U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURIIES EXCHANGE ACT
OF 1934
For the fiscal year ended November 30, 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.
(Name of small business issuer in its charter)
Wisconsin 39-1292200
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12000 W. Park Place, Milwaukee, Wisconsin 53224
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (414) 359-9800.
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
(Title of class)
Warrants to Purchase Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(b) 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..
Check if disclosure of delinquent filers in response to Item 405 of
Regulations S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
Issuer's revenues for its most recent fiscal year: $41,257,000
Aggregate market value of voting stock held by non-affiliates of
the issuer: $16,743,434 at February 1, 1997.
Number of shares of common stock, $.01 par value, outstanding on
February 1, 1997: 4,010,635
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Effective Management Systems, Inc. Proxy Statement
for the 1997 Annual Meeting (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
issuer's fiscal year and, upon such filing, to be incorporated by
reference into Part III).
Transitional Small Business Disclosure Format:
Yes..; No.X.
<PAGE>
Effective Management Systems, Inc.
Index to Annual
Report on Form 10-KSB
For the Fiscal Year Ended November 30, 1996
Part I
Item 1. Description of Business . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 17
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 18
Item 6. Management's Discussion and Analysis or Plan
Operation . . . . . . . . . . . . . . . . . . . . 19
Item 7. Financial Statements . . . . . . . . . . . . . . . 24
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . 46
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the
Exchange Act . . . . . . . . . . . . . . . . . . 46
Item 10. Executive Compensation . . . . . . . . . . . . . . 46
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . 46
Item 12. Certain Relationships and Related Transactions . . 46
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . 46
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 47
<PAGE>
Part I
Item 1. Description of Business
Overview
Effective Management Systems, Inc. ("EMS") develops, markets and
supports integrated manufacturing and business management software. EMS'
Time Critical Manufacturing/TM/ ("TCM/TM/") software is designed with the
underlying philosophy that time is a crucial element in manufacturing, and
that reducing time in the manufacturing process leads directly to
increased profits for the manufacturer. TCM/TM/ software integrates
technologies such as electronic data interchange ("EDI"), imaging, bar-
coding, factory automation, engineering system integration, distributed
numerical control ("DNC"), statistical process control ("SPC"), and fourth
generation language ("4GL") tools with EMS' proprietary algorithms for
scheduling and production, to optimize the customer's labor, capital and
inventory utilization. Software offered by EMS functions on the Windows
NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX operating systems. EMS also
provides services support for its software products and, on a selective
basis, sells computer hardware.
Software products offered by EMS include: TCM/TM/, which is a pre-
integrated enterprise resource planning, accounting and manufacturing
execution systems; and FACTORYnet/TM/ I/S, which is an integrated
Manufacturing Execution System "MES", providing production management,
shop floor scheduling, and operations support. These software products
are usually integrated with a bar code data collection system or direct
machine controls, and provide up-to-the-minute information to track
production and business operations. This facilitates real-time decision
making and enables employees throughout an organization to respond quickly
to marketplace demands and unanticipated events.
EMS typically focuses its sales and marketing efforts on discrete
manufacturing plants. According to Advanced Manufacturing Research ("AMR")
data from December 1995 there are over 24,000 discrete plant sites in the
United States in the market segments EMS targets. EMS has licensed its
software products to over 1,500 customer sites.
EMS distributes its products in the United States through twenty
branch offices and through seven joint ventures and independent
distributors. EMS also has established distribution channels through
independent distributors in Canada, Japan, Korea, China, Taiwan,
Australia, the United Kingdom, Belgium and Poland. In addition, the
Company has joint ventures in Poland and China to support these
distributors.
EMS was incorporated in Wisconsin in 1978. EMS became a publicly
held company as a result of its initial public offering which was
completed in February 1994. During 1995, EMS acquired Intercim
Corporation and the remaining interest in Effective Management Systems of
Illinois, Inc., a joint venture subsidiary. In 1996, EMS acquired the
remaining interest in Darwin Data Systems Corporation, another joint
venture subsidiary. For further details regarding these acquisitions, see
Note 2 of Notes to EMS' Consolidated Financial Statements, which
disclosure is included elsewhere in this Annual Report on Form 10-KSB and
incorporated herein by reference.
Industry Background
In the early 1970's, the Material Requirements Planning ("MRP")
approach was developed to enable manufacturing companies, with the aid of
computers, to plan and manage their businesses more efficiently by
managing the flow of materials at various stages of the manufacturing
process. In the 1980's, this management approach evolved into
Manufacturing Resource Planning ("MRP II"), which considers labor and
equipment planning for the manufacturing process as part of an iterative
materials planning approach. Concurrently with the evolution of MRP II,
manufacturing companies (predominantly in Japan) developed a management
technique which emphasizes the supply of component parts to "assembly-
oriented" manufacturing plants on a "just-in-time" basis. This technique
not only was the first to emphasize "time" in its orientation, but also
had other desirable outcomes for manufacturers, including improved
quality, lower costs and lower inventory levels.
In the 1990's, new management approaches for manufacturing companies
have emerged which focus on "time" as the critical element in the
manufacturing process. In these management approaches, the manufacturer
analyzes the component of time across its entire organization with the
goal of correlating the expenditure of time to the addition of value to
the finished product or service. Beyond the production focus of the
"just-in-time" environment, this new approach focuses on time in all areas
of the operation from engineering to manufacturing and from customer order
processing to shipment. This new approach differs from MRP II in that it
often focuses on improving business operations by treating plant capacity
and labor resources as the primary scheduling items and treating material
availability as a secondary consideration in manufacturing planning. The
new approach emphasizes "operations decision-making" support in contrast
to the planning emphasis of MRP II and more recently developed planning
systems such as Enterprise Resource Planning ("ERP"). In addition, a
category of information systems has been identified as MES Systems which
compliments ERP systems by making available real-time information from the
factory floor and enhancing production performance and decision-making
associated with plant operations. EMS believes that these MES Systems
represent a relatively new marketplace with substantial benefit potential
for manufacturers. EMS believes that this "time emphasis" in
manufacturing management, which is the focus of EMS' TCM/TM/ and
FACTORYnet/TM/ I/S products, will be an essential component of the
management approach for many manufacturers in the future.
During 1996, the Gartner Group of Stamford, Connecticut included EMS
in its evaluations for North American mid-market ERP solutions, Shop Floor
Control solutions and Computerized Maintenance Management Systems. In
these evaluations, EMS compared favorably relative to many of its
competitors. EMS was also the only corporation within the industry to have
a product offering evaluated in all three of these areas for discrete
manufacturing. Management believes this reflects the fact that EMS is the
only provider currently offering software for all of these dimensions of a
discrete manufacturer.
Strategy
EMS' objective is to grow as a leading provider of integrated
business software systems for discrete manufacturing plants within its
target market. EMS has identified three strategic initiatives to achieve
this goal.
Focus on Time Critical Manufacturing. EMS believes that
manufacturers are striving to become more "time competitive," and that
manufacturing software which focuses solely on providing information for
planning and on recording information for historical analysis will be
inadequate to meet the needs and demands of manufacturers in the years to
come. To be effective in the future, EMS believes that manufacturing
software will be required to empower individuals at all levels of an
organization to make immediate decisions regarding production processes
and business activities. Since 1988, EMS has focused its resources on
developing software to assist time-oriented manufacturing management.
EMS' software facilitates real-time decision-making by employees enabling
them to change processes proactively and react quickly to marketplace
demands and unanticipated events. With few exceptions, EMS believes that
the limited number of information system implementations currently in
place which have this "time" focus have been developed on an individual
customized basis. EMS is not aware of other major software package
products available in its target market for discrete manufacturers which
offer both planning and execution systems and have a strategy of focusing
on time.
Commitment to Manufacturing Execution Systems. EMS believes that
discrete manufacturers can gain significant competitive advantage by
implementing Manufacturing Execution Systems. These systems bring
together the data and information from ERP Systems, Industrial Control
Systems, and Engineering Systems as illustrated below.
[figure omitted]
[description of omitted figure: This figure illustrates the
necessary integration of data and information throughout the manufacturing
organization. The functional areas of engineering, manufacturing business
systems, and office automation depend on information from each other to
perform efficiently and with quality. Separate software solutions for each
of these functional areas causes quality loss through communications errors,
time loss through redundant entry of data, and incompatibilities of
necessary data.]
EMS offered its first MES package in 1988 and believes that it is
currently a leader in this software segment. Typical business functions
included in an MES are described below (see - "Time Critical Manufacturing
- - EMS Software Products"). Although the people in an organization which
use this software on a minute-to-minute and hour-to-hour basis are the
factory operations personnel, EMS believes that the value manufacturers
realize from implementing an MES extends far beyond this realm. EMS
believes, based on the experience of its customers, that the major benefit
of implementing an MES within an organization is improved customer service
and competitiveness. These systems allow an organization to reduce non-
value added elapsed time in the overall business process. EMS currently
offers two MES products, one which is pre-integrated with a total software
offering for the entire enterprise (TCM/TM/) and the second is
FACTORYnet/TM/ I/S in which EMS personnel use MES software to "round out"
and complete partial MES initiatives already undertaken by the customer.
AMR reported in December 1995 that MES software packages had at that time
penetrated the U.S. market by the percentages set forth below:
Industry % Penetration
Electronics 7%
Discrete 4%
Repetitive 0%
Management believes MES provides a significant market opportunity for
EMS and, correspondingly, has strategically committed EMS to enhancing its
MES offerings and marketplace presence.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. EMS'
experience in the marketplace resulted in the 1995 introduction of the
first "pre-integrated" ERP/MES/Controls software offering for discrete
manufacturers. This pre-integration initiative was facilitated by the
acquisition of Intercim Corporation. The figure set forth below
illustrates three risk and capital capacity curves which relate to the
eras of "custom" software, "custom systems integrated" software, and "pre-
integrated" software.
[figure omitted]
[description of omitted figure: This figure illustrates the evolution
of business software and the relationship of risk/capital capacity to
corporation size. "Custom" software systems and "Custom System
Integrated" software systems represent the past and current eras of
software development and implementation. Formerly, only large corporations
could afford the cost and risk of customized software. Today, with pre-
integrated software from EMS, all manufacturers can enjoy the benefits of
enterprise-wide solutions without the customization risk.]
The illustration depicts how, in the first era of "Custom" software,
only large corporations could afford the risk and capital outlays
necessary to develop such software. Results from these software
investments were mixed and implementation times generally spanned from
five years to infinity.
During the 1980's the industry entered its second era of "Custom
Systems Integrated" software. During this era, which actually spans from
the mid-80's until the present time, systems integration organizations
worked with manufacturing companies to procure software components (for
example, ERP, Statistical Process Control, Plant Maintenance, etc.) and
integrated them on a custom basis for a given facility or corporation.
The advent of this era dramatically reduced risk and capital capacity and
for the first time made such products affordable for mid-sized
corporations. Implementation time frames were reduced to three to five
years. This approach represents the state-of-the-art for many
manufacturers today.
EMS introduced the "pre-integrated" era in 1995 when it offered the
first pre-integrated software package for discrete manufacturers.
Software pre-integration means that a customer can buy a comprehensive set
of software from EMS which has already been integrated and proven to
function. The various software components may be built by EMS or
suppliers to EMS. In the case where there are suppliers to EMS, EMS has
generally established alliances so that it can have design influence over
the software. The pre-integration package also contemplates that other
software, for example, Computer Aided Design systems, may already be in
place at the customer site. "Off-the-shelf interfaces" for popular
Computer Aided Design systems which once again are proven in advance are
available to facilitate interaction with these software products. The
figure above illustrates that pre-integrated software reduces risk and
cost for the manufacturing company and also allows manufacturers of
varying sizes to take advantage of the features offered by the software.
Implementation time frames for pre-integrated software are between nine
and eighteen months. EMS plans to continue to focus on the pre-integrated
software marketplace. During 1996, Version 5.3 of TCM/TM/ became the
first industry product to span the business functions from ERP through MES
to Statistical Process Control (SPC) and Direct Numerical Control (DNC) as
illustrated below.
[figure omitted]
[description of omitted figure: This figure illustrates the
integration of ERP, MES, Controls, SPC, and actual physical devices on the
shop floor. The figure shows the inter-relationships of these systems and
the necessary feedback loops. The figure illustrates the value of
integrated solutions through pre-defined communications between
various software systems.]
EMS believes that "pre-integration" of much of this software reduces
the time and cost of system implementations and increases the business
value to the manufacturer similar to the way that "suites" of desktop
software have affected that marketplace as compared to custom integration
of word processing, data base, and spreadsheet desktop products.
Software Products
EMS develops, markets and supports TCM/TM/ application software for
discrete manufacturing companies. EMS currently offers licenses for two
software products: (a) TCM/TM/, which is a full function business and ERP
software system, including a pre-integrated MES providing production
management, shop floor scheduling and operations support; and b)
FACTORYnet/TM/ I/S, which is an MES that provides production personnel
with correct revisions of drawings, specifications, procedures, and
instructions to help them make a better product and make it right the
first time. EMS' software products are intended to provide a set of
"tactical tools" which will enable the customer to achieve its strategic
goals by correlating the expenditure of time to the addition of value to
the finished product or service.
