Hardware revenues rose 17.8% to $1,668,000 in the second quarter of 1996
compared with $1,416,000 for the corresponding period of 1995. The 1995
Acquisitions contributed $151,000 of hardware revenues to the second
quarter of 1996. Hardware revenues rose 46.7% to $4,019,000 in the first
half of 1996 compared with $2,740,000 for the corresponding period of
1995. The 1995 Acquisitions contributed $755,000 of hardware revenues to
the first half 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, to date, has 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 18.9%
for the second quarter of 1996, an increase from 15.4% for the
corresponding period of 1995. Cost of software license fees as a
percentage of related revenue was 21.0% for the first half of 1996, an
increase from 20.8% for the corresponding period of 1995. This increase
was mainly due to 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 relation-
ship with changes in revenue levels. In the second quarter of 1996, the
third party revenues and associated costs were flat in comparison to the
associated revenues for the second quarter of 1995. Third party
revenues can vary by both the number of users sold and the number of
systems sold. In the first half of 1996, the third party revenues and
associated costs were down in comparison to the associated revenues for
the first half of 1995. 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 77.1% for
the three months ended May 31, 1996 as compared with 70.7% for the same
quarter in the previous year. Cost of services as a percentage of related
revenue increased to 76.4% for the six months ended May 31, 1996 as
compared with 68.5% 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 ($205,000 year to date, 2.8% 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. Additional costs relating
to the 1995 Acquisitions had a nominal effect (1%) on the cost of services
as a percentage of related revenue in the second quarter of 1996 and no
material impact on the first half of 1996.
Cost of Hardware
The cost of hardware as a percentage of related revenue decreased from
77.8% in the second quarter of 1995 to 76.4% in the second quarter of
1996. The cost of hardware as a percentage of related revenue decreased
from 80.5% in the first half of 1995 to 76.8% in the first half 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 joint ventures, which were $443,000 and $302,000
in the second quarter of 1996 and 1995, respectively, and $812,000 and
$517,000 in the first half 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 $22,000 in the second
quarter of 1996, and $11,000 in the first half of 1996.
Selling and Marketing Expenses
Selling and marketing expenses increased $1,184,000 (53.0%) from
$2,233,000 in the second quarter of 1995 to $3,417,000 in the second
quarter of 1996. The 1995 Acquisitions accounted for $487,000 of the
second quarter increase. Selling and marketing expenses increased
$2,530,000 (63.5%) from $3,984,000 in the first half of 1995 to $6,514,000
in the first half of 1996. The 1995 Acquisitions accounted for $1,106,000
of the second half increase. The increases in sales and marketing
expenses corresponded to growth in software license fees.
General and Administrative Expenses
General and administrative expenses increased $233,000 (32.0%) from
$728,000 in the second quarter of 1995 to $961,000 in second quarter of
1996. The 1995 Acquisitions accounted for $115,000 of the second quarter
increase. General and administrative expenses increased $565,000 (46.0%)
from $1,229,000 in the first half of 1995 to $1,794,000 in first half of
1996. The 1995 Acquisitions accounted for $324,000 of the first half
increase. The remainder of the increase related to expenses that
corresponded with the total revenue growth, including personnel costs, and
telephone and insurance expenses. As a percent of total revenues, general
and administrative expenses were 9.9% and 11.0% in the second quarter of
1996 and 1995, respectively; and were 9.3% and 10.1% in the first half of
1996 and 1995, respectively. These improvements in general and
administrative expenses as a percent of total revenues were mainly due to
better utilization of personnel and facilities, along with improved
processes. 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 $54,000 in the second quarter
of 1996, as compared with $80,000 in the second quarter of 1995 and were
$138,000 in the first half of 1996, as compared with $161,000 in the first
half of 1995. Amounts received from EMS Solutions, Inc. are recorded as a
reduction of general and administrative expenses.
