Registration No. 333-68901
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Pre-Effective Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 7389 39-1292200
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
Michael D. Dunham,
President and Chief Executive Officer
Effective Management Systems, Inc.
12000 West Park Place
12000 West Park Place Milwaukee, Wisconsin 53224
Milwaukee, Wisconsin 53224 (414) 359-9800
(414) 359-9800 Facsimile (414) 359-9011
(Address, including zip code, (Name, address, including zip code,
and telephone number, and telephone number,
including area code, of registrant's including area code, of
principal executive offices) agent for service)
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Copies to:
Phillip J. Hanrahan
Jay O. Rothman
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-2400
Facsimile: (414) 297-4900
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1993 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Dated April 5, 1999
PROSPECTUS
947,214 Shares
Common Stock
EFFECTIVE MANAGEMENT SYSTEMS, INC.
This prospectus relates to the public offering of common stock of
Effective Management Systems, Inc. We are registering 947,214 shares of the
common stock for sale by certain selling shareholders.
We will not be selling any of the shares of the common stock that are
registered under this prospectus. No underwriters will be used in selling the
shares. While we will pay the expenses incurred in registering the common stock,
including legal and accounting fees, we will not receive any proceeds from the
sale of these shares. All selling and other expenses, including brokerage fees
and any underwriting discounts or commissions, incurred by individual selling
shareholders will be paid by the selling shareholders.
The selling shareholders may offer their shares of the common stock in
public or private transactions, on or off the OTC Bulletin Board, at prevailing
market prices, or at privately negotiated prices. In such transactions, the
selling shareholders and any broker-dealers through whom such common stock are
sold may be deemed to be underwriters within the meaning of the Securities Act
of 1933. Any commissions paid or concessions allowed to any broker-dealer, and,
if any broker-dealer purchases such common stock as a principal, any profits
received on the resale of such shares may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933.
Investing in the common stock involves certain risks. See "Risks
Factors" beginning on page 5.
Our common stock is traded on the OTC Bulletin Board and, as a result,
the market for the common stock is not particularly liquid. The price at which
the common stock trades may fluctuate and any market for the common stock may be
subject to disruptions that could make it difficult or impossible for the
holders of the common stock to sell shares in a timely manner, if at all, or to
recoup their investment in the common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Our principal executive offices are located at 12000 West Park Place,
Milwaukee, Wisconsin 53224, and our telephone number is (414) 359-9800.
The date of this prospectus is __________, 1999.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus, and is not complete and may not contain all the information you
should consider before investing in the common stock. You should read the entire
prospectus carefully.
THE COMPANY
Overview
We develop, procure, market and support integrated manufacturing and
business management software. We design our Time Critical Manufacturing(R)
("TCM(R)") software 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. We also provide
services support for our software products and sell computer hardware.
The software products we offer include: TCM(R), which is a
pre-integrated software program that aids enterprises in resource planning,
accounting and executing and making manufacturing decisions ("Manufacturing
Execution System"), and FACTORYnet(R) I/S ("FACTORYnet(R) I/S"), which is an
integrated software program providing production management, shop floor
scheduling, and operations support. We also offer the manufacturing software of
the Baan Company, which is an enterprise resource planning and accounting system
that will ultimately be combined with our Manufacturing Execution System
software. Our distributor arrangement with Baan was entered into in April 1998.
We typically focus our sales and marketing efforts on "discrete"
manufacturing plants. 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. We have licensed our software products to over 1,700 customer sites.
We distribute our products in the United States through eleven branch offices
and through seven joint ventures and independent distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary, and in 1996, we acquired the remaining interest in Darwin Data
Systems Corporation, another joint venture subsidiary.
In April 1998, we undertook a major restructuring and recorded a
restructuring charge of approximately $6.8 million. The restructuring included
entering into the distribution agreement with Baan and various cost reductions
aimed at improving our financial performance. In connection with the
restructuring, we closed facilities both in the United States and
internationally and decreased our workforce, particularly in development,
marketing and administration.
For our fiscal year ended November 30, 1998, we incurred a net loss of
approximately $10.6 million, inclusive of the restructuring charge. Our audit
report for the 1998 fiscal year contains a going concern explanatory paragraph,
pursuant to which our auditors have expressed substantial doubt as to our
ability to continue as a going concern.
Strategy
Our objective is to grow as a leading provider of pre-integrated
business software systems for discrete manufacturing plants within our target
market.
Our experience in the marketplace resulted in the 1995 introduction of
the first pre-integrated Manufacturing Execution System software offering for
discrete manufacturers. Software pre-integration means that a customer can buy a
comprehensive set of software which has already been integrated and proven to
function. We believe that "pre-integration" of much of our software reduces the
time and cost of system
<PAGE>
implementations and increases the business value to the manufacturer similar to
the way that "suites" of desktop software have affected that marketplace.
In addition, we believe 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, we believe 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. So, we focus our software on enabling time critical
manufacturing decisions at all levels.
Markets and Customers
We primarily target companies operating discrete manufacturing plants
in the United States and Canada. These plants may be owned by privately held
companies or by large, multi-national public corporations. Our customers include
capital equipment manufacturers, job shops, high volume manufacturers,
automotive suppliers, consumer product manufacturers and aerospace equipment
manufacturers.
Sales and Marketing
We market our products through advertising campaigns in national trade
periodicals and through direct mailings. We supplement these efforts with
listings in relevant directories and trade show and conference appearances. We
also receive leads regarding potential customers from hardware and services
vendors, existing customers and various accounting and consulting firms.
Product Development
We believe we must continue to enhance, broaden and modify our existing
line of software products to meet the constantly evolving needs of discrete
manufacturers within our target market. We have relied on internal development,
outside procurement, and development related to customized projects implemented
at field sites to extend, enhance and support our software products, and develop
and integrate new capabilities.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to our products.
Some of our 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 we have.