EMS' products are designed for discrete manufacturers, including both
stand-alone manufacturing plants and autonomous divisions of large
corporations. "Discrete" manufacturers assemble or fabricate parts into
finished products as distinguished from "process" manufacturers which mix,
separate and otherwise combine or control ingredients to create finished
products. EMS' focus on discrete manufacturers includes the market
segments of repetitive and electronics manufacturers which some people
identify as additional market segments.
Time Critical Manufacturing -- EMS Software Products
EMS software provides assistance for a broad range of tasks
identified in the six categories set forth below. The TCM/TM/ product can
include software from all of these six categories. TCM/TM/ and
FACTORYnet/TM/ I/S provide different capabilities within the MES and
Decision Support Tools categories described below. EMS believes that over
time the two MES product offerings will evolve into a single product which
is more comprehensive than either of the current MES offerings.
Time Critical Manufacturing Software Suites
I. PLANNING
Master Production Manufacturing Resource Capacity Planning
Scheduling Planning II Forecasting
Interface
II. PRODUCT DATA MANAGEMENT
Product Configurator Engineering Change Standard Bills of
Control Material
Standard Routings Computer Aided Document Library
Manufacturing ("CAM")
Item Master Computer Aided Design Standard Cost
("CAD") Interface Buildup
III. SUPPLY CHAIN MANAGEMENT
Customer Service Inventory Control Procurement
Estimate/Quote Inventory Management Requisitions
Customer Maintenance Distribution Management Vendor Maintenance
Customer Order Processing Purchase Orders
Shipping Vendor Performance
Liability & Warranty Electronic Data
Interchange
(EDI" ) *
Electronic Data Interchange ("EDI" ) *
IV. MANUFACTURING EXECUTION SYSTEM
Shop Floor Management Job Cost
Bar Code Factory Data Collection Time & Attendance
Plant & Equipment Maintenance Shop Floor Scheduling
"As Built History" Quality Management*
Electronic Traveler Machine Interface
Messaging & Alarms EMS Gateway
Electronic Work Instructions
Distributed Numerical Control ("DNC")
V. FINANCE, ACCOUNTING, AND ADMINISTRATION
Accounts Receivable General Ledger Fixed Assets*
Accounts Payable Human Resources*
Standard Cost Payroll
VI. DECISION SUPPORT TOOLS
Executive Information System Document Library
Report Writer E-Mail
Database Internet
Notification Services ODBC Access
* These Products Are Provided Based On Third Party Sublicensing
Alliances.
I. Planning. The planning modules provide master production
scheduling capability integrated with rough cut capacity planning to
assist production organizations in planning materials requirements and
manufacturing resource levels for the manufacturing facility.
II. Product Data Management ("PDM"). PDM modules allow for product
definition and control of engineering changes and relationships among
component parts. These modules include software which interface with
industry popular Computer Aided Design ("CAD") systems and offer Computer
Aided Manufacturing ("CAM") software.
III. Supply Chain Management.
Customer Service. Modules provide control over the customer order
cycle, including quotations, order entry, acknowledgment printing, pick
ticket printing, shipping and invoicing. These modules allow for flexible
pricing tables and multiple order types, including telephone orders,
blanket orders and releases, over-the-counter orders and credit memos.
EMS believes that its software for EDI, which facilitates electronic order
entry and advance shipping notification, is particularly useful in meeting
the needs of the automotive and retail supply industries.
Inventory Management. The Inventory Management modules provide
engineering data control and offer inventory recordkeeping, availability
projections and replenishment planning. These modules provide bin, lot
and serial number control, multi-location support, cycle counting and
physical inventory control.
Procurement. The Procurement modules provide control of the
purchasing cycle, including authorized vendor price quotations, purchase
order entry and printing, receipts entry and vendor performance analysis.
These modules coordinate blanket orders and releases, one-time purchase
orders, orders for non-productive materials and electronic mail
notification upon receipt.
IV. Manufacturing Execution System. The TCM/TM/ and FACTORYnet/TM/
I/S software products offer integrated MES which (i) provide production
management, shop floor scheduling, distribution of "electronic drawings"
as well as textual information on factory floor computer workstations,
(ii) collect information from bar coding systems and (iii) facilitate the
establishment of direct connections for virtually any NC/CNC machine tool
and/or CAD systems. The products also include quality systems integration
for statistical process control ("SPC") analysis. These MES may operate
as stand-alone systems or be integrated into existing customer systems,
and are pre-integrated with the remainder of the EMS software.
V. Finance, Accounting and Administration. These modules provide
general accounting and financial assistance in tracking and estimating
planned and actual work-in-process costs. Any information from the
finance and accounting database may be readily pulled into personal
computer spreadsheet systems for further analysis and reporting. These
modules also interface with third party human resource and fixed assets
software products sold by EMS.
VI. Decision Support Tools. These software modules are a combination
of internally developed and third party software sold by EMS which
facilitate easy data management, analysis, customization, communication,
etc., of the EMS software with other software in the customer's computing
environment.
EMS software modules may be licensed individually or in combination
to allow companies with differing business needs and schedules to have
flexibility in the implementation of the software system. Customers
generally license between $30,000 and $1,000,000 of software per plant,
with the total license fees per plant based on the modules licensed and a
per seat license fee.
Software Technology
EMS invests in a wide range of software technologies which are
important not only for the EMS end user customer but also for EMS'
internal software development and distribution. In appropriate
circumstances, EMS has licensed software developed by others and
integrated various features of that software into its own software
products. For example, EMS' software products incorporate imaging
technology, which enables the user to store and interactively display
images such as photographs of steps in a particular production process,
diagrams of manufacturing sub-assemblies or motion video depicting the
proper operation of a machine. This imaging capability facilitates
manufacturing and production set-up and also assists users in satisfying
ISO 9000 certification criteria (a set of international quality
standards). EMS' products also include EDI, which facilitates electronic
order entry and advance shipping notification.
For internal software development, EMS employs 4GL sets of
development tools which EMS believes are instrumental in achieving
software productivity improvements and allow end users flexibility to
customize their software systems. EMS has also developed proprietary
software which facilitates the conversion of EMS' software products into
various foreign languages, including complex Asian languages. EMS
believes that this technology is useful not only in penetrating foreign
software markets, but also in assisting customers which use EMS' software
products on a multi-national basis.
For a further discussion of EMS' ongoing efforts to develop new
software technologies, see "-- Product Development."
Customer Services
EMS offers comprehensive services for customers. Services provided
by EMS include a telephone support program, system integration, custom
software development, implementation consulting, and formal classroom and
on-site training. At the customer's option, these services, which are
available for both of EMS' software products, can be provided entirely by
EMS or may be supplied in part by the customer or another third party such
as a systems integrator or consulting firm. These services, which provide
a recurring stream of revenue for EMS, are offered on an unbundled basis
for either an annual or a multi-year subscription period. All of the
services offered by EMS are optional, except that EMS requires first-time
licensees of its software to subscribe for at least one year of telephone
support. EMS believes that the availability of effective customer
services is critical for customer satisfaction and to increase software
license fee revenues. EMS further believes that services can provide a
continuing and more predictable source of revenue as compared to software
license fee revenues. For the years ended November 30, 1994, 1995, and
1996, services revenues accounted for 32.0%, 37.8%, and 37.4% of EMS'
total net revenues, respectively.
The following is a brief description of the various services
provided by EMS:
Telephone Support Program. EMS' telephone support program is a
comprehensive, fee-based program designed to help customers obtain the
maximum benefit from EMS' business management software. The telephone
support program is handled out of EMS' Minnesota, Illinois, and Wisconsin
offices and is staffed by twenty-eight trained professionals. The program
includes, among other services, answering technical questions regarding
standard software, and diagnosing and resolving equipment and software
problems.
System Integration and Custom Software Development. EMS offers
system integration and custom software development services, on a fee
basis, to meet specific customer requirements and to integrate its
software with a customer's existing computer system. EMS has developed a
Time Critical Implementation Methodology ("TCIM/TM/"), which is a
proprietary implementation methodology intended to facilitate integration
and efficient implementation of EMS' products at customer sites. This
approach is designed to allow the customer to obtain business benefits
sooner than with less structured methodologies. Ongoing technical support
is also available from EMS to all customers who elect to purchase custom
software development services.
Implementation Consulting. EMS provides consulting services, on a
fee basis, to assist customers in implementing EMS' software systems using
the TCIM/TM/ approach. These services include value-added implementation
planning, project management and specialized customer training. EMS
employs a full-time professional services staff to provide these and other
services.
Training. EMS offers customers a series of both classroom and on-
site training options. Training includes classroom and personal
instruction at a number of EMS' locations or at the customer's plant site.
Standardized training is offered for a fixed fee per class.
Hardware Products
EMS sells computer hardware and data collection equipment in order
to facilitate sales of its software products to customers requiring a
complete management information system. EMS sells, among other hardware,
factory data collection equipment, CAMates/TM/ (a small specialized
computer allowing users to monitor and collect data from production
machines), bar coding systems, networking and communication equipment, and
server and client computer hardware. The factory data collection and bar
coding hardware is purchased from the original manufacturers and resold on
a project basis. This equipment ranges from fixed mount bar code scanners
and printers to portable units and radio frequency network units. EMS
also offers its customers networking and communication hardware and server
and client computing hardware which EMS purchases from original
manufacturers, including Digital Equipment Corporation, International
Business Machines, Inc., and Intermec Corporation, plus a distributor,
Hallmark Computer Products. During the past several years, EMS has
focused its efforts on generating an increasing percentage of its net
revenues from software license fees, which have a higher margin than
hardware revenues.
Markets and Customers
EMS targets companies operating discrete manufacturing plants in
the United States, Canada, the Pacific Rim, and Europe. These plants may
be owned by privately held companies or by large, multi-national public
corporations. EMS' customers include, among others, capital equipment
manufacturers, job shops, high volume manufacturers, automotive suppliers,
consumer product manufacturers, and aerospace equipment manufacturers.
Based on December 1995 data compiled by AMR, there are approximately
24,000 discrete manufacturing plants in the United States. EMS believes
that there are at least as many discrete manufacturers within this section
of the market outside of the United States. During each of the past three
fiscal years, no one customer has accounted for more than 10% of EMS'
total net revenues.
Sales and Marketing
In the United States and Canada, EMS licenses its products and
offers services through a direct branch office sales force, joint ventures
and independent distributors as reflected in the table below:
Branch Office Independent Distributor
Locations Territories
-Atlanta, GA -Camarillo, CA
-Austin, TX -Miller Place, NY
-Baltimore, MD -Menominee, MI
-Boston, MA -Pittsburgh, PA
-Charlotte, NC -Wausau, WI
-Chicago, IL -West Des Moines, IA
-Cincinnati, OH
-Detroit, MI Joint Venture
-Green Bay, WI Location
-Houston, TX -Cleveland, OH
-Indianapolis, IN
-Los Angeles, CA
-Milwaukee, WI
-Minneapolis, MN
-Norwalk, CN
-Philadelphia, PA
-Port St. Lucie, FL
-Ringwood, NJ
-Rockford, IL
-San Jose, CA
EMS owns 50% of the joint venture operating in Cleveland. EMS
obtained its interest in this joint venture primarily in exchange for
technical knowledge and management expertise. EMS has no obligation to
fund any losses that may be incurred by the joint venture.
EMS' direct sales personnel are compensated on a salary plus
commission basis. EMS' joint venture and independent distributor
agreements generally provide that sales will be made by authorized
resellers from offices within a designated territory. The agreements
obligate EMS to license the reseller at specified prices and to provide
training to each reseller. Resellers are normally obligated to sell a
specified minimum amount of EMS' software to keep the agreements in
effect. EMS also maintains a staff of systems consultants who offer pre-
and post-sales support to the sales and distribution network.
EMS markets its products through advertising campaigns in national
trade periodicals and through direct mailings. These efforts are
supplemented by listings in relevant directories and trade show and
conference appearances. EMS is also given leads regarding potential
customers by its hardware and services vendors, existing customers and
various accounting and consulting firms.
Sales cycles for EMS' products vary substantially based on the
degree of integration, consulting and training required and also on the
status of the customer's hardware system implementation. A sales cycle is
usually three to twelve months from the time an initial sales presentation
is made until the time a signed license agreement is entered into with a
customer.
In addition to its domestic markets, EMS over the last several
years has begun efforts to develop a market for its products in the
Pacific Rim and Europe. EMS has established independent distributor
relationships in Japan, South Korea, The Peoples Republic of China,
Taiwan, the United Kingdom, Belgium and Poland. In each of these
countries, EMS' software products have been or are in the process of being
converted to the local language. EMS has an office in Hong Kong to
support its Asian distributors.
Strategic Arrangements
A facet of EMS' strategy is to establish arrangements with
suppliers of state of the art information systems technology. EMS over
the last five years has worked to expand the number of its strategic
relationships.
EMS' longest ongoing equipment manufacturer relationship is with
Digital Equipment Corporation. EMS has also established manufacturer
relationships with International Business Machines Corporation ("IBM") and
Hewlett Packard. During 1995, EMS furthered its relationship with IBM by
entering into a program in which IBM personnel would sell and service
selected EMS software products in the United States. EMS also has
arrangements with Intermec Corporation relating to bar code data
collection systems which are integrated on an "off-the-shelf" basis into
EMS' software products. EMS' software has been integrated with other bar
coding systems on a customized basis. EMS also has a relationship with
the Datamyte Division of Rockwell Automation for its Quantum quality
control software product line.