Product Development Expense
Product development expense increased from $212,000 in the second quarter
of 1995 to $490,000, in the second quarter of 1996. Product development
expense increased from $487,000 in the first half of 1995 to $967,000 in
the first half of 1996. The 1995 Acquisitions accounted for $142,000 of
the increase in the second quarter and $312,000 of the increase in the
first half. The Company capitalizes costs in accordance with Statement of
Financial Accounting Standard (SFAS) No. 86. The Company capitalized
$846,000 in the second quarter of 1996 compared to $696,000 in the second
quarter of 1995. In the first half of 1996, the Company capitalized
$1,617,000 compared to $849,000 in the corresponding period of 1995. As a
percent of software license fees, the total amount invested in software
development was 31.4% and 34.8% in the second quarter of 1996 and 1995,
respectively, and was 32.6% and 27.9% in the first half 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 $35,000 of income for the second quarter of
1995 compared to $5,000 of income for the second quarter of 1996. Other
income\expense-net was $121,000 of income for the first half of 1995
compared to $16,000 of income for the first half 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. Additionally, the income-expense-net was
negatively impacted by a reduction in the amount of equity earnings of
$54,000 in the first half of 1996, mainly due to the acquisition of the
remaining 50% interest in EMS-ILL and a decrease in equity income for
other affiliates.
Income Tax
The effective income tax rate provided a benefit of 43.1% for the second
quarter of 1996 compared to an expense of 28.9% for the second quarter of
1995. The effective income tax rate provided a benefit of 43.8% for the
first half of 1996 compared to an expense of 18.0% for the first half of
1995. The effective rate was impacted mainly by the result of operating
losses and the effect of investments in tax-exempt securities.
Liquidity and Capital Resources
At May 31, 1996, the Company had cash and marketable securities
aggregating $1,641,000, including $1,500,000 of available-for-sale
securities. During the first half of 1996, the Company's operating
activities provided $769,000 of cash. This positive operating cash flow
was primarily due to non-cash charges to the income statement of
$1,627,000 less a working capital increase of $680,000. During the first
half of 1995, the Company's operating activities used $277,000 of cash.
This negative operating cash flow was primarily due to cash utilized in
the purchase of EMS-ILL of $380,000.
Investing activities used cash of $2,523,000 in the first half of 1996
compared to using $574,000 of cash in the first half of 1995. The
principal uses of the cash for the first half of 1996 were $1,617,000 for
capitalized product development and $634,000 for purchases of equipment
and furniture.
Financing activities provided $1,560,000 of cash in the first half of 1996
compared with $709,000 in the first half of 1995. The cash provided in
1996 reflected borrowings under the Company's bank line of credit. As of
May 31, 1996, the Company had $1,346,000 of availability under its
$3,000,000 line of credit based on the level of the eligible accounts
receivable.
The Company believes its cash flows from operations, funds available under
its line of credit, funds available from investment securities and, if
needed, other capital financing will be adequate to finance capital
expenditures and working capital requirements for at least the next twelve
months.
<PAGE>
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on April 30,
1996, Scott J. Mermel and Robert E. Weisenberg were elected as directors of
the Company for terms expiring in 1999. The following table sets forth
certain information with respect to the election of directors at the
annual meeting.
Shares Withholding
Name of Nominee Shares Voted For Authority
Scott J. Mermel 3,769,042 10,063
Robert E. Weisenberg 3,769,050 10,055
The following table sets forth the other directors of the Company
whose terms of office continued after the 1996 annual meeting:
Name of Director Term Expires
Thomas M. Dykstra 1997
Helmut M. Adam 1998
Michael D. Dunham 1998
In addition, at the annual meeting, shareholders approved to the
Effective Management Systems, Inc. 1993 Stock Option Plan, as amended.
With respect to such approval, the number of shares voted for and
against were 3,572,255 and 171,082, respectively. The number of shares
abstaining and the number of shares subject to broker non-votes were 15,584
and 20,184, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Effective Management Systems, Inc. 1993 Stock
Option Plan, as amended
(27.0) Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the
second quarter of 1996.