Recent Offerings of Preferred Stock
In October, 1998, we sold 780 shares of our Series B Preferred Stock,
at a purchase price of $1,000 per share, for an aggregate gross purchase price
of $780,000. In addition, we exchanged 1,005 shares of our Series B Preferred
Stock for a like number of shares of our Series A Preferred Stock. We had issued
the Series A Preferred Stock in August, 1998 for an aggregate gross purchase
price of $1,005,000. Dividends accrue on the Series B Preferred Stock at a rate
of 8% per year and are cumulative. The holders of the Series B Preferred Stock
may convert their shares at any time into shares of the common stock at a
conversion price of $3.00 per share, subject to adjustment.
In addition, we issued warrants to purchase a total of up to 54,714
shares of common stock, in connection with the sale of the Series A and Series B
Preferred Stock (the "Warrants"). The Warrants are exercisable at a price of
$3.60 per share.
This prospectus relates to the shares of the common stock that may be
issued upon conversion of the Series B Preferred Stock and upon the exercise of
the Warrants.
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Risk Factors
An investment in the common stock involves certain risks that a
potential investor should carefully evaluate prior to making an investment. A
discussion of certain factors to be considered in evaluating us, our business
and an investment in the common stock is included in the section titled "Risk
Factors" immediately following this summary.
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<TABLE>
<CAPTION>
Selected Financial Data
Year ended November 30
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1994 1995 1996 1997 1998
INCOME STATEMENT DATA: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues:
Software license fees $10,163 $11,534 $19,094 $21,752 $ 20,553
Services $ 7,256 $10,962 $15,412 $16,781 $ 16,846
Hardware $ 5,245 $ 6,528 $ 6,751 $ 4,112 $ 1,745
======= ======= ======= ======= ========
Total net revenues $22,664 $29,024 $41,257 $42,645 $ 39,144
Cost of products and services:
Cost of third party software license fees $ 797 $ 1,419 $ 2,484 $ 3,065 $ 4,717
Software development amortization $ 515 $ 879 $ 1,591 $ 2,535 $ 2,243
Cost of services $ 4,467 $ 7,884 $12,109 $14,000 $ 14,430
Cost of hardware $ 4,146 $ 5,118 $ 4,979 $ 3,260 $ 1,386
======= ======= ======= ======= ========
Total cost of products/services $ 9,925 $ 15,300 $21,163 $22,860 $ 22,776
=======================================================================================================================
Gross Margin $12,739 $13,724 $20,094 $19,785 $ 16,368
=======================================================================================================================
Selling and marketing expenses $ 7,407 $ 9,479 $14,060 $15,957 $ 13,280
General and administrative expenses $ 2,227 $ 3,029 $ 3,416 $ 3,838 $ 3,451
Software development expenses $ 752 $ 1,086 $ 2,235 $ 2,391 $ 2,804
Restructuring and other charges -- -- -- -- $ 6,836
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Total Operating Expenses $10,386 $ 13,594 $19,711 $22,186 $ 26,371
=======================================================================================================================
Operating income (loss) $ 2,353 $ 130 $ 383 $(2,401) $(10,003)
Other income (expense) $ 342 $ 80 $ (118) $ (377) $ (587)
Income (loss) before income taxes $ 2,695 $ 210 $ 265 $(2,778) $(10,590)
Income tax expense (benefit) $ 975 $ 79 $ 112 $ (618) $ 0
=======================================================================================================================
Net income (loss) $ 1,720 $ 131 $ 153 $(2,160) $(10,590)
=======================================================================================================================
Basic and diluted net income (loss) per share $ 0.53 $ 0.04 $ 0.04 $ (0.53) $ (2.59)
Weighted average common and common
equivalent shares outstanding 3,268 3,669 3,965 4,048 4,090
BALANCE SHEET DATA:
Working Capital (deficit) $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (6,131)
Total assets $17,903 $ 24,332 $27,446 $28,797 $ 24,160
Long-term obligations $ 50 $ 21 $ 2,123 $ 3,966 $ 242
Stockholder's equity $10,354 $ 14,177 $14,597 $12,573 $ 3,632
</TABLE>
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RISK FACTORS
The risk factors set forth below, as well as other information
appearing in this prospectus should be carefully considered before making an
investment in our common stock. Certain statements in this prospectus, including
statements relating to our expected operations and financing activities, are
forward-looking statements that involve certain risks and uncertainties. See
"Special Note Regarding Forward-Looking Statements."
Financial Results for the Last Three Years
For the fiscal year ended November 30, 1998, we had a net loss of
$10,590,000. For the fiscal years ended November 30, 1997 and 1996, we had a net
loss and net income of $2,160,000 and $153,000, respectively. Although we are
taking steps to improve our financial performance, we can give no assurance that
our business will become profitable.
Covenant Relief to Maintain Liquidity
Our credit agreement with our primary lender contains certain
restrictive covenants, including covenants relating to earnings before interest,
taxes, depreciation and amortization ("EBITDA"), tangible net worth and capital
expenditures. As a result of our recent financial performance and restructuring,
we have been obligated to obtain and have obtained covenant relief from our
lender relating to the EBITDA and tangible net worth covenants. To raise
additional capital, we have also sold shares of preferred stock. Although we
have taken steps to improve our financial performance, no assurance can be given
that these steps will have the intended result. In the event that our financial
performance does not improve or if we are unable to secure additional investment
capital or sell assets to bolster our financial position, we will require
additional covenant relief. In the event that such covenant relief is not
obtained, it would likely have a material adverse effect on our liquidity,
including our ability to fund continuing operations. Our current credit facility
contains limits on the amount we may borrow based on the level of our
outstanding accounts receivable. At January 31, 1999, we had borrowing
availability of $773,000 under our credit agreement.