In addition to its relationships with equipment providers, EMS has
relationships with numerous software product suppliers. These companies
provide software which EMS uses within its TCM/TM/ and FACTORYnet/TM/ I/S
software. Synergex International Corporation has provided the Synergy 4GL
Applications Development Environment since 1990. EMS purchases EDI
software from Supply Tech and Radley Corporation.
EMS' relationship with the equipment and software product suppliers
described above is basically that of a reseller of such suppliers'
products. As such, EMS is entitled to volume discounts on products which
it purchases and is generally entitled to the benefits of cooperative
marketing programs.
Product Development
EMS believes it must continue to enhance, broaden and modify its
existing line of software products to meet the constantly evolving needs
of discrete manufacturers within its target market. EMS has relied on
internal development and development related to customized projects
implemented at field sites to extend, enhance and support its software
products, and develop and integrate new capabilities.
EMS has defined and implemented a methodology to leverage EMS'
software development efforts related to advanced customized projects at
field sites. Under this methodology, EMS' customized software programmers
must adhere to a set of proprietary development techniques which improve
software quality and facilitate the integration of customized software
developments into the future software releases of EMS' standard products.
In general, EMS has historically made one new product release each
year. These formal releases are supplemented by periodic releases for its
EDI software to respond to ongoing changes in trading partner
requirements.
During the fiscal years ended November 30, 1994, 1995, and 1996,
EMS' total software investment (consisting of product development expenses
and capitalized software development costs) was $1.9 million, $3.4
million, and $5.6 million, respectively. Product development expenditures
which were expensed and not capitalized during those three fiscal years
totaled $.8 million, $1.1 million, and $2.2 million, respectively.
Software development efforts currently in progress include the
development of product enhancements such as additional object orientation
features within EMS' products, enhanced client-server network operations
on various operating systems, extended operation on various relational
database products, and enhanced functional capability. There can be no
assurance, however, that these development efforts will result in product
enhancements that EMS will be able to market successfully. Certain of
these enhancements are dependent upon the development efforts of third
party suppliers over whom EMS has no control. In the event the
development efforts of the third party suppliers are delayed or are
unsuccessful, the software developments of EMS would be similarly delayed.
Software development is, however, an evolutionary process and EMS
management believes it could eventually find other suppliers or, if
unsuccessful in its search, that it could successfully re-engineer
existing products to fulfill its requirements.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to EMS'
products. Some of EMS' existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and
larger marketing and sales organizations and significantly greater
financial resources than EMS.
EMS believes that its employees' understanding of diverse
manufacturing operations and processes and the potential business benefits
of the TCM/TM/ management approach to such operations allow EMS to
differentiate itself from competitors. Other competitive factors include
software product features and functions, product architecture, the ability
to function on a variety of operating systems, technical support and other
related services, ease of product integration with third party application
software, price, and performance. In December 1996, Gartner Group
identified sixteen competitors of EMS in the North American mid-market
Enterprise Resource Planning area for discrete manufacturers.
Additionally, that firm identified seven competitors in the MES market.
Although Gartner Group identified a limited number of competitors in its
MES study, EMS generally does not encounter these competitors in the
marketplace. EMS believes that its primary competition for its MES
products are customized software products developed by internal data
processing staffs or by third party customized software developers. None
of the competitors identified by Gartner Group had product offerings for
both ERP and MES discrete manufacturers.
Intellectual Property
EMS has registered or has applied for registration of its "EMS/TM/"
and "TCM/TM/" trademarks for software services and products with the
United States Patent and Trademark Office and with the equivalent offices
of most foreign countries in which EMS currently does business. Among
others, EMS has also received or applied for trademarks for products
marketed under the names FACTORYnet/TM/ I/S and CAMate/TM/ .
EMS regards its software products as proprietary in that title to
and ownership of its software reside exclusively with EMS. EMS attempts
to protect its rights with a combination of trademark, copyright and
employee and third-party nondisclosure agreements. Despite these
precautions, it may be possible for unauthorized parties to copy or
reverse-engineer portions of EMS' software products. While EMS'
competitive position could conceivably be threatened by its inability to
protect its proprietary information, EMS believes that copyright and
trademark protection are less important to EMS' success than other factors
such as the knowledge, ability and experience of EMS' personnel, name
recognition and ongoing product development and support.
Employees
As of November 30, 1996, EMS had 352 full-time employees, of whom
60 were engaged in sales and marketing; 78 in product development; 181 in
customer service; and 33 in management, finance and administration. EMS
employees are not represented by any collective bargaining organization
and EMS has never experienced a work stoppage. EMS considers its employee
relations to be good.
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended November 30 1992 1993 1994 1995(4) 1996
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $5,052 7,146 $10,163 $11,534 $19,094
Services 4,972 5,928 7,256 10,962 15,412
Hardware 6,319 6,220 5,245 6,528 6,751
------- ------- ------- ------- -------
Total net revenues $16,343 $19,294 $22,664 $29,024 $41,257
------- ------- ------- ------- -------
Cost of products and services
Cost of software license fees $660 $747 $1,312 $2,298 $4,075
Cost of services 3,029 3,898 4,467 7,884 12,109
Cost of hardware 5,420 4,752 4,146 5,118 4,979
------- ------- ------- ------- -------
Total Cost of product/services $9,109 $9,397 $9,925 $15,300 $21,163
------- ------- ------- ------- -------
Gross Margin 7,234 9,897 12,739 13,724 20,094
Selling and marketing expenses $3,888 $5,546 $7,407 $9,479 $14,060
General and administrative 1,778 2,038 2,227 3,029 3,416
expenses
Product development expenses (1) 546 621 752 1,086 2,235
------- ------- ------- ------- -------
Total operating expenses $6,212 $8,205 $10,386 $13,594 $19,711
------- ------- ------- ------- -------
Operating income $1,022 $1,692 $2,353 $130 $383
Other income (expenses) (19) (32) 342 80 118
----- ----- ----- ---- ----
Income before income taxes $1,003 $1,660 $2,695 $210 265
Income tax expense 359 650 975 79 112
Net income 644 1,010 1,720 131 153
Net income per share $0.18 $0.39 $0.53 $0.04 $0.04
Weighed average common and common
equivalent share outstanding (2) 3,527 2,574 3,268 3,669 3,965
OTHER STATISTICAL DATA:
Software investment (3) $961 $1,312 $1,857 $3,407 $5,607
Software investment as a percentage
of software license fees 19.0% 18.4% 18.3% 29.5% 29.4%
BALANCE SHEET DATA:
Working capital (deficit) $(251) $42 $4,749 $4,677 $4,510
Capitalized software development
costs, net 921 1,271 1,861 4,000 5,781
Total assets 7,806 8,043 17,903 24,332 27,446
Long-term obligations 1,298 580 50 21 2,123
Stockholder's equity 531 1,541 10,354 14,177 14,597
</TABLE>
(1) Does not include capitalized software cost of $415, $691, $1,105,
$2,321, and $3,372 recorded for the years ended November 1992, 1993,
1994, 1995, and 1996, respectively.
(2) Weighted average common and common equivalent shares outstanding for
the periods shown include the effect of common stock equivalents, if
dilutive. The decrease in common and common equivalent shares from
1992 to 1993 was due to the redemption of convertible preferred stock
and the cancellation of outstanding warrants in November 1992.
(3) Software investment consists of product development expense and
capitalized software development costs.
(4) Includes results of Effective Management Systems of Illinois, Inc. and
Intercim Corporation since being acquired effective March 31, 1995
and September 6, 1995, respectively.
<PAGE>
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(In thousand, except per share)
The following table sets forth certain unaudited condensed operating
results for each of the eight quarters in the two-year period ended
November 30, 1996. This information has been prepared by EMS on the same
basis as the Consolidated Financial Statements appearing elsewhere in this
report and includes, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information when read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere
herein. EMS' operating results for any one quarter are not necessarily
indicative of results for any future period.
<TABLE>
Three Months Ended
<CAPTION>
Feb 28, May 31, Aug 31, Nov 30 Feb 28 May 31 Aug 31 Nov 30
1995 1995 1995 1995 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Net revenues:
Software license fees $2,169 $2,612 $2,047 $4,706 $3,675 $4,255 $4,040 $7,124
Services 2,046 2,605 3,055 3,256 3,617 3,780 3,755 4,260
Hardware 1,324 1,416 2,128 1,660 2,351 1,668 1,278 1,454
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues $5,539 $6,633 $7,230 $9,622 $9,643 $9,703 $9,073 $12,838
Total operating
expenses $5,572 $6,516 $7,837 $8,969 $9,818 $9,861 $9,616 $11,579
------- ------- ------- ------- ------- ------- ------- -------
Operating income <33> 117 <607> 653 <175> <158> <543> 1,259
Income before income
taxes 53 152 <645> 650 <164> <153> <566> 1,148
------- ------- ------- ------- ------- ------- ------- -------
Net Income 60 108 <390> 353 <91> <87> <333> 664
======= ======= ======= ======= ======= ======= ======= =======
Net income per share $0.02 $0.03 <$0.11> $0.09 <$.02> <$.02> <$.08> $.17
======= ======= ======= ======= ======= ======= ======= =======
Weighed averaged common
and equivalent share
outstanding 3,611 3,702 3,634 3,903 3,932 3,950 3,973 4,006
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Item 2. Properties
EMS' corporate headquarters are located in Milwaukee, Wisconsin, in a
leased office consisting of approximately 42,000 square feet under a lease
expiring November 30, 2003. EMS leases additional facilities domestically
in Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati,
Ohio; Detroit, Michigan; Hartford Connecticut; Houston, Texas;
Indianapolis, Indiana; Minneapolis, Minnesota; Philadelphia, Pennsylvania;
Port St. Lucie, Florida; Rockford, Illinois and San Jose, California. For
its international operations, EMS leases office space in Hong Kong.
Additional space may be required within the next twelve months, but EMS
believes that suitable additional space will be available as required.
See Note 8 of the Notes to Consolidated Financial Statements for
information regarding EMS total lease obligations.
Item 3. Legal proceedings
As of the date of this filing, neither MES nor any of its subsidiaries is
a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material effect on EMS' results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended November 30, 1996.
PART II
Item 5, Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock and common stock warrants of EMS are traded on The
Nasdaq Stock market under the symbols EMSI and EMSIW, respectively.
The table below represents the high and low sales prices for the EMS
common stock and warrants as reported on The Nasdaq Stock Market for
fiscal 1995 and 1996:
Common Stock Warrant/1
1995 High Low High Low
First Quarter 7 7/8 5 7/8 -- --
Second Quarter 8 3/4 6 1/4 -- --
Third Quarter 7 3/4 6 1/8 -- --
Fourth Quarter 8 1/2 4 3/4 3 1/2 2
1996 High Low High Low
First Quarter 5 3/4 4 1/4 2 1/8 1 1/4
Second Quarter 7 3/4 4 1/4 3 1 1/4
Third Quarter 8 5 1/4 3 1/8 2 1/2
Fourth Quarter 8 1/4 5 1/4 3 1/4 2 1/2
1/Trading commenced on October 31, 1995
As of February 1, 1997, there were 408 shareholders of record of EMS'
common stock and 307 holders of record of the warrants. EMS has not
declared or paid cash dividends on its common stock in the past, and
currently intends to retain any earnings for use in its business.
Therefore, EMS does not anticipate paying any cash dividends in the
foreseeable future. EMS' credit facility also contains provisions
limiting its ability to pay cash dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations (for the fiscal years ended November 30, 1996, 1995,
and 1994)
Overview
Effective Management Systems, Inc.("EMS" or "the Company") recorded a
strong increase in revenues and a slight increase in net income for fiscal
1996 compared with fiscal 1995. The increase in revenues was mainly the
result of the introduction of new products and technologies along with the
expansion of new market channels. During fiscal 1996, the Company became
the first pre-integrated supplier for manufacturing software that fully
integrates customer service, engineering, production control, dispatching,
quality and machine tool communication. The Company also secured the
first orders from its marketing relationship with the International
Business Corporation (IBM). Lastly, the Company recorded significant
revenues from the introduction of its products on the Windows NT operating
system of the Microsoft Corporation. The Company had recorded a decline
in net income for fiscal 1995 compared with fiscal 1994. The decline was
primarily the result of three factors, including extended efforts to
incorporate advancing technologies into the Company's software products,
rising expenses to build the infrastructure necessary for newly
established selling relationships, including IBM, and time and costs
associated with effecting two acquisitions.
Effective March 31,1995, the Company acquired the remaining 50% interest
(in addition to the 50% interest previously owned) in Effective Management
System of Illinois, Inc. ("EMS-ILL") for a cost of approximately $793,000
in Company common stock, cash, and related direct acquisition costs. The
acquisition was accounted for as a purchase and resulted in the Company
recording goodwill, which is being amortized over a twenty-year period.
On September 6, 1995, the Company acquired all of the common stock of
Intercim Corporation ("Intercim") for a cost of approximately $3,355,000
in Company common stock , warrants and related direct acquisition costs.
The warrants have a ten-year term and an exercise price of $6.75. The
acquisition was accounted for as a purchase and the goodwill resulting
from the transaction is being amortized over a twelve-year period.