<PAGE>
SIGNATURES
In accordance with 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.
/s/ Michael D. Dunham
July 12, 1996 Michael D. Dunham
President (principal executive
officer)
/s/ Jeffrey J. Fossum
Jeffrey J. Fossum
Chief Financial Officer and Assistant
Treasurer (principal financial and
accounting officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
10.1 Effective Management Systems, Inc. 1993 Stock
Option Plan, as amended
27.0 Financial Data Schedule [EDGAR version only]
EFFECTIVE MANAGEMENT SYSTEMS, INC.
1993 STOCK OPTION PLAN
AS AMENDED
1. Purpose. The purpose of the Effective Management Systems, Inc.
1993 Stock Option Plan (the "Plan") is to promote the best interests of
Effective Management Systems, Inc. (the "Company") and its shareholders by
providing employees of the Company and its subsidiaries and members of the
Company's Board of Directors who are not employees of the Company or its
subsidiaries with an opportunity to acquire a proprietary interest in the
Company. It is intended that the Plan will promote continuity of
management and increased incentive and personal interest in the welfare of
the Company by employees of the Company and its subsidiaries. In
addition, by encouraging stock ownership by non-employee directors, the
Company seeks both to attract and retain on its Board of Directors (the
"Board") persons of exceptional competence and to provide a further
incentive to serve as a director of the Company.
It is intended that certain of the options issued pursuant to the
Plan will constitute incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and successor provisions thereto (the "Code"), and the remainder
of the options issued under the Plan will constitute nonstatutory stock
options.
2. Administration. The Plan shall be administered by a committee
designated by the Board (the "Committee"). The Committee shall consist of
not less than two members of the Board who are "disinterested persons" as
defined in Section 13 hereof. A majority of the members of the Committee
shall constitute a quorum. All determinations of the Committee shall be
made by at least a majority of its members. Any decision or determination
reduced to writing and signed by all of the members of the Committee shall
be fully as effective as if it had been made by a unanimous vote at a
meeting duly called and held.
In accordance with the provisions of the Plan, the Committee shall:
select the employees to whom options are granted; determine the number of
shares to be covered by each option, the time at which the option is to be
granted, the type of option, the option period, the option exercise price
and the manner and time in which options become exercisable; and establish
such other provisions of the option agreements as the Committee may deem
necessary or desirable. Grants of options to non-employee directors, all
of which options shall be nonstatutory stock options, shall be automatic
and the amount and the terms of such awards shall be determined in
accordance with Section 5 hereof.
The Committee may adopt such rules and regulations for carrying out
the Plan as it may deem proper and in the best interests of the Company.
The interpretation of any provision of the Plan by the Committee and any
determination made by the Committee on the matters referred to in this
Section 2 shall be final.
3. Shares Subject to the Plan. The shares to be subject to options
under the Plan shall be shares of the Company's Common Stock ("Stock").
The total number of shares of Stock which may be purchased pursuant to
options granted under the Plan shall not exceed an aggregate of 550,025
shares, subject to adjustment as provided in Section 8 hereof. Shares of
Stock delivered upon exercise of an option under the Plan may consist, in
whole or in part, of authorized but unissued shares or of treasury shares.
In the event that an option granted under the Plan expires, is cancelled
or terminates unexercised as to any shares of Stock covered thereby, such
shares shall thereafter be available for the granting of additional
options under the Plan.
4. Grants to Employees.
(a) Eligibility. Any employee ("Employee") of the Company or
its present and future subsidiaries, as defined in Section 424(f) of the
Code ("Subsidiaries"), including any such Employee who is also an officer
or director of the Company, whose judgment, initiative and efforts
contribute to the successful performance of the Company shall be eligible
to receive options under the Plan. Notwithstanding any provision to the
contrary herein, no Employee shall be granted options that could result in
such Employee receiving more than 150,000 shares of Stock under the Plan
(such number of Shares shall be subject to adjustment as provided in
Section 8 hereof).
