U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED February 28,
1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission file number 0-23438
Effective Management Systems, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1292200
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 West Park Place
Milwaukee, WI 53224
(Address of principal executive offices)
414-359-9800
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Class Outstanding as of February 28, 1997
Common Stock, $.01 par value 4,024,892
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
February 28, 1997
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets at
February 28, 1997 and November 30, 1996 3
Consolidated Statements of Income - Three
Months Ended February 28, 1997 and February 29, 1996 5
Consolidated Statements of Cash Flows - Three 6
Months Ended February 28, 1997 and February 29, 1996
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
PART I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1996 amounts)
ASSETS 28-Feb 30-Nov
1997 1996
CURRENT ASSETS
Cash $129 $866
Investments in available-for-sale
securities 255 505
Accounts Receivable:
Trade, less allowance for
doubtful accounts 10,183 11,146
Related Parties 776 693
Inventories 409 391
Refundable Income Taxes 804 159
Deferred Income Taxes 175 175
Prepaid Expenses and Other Current
Assets 362 288
------- -------
TOTAL CURRENT ASSETS 13,093 14,223
LONG TERM ASSETS
Computer Software, net 6,075 5,781
Investments in and Advances to
Unconsolidated Joint Ventures 199 199
Equipment and Leasehold Improvements,
net 4,134 3,961
Intangible Assets, net 2,632 2,690
Other Assets 594 592
------- -------
TOTAL LONG TERM ASSETS 13,634 13,223
------- -------
TOTAL ASSETS $26,727 $27,446
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited except for
November 30, 1996 amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 28-Feb 30-Nov
1997 1996
CURRENT LIABILITIES
Accounts Payable $1,856 $2,026
Accrued Liabilities 1,288 2,846
Deferred Revenues 5,004 4,605
Customer Deposits 105 109
Current portion of
Long-term Obligations 527 127
------- ------
TOTAL CURRENT LIABILITIES 8,780 9,713
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 464 453
Long-term Obligations 3,139 2,123
Deferred Income Taxes 560 560
------- -------
TOTAL LONG TERM LIABILITIES 4,163 3,136
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized
3,000,000 shares; none issued or outstanding - -
Common Stock, $.01 par value;
authorized 20,000,000 shares;
issued 4,027,517 and 4,011,018
shares; outstanding 4,024,892
and 4,008,393 shares 41 41
Common Stock Warrants 4 4
Additional Paid- in Capital 11,207 11,137
Retained Earnings 2,537 3,420
Cost of Common Stock in Treasury
(2,625 shares) (5) (5)
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,784 14,597
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,727 $27,446
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) (unaudited)
THREE MONTHS ENDED
28-Feb 29-Feb
1997 1996
NET REVENUES:
Software license fees $4,211 $3,675
Services 4,246 3,617
Hardware 1,018 2,351
------ ------
Total net revenues $9,475 $9,643
COST OF PRODUCTS AND SERVICES
Software license fees 1,177 862
Services 3,701 2,736
Hardware 882 1,813
------ ------
Total cost of products and services $5,760 $5,411
Selling and marketing expenses 3,381 3,097
General and administrative expenses 1,065 833
Product development expenses 704 477
------ ------
Total costs and operating expenses $10,910 $9,818
------ ------
LOSS FROM OPERATIONS $(1,435) $(175)
Other (Income)/ Expense
Equity (earnings)/loss of unconsolidated
joint ventures 2 (3)
Interest (income) (15) (22)
Interest expense 75 14
------ ------
62 (11)
------ ------
LOSS BEFORE INCOME TAXES $(1,497) $(164)
Income Tax Benefit (614) (73)
------ ------
NET LOSS $(883) $(91)
====== ======
Loss per share ($0.22) ($0.02)
Weighted average common and
equivalent shares outstanding 4,025 3,932
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
THREE MONTHS ENDED
28-Feb 29-Feb
1997 1996
OPERATING ACTIVITIES
Net Loss ($883) ($91)
Adjustments to reconcile net income(loss)
to net cash provided(used) by operating
activities:
Depreciation and amortization 281 275
Amortization of capitalized computer
software development costs 644 475
Equity in earnings of joint ventures - (3)
Goodwill Amortization 58 67