The consolidated financial statements reflect the operating results of
EMS-ILL and Intercim since their respective dates of acquisition. EMS-ILL
was the exclusive distributor of the Company's products in Illinois and
northern Indiana. Intercim designed, built, integrated, and supported
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 acquisitions are herein
referred to as the "1995 Acquisitions".
Results of Operations
Total Revenue
Total revenue for fiscal 1996 increased 42.2% to $41,257,000 from
$29,024,000 in 1995 and grew 28.1% from $22,664,000 in 1994 to 1995. The
1995 Acquisitions accounted for $7,338,000 of the increase in revenues in
1996 and $5,498,000 in 1995. The increase in revenues in all periods
presented was primarily related to the increase in the amount of
software sold with each unit and the corresponding services revenues. The
mix of software, services, and hardware, as a percentage of total revenue,
was 46.2%, 37.4%, and 16.4%, respectively, in fiscal 1996; 39.7%, 37.8%,
and 22.5%, respectively, in fiscal 1995; and 44.8%, 32.0%, and 23.2%,
respectively, in fiscal 1994. The change in mix of revenues from fiscal
1995 to fiscal 1996 was mainly the result of declining hardware revenues
due to the introduction of the Company's products on the Microsoft
Windows NT operating system. Customers are able to use the Company's
software on hardware that they have already purchased, or purchase the
necessary hardware through local retail channels. The change in mix of
revenues from fiscal 1994 to fiscal 1995 was mainly the result of a lower
volume of revenues from new software installations in fiscal 1995 as
compared to growing service revenues from established customers.
Software License Fee Revenues
Software license fee revenues are customer charges for the right to use
the Company's software products. These revenues increased 65.6% to
$19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995
Acquisitions accounted for $4,623,000 of the 1996 increase in revenues
and $1,846,000 of the 1995 increase in revenues. Exclusive of the
revenues from the 1995 Acquisitions, the increase in software license fees
during fiscal 1996 was mainly the result of new sales from the IBM
marketing relationship, the hiring of additional sales personnel, and
increased productivity of existing sales personnel. Software license fee
revenues increased by $1,371,000 (13.5%) to $11,534,000 in fiscal 1995
from $10,163,000 in fiscal 1994. The 1995 Acquisitions accounted for
$1,846,000 of the 1995 revenues. The impact of the 1995 Acquistions on
software license fee revenues was offset in part by a decline in software
revenues relating to the Company's historical product offerings. The main
contributors to this decrease(net of 1995 Acquisitions) was the on-going
efforts to incorporate advancing technologies into the Company's software
products. The Company was also focused on integrating the products
obtained as a result of the acquisition of Intercim.
Service Revenues
The Company offers optional services to its customers. Services provided
include a telephone support program, systems integration, custom software
development, implementation consulting, and formal classroom and on-site
training. Service revenues increased 40.6% to $15,412,000 in fiscal 1996
from $10,962,000 in fiscal 1995 and increased 51.1% to $10,962,000 in
fiscal 1995 from $7,256,000 in fiscal 1994. Of these increases,
$4,496,000 and $2,320,000 were attributable to the 1995 Acquisitions in
fiscal 1996 and 1995, respectively. The balance of the increases in all
periods presented were primarily due to growth in the customer base and
normal price increases.
Hardware Revenues
As an option, the Company sells computer hardware manufactured by others,
along with the Company's software and services, to provide its customers
"integrated" solutions to their management information system needs.
Hardware revenues increased 3.4% to $6,751,000 in fiscal 1996 from
$6,528,000 in fiscal 1995 and increased 24.5% from $5,245,000 in fiscal
1994. These increases reflect the additional revenues of the 1995
Acquisitions ($1,740,000 in fiscal 1996 and $1,291,000 in fiscal 1995).
Net of the 1995 Acquisitions, hardware revenues decreased to $5,011,000,
$5,237,000, and $5,245,000 in fiscal 1996, fiscal 1995, and fiscal 1994,
respectively. 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. The recent introduction of the Company's
products on the Windows NT platform has resulted in an increased number
of "software only" sales. Second, as the volume of business grows,
hardware revenues have tended to increase. 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 counterbalancing, but, to date, have generally
resulted in a long-term decline in hardware sales as a percentage of
revenue.
Cost of Software License Fees
Most of the system sales also include the sale of a report writer, a word
processor, and/or other software components provided by outside suppliers.
The integration of these products into the Company's software products
generally requires that the Company pay royalties to these suppliers.
Additionally, the costs of software license fees also include the
amortization of past investments in product development. Cost of software
license fees increased from $1,312,000 in fiscal 1994, to $2,298,000 in
fiscal 1995 and to $4,075,000 in fiscal 1996. The 1995 Acquisitions
accounted for $526,000 of the fiscal 1995 increase and $834,000 of the
fiscal 1996 increase. Aside from the effect of the 1995 Acquisitions,
these increases were mainly attributable to increases in both the costs of
additional third party software sales and the software amortization
resulting from increased capitalized investment in software products
during fiscal 1994, fiscal 1995, and fiscal 1996. Amortization of
capitalized software costs is dependent on past investments in product
development and may not necessarily correspond to revenue growth.
Cost of Services
Cost of services as a percentage of related revenues increased to 78.6% in
1996, from 71.9% in 1995 and from 61.6% in 1994. The increase was
attributable to both a rising cost of labor, additional management expense
in regard to building an organization for the future, additional expenses
to further develop a world wide learning initiative in regard to new
selling relationships (3.5% of related revenues in 1996), and the training
expense related to newly hired employees. The 1995 Acquisitions did not
have a material impact on the Company's cost of services as a percentage
of related revenues.
Cost of Hardware
Cost of hardware as a percentage of related revenues decreased to 73.8% in
fiscal 1996 form 78.4% in fiscal 1995 and 79.1% in fiscal 1994. As more
customers purchase the low margin hardware at local retail channels, the
remaining hardware sales are made at higher margins due to the technical
expertise that the Company brings to the process. This higher margin
hardware includes such items as servers, network equipment, and data
collection devices. Management expects the overall level of hardware per
unit sale to decline, but the resultant value added margins to be higher.
Additionally, the cost of hardware as a percentage of hardware revenues
can vary due to amount of lower margin sales (cost plus 11%) to the
Company's joint ventures and affiliates, which were $1,264,000,
$1,091,000, and $685,000 in fiscal 1996, fiscal 1995, and fiscal 1994,
respectively. Commencing January 1, 1996, the Company began charging 11%
over cost (previously sold at cost) on hardware sales to EMS Solutions,
Inc., an affiliated entity owned by certain executive officers of the
Company, to match similar terms offered to the Company's joint ventures.
Sales of hardware to EMS Solutions, Inc. were $851,000 in fiscal 1996,
$926,000 in fiscal 1995, and $408,000 in fiscal 1994.
Net Product Development Expenses
Product development expenses, net of amounts capitalized, increased from
$752,000 in fiscal 1994 to $1,086,000 (44.4% growth) in fiscal 1995 and
to $2,235,000 (105.8% growth) in fiscal 1996. These increases were mainly
the result of the Company's strategic initiatives to increase investment
in the development of future products, including the incorporation of
various new technologies into the Company's software products. In fiscal
1995 and fiscal 1996, the 1995 Acquisitions added $545,000 and $659,000,
respectively, to product development expense, excluding $313,000 and
$1,329,000 which were capitalized in accordance with Statement of
Financial Standards (SFAS) No. 86. Management expects product development
expense to continue to rise in fiscal 1997 as efforts continue on the
development of new products and the incorporation of new technologies.
Total development expense (defined as net development expense plus amounts
capitalized) increased in fiscal 1996 to $5,607,000 from $3,407,000 in
fiscal 1995 and from $1,857,000 in fiscal 1994. These expenses expressed
as a percent of related software sales were 29.4%, 29.5% and 18.3% in
fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
Selling and Marketing Expenses
Selling and marketing expenses increased to $14,060,000 in 1996 from
$9,479,000 in fiscal 1995 and from $7,407,000 in fiscal 1994. As a
percent of gross margin (total net revenues minus total costs of products
and services), selling and marketing expenses increased to 70.0% in
fiscal 1996 from 69.1% in fiscal 1995 ,and from 58.1% in fiscal 1994. The
1995 Acquisitions accounted for $1,756,000 of the increase in the selling
and marketing expenses in fiscal 1996 and accounted for $843,000 of the
increase in the selling and marketing expense in fiscal 1995. Other
primary reasons for the increases in fiscal 1996 compared to fiscal 1995
include: enhanced marketing efforts ($293,000); growth in international
sales efforts ($159,000); and general growth in selling efforts. Other
primary reasons for the increase in fiscal 1995 compared to fiscal 1994
include: expanded national distribution channels ($337,000); enhanced
marketing efforts ($381,000); growth in international sales efforts
($239,000); and general growth in selling efforts.. The Company expects
selling and marketing expense to continue to rise as additional sales
people are hired and existing markets are developed.
General and Administrative Expenses
For fiscal 1996, general and administrative expense increased to
$3,416,000 from $3,029,000 in fiscal 1995 and from $2,227,000 in fiscal
1994. As a percent of gross margin (total net revenues minus total costs
of products and services), these expenses were 17.0%, 22.1% and 17.5% in
fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The 1995
Acquisitions increased general and administrative expense by $1,009,000 in
fiscal 1996 and by $706,000 in fiscal 1995. Other primary reasons for
the increase in fiscal 1996 include: additional depreciation from rising
levels of capital purchases ($161,000); added support personnel for system
and facilities needs ($71,000); and additional administrative costs
attributable to the growth in hardware and service revenues. Other
primary reasons for the increase in fiscal 1995 include: additional
depreciation from rising levels of capital purchases ($138,000); added
support personnel for system and facilities needs ($121,000); and
additional administrative costs attributable to the growth in hardware and
service revenues. EMS also provides office space, accounting and
administrative services, computer processing time, and other miscellaneous
services to EMS Solutions, Inc. (an affiliated company). The amounts
received by the Company for these services were $269,000 in fiscal 1996,
$321,000 in fiscal 1995, and $349,000 in fiscal 1994. The amounts received
from EMS Solutions, Inc. are recorded as a reduction against general and
administrative expense.
Other Income/Expense
Other income/expense was $118,000 of expense in fiscal 1996, $80,000 of
income in fiscal 1995 and $342,000 of income in fiscal 1994. Equity
earnings from affiliates were $25,000 of income in fiscal 1996, $31,000
of loss in fiscal 1995 and $245,000 of income in fiscal 1994. The equity
earnings for fiscal 1996 and fiscal 1995 declined , in part, due to the
merger with EMS-Ill, which resulted in reduced equity earnings from this
former joint venture. Interest income and interest expense were $89,000
and $145,000, respectively, in fiscal 1996; $176,000 and $52,000,
respectively, in fiscal 1995; and $149,000 and $52,000, respectively, in
fiscal 1994. The decrease in interest income and simultaneous rise in
interest expense were mainly due to the Company's reduction in cash and
short-term assets in order to fund investments in products, distribution
channels, and service infrastructure. The Company anticipates that
interest income will continue to decline and interest expense will
continue to increase with continued application of cash for operating and
capital expenditure purposes.
Income Tax Expense
The effective income tax rate was 42.3% for fiscal 1996 versus 37.6% for
fiscal 1995 and 36.2% for fiscal 1994. The effective income tax rate
fluctuates mainly in relation to the equity earnings of unconsolidated
joint ventures, interest earned on tax-free municipal obligations, the
amount of allowable tax credit for research and development expenditures,
goodwill amortization, meals and entertainment expense, and officer's life
insurance expense. In 1996, the effective income tax rate was higher than
fiscal 1995 due to reduced tax-exempt interest income and non-deductible
meals and entertainment expenses. In fiscal 1996, Intercim, formally a
wholly owned subsidiary of the Company, was merged into the Company. As a
result, the net operating loss carryforwards of Intercim may be used to
offset the Company's taxable income, subject to an annual limitation of
$182,000. These net operating loss carryforwards expire in the year 2010.
Liquidity and Capital Resources
Cash provided by operations was $2,906,000 in fiscal 1996, $1,915,000 in
fiscal 1995, and $61,000 in fiscal 1994. Non-cash expenditures ,
including depreciation relating to capital expenditures, amortization
associated with software product development, and amortization of
goodwill, contributed to the cash provided in fiscal 1996 and fiscal 1995.
In addition, improvements in accounts receivable collection practices,
contributed to the cash provided in fiscal 1996 and fiscal 1995.
Investment activities used cash of $4,163,000 in fiscal 1996, $1,850,000
in fiscal 1995 and $6,451,000 in fiscal 1994. In fiscal 1996, the
Company used the cash mainly to fund $1,424,000 of capital expenditures
and $3,372,000 of investment in capitalized software product development.
The Company sold $1,584,000 of available-for-sale securities and $743,000
hold-to-maturity securities in fiscal 1995, which funded, in part,
$1,430,000 of capital expenditures and $2,321,000 of capitalized product
development. The 1995 Acquisitions were funded primarily though issuance
of the Company's common stock and warrants. In fiscal 1994, the Company
purchased $3,590,000 of securities and funded $1,219,000 of capital
expenditures and $1,105,000 of capitalized software product development.