Doubt Regarding Going Concern
Based on recent financial performance, all of our debt has been
classified as short-term and our audit report contains a going concern
explanatory paragraph, pursuant to which our auditors have expressed substantial
doubt as to our ability to continue as a going concern. Our financial situation
may also make it more difficult for us to market our products to new and
existing customers.
Recent Restructuring may not Positively Impact Operations
In April 1998, we effected a major restructuring and recorded a
restructuring charge of approximately $6.8 million. The restructuring related to
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving our financial
performance. In connection with the restructuring, we closed facilities both in
the United States and internationally and took actions to rationalize our
workforce, particularly in the development, marketing and administrative areas.
Although we expect the restructuring to impact our financial performance
positively, no assurance can be given that the restructuring will be successful
or that it will not have unanticipated effects, such as the loss of significant
customers and/or key employees.
Absence of Formal Trading Market may Hinder Ability to Sell Common Stock
There is currently no formal trading market for our common stock. The
common stock trades only on the OTC Bulletin Board and, as a result, the market
for the common stock is not particularly liquid. The price at which the common
stock may trade may fluctuate and the market for the common stock may be subject
to disruptions that could make it difficult or impossible for the holders of our
common stock to sell shares in a
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timely manner, if at all. Even if trading markets do develop, they may be
unstable and illiquid for an indeterminate period of time.
A Decrease in Revenue from License Fees Could Negatively Impact Operations
A significant portion of our revenue is derived from license fees for
TCM(R) and for FACTORYnet(R) I/S and the sale of related support services.
Accordingly, any event that could adversely affect license fees for TCM(R) or
FACTORYnet(R) I/S, such as significant flaws or incompatibility, negative
publicity or evaluation, or obsolescence of the hardware platforms on which the
systems run, could have a material adverse effect on our results of operation.
Failure of the Baan Relationship or Failure of Third-Parties to Supply
Software Could Negatively Impact Operations
We recently entered into an arrangement pursuant to which we license
certain software products from Baan to sell into a segment of our marketplace.
As a result of this arrangement, we have refocused our current TCM(R) product to
the lower end of the mid-market and will rely on the Baan product to service the
high end of the mid-market. There can be no assurance that we will be successful
in marketing the Baan product offering, that such offering will remain viable in
our target market or that Baan will continue such relationship after the
expiration of its initial term. In addition to the Baan relationship, internally
developed software products incorporate and use software technology and software
products developed by other third parties. There can be no assurance that all of
these companies will remain in business or that their product lines will remain
viable. If any of these companies fails to remain in business or abandons or
fails to enhance a particular product line, we may need to seek other suppliers.
This could result in us having to significantly alter our internally developed
product lines which could have a material adverse effect on our results of
operations. There also can be no assurance that our current suppliers will not
significantly alter their pricing in a manner adverse to us.
Loss of Key Employees Could Negatively Impact Future Success
Our success is dependent to a significant extent on our executive
officers and other key personnel (including technical and sales personnel), the
loss of whom could have a material adverse effect on us. Our future success will
depend in large part on our ability to retain talented and qualified employees.
Competition in the recruiting of highly-qualified personnel in the management
information systems industry is intense and there can be no assurance that we
can retain our key employees or that we can attract, assimilate and retain other
qualified personnel in the future. We have recently experienced attrition at
rates higher than our historical experience. We have taken steps to curtail the
attrition, but we can give no assurance that these steps will be successful or
that further attrition will not materially impact our financial performance.
No Assurance Important Intellectual Property and Property Rights can be
Protected
We regard our software products as proprietary, in that title to and
ownership of our software generally reside exclusively with us. We attempt to
protect ownership of our software with a combination of copyright, trademark and
trade secret laws, employee and third-party disclosure agreements and other
methods of protection common in the industry. Despite these precautions, it may
be possible for unauthorized third parties to copy or reverse-engineer certain
portions of our products or to obtain and use information that we regard as
proprietary. Like many software firms, we presently have no patents. We license
the source code for our software to some customers for customization. Although
our source code license contains confidentiality and nondisclosure provisions,
there can be no assurance that such customers will take adequate precautions to
protect such code. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms we use to protect our
software will be adequate or that our competitors will not independently develop
software products that are substantially equivalent or superior to our software
products. Although we do not believe that our products infringe on the existing
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against us.
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Variability of Quarterly Operating Results; Limited Backlog
Our operating results can vary substantially from quarter to quarter
due to various factors, including, among others: the size and timing of customer
orders; the buying patterns of manufacturers in our target market; delays in the
introduction of products or product enhancements by us or by other providers of
hardware, software and components for the management information systems market;
competition and pricing in the software industry; customer order deferrals in
anticipation of new products; market acceptance of new products; reduction in
demand for existing products; changes in operating expenses; and general
economic conditions. We have historically operated with little backlog because
software orders are generally shipped as orders are received. As a result,
product revenue in any quarter is dependent on orders booked and shipped during
that quarter. A significant portion of our operating expenses are based on
anticipated revenue levels and are relatively fixed in nature. If revenue does
not meet our expectations in any given quarter, operating results may be
adversely affected.
Impact of Competition by Larger Companies
The management information systems industry is intensely competitive
and rapidly changing. A number of companies offer products similar to the
products we offer. Some of our existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and larger
marketing and sale organizations and significantly greater financial resources
than us and our third-party suppliers. There can be no assurance that such
competitors will not develop products that are superior to the products we offer
or that achieve greater market acceptance. Our future success will depend, in
part, upon our ability to increase software license fee revenues in our target
markets. There can be no assurance that we will be able to compete successfully
against our competitors or that the competitive pressures we face will not
adversely affect our financial performance.