(b) Option Price. The option exercise price per share of Stock
shall be fixed by the Committee, but shall not be less than 100% of the
fair market value of a share of Stock on the date the option is granted;
provided, however, that no Incentive Stock Option shall be granted to any
Employee who, at the time such Incentive Stock Option is granted, owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent corporation or
Subsidiaries unless the option exercise price of such Incentive Stock
Option is at least 110% of the fair market value of a share of Stock on
the date of grant. Unless otherwise determined by the Committee, the
"fair market value" of a share of Stock on the date of grant shall be the
last sale price for shares of Stock in the NASDAQ National Market System
on the trading date next preceding the date on which the option is
granted, as reported in The Wall Street Journal (Midwest Edition);
provided, however, that if the principal market for the Stock is then a
national securities exchange, the "fair market value" shall be the closing
price for shares of Stock on the principal securities exchange on which
the Stock is traded on the trading date next preceding the date of grant,
or, in either case above, if no trading occurred on the trading date next
preceding the date of grant, then the option price per share shall be
determined with reference to the next preceding date on which the Stock is
traded.
(c) Grant of Options. Subject to the terms and conditions of
the Plan, the Committee may, from time to time, grant to Employees options
to purchase such number of shares of Stock and on such terms and
conditions as the Committee may determine; provided, however, that any
option granted to an Employee who is subject to the provisions of
Section 16 of the Securities Exchange Act of 1934, as amended, on the date
of the grant shall not become exercisable (except as otherwise
specifically set forth in the option agreement) until at least six months
elapse from the date of grant. More than one option may be granted to the
same Employee. The date on which an option is granted shall be the date
the Committee approves the granting of the option or if the Committee so
specifies, such later date as the Committee may determine. Options
granted to Employees may be either Incentive Stock Options or nonstatutory
stock options as determined by the Committee. The terms of any Incentive
Stock Option granted under the Plan shall comply in all respects with the
provisions of Section 422 of the Code, or any successor provision thereto,
and any regulations promulgated thereunder.
(d) Option Period. The Committee shall determine the
expiration date of each option, but such expiration date shall be not
later than ten years after the date such option is granted; provided,
however, that no Incentive Stock Option shall be granted to any Employee
who, at the time such Incentive Stock Option is granted, owns stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its parent corporation or Subsidiaries
unless such Incentive Stock Option by its terms is not exercisable after
the expiration of five years from the date of grant.
(e) Maximum Per Participant. The aggregate fair market value
(determined as of the date the option is granted) of the Stock with
respect to which any Incentive Stock Options are exercisable for the first
time by an Employee during any calendar year under the Plan or any other
plan of the Company or any parent corporation or Subsidiary shall not
exceed $100,000.
(f) Exercise of Options. An option may be exercised, subject
to its terms and conditions and the terms and conditions of the Plan, in
full at any time or in part from time to time by delivery to the Assistant
Secretary of the Company at the Company's principal office in Milwaukee,
Wisconsin, of a written notice of exercise specifying the number of shares
with respect to which the option is being exercised. Any notice of
exercise shall be accompanied by full payment of the option price of the
shares being purchased (i) in cash or its equivalent; (ii) with the
consent of the Committee (as set forth in the option agreement or
otherwise), by tendering previously acquired shares of Stock (valued at
their fair market value as of the date of exercise, as determined by the
Committee consistent with the method of valuation set forth in
Section 4(b) above); or (iii) with the consent of the Committee (as set
forth in the option agreement or otherwise), by any combination of the
means of payment set forth in subparagraphs (i) and (ii). For purposes of
this Section 4, the term "previously acquired shares of Stock" shall only
include Stock owned by the Employee prior to the exercise of the option
for which payment is being made and shall not include shares of Stock
which are being acquired pursuant to the exercise of said option. No
shares shall be issued until full payment therefor has been made.