Changes in operating assets and
liabilities:
Accounts Receivable 917 (286)
Inventories and other current assets (774) (109)
Accounts payable and other liabilities (922) (665)
------ ------
Total adjustments 204 (246)
Net cash used in operating activities (679) (337)
INVESTING ACTIVITIES
Additions to equipment and leasehold
improvements (454) (318)
Proceeds from sale (purchase) of
securities 250 263
Software development costs capitalized (938) (770)
Other (2) (23)
------ ------
Net cash used in investing activities (1,144) (848)
FINANCING ACTIVITIES
Proceeds(payments) on long-term debt and
other notes payable 1,016 1,124
Additional paid in capital 70 17
------- -------
Net cash provided(used) by financing
activities 1,086 1,141
------- -------
Net decrease in cash ($737) ($44)
Cash-beginning of period 866 335
Cash-end of period 129 291
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1997
(Unaudited) (In Thousands)
Note 1 - Basis of Presentation
The accompanying consolidated interim financial statements included
herein have been prepared by Effective Management Systems, Inc. (the
"Company"), without an audit, in accordance with generally accepted
accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
made are adequate to make the information presented not misleading.
In the opinion of management, the information furnished for the three-
month periods ended February 28, 1997 and February 29, 1996 includes all
adjustments, consisting solely of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations
for the interim periods. The results of operations for the three months
ended February 28, 1997 are not necessarily indicative of the results of
operations to be expected for the entire fiscal year ending November 30,
1997. It is suggested that the interim financial statements be read in
conjunction with the audited consolidated financial statements for the
year ended November 30, 1996 included in the Company's Form 10-KSB filed
with the Securities and Exchange Commission.
Note 2 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the following:
2-28-1997 11-30-1996
Gross $8,629 $8,169
Less: Accumulated Depreciation < 4,495> < 4,208>
------- -------
Net $4,134 $3,961
Allowance for doubtful accounts consisted of the following:
2-28-1997 11-30-1996
Balance $ 392 $ 346
Provision for doubtful accounts consisted of the following:
2-28-1997 11-30-1996
Balance $ 51 $ 113
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company recorded a small decrease in revenues (1.7%) and a net loss of
$882,000 for the first quarter of 1997 compared with a net loss of $91,000
for the first quarter of 1996. Revenues were significantly under budgeted
levels reflecting both a delay in the finalization of a large contract and
a decrease in the anticipated level of new account sales. The increased
net loss resulted mainly from the expense of building the infrastructure
necessary to support higher levels of revenues which did not materialize.
These expenses related to strategic investments in product development and
field service infrastructure. Management believes these strategic
investments have the potential to positively enhance future revenues and
profitability.
Results of Operations
Total Revenues
Net revenues decreased to $9,475,000 for the three months ended February
28, 1997, which was a decrease of 1.7% from the $9,643,000 for the same
quarter in the previous year. The decline in revenues was attributable to
a delay in the finalization of a large contract, a decrease in the level
of new account sales and a decrease in hardware revenues.
The mix of revenues comparing software, services, and hardware revenues as
a percentage of total revenues improved to 44.4%, 44.8%, and 10.8%,
respectively, in the first quarter of 1997 as compared with 38.1%, 37.5%,
and 24.4%, respectively, in the first quarter of 1996. International
revenues represented less than 10% of total revenues for all periods
presented.
The Company's operating revenues can vary substantially from quarter to
quarter based on the size and timing of customer orders and market
acceptance of new products. The Company has historically operated with
little backlog because software orders are generally shipped as orders are
received. As a result, product revenue in any quarter is substantially
dependent on orders booked and shipped during that quarter.