"Penny Stock" Rules may make Brokers Unwilling to Engage in
Transactions Involving our Common Stock
Our common stock is currently traded on the OTC Bulletin Board after
having been delisted from the Nasdaq National Market. If no other exclusion from
the definition of "penny stock" under the Securities Exchange Act of 1934 is
available, then any broker engaging in a transaction in our securities is
required to provide any customer with a risk disclosure document and the
compensation of the broker/dealer in the transaction and monthly account
statements showing the market values of our securities held in the customer's
accounts. The bid and offer quotations and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. If brokers are subject to the "penny stock" rules when
engaging in transactions in our securities, they may be less willing to engage
in such transactions.
Control by Management
Our management currently holds approximately 40% of the outstanding
common stock. As a result, management personnel have a significant impact, if
they act together, on the election of directors and shareholder approval of
various corporate actions.
No Dividends on the Common Stock
We have never paid any cash dividends on the common stock and do not
anticipate paying cash dividends on the common stock in the foreseeable future.
The payment of dividends on the common stock by us will depend on our earnings,
financial condition and other business and economic factors affecting us at that
time, as the Board of Directors may consider relevant.
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Anti-Takeover Provisions of Charter, Bylaws and Wisconsin Law.
Certain provisions of our charter and bylaws may delay or frustrate the
removal of incumbent directors and may prevent or delay a merger, tender offer
or proxy contest involving the Company that is not approved by the Board of
Directors, even if such events may be beneficial to the interests of
shareholders. For example, our charter authorizes the Board of Directors,
without shareholder approval, to issue preferred stock in addition to the Series
A Preferred Stock and the Series B Preferred Stock with voting or conversion
rights which could adversely affect the voting power of the holders of the
common stock. In addition, the Wisconsin Business Corporation Law contains
provisions that may have the effect of delaying or making more difficult
attempts by others to obtain control of the Company without the approval of the
Board of Directors.
Cost of Ensuring Year 2000 Compliance
Many computer programs and applications define the applicable year
using two digits rather than four in order to save memory and enhance the speed
of repeated date-based calculations. The "Year 2000 problem" refers to the
inability of these computer programs on and after January 1, 2000 to recognize
that "00" refers to "2000" rather than "1900". The term "Year 2000-compliant"
means a computer or a computer system which has been designed or modified to
recognize dates on and after January 1, 2000.
We utilize a combination of our own software and custom-written systems
for running our own operations. Based on our own evaluation, we believe that we
will incur no significant costs associated with ensuring Year 2000 compliance of
our internal systems. Since the release of version 5.1.2 of our software
product, our software product has been Year 2000 compliant.
Failure to correct critical Year 2000 issues could cause a serious
interruption in our business operations. Such interruptions could have a
material impact on our results of operations, liquidity, and financial
condition. We are taking actions to minimize these issues, but no assurance can
be given that all potential issues can be eliminated. Additionally, the effects
of potential litigation can not be estimated and such litigation could have a
material effect on the results of operations. Finally, factors outside our
control could also cause disruption of business activities which could
materially affect the results of operations.
Effect of Future Sales of Common Stock on Market Price; Cost of
Registration Rights
We cannot predict the effect, if any, that future sales or issuance of
the common stock or the availability of the common stock for future sale or
issuance will have on future market prices of the common stock
The agreement under which we sold the Series B Preferred Stock (the
"Purchase Agreement") obligates us, at our sole cost and expense, to file a
registration statement covering shares of the common stock issuable upon
conversion of the Series B Preferred Stock and to use our best efforts to have
such registration statement declared effective as soon as possible after filing
and to keep the registration statement effective for up to three years. The
Purchase Agreement also provides for certain demand and piggyback registration
rights.
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AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at the following
locations:
o Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
o Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
o Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically.
You can access the electronic versions of these filings on the Internet at the
SEC's website, located at http://www.sec.gov.
We have included this prospectus in our registration statement that we
filed with the SEC. The registration statement provides additional information
that we are not required to include in the prospectus. You can receive a copy of
the entire registration statement as described above. Please note that the
registration statement also includes complete copies of the documents described
in the prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this prospectus are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe our future plans,
objectives or goals are forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties, including those
described in the section captioned "Risk Factors" above.
These factors are not exhaustive, and should be read in conjunction
with other cautionary statements that are included in this prospectus. The
forward-looking statements made herein are only made as of the date of this
prospectus and we are not obligated to publicly update forward-looking
statements to reflect subsequent events or circumstances.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
the common stock by the selling shareholders. If all of the Warrants issued in
connection with the Series A and Series B Preferred Stock are exercised at the
exercise price of $3.60, we will receive gross cash proceeds of approximately
$196,970. See "Plan of Distribution." The proceeds may be used for working
capital and general corporate purposes.
SELLING SECURITY HOLDERS
The following table sets forth the number of shares of common stock
beneficially owned by each of the selling shareholders and registered hereunder.
Because the selling shareholders may not sell all of the shares of the common
stock received upon conversion or exercise of the Series B Preferred Stock or
the Warrants and because their offering is not being underwritten on a firm
commitment basis, no estimate can be given as to the number of shares of common
stock that will be beneficially owned by the selling shareholders upon
termination of this offering. The shares offered by this prospectus may be
offered from time to time by the selling shareholders named below.
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<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned After
Prior to Offering Offering (1)
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Amount and Number of Amount and
Name and Address of Nature of Percentage Shares Offered Nature of Percentage of
Beneficial Owner Ownership of Class Hereby Ownership Class
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Selling Shareholders(2)(3):
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Alvin R. Bonnette, Trustee 25,475 * 25,475 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Arthur D. Sterling and Marie
Sterling 12,740 * 12,740 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Christopher Schreiber(4) 6,983 * 6,983 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Carl M. Birkelbach(7) 2,100 * 2,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
David H. Padden 1983 Trust 10,200 * 10,200 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
David Random 12,740 * 12,740 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Donald Gross 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Donald T. McKiernan(7) 3,200 * 3,200 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Douglas E. Hailey(5) 16,732 * 16,732 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
EmJayco 15,285 * 15,285 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Gary Arnold 76,425 1.5% 76,425 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
George N. Gaynor 10,200 * 10,200 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Gustave Levinson and Lydia F.