5. Grants to Non-Employee Directors.
(a) Eligibility. Each member of the Board who is not an
employee of the Company or any of its Subsidiaries or any parent
corporation of the Company (a "Non-Employee Director") shall be eligible
to be granted nonstatutory stock options under the Plan. A Non-Employee
Director may hold more than one option, but only on the terms and subject
to any restrictions set forth in this Section 5.
(b) Option Price. The option exercise price per share of Stock
shall be equal to 100% of the fair market value of a share of Stock on the
date the option is granted. For purposes of this Section 5, the "fair
market value" of a share of Stock shall be determined in the manner set
forth in Section 4(b) hereof; provided, however, that, to the extent
applicable, the fair market value of a share of Stock shall be determined
with reference to the reported market price of the Stock determined in the
manner provided in Section 4(b).
(c) Grant of Options. Any person who is first elected as a
Non-Employee Director after the date of approval of the Plan by the Board
shall automatically on the date of such election be granted an option to
purchase 2,030 shares of Stock (which number of shares shall be subject to
adjustment in the manner as provided in Section 8). Thereafter, in
consideration for serving on the Board, each Non-Employee Director (if he
or she continues to serve in such capacity) shall automatically be granted
an option on the day following the annual meeting of shareholders in each
year commencing with the 1995 annual meeting and continuing for so long as
the Plan remains in effect and a sufficient number of shares are available
thereunder for the granting of such option. Such option shall entitle the
Non-Employee Director to purchase 1,500 shares of Stock (which number of
shares shall be subject to adjustment in the manner as provided in Section
8). In addition, in consideration for serving on committees of the Board,
each Non-Employee Director (if he or she continues to serve in such
capacity) shall automatically be granted an additional option on the day
following the annual meeting of shareholders in each year commencing with
the 1995 annual meeting and continuing for so long as the Plan remains in
effect and a sufficient number of shares are available thereunder for the
granting of such option. Such option shall entitle the Non-Employee
Director to purchase a number of shares of Stock equal to the product of
(i) 1,000 shares of Stock (which number of shares shall be subject to
adjustment in the manner as provided in Section 8) multiplied by (ii) the
number of committees of the Board on which the Non-Employee Director is
then serving.
(d) Exercisability and Termination of Options. Options granted
to Non-Employee Directors shall vest and become exercisable, but only
during the time that the Non-Employee Director serves in such capacity, as
to 10% of the shares of Stock subject thereto after one year has elapsed
from the date of grant, as to an additional 20% after the second year has
elapsed from the date of grant, as to an additional 30% after the third
year has elapsed from the date of grant, and as to the final 40% after the
fourth calendar year has elapsed from the date of grant; provided,
however, that if a Non-Employee Director ceases to be a director of the
Company by reason of death, disability or retirement within four years
after the date of grant, the option shall become immediately exercisable
in full. Options granted to Non-Employee Directors shall terminate on the
earlier of:
(i) ten years after the date of grant;
(ii) six months after the Non-Employee Director ceases
to be a director of the Company by reason of death; or
(iii) three months after the Non-Employee Director
ceases to be a director of the Company for any reason other than
death.
(e) Exercise of Options. An option may be exercised, subject
to its terms and conditions and the terms and conditions of the Plan, in
full at any time or in part from time to time by delivery to the Assistant
Secretary of the Company at the Company's principal office in Milwaukee,
Wisconsin, of a written notice of exercise specifying the number of shares
with respect to which the option is being exercised. Any notice of
exercise shall be accompanied by full payment of the option price of the
shares being purchased (i) in cash or its equivalent; (ii) by tendering
previously acquired shares of Stock (valued at their fair market value as
of the date of exercise as determined in the manner set forth in
Section 4(b) above; provided, however, that, to the extent applicable, the
fair market value of a share of Stock shall be determined with reference
to the reported market price of the Stock determined in the manner
provided in Section 4(b)); or (iii) by any combination of the means of
payment set forth in subparagraphs (i) and (ii). For purposes of
subparagraphs (ii) and (iii) above, the term "previously acquired shares
of Stock" shall only include Stock owned by the Non-Employee Director
prior to the exercise of the option for which payment is being made and
shall not include shares of Stock which are being acquired pursuant to the
exercise of said option. No shares shall be issued until full payment
therefor has been made.