Software License Fees
Software license fees are customer charges for the right to use the
Company's software products. Software license fees increased 14.6% to
$4,211,000 in the first quarter of 1997 from $3,675,000 in the first
quarter of 1996. The increase in software license fees was attributable
to increased levels of sales activity. Between February 29, 1996 and
February 28, 1997, the Company added 14 sales and marketing personnel
through new hiring. The Company also continued its strategic plan to
undertake efforts to incorporate new technologies into its products and to
integrate certain products into its product lines from its acquisition of
Intercim Corporation in fiscal 1995. These activities are intended to be
completed at various times in the future, and management believes that the
successful completion of these efforts will ultimately provide the Company
with significant competitive differentiation and advantage.
Service Revenues
The Company offers a number of optional services to its customers
including such services as a telephone support program, systems
integration, custom software development, implementation consulting, and
formal classroom and on-site training. Service revenues increased 17.4%
to $4,246,000 for the three months ended February 28, 1997 from $3,617,000
for the same period of the prior year. The increase in service revenues
was mainly the result of new customers, as well as requirements of the
established customer base.
Hardware Revenues
Hardware revenues decreased 56.7% to $1,018,000 in the first quarter of
1997 compared with $2,351,000 for the corresponding period of 1996. The
decrease was due to increased sales of software on platforms for which the
Company does not supply hardware and a higher percentage of sales to
established customers for which hardware was sold in a prior period.
Hardware revenues are generally impacted by three major influences.
First, and most significant, 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.
Second, as the volume of business grows, hardware revenues can increase
correspondingly. Finally, hardware revenues are related to the number of
hardware manufacturers represented at any one time by the Company. These
three factors in combination can work to increase or decrease hardware
revenues in any given period. To date, however, they have generally
resulted in a long-term decline in hardware sales as a percentage of total
revenue.
Cost of Software License Fees
The cost of software license fees as a percentage of related revenue was
28.0% for the first quarter of 1997, an increase from 23.5% for the
corresponding period of 1996. Cost of software license fees is composed
of both amortization of past investment in software development and the
costs associated with third party software revenues. Software
amortization is related to past investment in software development and
does not vary consistently with variations in software revenues. Software
amortization accounted for an increase of 2.3% in the cost of software
license fees as a percent of software license fee revenues for the periods
shown. The cost of software license fees is also dependent on the level
of revenues from third party-supplied software and the associated costs.
In the first quarter of 1997, the costs associated with third party-
supplied software increased by 29.5% over the first quarter of 1996.
Cost of Services
The cost of services as a percentage of related revenue increased to 87.2%
for the three months ended February 28, 1997 as compared with 75.6% for
the same quarter in the previous year. The increase was mainly due to
reduced growth in new account business, the startup and training costs
associated with newly hired personnel, and additional costs related to the
building of a service infrastructure ($105,000 year to date or 2.5% of
service revenues) for both ongoing business growth and the establishment
of new third party selling relationships. The Company hired a net of 30
new service personnel between February 29, 1996 and February 28,1997. The
service infrastructure costs include investments to strengthen the support
of national and international third party suppliers of service in
conjunction with the continued expansion of distribution channels.
Cost of Hardware
The cost of hardware as a percentage of related revenue increased from
77.1% in the first quarter of 1996 to 86.6% in the first quarter of 1997.
The cost of hardware as a percentage of related revenue varies with the
size of the system, the manufacturer of the equipment, and the
competitive pressure of the customer sale. Additionally, the cost of
hardware as a percentage of hardware revenues can vary due to the amount
of lower margin sales (cost plus 11%) to joint ventures, which were
$189,000 and $370,000 in the first quarter of 1997 and 1996, respectively.
Selling and Marketing Expenses
Selling and marketing expenses increased $284,000 or 9.2% from $3,097,000
in the first quarter of 1996 to $3,381,000 in the first quarter of 1997.
Between February 29, 1996 and February 28,1997, the Company added a net of
14 sales and marketing personnel through new hiring. The increases in
sales and marketing expenses corresponded to growth in software license
fees.
General and Administrative Expenses
General and administrative expenses increased $227,000 or 27.9%, from
$833,000 in the first quarter of 1996 to $1,065,000 in first quarter of
1997. The increase was mainly due to rising expenses for both telephone
($106,000) and compensation ($44,000). As a percentage of total revenues,
general and administrative expenses were 11.2% and 8.6% in the first
quarter of 1997 and 1996, respectively. The Company also provides office
space, accounting and administrative services, computer processing time,
and other miscellaneous services to EMS Solutions, Inc., an affiliated
entity. The amounts received by the Company for these items were $46,000
in the first quarter of 1997, as compared with $82,000 in the first
quarter of 1996. Amounts received from EMS Solutions, Inc. are recorded
as a reduction of general and administrative expenses.