Financing activities provided $1,788,000 of cash in fiscal 1996 compared
with $10,000 of cash used in fiscal 1995 and $6,498,000 of cash provided
in fiscal 1994. The cash provided from financing activities in 1996 was
mainly through the Company's line of credit. The cash provided in fiscal
1994 was mainly from the Company's initial public offering. As of
November 30, 1996, the Company had $3,136,000 of availability under its
revolving line of credit.
The Company believes its cash flows from operations, funds available under
its line of credit, and funds available from investment securities will be
adequate to finance capital expenditures and working capital requirements
for at least the next twelve months.
<PAGE>
Item 7. Financial Statements
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . 25
Consolidated Balance Sheets as of November 30, 1996 and 1995 . . . . . 26
Consolidated Statements of Income for the Years Ended
November 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Stockholders' Equity for the
Years Ended November 30, 1996, 1995 and 1994 . . . . . . . . . . . . 29
Consolidated Statements of Cash Flows for the Years Ended
November 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 32
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Effective Management Systems, Inc.
We have audited the accompanying consolidated balance sheets of Effective
Management Systems, Inc. (the Company) and subsidiaries as of November 30,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended November 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of the Company and subsidiaries at November 30, 1996 and 1995,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended November 30, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 17, 1997
<PAGE>
Effective Management Systems, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
November 30
1996 1995
Assets
Current assets:
Cash and cash equivalents $866 $335
Investment in available-for-sale
securities 505 1,263
Accounts receivable:
Trade, less allowance for doubtful
accounts of $346-1996; $312-1995 11,146 9,402
Related parties 693 652
------- -------
11,839 10,054
Refundable income taxes 159 462
Inventories 391 518
Deferred income taxes 175 157
Prepaid expenses and other current
assets 288 197
------- -------
Total current assets 14,223 12,986
Computer software, net 5,781 4,000
Investments in and advances to
unconsolidated joint ventures 199 179
Equipment and leasehold improvements,
net 3,961 3,223
Intangible assets, net 2,690 3,387
Other assets 592 557
------- -------
Total assets $27,446 $24,332
======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $2,026 $2,076
Accrued liabilities 2,846 2,182
Deferred revenue 4,605 3,735
Customer deposits 109 227
Current portion of long-term
obligations 127 89
------- -------
Total current liabilities 9,713 8,309
Deferred revenue and other long-term
liabilities 453 532
Long-term obligations 2,123 21
Deferred income taxes 560 1,293
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 3,000,000 shares; none
issued or outstanding - -
Common stock, $. 01 par value;
authorized 20,000,000 shares; issued
4,011,018 and 3,906,105 shares;
outstanding 4,008,393 and 3,903,480
shares 41 39
Common stock warrants 4 3
Common stock and warrants to be issued - 211
Additional paid-in capital 11,137 10,662
Retained earnings 3,420 3,267
Cost of common stock in treasury
(2,625 shares) (5) (5)
------- -------
14,597 14,177
------- -------
Total liabilities and stockholders'
equity $27,446 $24,332
======= =======
See accompanying notes.
<PAGE>
Effective Management Systems, Inc.
Consolidated Statements of Income
(In Thousands, except per share amounts)
Year ended November 30
1996 1995 1994
Net revenues:
Software license fees $19,094 $11,534 $10,163
Services 15,412 10,962 7,256
Hardware 6,751 6,528 5,245
------- ------- -------
41,257 29,024 22,664
Costs of products and services:
Cost of software license fees 4,075 2,298 1,312
Cost of services 12,109 7,884 4,467
Cost of hardware 4,979 5,118 4,146
------- ------- -------
21,163 15,300 9,925
Selling and marketing expenses 14,060 9,479 7,407
General and administrative
expenses 3,416 3,029 2,227
Product development expenses 2,235 1,086 752
------- ------- -------
40,874 28,894 20,311
------- ------- -------
Income from operations 383 130 2,353
Other income (expense):
Equity in earnings (losses) of
unconsolidated joint
ventures 25 (31) 245
Interest income 89 176 149
Interest expense (145) (52) (52)
Other (87) (13) -
------- ------- -------
(118) 80 342
------- ------- -------
Income before income taxes 265 210 2,695
Income tax expense 112 79 975
-------- ------- -------
Net income $153 $131 $1,720
======== ======= =======
Net income per common share -
Primary and fully diluted $.04 $.04 $.53
======== ======= =======
Weighted average common and
common equivalent shares -
Primary and fully diluted 3,965 3,669 3,268
======== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Common
Stock and
Common Warrants
Common Stock to be Paid-in Retained Treasury
Shares Stock Warrants Issued Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1993 2,493,715 $25 $ - $ - $ 105 $1,416 $(5) $ 1,541
Shares sold to public, net of
offering costs 1,000,000 10 - - 6,999 - - 7,009
Stock options exercised 51,500 1 - - 83 - - 84
Net income - - - - - 1,720 - 1,720
--------- ----- ---- ------ ------- ------- ------- -------
Balance, November 30, 1994 3,545,215 36 - - 7,187 3,136 (5) 10,354
Issuance of common stock:
Acquisitions 328,393 3 - - 2,338 - - 2,341
Stock options 30,002 - - - 71 - - 71
Employee stock purchase plan 18,671 - - - 96 - - 96
Issuance of common stock
warrants for acquisitions - - 3 - 970 - - 973
Common stock and warrants to be
issued to complete Intercim
transaction - - - 211 - - - 211
Net income - - - - - 131 - 131
--------- ---- ---- ------ ------- ------- ----- -------
Balance, November 30, 1995 3,922,281 39 3 211 10,662 3,267 (5) 14,177
Issuance of common stock:
Acquisitions 24,000 - - - 132 - - 132
Stock options 35,000 1 - - 60 - - 61
Employee stock purchase plan 29,718 - - - 113 - - 113
Warrants 19 - - - - - - -
Issuance of additional common
stock and warrants to complete
Intercim transaction - 1 1 (172) 170 - - -
Purchase of shares from
dissenting former Intercim
shareholder - - - (39) - - - (39)
Net income - - - - - 153 - 153
--------- ----- ---- ------ ------ ----- ---- ------
Balance, November 30, 1996 4,011,018 $41 $4 $ - $11,137 $3,420 $(5) $14,597
========= ===== ==== ====== ====== ===== ==== ======
</TABLE>
See accompanying notes.
<PAGE>
Effective Management Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year ended November 30
1996 1995 1994
Operating activities
Net income $153 $131 $ 1,720
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,037 730 445
Amortization, other 189 82 54
Amortization of capitalized computer
software development costs 1,591 879 515
Equity in losses (earnings) of joint
ventures (25) 31 (245)
(Gain) loss on disposal of equipment
and leasehold improvements (24) 4 20
Deferred income taxes 202 554 203
Changes in operating assets and
liabilities:
Accounts receivable (1,770) (297) (3,690)
Inventories and other current assets 341 265 (352)
Accounts payable and other
liabilities 1,212 (464) 1,391
------- ------- -------
Total adjustments 2,753 1,784 (1,659)
------- ------- -------
Net cash provided by operating
activities 2,906 1,915 61
Investing activities
Acquisition of Darwin Data Systems,
net of cash received of $19 (51) - -
Acquisition of EMS-Illinois, net of
cash received of $160 - (238) -
Acquisition of Intercim - (225) -
Additions to equipment and leasehold
improvements (1,424) (1,430) (1,219)
Purchases of available-for-sale
securities (495) - (1,584)
Purchases of held-to-maturity
securities - - (2,006)
Proceeds from sales of available-for-
sale securities 1,247 1,584 -
Proceeds from sales of held-to-
maturity securities - 743 -
Proceeds from sale of equipment and
leasehold improvements 68 39 9
Increase in cash surrender value of
life insurance (25) (31) (112)
Software development costs
capitalized (3,372) (2,321) (1,105)
Other (111) 29 (434)
------- -------- --------
Net cash used in investing activities (4,163) (1,850) (6,451)
Financing activities
Net proceeds from initial public stock
offering $ - $ - $ 7,009
Proceeds from issuance of stock to
employees 174 167 84
Proceeds from increase in debt 1,864 - -
Payments on long-term debt and capital
lease obligations (250) (177) (595)
------- -------- -------
Net cash provided by (used in)
financing activities 1,788 (10) 6,498
------- ------- -------
Net increase in cash 531 55 108
Cash:
Beginning of year 335 280 172
------- ------- -------
End of year $866 $335 $280
======= ======= =======
Supplemental cash flow information:
Interest paid (net of amount
capitalized) $133 $52 $8
Income taxes paid (refunded), net (464) 357 518
Noncash transactions:
Equipment recorded under capital lease
obligations 371 - 7
Issuance of common stock and warrants
for acquisitions 132 3,314 -
Common stock and warrants to be issued
for an acquisition - 211 -
See accompanying notes.
<PAGE>
Effective Management Systems, Inc.
Notes to Consolidated Financial Statements
Years ended November 30, 1996, 1995 and 1994
(Dollars in thousands)
1. Basis of Presentation and Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Effective Management Systems, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Business and Concentration of Credit Risk
The Company develops, sells, and services computer software and related
hardware throughout the United States and certain foreign countries that
meet the Company's credit policies. The Company performs periodic credit
evaluations of its customers' financial condition and generally follows a
policy to obtain deposits for sales to new customers.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized in accordance with the provisions of AICPA Statement
of Position (SOP) 91-1, "Software Revenue Recognition," as follows:
Software and Hardware Sales
Revenue is recognized when the product is delivered.
Professional Fees and Services
Revenue is recognized as time and material costs are incurred.
Software Support Fees
Revenue is recognized ratably over the terms of the nonrefundable support
contract.
Annual Upgrade Fees
Revenue is recognized ratably over the nonrefundable annual upgrade
contract period.
Investments
Debt securities are classified as available-for-sale and are carried at
fair value, which approximates cost. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold is
based on the specific identification method. Interest on securities
classified as available-for-sale is included in interest income.
Inventory Valuation
Inventories are carried at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," the Company capitalizes internal costs in developing
software products upon determination that technological feasibility has
been established for the product, whereas costs incurred prior to the
establishment of technological feasibility are charged to product
development expense. When the product is available for general release to
customers, capitalization ceases and such costs are amortized on a
product-by-product basis based on current and future revenue with an
annual minimum equal to the straight-line amortization over the remaining
estimated economic useful life of the product.
Capitalized software development costs were $5,781 and $4,000 at November
30, 1996 and 1995, respectively, which is net of accumulated amortization
of $5,342 and $3,751, respectively.
Investment in Unconsolidated Joint Ventures
Investments in unconsolidated joint ventures are accounted for on the
equity method wherein the Company's share of the joint ventures' net
earnings or losses is recorded as an adjustment to the investment.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are
depreciated using the straight-line method for financial reporting
purposes. The estimated useful lives used to calculate depreciation are as
follows:
Years
Leasehold improvements 5
Furniture and fixtures 10
Equipment 5
Assets under capital leases are amortized on a straight-line basis over
their useful lives, unless the length of the lease is less and there is
not a bargain purchase option.
Intangible Assets
Intangible assets are amortized using the straight-line method for
financial reporting purposes over the following estimated lives:
Years
Customer list 15
Goodwill 12 - 20
Other intangibles 6 - 40
Income Taxes
Deferred income taxes are provided for temporary differences between
financial reporting and income tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Net Income Per Common Share
Net income per common share is computed based on the weighted average
number of common shares outstanding for the periods presented. The
dilutive effect of stock options and warrants was not material for all
years presented.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, marketable securities, trade receivables, related-party
receivables, trade payables and debt instruments. The book values of cash
and cash equivalents, marketable securities, trade receivables, related-
party receivables and trade payables are considered to be representative
of their respective fair values. None of the Company's debt instruments
that are outstanding as of November 30, 1996, have readily ascertainable
market values; however, the carrying values are considered to approximate
their respective fair values. See Note 8 for the terms and carrying values
of the Company's various debt instruments.
Stock Compensation
The Company accounts for employee stock compensation (e.g., stock options)
in accordance with APB Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Under APB 25, the total compensation expense
recognized is equal to the difference between the award's exercise price
and the underlying stock's market price (referred to as "intrinsic value")
at the measurement date, which is the first date that both the exercise
price and number of shares to be issued is known.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective
December 1, 1996. The Company will adopt SFAS No. 123 in fiscal 1997. As
is permitted under SFAS No. 123, the Company has tentatively decided to
continue accounting for employee stock compensation using APB 25, but will
disclose pro forma results using the new standard's alternative accounting
treatment, which calculates the total compensation expense to be
recognized as the fair value of the award at the date of grant for
effectively all awards granted after December 31, 1994.
2. Acquisitions
Effective April 15, 1996, the Company completed the purchase of the
remaining 75% of Darwin Data Systems (Darwin). Consideration for this
acquisition was $303, consisting of $101 in notes payable, 24,000 shares
of the Company's common stock valued at $132 and $70 of acquisition costs.
Effective March 31, 1995, the Company completed the purchase for $793 of
the remaining 50% of the capital stock of EMS-Illinois not then owned by
the Company. The purchase price consisted of 50,200 shares of the
Company's common stock valued at $395, $380 in cash and $18 of acquisition
costs.