6. Nontransferability of Options. No option shall be transferable
by an optionee other than by will or the laws of descent and distribution.
Options under the Plan may be exercised during the life of the optionee
only by the optionee or his guardian or legal representative.
7. Powers of the Company Not Affected. The existence of the Plan
or any options granted under the Plan shall not affect in any way the
right or power of the Company or its shareholders to make or authorize any
or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of bonds, debentures, or
preferred or prior preference stock ahead of or affecting the Stock or the
rights thereof, or any dissolution or liquidation of the Company, or any
sale or transfer of all or any part of the Company's assets or business or
any other corporate act or proceeding, whether of a similar character or
otherwise.
8. Capital Adjustments Affecting Stock. In the event of a capital
adjustment resulting from a stock dividend (other than a stock dividend in
lieu of an ordinary cash dividend), stock split, reorganization, spin-off,
split up or distribution of assets to shareholders, recapitalization,
merger, consolidation, combination or exchange of shares or the like
following Board approval of the Plan, the number of shares of Stock
subject to the Plan, the number of shares referenced in the limitation in
Section 4(a) hereof, the number of shares subject to options to be granted
to Non-Employee Directors pursuant to Section 5(c) hereof, and the number
of shares under option in outstanding option agreements shall be adjusted
in a manner consistent with such capital adjustment; provided, however,
that no such adjustment shall require the Company to sell any fractional
shares and the adjustment shall be limited accordingly. The price of any
shares under option shall be adjusted so that there will be no change in
the aggregate purchase price payable upon exercise of any such option.
The determination of the Committee as to any adjustment shall be final.
9. Corporate Mergers and Other Consolidations. The Committee may
also grant options having terms and provisions which vary from those
specified in the Plan provided that any options granted pursuant to this
Section 9 are granted in substitution for, or in connection with the
assumption of, existing options granted by another corporation and assumed
or otherwise agreed to be provided for by the Company pursuant to or by
reason of a transaction involving a corporate merger, consolidation,
acquisition or other combination or reorganization to which the Company is
a party.
10. Option Agreements. All options granted under the Plan shall be
evidenced by written agreements (which need not be identical) in such form
as the Committee shall determine. Each option agreement shall specify
whether the option granted thereunder is intended to constitute an
Incentive Stock Option or a nonstatutory stock option.
11. Rights as a Shareholder; Rights as an Employee or a Director.
An optionee shall have no rights as a shareholder with respect to shares
covered by an option until the date of issuance of stock certificates to
him or her and only after such shares are fully paid. Neither the Plan
nor any option granted hereunder shall confer upon any optionee the right
to continue as an employee or as a director of the Company.
12. Transfer Restrictions. Shares of Stock purchased under the Plan
and held by any person who is an officer or director of the Company, or
who directly or indirectly controls the Company, may not be sold or
otherwise disposed of except pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or except in a
transaction which, in the opinion of counsel for the Company, is exempt
from registration under said Act. The Committee may waive the foregoing
restrictions in whole or in part in any particular case or cases or may
terminate such restrictions whenever the Committee determines that such
restrictions afford no substantial benefit to the Company.
13. Disinterested Person. A "disinterested person" for purposes of
the Plan shall mean (except as otherwise provided in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended) a director who is not, during
the one year period prior to service as an administrator of the Plan,
granted or awarded equity securities pursuant to the Plan (except for any
automatic grants to Non-Employee Directors pursuant to Section 5 hereof)
or any other plan of the Company or any of its affiliates.