Levinson 12,740 * 12,740 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
JDN Partners, L.P. 102,000 2.0% 102,000 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
John Clifford 50,950 1.0% 50,950 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
John D. Holley 76,425 1.5% 76,425 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
John L. Palazzola and Maria
Palazzola 12,740 * 12,740 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
John R. Bertsch 10,190 * 10,190 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
John R. Graham, Trustee of
the John R. Graham Trust 5,100 * 5,100 0 *
dated 1/3/92
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Joseph G. D'Amadeo(7) 6,515 * 6,515 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Laura A. Conroy(7) 2,400 * 2,400 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Lawrence S. Smith 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Lewco Securities as Nominee
for Schroder & Co. Custodian
f/b/o Ron Magruder and
Elizabeth Magruder 50,950 1.0% 50,950 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Lone Star Holdings Partners,
L.P. 102,000 2.0% 102,000 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Michael E. Recca(7) 7,754 * 7,754 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Michael Taglich(6) 19,257 * 19,257 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
-11-
<PAGE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned After
Prior to Offering Offering (1)
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Amount and Number of Amount and
Name and Address of Nature of Percentage Shares Offered Nature of Percentage of
Beneficial Owner Ownership of Class Hereby Ownership Class
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Morton Topfer 127,375 2.5% 127,375 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Rafael Caballero 25,475 * 25,475 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Richard C. Oh(7) 1,000 * 1,000 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Robert C. Schroeder(7) 1,600 * 1,600 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Robert F. Taglich(6) 12,740 * 12,740 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Robert L DeBruyn and Tracey
H. DeBruyn 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Sanford R. Penn Jr. 25,475 * 25,475 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Shadow Capital LLC 25,475 * 25,475 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Thomas J. Waggoner and Patsy
Ann Waggoner 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Thomas P. Morrisey 15,285 * 15,285 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
U.S. Bank, National
Association, as Trustee for
the Dorsey & Whitney Master
Trust FBO Stanley Rein 10,200 * 10,200 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Vincent M. Palmieri(7) 1,000 * 1,000 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
William C. Smith Jr. 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
William J. Easton Jr. 5,100 * 5,100 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
William Kuntz 15,285 * 15,285 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
William Wieck & Elizabeth
Wieck 7,645 * 7,645 0 *
- ------------------------------- ------------------ ------------- ----------------- ------------------ -------------------
Wulf Paulick and Renate
Paulick 7,645 * 7,645 0 *
- -------------------------
* represents less than 1%.
(1) Assumes the sale of all of the shares offered by each selling
shareholder.
(2) Percentage ownership for selling shareholders is based on 5,108,500
(4,118,486 outstanding as of March 10, 1999, plus 54,714 exercisable
through the Warrants and 909,825 exercisable through conversion of the
Series B Preferred Stock at $2.00) shares of the common stock
outstanding.
(3) The number of shares beneficially owned with respect to selling
shareholders holding the Series B Preferred Stock is based on
conversion at the current conversion price of $2.00.
(4) Includes (i) 2,505 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 4,478 issuable upon
exercise of certain of the Warrants.
(5) Includes (i) 5,100 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 11,632 issuable upon
exercise of certain of the Warrants.
(6) Includes (i) 12,740 shares of common stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 6,517 issuable upon
exercise of certain of the Warrants.
(7) Represents shares issuable upon exercise of certain of the Warrants.
</TABLE>
-12-
<PAGE>
DIVIDEND POLICY
We have no present intention of paying any dividends on the common
stock. We expect that, except for the dividends required to be paid or payable
to the holders of the Series B Preferred Stock, we will retain our earnings, if
any, to finance operations.
The declaration and payment of future dividends to holders of the
common stock will be at the discretion of our Board of Directors and will depend
upon many factors, including our financial condition, earnings, the capital
requirements of our operating subsidiaries, legal requirements and such other
factors as the Board of Directors deems relevant.
MARKET FOR THE COMMON STOCK
There is currently no established public trading market for the common
stock. The common stock is traded on the OTC Bulletin Board. See "Risk Factors."
As of March 19, 1999, we had 415 record holders of the common stock and 300
record holders of certain publicly traded warrants to purchase common stock (the
"Public Warrants"). See "Description of Capital Stock".
PRICE RANGE OF COMMON STOCK
Our common stock was traded on the Nasdaq National Market for fiscal
years ended November 30, 1996 and 1997, and through November 6, 1998 for the
fiscal year ended November 30, 1998. Currently, our common stock and Public
Warrants are traded on the OTC Bulletin Board under the symbols "EMSI" and
"EMSIW," respectively.
The range of high and low bid closing quotations (and for periods prior
to November 6, 1998, the high and low sale prices) for the common stock and the
Public Warrants for each fiscal quarter for the two (2) completed fiscal years
and the most current fiscal year, are as follows:
<TABLE>
<CAPTION>
Common Stock Public Warrants
1999 High Low High Low
<S> <C> <C> <C> <C>
Second Quarter (through $ 2-1/16 $ 7/8 $ 3/100 $ 1/100
March 31, 1999)
First Quarter $ 2-1/4 $ 1-5/16 $ 6/100 $ 1/100
1998 High Low High Low
First Quarter $ 4-3/8 $ 2-1/16 $ 2 $ 1-1/8
Second Quarter $ 5-7/8 $ 3 $ 1-5/8 $ 1
Third Quarter $ 2-7/8 $ 5-3/8 $ 1-1/2 $ 1/2
Fourth Quarter $ 3-3/4 $ 1-7/8 $ 1-1/8 $ 3/8
1997 High Low High Low
First Quarter $ 7-3/4 $ 5-1/2 $ 3-3/16 $ 2-1/2
Second Quarter $ 7-1/2 $ 6-1/2 $ 2-1/2 $ 3/4
Third Quarter $ 6-1/8 $ 4 $ 1-1/2 $ 1
Fourth Quarter $ 6-1/2 $ 4 $ 2 $ 1-1/2
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - AT AND FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Overview
We recorded a loss of approximately $10.6 million in fiscal 1998 as
compared with a loss of $2.2 million in fiscal 1997. The decline in results of
operations related in part to a major restructuring plan ("Restructuring")
implemented in fiscal 1998 pursuant to which we established a distribution
relationship with Baan and incurred the associated costs of transitioning to the
new relationship. In the Restructuring, we refocused our TCM product to the
lower end of the mid market, added the Baan product for the upper mid market,
and continued to offer the Intercim Corporation products in the Fortune 1000
market. Our management expects the transition in our product offerings to be
completed in the first half of fiscal 1999. As part of the Restructuring, we
incurred a restructuring charge of approximately $6.8 million.