On September 6, 1995, the Company acquired all of the common stock of
Intercim for approximately $3,355, comprised of 278,193 shares of the
Company's common stock valued at $7.50 per share and 278,193 of the
Company's warrants valued at $3.75 per share, and direct acquisition costs
of $225. Because the average trading price (Price) of the warrants for
fifteen trading days prior to April 18, 1996, was less than $3.8075, the
Company was required to issue 123,719 additional warrants, which was equal
to the difference between the number of warrants originally issued and the
warrants which should have been issued at the Price above, had the Price
been known at September 6, 1995.
The acquisitions of the remaining interests in Darwin and EMS-Illinois as
well as the purchase of Intercim have been accounted for under the
purchase method of accounting. Accordingly, the assets and liabilities of
Darwin, EMS-Illinois and Intercim have been adjusted to their estimated
fair values. The excess of cost over the net assets acquired has been
allocated to goodwill.
The results of operations for Darwin, EMS-Illinois and Intercim have been
included in the Company's consolidated financial statements from their
respective acquisition dates. The unaudited pro forma results of
operations below for EMS-Illinois and Intercim assume that the
acquisitions had occurred at the beginning of each period presented. In
addition to combining the historical results of all the entities, the pro
forma calculations include adjustments for amortization of various
intangibles acquired in conjunction with the acquisition and elimination
of intercompany transactions with EMS-Illinois. However, no adjustments
have been reflected for nonrecurring expenses as a result of the
combination of the entities.
Year ended November 30
1995 1994
(Unaudited)
Total net revenue $34,174 $32,435
Net income (loss) (505) 1,616
Earnings per share (.13) .45
Pro forma results have not been included for 1996 for the Darwin
acquisition because the impact was not significant.
3. Investments
The following is a summary of investment securities at November 30:
1996
Available-for-Sale Securities
Gross
Unrealized
Gains Estimated
Cost (Losses) Fair Value
Obligations of states and
political subdivisions $505 $ - $505
1995
Available-for-Sale Securities
Gross
Unrealized
Gains Estimated
Cost (Losses) Fair Value
Obligations of states and
political subdivisions $1,263 $ - $1,263
All of the above securities were due in one year or less.
During the years ended November 30, 1995 and 1996, debt available-for-sale
and certain debt held-to-maturity securities with fair market value of
$1,247 and $2,330, respectively, were sold, with proceeds received
approximating cost. The sales were made to provide funding for certain
acquisitions, software development and normal operations. No unrealized
holding gains (losses) on available-for-sale securities, which would be
included as a separate component of shareholders' equity, have been
recorded as cost approximated estimated fair value as of November 30, 1996
and 1995.
4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consisted of the following at
November 30:
1996 1995
Equipment $6,090 $4,738
Furniture and fixtures 1,199 1,058
Leasehold improvements 426 253
Equipment under capital leases 454 367
------- -------
8,169 6,416
Less accumulated depreciation and
amortization (4,208) (3,193)
------- -------
Equipment and leasehold improvements, net $3,961 $3,223
======= =======
5. Intangible Assets
Intangible assets consisted of the following at November 30:
1996 1995
Goodwill $1,435 $1,915
Customer list 1,400 1,400
Other 200 200
------ ------
3,035 3,515
Less accumulated amortization (355) (128)
------ ------
Intangible assets, net $2,680 $3,387
====== ======
6. Unconsolidated Joint Ventures and Contingent Liabilities
The Company owns a 50% equity investment in two joint ventures that market
and sell the Company's software. In April 1996 and March 1995, the Company
purchased the remaining joint venture interest in which it previously only
owned 25% and 50%, respectively. The Company recognized earnings (losses)
from these joint ventures of $25, ($31) and $245 in 1996, 1995 and 1994,
respectively. The Company has no obligation to fund any losses that may be
incurred by these joint ventures.
Included in accounts receivable related parties are amounts due from the
joint ventures totaling $174 and $137 at November 30, 1996 and 1995,
respectively. Included in the Company's net revenues are $486, $531 and
$1,464 from joint ventures in 1996, 1995 and 1994, respectively.
Summarized financial information from the unaudited annual financial
statements of the unconsolidated joint ventures is presented below using
their fiscal year ends completed prior to the Company's November 30 fiscal
year below:
1994
Net revenues $7,892
Costs and expenses 7,255
Net income 276
Information for 1996 and 1995 was not included as the Company's investment
in joint ventures is not material at November 30, 1996 and 1995,
respectively.
7. Affiliated Company
Certain of the Company's stockholders also own all of the common stock of
an affiliated company, EMS Solutions, Inc. (Solutions), which develops and
sells computer software and related hardware to the food vending and food
distribution industry. The Company provides office space and other
services to Solutions for which the Company received fees of $269, $321
and $349 in 1996, 1995 and 1994, respectively, that are recorded as an
offset to general and administrative expense. The Company also sells
computer hardware to Solutions that totaled $851, $926 and $408 in 1996,
1995 and 1994, respectively. Amounts due from Solutions were $445 and $429
at November_30, 1996 and 1995, respectively. Material transactions with
Solutions must be approved by a majority of the Company's nonemployee
directors.
8. Long-Term Debt and Lease Commitments
Long-term obligations consist of the following at November 30:
1996 1995
Line of credit $1,864 $ -
Notes payable 27 -
Capital lease obligations 359 110
------- ------
2,250 110
Less amounts due within one
year (127) (89)
------- ------
$2,123 $ 21
======= ======
The Company has entered into a loan and security agreement (Agreement)
with a bank, as amended, which includes a revolving line of credit
facility (Revolver) providing for maximum borrowings of $5,000 at November
30, 1996. Amounts outstanding have been classified as long-term based upon
the stated maturity date and the Company's estimates that borrowings will
not decrease during fiscal 1997. Interest is payable monthly based on the
bank's base rate, or quarterly based on a Eurodollar borrowing rate plus a
margin, depending upon how advances are drawn. The Revolver had a weighted
average interest rate of 8.38% at November 30, 1996, and matures in
February 1998. Total borrowings under the Revolver are limited to the
lesser of a) the commitment amount or b) 80% of qualified accounts
receivable, as defined in the Agreement.
Borrowings under the Agreement are secured by substantially all assets of
the Company (except inventory subject to the lien of a vendor). In
addition, the Agreement requires the Company to maintain compliance with
various covenants, including minimum levels of net income, tangible net
worth, capital expenditures and expenditures for capitalized software. The
Company is also required to pay a monthly commitment fee of .25% per annum
on the difference between the commitment amount and balance outstanding
under the Revolver in lieu of a minimum monthly interest payment.
The Company leases computer and other equipment under capital leases. The
Company also leases office space, automobiles, and certain other equipment
under operating leases.
At November 30, 1996, future payments under capital and noncancellable
operating leases were as follows:
November 30, 1996
Fiscal Year Ending Capital Operating
November 30 Leases Leases
1997 $164 $1,142
1998 153 1,059
1999 99 990
2000 4 958
2001 - 878
Thereafter - 1,451
------ ------
Total minimum lease obligations 420 $6,478
======
Amounts representing interest (61)
-----
Capital lease obligations $359
=====
Amortization expense relating to assets under capital leases is included
in total depreciation expense for the period.
Total rent expense on all operating leases was approximately $1,404,
$1,042 and $642 in 1996, 1995 and 1994, respectively.
9. Stockholders' Equity
As of November 30, 1995, the Company had 18,801 shares of common stock and
18,801 warrants with an aggregate value of $211 that were to be issued in
exchange for common stock of former Intercim stockholders. These amounts,
which were classified as common stock and warrants to be issued in
stockholders' equity at November 30, 1995, were substantially issued in
1996.
In connection with the acquisition of Intercim (see Note 2), the Company
issued common stock warrants. Each warrant entitles the holder, at any
time prior to September 6, 2005, to purchase one share of the Company's
common stock at $6.75 per share.
In 1994, the Company issued 1,000,000 new shares of common stock to the
public in an initial public offering (IPO) and received net proceeds of
approximately $7.0 million.
10. Stock Options and Employee Stock Purchase Plans
The Company maintains the 1986 Employees' Stock Option Plan (the 1986
Plan) pursuant to which executive officers and other key employees of the
Company have received options to purchase shares of the Company's common
stock. Options under the 1986 Plan were granted at exercise prices equal
to the fair market value of the common stock on the date of grant. Options
to purchase an aggregate of 57,000 shares have previously been granted and
remain outstanding at November 30, 1996, and no additional options will be
granted.
In December 1993, the Company's Board of Directors adopted the Effective
Management Systems, Inc. 1993 Stock Option Plan (the 1993 Plan). The 1993
Plan, as amended, provides for the granting of both incentive stock
options and nonqualified stock options to employees and non-employee
directors of the Company covering up to a maximum of 550,025 shares. Under
the 1993 Plan, the exercise price of options granted cannot be less than
100% of the fair market value of a share of the Company's stock at the
date of grant.
On September 6, 1995, in conjunction with the merger of Intercim (see Note
2), the Company adopted a new stock option plan, pursuant to which the
Company granted stock options to those holders who agreed to the
cancellation of their Intercim stock options.
The Company has also issued nonqualified stock options to certain of its
executives and other nonemployee directors. These options have various
vesting schedules.
Information with respect to stock options granted under all plans is as
follows:
Number Exercise Price
of Shares Per Share
Outstanding at November 30, 1993 169,750 $1.57 - 2.29
Granted 272,049 1.57 - 8.00
Exercised (51,500) 1.57 - 6.25
Canceled or expired (875) 1.57 - 2.29
------- -----------
Outstanding at November 30, 1994 389,424 1.57 - 8.00
Granted 518,352 6.125 - 7.25
Exercised (29,949) 1.57 - 6.25
Canceled or expired (47,399) 6.25
------- -----------
Outstanding at November 30, 1995 830,428 1.57 - 8.00
Granted 124,043 4.75 - 7.00
Exercised (35,000) 1.71
Canceled or expired (14,569) 5.75 - 7.50
------- -----------
Outstanding at November 30, 1996 904,902 1.71 - 7.50
======= ===========
At November 30, 1996, options to purchase 338,970 shares were exercisable
under all plans.
In December 1993, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (Stock Purchase Plan), which permits employees to purchase
shares of the Company's common stock during six-month periods beginning on
June 1 and December_1 of each year. The purchase price of such shares will
be equal to the lesser of 85% of the fair market value of the stock at the
beginning or end of each six-month offering period. During fiscal 1996 and
1995, 29,718 and 18,671 shares, respectively, were purchased under the
Stock Purchase Plan. The maximum cumulative number of shares that may be
purchased under the Stock Purchase Plan is 100,240.
The Company has reserved 1,508,813 shares of its common stock for
potential conversion of common stock warrants (see Note 9) and issuance
under the stock option and purchase plans described above.
11. Income Taxes
Income tax expense (credit) in the consolidated statement of operations
consists of the following:
Year ended November 30
1996 1995 1994
Current:
Federal $(170) $(485) $635
State 80 10 137
----- ----- ----
(90) (475) 772
Deferred 202 576 203
Change in valuation reserve - (22) -
---- ---- ----
$ 112 $ 79 $975
==== ==== ====
The reconciliation of income tax expense computed at the U.S. federal
statutory rate to income tax expense is:
Year ended November 30
1996 1995 1994
Tax at U.S. statutory rate of 34% $ 90 $ 71 $916
State income taxes, net of federal
benefit 14 7 137
Intangible amortization 28 28 -
Other nondeductible items 84 54 -
Tax-exempt investment income (13) (32) (27)
General business credits (98) (69) (61)
Change in valuation allowance - 22 -
Other 7 (2) 10
---- ---- ----
$112 $ 79 $975
==== ==== ====
The significant components of the deferred tax accounts recognized for
financial reporting purposes at November 30 were as follows:
1996 1995
Deferred tax liabilities:
Capitalized computer software costs $2,341 $1,579
Depreciation 328 241
Other, net 15 60
------- -------
Total deferred tax liabilities 2,684 1,880
Deferred tax assets:
Net operating loss carryforwards 1,578 1,108
Allowance for doubtful accounts 108 114
Deferred revenue 72 146
Inventory 40 100
General business credit carryforwards 448 69
Other, net 53 63
------ ------
Total deferred tax assets 2,299 1,600
Valuation allowance - (856)
------ ------
Net deferred tax liabilities $ 385 $1,136
====== ======
At November 30, 1996, the Company had net operating loss carryforwards
(NOLs) of approximately $3,345,000 available to offset future federal
taxable income. The utilization of $2,730,000 of the NOLs is subject to an
annual limitation of approximately $182,000 annually and expires in the
year 2010. The carryforwards resulted from the Company's acquisition of
Intercim Corp. (Intercim) in 1995. In addition, the Company has general
business credits totaling $281,000 which can be used to reduce federal
taxable income through 2011.
In conjunction with the acquisition of Intercim (see Note 2), a valuation
allowance was recorded as an offset to the net deferred tax assets
acquired (which primarily consisted of acquired net operating loss
carryforwards) based on uncertainty regarding realization of such deferred
tax assets because Intercim's NOLs were only available to offset future
taxable income of Intercim. On November 29, 1996, Intercim was merged into
the Company and, as a result, the NOLs can be offset against the Company's
taxable income, subject to the annual limitation described above. As a
result, the valuation allowance referred to above has been eliminated with
an offsetting reduction of the goodwill recorded in the Intercim
acquisition.