14. Amendment of Plan. The Board shall have the right to amend the
Plan at any time and for any reason; provided, however, that the
provisions of Section 5 of the Plan shall not be amended more than once
every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
promulgated thereunder; and provided further that shareholder approval of
any amendment to the Plan shall also be obtained: (a) if otherwise
required by (i) the rules and/or regulations promulgated under Section 16
of the Securities Exchange Act of 1934, as amended (in order for the Plan
to remain qualified under Rule 16b-3 or any successor provision under such
Act), (ii) the Code, or any rules promulgated thereunder (in order to
allow for Incentive Stock Options to be granted under the Plan) or (iii)
the quotation or listing requirements of NASDAQ or any principal
securities exchange or market on which the Stock is then traded (in order
to maintain the Stock's quotation or listing thereon); (b) if such
amendment materially modifies the eligibility requirements as provided in
Sections 4(a) and 5(a) hereof; (c) if such amendment increases the total
number of shares of Stock, except as provided in Section 8 hereof, which
may be purchased pursuant to the exercise of options granted under the
Plan; or (d) if such amendment reduces the minimum option price per share
at which options may be granted as provided in Sections 4(b) and 5(b)
hereof. Any amendment of the Plan shall not, without the consent of the
optionee, alter or impair any of the rights or obligations under any
option previously granted to the optionee.
15. Termination of Plan. The Board shall have the right to suspend
or terminate the Plan at any time; provided, however, that no Incentive
Stock Options may be granted after the tenth anniversary of the effective
date of the Plan. Termination of the Plan shall not affect the rights of
optionees under options previously granted to them, and all unexpired
options shall continue in force and operation after termination of the
Plan except as they may lapse or be terminated by their own terms and
conditions.
16. Effective Date. The Plan shall become effective on the date of
adoption by the Board, subject to approval and ratification by the
shareholders of the Company within twelve months of the date of adoption
by the Board. All options granted prior to shareholder approval and
ratification of the Plan shall be subject to such approval and
ratification and shall not be exercisable until after such approval and
ratification.
17. Tax Withholding. The Company may deduct and withhold from any
cash otherwise payable to the optionee (whether payable as salary, bonus
or other compensation) such amount as may be required for the purpose of
satisfying the Company's obligation to withhold Federal, state or local
taxes. Further, in the event the amount so withheld is insufficient for
such purpose, the Company may require that the optionee pay to the Company
upon its demand or otherwise make arrangements satisfactory to the Company
for payment of such amount as may be requested by the Company in order to
satisfy its obligation to withhold any such taxes.
With the consent of the Committee, an Employee may be permitted to
satisfy the Company's withholding tax requirements by electing to have the
Company withhold shares of Stock otherwise issuable to the Employee or to
deliver to the Company shares of Stock having a fair market value on the
date income is recognized pursuant to the exercise of an option equal to
the amount required to be withheld. The election shall be made in writing
and shall be made according to such rules and in such form as the
Committee may determine.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS,
INC. AS OF AND FOR THE QUARTER ENDED MAY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 141
<SECURITIES> 1,500
<RECEIVABLES> 9,056
<ALLOWANCES> 372
<INVENTORY> 336
<CURRENT-ASSETS> 12,217
<PP&E> 7,068
<DEPRECIATION> 3,745
<TOTAL-ASSETS> 24,478
<CURRENT-LIABILITIES> 6,841
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 14,057
<TOTAL-LIABILITY-AND-EQUITY> 24,478
<SALES> 4,019
<TOTAL-REVENUES> 19,346
<CGS> 3,088
<TOTAL-COSTS> 19,679
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (317)
<INCOME-TAX> (139)
<INCOME-CONTINUING> (178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (178)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0<F1>
<FN>
<F1> Not required to be calculated in accordance with generally
accepted accounting principles.
</FN>
</TABLE>