We recorded a loss of approximately $2.2 million in fiscal 1997 as
compared with net income of $153,000 in fiscal 1996. The decline in results of
operations was due in part to the delayed introduction of version 6.0 of the TCM
software product as well as increased service costs associated with the
implementation of new products and technologies. On November 26, 1997, we
released version 6.0 of our TCM product which completed the application of a
Windows compliant interface, the lack of which had negatively impacted software
sales in the past. Also in fiscal 1997, we initiated a cost reduction program
(the "1997 Cost Reduction") with the goal of reducing costs by $2 million per
annum. We also announced a realignment of executive management, which included
the departure of two executives.
Although our goal is to return to profitability, no assurance can be
given that the various measures that we have taken will actually result in the
achievement of this objective. In addition, as a result of the fiscal 1997 and
1998 losses, we have been required to obtain waivers from our primary lender for
covenant violations. In the event our financial performance does not improve or
if we are unable to secure additional investment capital or sell assets to
bolster our financial position, we will require additional covenant relief in
fiscal 1999. In the event that such covenant relief cannot be obtained, it would
likely have a material adverse effect on our liquidity, including our ability to
fund current operations. Although we did raise additional equity capital in
fiscal 1998 through the sale of preferred stock, our ability to borrow
additional funds under our existing credit facility remains limited. As a result
of our financial situation, all of our debt has been classified as short-term
and our audit report contains a going concern explanatory paragraph.
Our long term success is also dependent on our ability to attract and
retain a highly qualified sales, development and service staff. We have recently
experienced attrition at rates higher than our historical experience. We have
taken steps to curtail the attrition, but no assurance can be given that these
steps will be successful or that further attrition will not materially impact
our financial performance.
Results of Operations
Total Revenue
Total revenue for fiscal 1998 decreased 8.2% to $39,144,000 from
$42,645,000 for fiscal 1997. Total revenue for fiscal 1997 increased 3.4% to
$42,645,000 from $41,257,000 in fiscal 1996. The mix of software, services, and
hardware revenues was 52.5%, 43.0%, and 4.5%, respectively, in fiscal 1998 as
compared to 51.0%, 39.4%, and 9.6%, respectively, in 1997, and 46.3%, 37.4%, and
16.4%, respectively, in 1996. The growth in software and service revenues as a
percentage of total revenues during these years was the
-14-
<PAGE>
result of a strategic decision to focus our marketing and selling efforts on
generating an increased percentage of revenues from higher margin software and
services as opposed to lower margin hardware sales. International revenues
represented less than 10% of total revenues for all periods presented.
Software License Fee Revenues
Software license fee revenues are customer charges for the right to use
our software products. These revenues decreased 5.5% to $20,553,000 in fiscal
1998 from $21,752,000 in fiscal 1997. The decrease in software license fees was
mainly attributable to: (1) the attention and efforts spent in the transition to
selling the new Baan product lines; (2) reduced revenues and corresponding
returns from restructured operations ($2,000,000); and (3) reduced revenues due
to a lower number of sales personnel as a result of attrition. Sales of the Baan
products which began in April 1998, rose from $130,000 in the third quarter of
fiscal 1998 to $1,553,000 in the fourth quarter of fiscal 1998. As additional
sales personnel train in the Baan products, sales productivity temporarily
decreases. The length of the sales cycle can range from two to twelve months
depending on such factors as the size of the prospect or the complexity of the
need of the prospect. We are also in the process of building a sufficient level
of prospect leads to maintain and enhance necessary levels of sales activity.
Our management expects that this decrease in productivity will gradually improve
during the next two fiscal quarters, and, thereafter, return to historical
levels. Exclusive of the territories closed in connection with the
Restructuring, sales of our TCM software products declined 23.7% from fiscal
1997 to fiscal 1998 mainly due to prospect concerns about past financial
performance. Our management expects slower sales of TCM products to continue
until we become profitable. Sales of the Intercim software products increased
27.5% from fiscal 1997 to fiscal 1998. The software license fee revenues
increased 13.9% to $21,752,000 in fiscal 1997 from $19,094,000 in fiscal 1996.
The main reason for this increase was the additional sales made to new customers
during fiscal 1997.
Service Revenues
We offer both mandatory and optional services to our 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 to $16,846,000 in fiscal 1998 from
$16,781,000 in fiscal 1997. This increase was mainly the result of higher levels
of demand from customers upgrading to newer versions of our products, an
increase in maintenance revenues, combined with a reduction in service revenues
due to a lower number of service personnel as a result of both the Restructuring
and attrition, along with a lower level of new TCM software unit sales. As we
transition to include the Baan product, our management expects service revenues
to increase. Initial services will be provided by third party providers, but
will be later supplied internally as additional resources are added. Service
revenues increased 8.9% to $16,781,000 in fiscal 1997 from $15,412,000 in fiscal
1996. This increase was primarily due to growth in the customer base and normal
price increases
Hardware Revenues
As an option, we will sell computer hardware manufactured by others,
along with our software and services. Hardware revenues decreased 57.6% to
$1,745,000 in fiscal 1998 from $4,112,000 in fiscal 1997. Hardware revenues
decreased 39.1% to $4,112,000 in fiscal 1997 from $6,751,000 in fiscal 1996.