12. Savings Plan
The Company has three defined contribution 401(k) savings plans that cover
substantially all employees meeting certain minimum eligibility
requirements. Participating employees can elect to defer a portion of
their compensation and contribute it to the plan on a pretax basis. The
Company also matches certain amounts and/or provides additional
discretionary contributions, as defined. The Company s contributions to
the various plans were $345, $246 and $184 for 1996, 1995 and 1994,
respectively.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable
Part III
Item 9. Directors, Executive Officers, Promoters, and Control Persons of
the Registrant; Compliance with Section 16 (a) of the Exchange Act
Pursuant to Instruction E, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1997 annual meeting of shareholders under the captions "Election
of Directors", "Executive Officers" and "Miscellaneous-Section 16(a)
Beneficial Ownership Reporting Compliance.". The definitive proxy
statement will be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year.
Item 10. Executive Compensation
Pursuant to Instruction E, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1997 annual meeting of shareholders under the caption "Board of
Directors-Director Compensation" and "Executive Compensation". The
definitive proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction E, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1997 annual meeting of shareholders under the caption "Principal
Shareholders". The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
Item 12. Certain Relationships and Related Transactions
Pursuant to Instruction E, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1997 annual meeting of shareholders under the caption "Related
Party Transactions". The definitive proxy statement will be filed with
the Securities and Exchange Commission with 120 days after the end of the
Company's fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
Exhibits
Reference is made to the separate exhibit index contained on
pages E-1 through E-5 hereof.
b) Reports on Form 8-K
No current reports on Form 8-K were filed during the fourth
quarter of the Company's fiscal year ended November 30, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 14, 1997.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
BY: /s/ Michael D. Dunham
Michael D. Dunham
President
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities indicated on February 14, 1997.
Signature Title
/s/ Michael D. Dunham President and Director
Michael D. Dunham (Principal Executive Officer)
/s/ Jeffrey J. Fossum Chief Financial Officer and
Jeffrey J. Fossum Assistant Treasurer (Principal
Financial and Accounting Officer)
/s/ Helmut M. Adam Director
Helmut M. Adam
/s/ Thomas M. Dykstra Director
Thomas M. Dykstra
/s/ Scott J. Mermel Director
Scott J. Mermel
/s/ Robert E. Weisenberg Director
Robert E. Weisenberg
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
2.1 Agreement and Plan of Merger, dated as of February 17, 1995,
among Effective Management Systems, Inc., EMS Acquisition Corp.
and Intercim Corporation [Incorporated by reference to Exhibit
2.1 to Effective Management Systems, Inc.'s Registration
Statement on Form S-4 (Registration No. 33-95338)]
2.2 Amendment No. 1 to Agreement and Plan of Merger described in
Exhibit 2.1, dated as of June 30, 1995 [Incorporated by
reference to Exhibit 2.2 to Effective Management Systems, Inc.
Registration Statement on Form S-4 (Registration No. 33-95338)]
2.3 Amendment No. 2 to Agreement and Plan of Merger described in
Exhibit 2.1, dated as of July 31, 1995 [Incorporated by
reference to Exhibit 2.3 to Effective Management Systems,
Inc.'s Registration Statement on Form S-4 (Registration No.
33-95338)]
2.4 Agreement of Merger, dated as of March 22, 1995, among Effective
Management Systems, Inc., EMS Illinois Acquisition Corp.,
Effective Management Systems of Illinois, Inc., Richard W.
Grelck and Daniel E. Long [Incorporated by reference to Exhibit
2.2 to Effective Management Systems, Inc.'s Quarterly Report on
Form 10-QSB for the quarter ended February 28, 1995]
3.1 Restated Articles of Incorporation of Effective Management
Systems, Inc. [Incorporated by reference to Exhibit 3.1 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
3.2 By-laws of Effective Management Systems, Inc. [Incorporated by
reference to Exhibit 3.2 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)]
4.1 Article 4 of the Restated Articles of Incorporation of Effective
Management Systems, Inc. [Incorporated by reference to Exhibit
3.1 of Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 (Registration No. 33-73354)]
4.2 Loan and Security Agreement, dated November 9, 1992, by and
between Bank One, Milwaukee, National Association, and Effective
Management Systems, Inc. and certain affiliates [Incorporated by
reference to Exhibit 4.2 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)]
4.3 First Amendment to Loan and Security Agreement, dated April 23,
1993, by and between Bank One, Milwaukee, National Association,
and Effective Management Systems, Inc. and certain affiliates
[Incorporated by reference to Exhibit 4.3 to Effective
Management Systems, Inc.'s Registration Statement on Forms SB-2
(Registration No. 33-73354)]
4.4 Second Amendment to Loan and Security Agreement, dated February
8, 1994, by and between Bank One, Milwaukee, National
Association, and Effective Management Systems, Inc. and certain
affiliates [Incorporated by reference to Exhibit 4.4 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
4.5 Third Amendment to Loan and Security Agreement, dated May 11,
1995, by and between Bank One, Milwaukee, National Association,
and Effective Management Systems, Inc. and certain affiliates
[Incorporated by reference to Exhibit 4.1 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended February 29, 1996]
4.6 Fourth Amendment to Loan and Security Agreement, dated August
31, 1995, by and between Bank One, Milwaukee, National
Association, and Effective Management Systems, Inc. and certain
affiliates [Incorporated by reference to Exhibit 4.2 to
Effective Management Systems, Inc.'s Quarterly Report on Form
10-QSB for the quarter ended February 29, 1996]
4.7 Fifth Amendment to Loan and Security Agreement, dated May 31,
1996, by and between Bank One, Milwaukee, National Association,
and Effective Management Systems, Inc. and certain affiliates.
4.8 Sixth Amendment to Loan and Security Agreement, dated October
31, 1996, by and betwen Bank One, Milwaukee, National
Association, and Effective Management Systems, Inc. and certain
affiliates.
4.9 Warrant Agreement between Effective Management Systems, Inc. and
American Stock Transfer & Trust Company, dated as of September
6, 1995 [Incorporated by reference to Exhibit 4.2 to Effective
Management Systems, Inc.'s Current Report on Form 8-K, dated
September 6, 1995]
10.1 Business Agreement by and between Digital Equipment Corporation
and Effective Management Systems, Inc., effective as of February
8, 1994 [Incorporated by reference to Exhibit 10.1 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.2 Addendum to Business Agreement by and between Digital Equipment
Corporation and Effective Management Systems, Inc., effective as
of February 8, 1994 [Incorporated by reference to Exhibit 10.2
to Effective Management Systems, Inc.'s Registration Statement
on Form SB-2 (Registration No. 33-73354)]
10.3 Value Added Reseller Agreement by and between Digital
Information Systems Corporation and Effective Management
Systems, Inc., effective as of November 9, 1992 [Incorporated by
reference to Exhibit 10.3 to Effective Management Systems,
Inc.'s Registration Statement on Form SB-2 (Registration No. 33-
73354)]
10.4 Domestic Value Added Reseller Agreement between Intermec
Corporation and Effective Management Systems, Inc., dated as of
March 4, 1991 [Incorporated by reference to Exhibit 10.4 to
Effective Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
10.5 Amendment No. 1 to Domestic Value Added Reseller Agreement
between Intermec Corporation and Effective Management Systems,
Inc., dated as of October 29, 1991 [Incorporated by reference to
Exhibit 10.5 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)]
10.6 Amendment No. 2 to Domestic Value Added Reseller Agreement
between Intermec Corporation and Effective Management Systems,
Inc., dated as of June 11, 1993 [Incorporated by reference to
Exhibit 10.6 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)]
10.7 Software Supplier Agreement, dated August 6, 1994, by and between
Effective Management Systems, Inc. and Hewlett Packard Company
[Incorporated by reference to Exhibit 10.7 to Effective
Management Systems, Inc.'s Annual Report on Form 10-KSB for the
year ended November 30, 1994]
10.8 Joint Venture Agreement, dated September 15, 1985, by and
between Effective Management Systems, Inc. and Joseph H.
Schlanser, Aurinee M. Schansler and Barton R. Benjamin
[Incorporated by reference to Exhibit 10.9 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.9 International Marketing Agreement, dated July 5, 1994 by and
between Effective Management Systems, Inc., Systems, Inc. and
Systems Technology Management Corporation [Incorporated by
reference to Exhibit 10.11 to Effective Management Systems,
Inc.'s Annual Report on Form 10-KSB for the year ended November
30, 1994]
10.10 Lease by and between Effective Management Systems, Inc. and
Milwaukee Park Place Limited Partnership, as amended
[Incorporated by reference to Exhibit 10.10 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.11* Effective Management Systems, Inc. 1986 Employee's Stock Option
Plan [Incorporated by reference to Exhibit 10.11 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.12* Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended [Incorporated by reference to Exhibit 10.1 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended May 31, 1996]
10.13* Stock Option Agreement by and between Helmut M. Adam and
Effective Management Systems, Inc., dated as of December 17,
1993 [Incorporated by reference to Exhibit 10.13 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.14* Stock Option Agreement by and between Scott J. Mermel and
Effective Management Systems, Inc., dated as of December 17,
1993 [Incorporated by reference to Exhibit 10.14 to Effective
Management Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.15* Bonus Arrangement by and between Thomas G. Allen and Effective
Management Systems, Inc. [Incorporated by reference to Exhibit
10.16 to Effective Management Systems, Inc.'s Annual Report on
Form 10-KSB for the year ended November 30, 1994]
10.16 IBM Business Partner Agreement between International Business
Machines Corporation and Effective Management Systems, Inc.,
dated as of March 3, 1995 [Incorporated by reference to Exhibit
10.1 to Effective Management Systems, Inc.'s Quarterly Report on
Form 10-QSB for the quarter ended February 28, 1995]
10.17 Software Reseller Agreement between International Business
Machines Corporation and Effective Management Systems, Inc.,
dated as of September 6, 1995 [Incorporated by reference to
Exhibit 10.18 to Effective Management Systems, Inc.'s Annual
Report on Form 10-KSB for the year ended November 30, 1995]
21 List of subsidiaries of Effective Management Systems, Inc.
23 Consent of Ernst & Young, LLP
27 Financial Data Schedule [EDGAR Version Only]
99 Proxy Statement for 1997 Annual Meeting Shareholders
[The Proxy Statement for the 1997 Annual Meeting of
Shareholders will be filed with the Securities and
Exchange Commission under Regulation 14A within 120
days after the end of the Company's fiscal year;
except to the extent incorporated by reference, the
Proxy Statement for the 1997 Annual Meeting of
Shareholders shall not be deemed to be filed with the
Securities and Exchange Commission as part of this
Annual Report on form 10-KSB]
* Indicates a management contract or compensatory plan or arrangement.
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fifth Amendment to Loan and Security Agreement is dated as
of May 31, 1996 by and between Bank One, Milwaukee, NA (the "Secured
Party") and Effective Management Systems, Inc. ("EMS"), Effective
Management Systems of Michigan, Inc., EMS-East, Inc., Intercim Corp. f/k/a
EMS Acquisition Corp. and Effective Management Systems of Illinois, Inc.
(collectively, the "Debtors").
WHEREAS, the Secured Party and certain of the Debtors entered
into a loan and security agreement dated as of April 23, 1993, which
agreement has subsequently been amended (as amended, the "Loan
Agreement"); and
WHEREAS, the Secured Party and the Debtors desire to further
amend the Loan Agreement as hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows (all
capitalized terms used but not defined herein shall have the meaning
assigned in the Loan Agreement):
1. The definition of "Note A" is amended and restated such that
it shall mean Debtors' amended and restated Note A of even date herewith,
a copy of which is attached as Exhibit A.
2. Section 7 (aa) of the Loan Agreement is amended and restated as
follows:
(aa) Financial average. EMS shall maintain at all
times a ratio of (i) its Consolidated liabilities
(other than capital stock and surplus) as shown on its
consolidated balance sheet in accordance with GAAP,
and including as liabilities all reserves for
contingencies and other potential liabilities and all
liabilities of all foreign subsidiaries, to (ii) its
Consolidated Adjusted Tangible Net Worth (including
net capitalized software costs) of less than 1.50 to
1.00.
3. Section 8(c) of the Loan Agreement is amended and restated as
follows:
(c) Capital Expenditures. Expend or contract to
expend more than $5,750,000 in fiscal year 1996 and
more than $6,000,000 in any fiscal year thereafter in
the aggregate for all Debtors for the lease (other
than operating leases), purchase or other acquisition
of any capital asset, or for the lease (other than
operating leases) of any other asset, whether payable
currently or in the future.
4. Section 8(i) of the Loan Agreement is amended and restated as
follows:
(i) Purchase stock or securities of, extend credit to
(other than that expressly permitted in Section 8(l))
or make investments in, become liable as surety for,
or guarantee or endorse any obligation in excess of
$25,000 of, any person, firm or corporation, except
investments in direct obligations of the United States
and commercial bank deposits with Secured Party,
extensions of credit reflected by trade accounts
receivables arising for goods sold by a Debtor in the
ordinary course of its business, investments in EMS
Asia Pacific Limited, a Hong Kong corporation, up to
$25,000 in the aggregate and except acquisitions with
a cash price and/or Subordinated Debt in the aggregate
of less than $1,000,000, provided Debtors provide
Secured Party, within 30 days of such acquisition, a
certificate demonstrating that Debtors are not in
breach of Section 7 (aa) of this Agreement after
giving effect to such acquisition and using the most
recent fiscal quarter-End financial statements.