Product Development Expense
Product development expense increased 47.6% from $477,000 in the first
quarter of 1996 to $704,000 in the first quarter of 1997. The Company
capitalizes costs in accordance with Statement of Financial Accounting
Standard (SFAS) No. 86. The Company capitalized $938,000 in the first
quarter of 1997 compared to $770,000 in the first quarter of 1996. As a
percent of software license fees, the total amount invested in software
development was 39.0% and 33.9% in the first quarter of 1997 and 1996,
respectively. This increase was focused mainly on the incorporation of
various new technologies into the Company's software products. Management
expects to continue the level of investment in product development at or
slightly above the levels recorded in the first quarter of 1997.
Other Income\Expense-Net
Other income\expense-net was $11,000 of income for the first quarter of
1996 compared to $62,000 of expense for the first quarter of 1997. This
decrease was mainly the result of a reduction in interest income and an
increase in interest expense as a result of increased borrowings under the
Company's bank line of credit.
Income Tax
The effective income tax rate provided a benefit of 41.0% for the first
quarter of 1997 compared to a benefit of 44.5% for the first quarter of
1996. The change in the effective rate was mainly the result of
investments in tax-exempt securities.
Liquidity and Capital Resources
At February 28, 1997, the Company had cash and marketable securities
aggregating $384,000, including $255,000 of available-for-sale securities.
During the first quarter of 1997, the Company's operating activities used
$679,000 of cash compared to $337,000 of cash for the same period of the
prior year.
Investing activities used cash of $1,144,000 in the first quarter of 1997
compared to $848,000 of cash in the first quarter of 1996. The principal
uses of the cash in the first quarter of 1997 included $938,000 for
capitalized product development and $454,000 for purchases of equipment
and furniture. The principal uses of the cash in the first quarter of 1996
included $770,000 for capitalized product development and $318,000 for
purchases of equipment and furniture. Management expects a decrease in
the current level of capital expenditures in conjunction with the
anticipated lower level of new employee hires.
Financing activities provided $1,086,000 of cash in the first quarter of
1997 compared with $1,141,000 in the first quarter of 1996. The cash
provided in 1997 reflected borrowings under the Company's bank line of
credit. As of February 28, 1997, the Company had $2,100,000 available
under its $5,000,000 line of credit which is based on the level of the
eligible accounts receivable.
The Company believes its cash flows from operations, funds available under
its line of credit, funds available from investment securities and, if
needed, other capital financing will be adequate to finance capital
expenditures and working capital requirements for at least the next twelve
months.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27.0) Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
/S/ MICHAEL D. DUNHAM
March 26, 1997 Michael D. Dunham
President (principal executive officer)
/S/ JEFFREY J. FOSSUM
Jeffrey J. Fossum
Chief Financial Officer and Assistant Treasurer
(principal financial and accounting officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Description
27. Financial Data Schedule [EDGAR version only]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 129
<SECURITIES> 255
<RECEIVABLES> 11,351
<ALLOWANCES> 392
<INVENTORY> 409
<CURRENT-ASSETS> 13,093
<PP&E> 8,629
<DEPRECIATION> 4,495
<TOTAL-ASSETS> 26,727
<CURRENT-LIABILITIES> 8,780
<BONDS> 0
0
0
<COMMON> 41
<OTHER-SE> 13,743
<TOTAL-LIABILITY-AND-EQUITY> 26,727
<SALES> 1,018
<TOTAL-REVENUES> 9,475
<CGS> 882
<TOTAL-COSTS> 10,028
<OTHER-EXPENSES> 62
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> (1497)
<INCOME-TAX> (614)
<INCOME-CONTINUING> (883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (883)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not required to be calculated in accordance with generally accepted accounting
principles.
</FN>
</TABLE>