These decreases were mainly due to increased sales of software on platforms for
which we do not supply hardware. We have decided to reduce our sales of
commodity priced hardware products and those which require specific expertise
beyond the scope of our product focus. In turn, we have developed relationships
with various system integrators which sell the hardware and provide these
value-added hardware services.
-15-
<PAGE>
Cost of Third-Party Software License Fees
Most of our 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 our software products generally requires
that we pay royalties to these suppliers. Cost of third-party software license
fees increased to $4,717,000 in fiscal 1998 from $3,065,000 in fiscal 1997 and
from $2,484,000 in fiscal 1996. Since third-party software products are
generally sold in conjunction with our software licenses, the increases were
historically attributable to a rise in the level of sales of our software as a
result of new customer sales and existing customer upgrade sales. In fiscal
1998, $920,000 of the increase in the cost of third-party software license fees
was attributable to the new relationship with Baan under which we purchase
software licenses for sales to end users.
Software Development Amortization
Software development amortization represents the amortization of past
investments made by us in product development. Software development amortization
increased from $1,591,000 in fiscal 1996 to $2,535,000 in fiscal 1997, and
decreased to $2,243,000 in fiscal 1998. The increase in 1997 mainly reflected an
increase in past capitalized software development costs related to improvements
to our software products. In the second quarter of fiscal 1998, however, we
wrote-off a significant portion of our TCM capitalized software in conjunction
with the Restructuring, which in turn lowered the amount of software development
amortization.
Cost of Services
Cost of services as a percentage of related revenues increased to 85.7%
in 1998 from 83.4% in 1997 and from 78.6% in 1996. The main reasons for the
increases include increased costs related to warranty work, training costs
associated with new personnel, allocation of resources to assist in developing
new products, increased compensation for current employees, higher costs of
out-sourced labor, and educational costs related to new products and
technologies. Our management expects the cost of services as a percentage of
related revenues to increase for the Baan product sales in the short term due to
the cost of third party suppliers and the internal cost of training employees in
the new products. The 1997 Cost Reduction reduced fiscal 1997 cost of services
by $264,000 through a work force reduction and a decrease of indirect
activities.
Cost of Hardware
Cost of hardware as a percentage of related revenues increased to 79.4%
in fiscal 1998 compared to 79.3% in fiscal 1997 and 73.8% in fiscal 1996. The
cost of hardware as a percentage of related revenue varies with the size of the
system, the margin mix of items comprising the system being sold, and the
competitive conditions of the customer sale. Additionally, the cost of hardware
as a percentage of hardware revenues can vary due to the proportion of
lower-margin sales (cost plus 11%) made to our joint ventures and affiliates,
which were $233,000, $534,000, and $1,264,000 in fiscal 1998, 1997, and 1996,
respectively.
Net Product Development Expenses
Product development expenses, net of amounts capitalized, increased
from $2,235,000 in fiscal 1996 to $2,391,000 in fiscal 1997 and to $2,804,000 in
fiscal 1998. These increases were mainly the result of our strategic initiative
to increase investment in the development of future products, including the
incorporation of various new technologies into our software products. The
Restructuring reduced both new product development expense and reduced the
resulting level of software capitalized. The 1997 Cost Reduction lowered new
product development expense by $876,000 through the reduction of the use of
third-party consultants and a work force reduction. Total development expense
(defined as net development expense plus amounts capitalized)
-16-
<PAGE>
decreased to $6,200,000 in fiscal 1998 from $6,862,000 in fiscal 1997. Total
development expense increased to $6,862,000 in fiscal 1997 from $5,607,000 in
fiscal 1996. These expenses expressed as a percent of related software revenues
were 30.2%, 31.6%, and 29.4% in fiscal 1998, 1997 and 1996, respectively.
Restructuring
In the second quarter of fiscal 1998, we recorded a restructuring
charge of $6,836,000 related to entering into the new distributor arrangement
with Baan for manufacturing software, and a reduction of costs focused on
improving our financial performance. Approximately $6,824,000 of the total
charge has been paid or expensed as of November 30, 1998. We anticipate the
remaining amount of approximately $12,000 to be paid in the first quarter of
fiscal 1999. For additional information on the Restructuring, see Note 3 of
Notes to Consolidated Financial Statements.
Selling and Marketing Expenses
Selling and marketing expenses decreased to $13,280,000 in fiscal 1998
from $15,957,000 in fiscal 1997. Selling and marketing expenses increased to
$15,957,000 in fiscal 1997 from $14,060,000 in fiscal 1996. The operations
discontinued in the Restructuring accounted for $1,691,000 of the decrease in
selling and marketing expenses in fiscal 1998. As a percent of gross margin
(total net revenues minus total costs of products and services), selling and
marketing expense increased from 80.7% to 81.1% between fiscal 1997 and fiscal
1998, and from 70.0% to 80.7% between fiscal 1996 and fiscal 1997, respectively.
The increase in selling and marketing expense as a percent of gross margin
between fiscal 1998 and fiscal 1997 was due to: (1) personnel time spent
building new pipelines for the new Baan products; (2) training costs for newly
hired sales personnel; (3) time spent handling the concerns of prospective
customers regarding our negative operating results; and (4) a general reduction
of marketing activities ($495,000). The increase in selling and marketing
expense as a percent of gross margin between fiscal 1997 and fiscal 1996 was due
to: (1) lower margin due to higher costs of software license fees (see above)
and higher costs of services (see above); (2) increased expenses from developing
international markets ($134,000) and lower productivity of new personnel; and
(3) time spent handling the concerns of prospective customers regarding our
operating results for fiscal 1997. The 1997 Cost Reduction lowered selling and
marketing expense by $730,000 in fiscal 1997, mainly through a decrease in
international market expansion, a focusing of market communications, and a work
force reduction.