5. Section 10 of the Loan Agreement is amended by deleting
"February 27, 1997" appearing therein and inserting "February 28, 1998" in
its place.
6. This Fifth Amendment shall be effective upon the execution of
this Fifth Amendment, as well as the Amended and Restated Note A of even
date herewith in the amount of $3,000,000, a copy of which is attached
hereto as Exhibit A Thereafter, such note shall become Exhibit A to the
Loan Agreement
7. The Debtors represent that all of the representations and
warranties contained in the Loan Agreement are true and correct as of the
date hereof, there is no event of default which has occurred and is
continuing under the Loan Agreement and there has not, since January 26,
1996, been any material adverse change in the financial condition or
business prospects of the Debtors.
8. Except as specifically amended hereby, the Loan Agreement
continues in full force and effect and all references therein or otherwise
to the Loan Agreement shall mean the Loan Agreement as amended hereby.
EFFECTIVE MANAGEMENT
BANK ONE, MILWAUKEE, NA SYSTEMS, INC.
By: ___________________________ By: _____________________________
William E. Shaw, Vice President
EFFECTIVE MANAGEMENT
SYSTEMS OF MICHIGAN, INC.
By: _____________________________
EMS-EAST, INC.
By: _____________________________
INTERCIM CORP. f/k/a
EMS ACQUISITION CORP.
By: _____________________________
EFFECTIVE MANAGEMENT
SYSTEMS OF ILLINOIS, INC.
By: _____________________________
<PAGE>
EXHIBIT A
AMENDED AND RESTATED NOTE A
Dated: May 31, 1996 Executed at
Stated Principal: $3,000,000 Milwaukee, Wisconsin
FOR VALUE RECEIVED, Effective Management Systems, Inc., a
Wisconsin corporation, Effective Management Systems of Michigan, Inc., a
Michigan corporation, EMS-East, Inc., a Massachusetts corporation,
Intercim Corp. f/k/a EMS Acquisition Corp., a Minnesota corporation and
Effective Management Systems of Illinois, Inc., an Illinois corporation
(collectively, "Borrowers"), hereby promise to pay, jointly and severally,
to the order of Bank One, Milwaukee, National Association, its successors
and assigns (the "Secured Party") at its Milwaukee office at 111 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, the principal sum of Three
Million Dollars ($3,000,000) or the aggregate unpaid principal amount of
all advances made by the Secured Party hereunder pursuant to the Loan
Agreement hereinafter referred to and to pay interest from the date hereof
on the unpaid balances hereof at the rate set forth in Section 2 of the
Loan Agreement and to pay interest at a rate equal to 2.5% per annum above
the Reference Rate (as defined in the Loan Agreement) after default or
maturity. Any change in interest hereon shall be effective on the date of
each such change in the Reference Rate. In the absence of a default,
interest (computed on the basis of actual days elapsed and a year of 360
days) for each calendar month shall be due and payable as of the first day
of the next succeeding month, commencing on the first such date after the
date hereof, and at Secured Party's sole discretion may be debited to
Borrowers' loan account ledger for Credit Facility A (as defined in the
Loan Agreement) or debited to any Borrowers commercial demand account
maintained with Secured Party, and all principal and accrued but unpaid
interest shall be due and payable upon termination of the Loan Agreement.
AD payments received hereunder shall be applied first to
interest accrued and unpaid to date of receipt and then to repay
principal.
No deferral of time of payment shall be valid unless the holder
consents in writing and if such deferral is granted,the deferred balance
including interest thereof at 2.5% in excess of the Reference Rate shall
be an additional obligation under this Note. The undersigned and each
endorser hereby waive presentment, protest, and notice of dishonor and
give consent to the holder to extend time and to compound, release or
delay enforcement of rights against the undersigned or the security.
This Note is cross-defaulted and cross-collateralized with
Borrowers' Amended and Restated Note B payable to Secured Party dated
February 8, 1994.
This Note is the Note A referred to in the Loan and Security
Agreement dated as of November 9, 1992 as amended by the First Amendment
to Loan and Security Agreement dated as of April 23, 1993, by the Second
Amendment to Loan and Security Agreement dated February 8, 1994, by Third
Amendment to Loan and Security Agreement dated May 11, 1995, by Fourth
Amendment to Loan and Security Agreement dated January 26, 1996, and Fifth
Amendment to Loan and Security Agreement of even date, between the
undersigned, or some of the undersigned, and the Secured Party (as the
same may be amended, modified, supplemented or restated from time to time,
the "Loan Agreement"). This Note is secured by certain collateral referred
to in the Loan Agreement:
This Note is, in part, in substitution and replacement of the
Amended and Restated Note A executed by the undersigned, or some of the
undersigned, and delivered to Secured Party dated May 11, 1995 in the
original principal amount of $3,000,000, and does not constitute repayment
of such Note.
EFFECTIVE MANAGEMENT INTERCIM CORP. f/k/a
SYSTEMS, INC. EMS ACQUISITION CORP.
By: __________________________ By: ____________________________
Attest:_______________________ Attest:_________________________
EFFECTIVE MANAGEMENT EFFECTIVE MANAGEMENT
SYSTEMS OF MICHIGAN, INC. SYSTEMS OF ILLINOIS, INC.
By: __________________________ By: ____________________________
Attest:_______________________ Attest:_________________________
EMS-EAST INC.
By: ___________________________
Attest: _______________________
SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Sixth Amendment to Loan and Security Agreement is dated as
of October 31, 1996 by and between Bank One, Milwaukee, NA (the "Secured
Party") and Effective Management Systems, Inc. ("EMS"), Effective
Management Systems of Michigan, Inc., EMS-East, Inc., Intercim Corp. f/k/a
EMS Acquisition Corp. and Effective Management Systems of Illinois, Inc.
(collectively, the "Debtors").
WHEREAS, the Secured Party and certain of the Debtors entered
into a loan and security agreement dated as of April 23, 1993, which
agreement has subsequently been amended (as amended, the "Loan
Agreement"); and
WHEREAS, the Secured Party and the Debtors desire to further
amend the Loan Agreement as hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows (all
capitalized terms used but not defined herein shall have the meaning
assigned in the Loan Agreement):
1. The definition of "Note A" is amended and restated such
that it shall mean Debtors' amended and restated Note A of even date
herewith, a copy of which is attached as Exhibit A.
2. The definitions for the defined terms "Default," "Minimum"
and "Target" levels of Consolidated adjusted Net Earnings From Operations
are amended and restated as follows:
"Default," "Minimum" and "Target" levels of Consolidated
Adjusted Net Earnings From Operations shall be determined in
accordance with the following table, for the periods set forth
therein, as follows:
Consolidated Adjusted
Period Net Earnings From Operations
Four fiscal quarters
ending: Default Minimum Target
August 31, 1996 ($175,000) $ 500,000 $ 700,000
November 30, 1996 ($100,000) $ 550,000 $ 750,000
February 28, 1997 $100,000 $ 600,000 $ 800,000
May 31, 1997 $400,000 $ 600,000 $ 800,000
each quarter end thereafter $800,000 $1,000,000 $1,250,000
As used herein, amounts within parentheses are negative numbers.
3. Section 2(a) of the Loan Agreement is amended by deleting
"$3,000,000" appearing therein and inserting "$5,000,000" in its place.
4. This Sixth Amendment shall be effective upon the execution
of this Sixth Amendment, as well as the Amended and Restated Note A of
even date herewith in the amount of $5,000,000, a copy of which is
attached hereto as Exhibit A Thereafter, such note shall become Exhibit A
to the Loan Agreement.
5. The Debtors represent that all of the representations and
warranties contained in the Loan Agreement are true and correct as of the
date hereof, there is no event of default which has occurred and is
continuing under the Loan Agreement and there has not, since May 31, 1996,
been any material adverse change in the financial condition or business
prospects of the Debtors.
6. Except as specifically amended hereby, the Loan Agreement
continues in full force and effect and all references therein or otherwise
to the Loan Agreement shall mean the Loan Agreement as amended hereby.
EFFECTIVE MANAGEMENT
BANK ONE, MILWAUKEE, NA SYSTEMS, INC.
By: By:
William E. Shaw, Vice
President
EFFECTIVE MANAGEMENT
SYSTEMS OF MICHIGAN, INC.
By:
EMS-EAST, INC.
By:
INTERCIM CORP. f/k/a
EMS ACQUISITION CORP.
By:
EFFECTIVE MANAGEMENT
SYSTEMS OF ILLINOIS, INC.
By:
<PAGE>
EXHIBIT A
AMENDED AND RESTATED NOTE A
Dated: October 31, 1996 Executed at
Stated Principal: $5,000,000 Milwaukee, Wisconsin
FOR VALUE RECEIVED, Effective Management Systems, Inc., a
Wisconsin corporation, Effective Management Systems of Michigan, Inc., a
Michigan corporation, EMS-East, Inc., a Massachusetts corporation,
Intercim Corp. f/k/a EMS Acquisition Corp., a Minnesota corporation and
Effective Management Systems of Illinois, Inc., an Illinois corporation
(collectively, "Borrowers"), hereby promise to pay, jointly and severally,
to the order of Bank One, Milwaukee, National Association, its successors
ad assigns (the "Secured Party") at its Milwaukee office at 111 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, the principal sum of Five
Million Dollars ($5,000,000) or the aggregate unpaid principal amount of
all advances made by the Secured Party hereunder pursuant to the Loan
Agreement hereinafter referred to ad to pay interest from the date hereof
on the unpaid balances hereof at the rate set forth in Section 2 of the
Loan Agreement and to pay interest at a rate equal to 2.5% per annum above
the Reference Rate (as defined in the Loan Agreement) after default or
maturity. Any change in interest hereon shall be effective on the date of
each such change in the Reference Rate. In the absence of a default,
interest (computed on the basis of actual days elapsed and a year of 360
days) for each calendar month shall be due and payable as of the first day
of the next succeeding month, commencing on the first such date after the
date hereof, and at Secured Party's sole discretion may be debited to
Borrowers' loan account ledger for Credit Facility A (as defined in the
Loan Agreement) or debited to any Borrowers commercial demand account
maintained with Secured Party, and all principal and accrued but unpaid
interest shall be due and payable upon termination of the Loan Agreement.
All payments received hereunder shall be applied first to
interest accrued and unpaid to date of receipt and then to repay
principal.
No deferral of time of payment shall be valid unless the holder
consents in writing and if such deferral is granted, the deferred balance
including interest thereof at 2.5% in excess of the Reference Rate shall
be an additional obligation under this Note. The undersigned and each
endorser hereby waive presentment, protest, and notice of dishonor and
give consent to the holder to extend time and to compound, release or
delay enforcement of rights against the undersigned or the security.
This Note is cross-defaulted and cross-collateralized with
Borrowers' Amended and Restated Note B payable to Secured Party dated
February 8, 1994.
This Note is the Note A referred to in the Loan and Security
Agreement dated as of November 9, 1992 as amended by the First Amendment
to ban and Security Agreement dated as of April 23,993, by the Second
Amendment to ban and Security Agreement dated February 8, 1994, by Third
Amendment to Loan and Security Agreement dated May 11, 1995, by Fourth
Amendment to Loan and Security Agreement dated January 26, 1996, by Fifth
Amendment to Loan and Security Agreement dated May 31, 1996 and by Sixth
Amendment to Loan and Security Agreement of even date, between the
undersigned, or some of the undersigned, and the Secured Party (as the
same may be amended, modified, supplemented or restated from time to time,
the "Loan Agreement"). This Note is secured by certain collateral
referred to in the loan Agreement.
This Note is, in part, in substitution and replacement of the
Amended and Restated Note A executed by the undersigned, or some of the
undersigned, and delivered to Secured Party dated May 31, 1996 in the
original principal amount of $3,000,000, and does not constitute repayment
of such Note.
EFFECTIVE MANAGEMENT
SYSTEMS, INC. INTERCIM CORP. f/k/a
EMS ACQUISITION CORP.
By:
By:
Attest:
Attest:
EFFECTIVE MANAGEMENT
SYSTEMS OF MICHIGAN, INC. EFFECTIVE MANAGEMENT
SYSTEMS OF ILLINOIS, INC.
By:
By:
Attest:
Attest:
EMS-EAST, INC.
By:
Attest:
Exhibit 21
List of Subsidiaries of Effective Management Systems, Inc.
Name of Subsidiary Jurisdiction of
Incorporation
Intercim Corporation Minnesota
EMS-East, Inc. Massachusetts
Effective Management Systems of Michigan, Inc. Michigan
Effective Management Systems of Illinois, Inc. Illinois
Total Management Systems, Inc. Ohio
EMS-Asia Pacific, Ltd. Hong Kong
EMS China, Ltd. Hong Kong
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-79838) pertaining to the Effective Management Systems,
Inc. 1994 Employee Stock Purchase Plan, the Registration Statement on Form
S-8 (No. 33-78658) pertaining to the Effective Management Systems, Inc.
1993 Stock Option Plan and the Registration Statement on Form S-3 (No. 33-
95816) pertaining to the registration of 550,000 shares of its common
stock of our report dated January 17, 1997, with respect to the
consolidated financial statements of Effective Management Systems, Inc.
included in the Annual Report on Form 10-KSB for the year ended November
30, 1996.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 14, 1997
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