General and Administrative Expenses
For fiscal 1998, general and administrative expense decreased to
$3,451,000 from $3,838,000 in fiscal 1997. General and administrative expense
increased to $3,838,000 in fiscal 1997 from $3,416,000 in fiscal 1996. As a
percent of gross margin (total net revenues minus total costs of products and
services), these expenses were 17.0%, 19.4% and 21.1% in fiscal 1996, 1997 and
1998, respectively. The increases in general and administrative expense as a
percent of gross margin from fiscal 1997 to fiscal 1998 was mainly due to an
increase in legal and professional fees related to capital raising activities
($294,000). The increase in general and administrative expense as a percent of
gross margin from fiscal 1996 to fiscal 1997 was mainly due to an increase in
the provision for bad debts (2.5%). The 1997 Cost Reduction lowered general and
administrative expense by $303,000 in fiscal 1997 mainly through a work force
reduction.
Other Income/Expense
Other income/expense resulted in $587,000 of expense in fiscal 1998
compared with $377,000 of expense in fiscal 1997 and $118,000 of expense in
fiscal 1996. Equity income from affiliates was $109,000 in fiscal 1998 compared
with a loss of $25,000 in fiscal 1997 and $25,000 in fiscal 1996. Interest
expense and interest income were $714,000 and $51,000, respectively, in
-17-
<PAGE>
fiscal 1998; $399,000 and $47,000, respectively, in fiscal 1997; and $145,000
and $89,000, respectively, in fiscal 1996. The increase in the levels of
interest expense was mainly the result of increased borrowings under our
borrowing facility. We anticipate that interest expense will continue to rise in
the short-term with continued borrowings for operating and capital expenditure
purposes.
Income Tax Expense
No income tax benefit was recorded for the fiscal year of 1998 compared
to a benefit of $618,000 for the fiscal year of 1997. At November 30, 1998, we,
for financial reporting purposes, were in a tax loss carryforward position.
Generally accepted accounting principles prohibit us from recording a tax
benefit under these circumstances.
Liquidity and Capital Resources
Cash provided by operations was $311,000 in fiscal 1998, $1,733,000 in
fiscal 1997 and $2,906,000 in fiscal 1996. Non-cash expenditures, including
restructuring, depreciation relating to capital expenditures and amortization
associated with software product development, contributed to the cash provided.
Investment activities used cash of $3,101,000 in fiscal 1998, compared
to $5,363,000 in fiscal 1997 and $4,163,000 in fiscal 1996. The cash was used to
fund capital expenditures of $170,000, $1,177,000, and $1,424,000 in fiscal
1998, 1997, and 1996, respectively, and to fund investment in capitalized
software product development of $3,396,000, $4,471,000, and $3,372,000 in fiscal
1998, 1997, and 1996, respectively. We sold $505,000 of available-for-sale
securities in fiscal 1997, and $1,247,000 of available-for-sale securities in
fiscal 1996, which funded, in part, the capital expenditures and capitalized
product development.
Financing activities provided $2,797,000 of cash in fiscal 1998,
$2,778,000 of cash in fiscal 1997, and $1,788,000 of cash in fiscal 1996. The
cash provided in fiscal 1998 mainly reflected both the equity contribution from
a preferred stock offering and borrowings on our credit facilities. As of
November 30, 1998, we, based on the level of eligible accounts receivables, had
$2,448,000 of availability under our $5,000,000 line of credit. As of January
31, 1999, we had $773,000 of availability under our line of credit.
Our credit agreement with Foothill Capital Corporation contains certain
restrictive covenants relating to income (EBITDA), tangible net worth, and level
of capital expenditures. On January 28, 1999, we obtained a waiver from the
lender as a result of our failure to meet the tangible net worth and EBITDA
covenants. In order to meet financial covenants in the future and to meet short
term operational needs, we will need positive operational results in the short
term. In the event that our performance does not improve in the short term, we
will need to secure additional waivers and/or alternative sources of financing
(which could include the sale of assets). We are continuing our review of
alternative sources of financing to deal with our current financial status.
Although our management believes that waivers and/or additional financing can be
obtained, if needed, no assurance can be given that waivers or such additional
financing will be available to us on acceptable terms. In the event that we are
unable to secure necessary waivers or additional financing, it would likely have
a material adverse effect on our liquidity, including our ability to fund
continuing operations.
As a result of our current financial situation, we, in accordance with
generally accepted accounting principles, have reclassified all of our
outstanding debt under the credit facility as short-term debt. (See Note 8 to
the Notes to Consolidated Financial Statements). All debt pertaining to the
credit facility having cross-default provisions has been so reclassified
regardless of whether or not covenant violations have occurred
-18-
<PAGE>
or are anticipated. Our report from our independent accountants contains a going
concern explanatory paragraph, pursuant to which the auditors expressed
substantial doubt as to our ability to continue as a going concern.
The American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition" (SOP 97-2), was issued in October
1997. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. Therefore, SOP 97-2 will effect transactions
entered into by us after December 1, 1998. SOP 97-2 addresses various aspects of
the recognition of revenue on software transactions and supersedes SOP 91-1, the
policy previously followed by us. SOP 97-2 provides guidance on software
arrangements consisting of multiple elements, evidence of fair value, delivery
of elements, accounting for service elements, and software arrangements
requiring significant production, modification, or customization of software. We
currently believe that the impact of SOP 97-2 will not be material in regard to
our consolidated financial statements.
Market Risk
Due to the variable rate paid on the revolver portion of our credit
facility, we are exposed to market risk from changes in interest rates.
Generally, if the base rate on the revolver averaged 2% more in fiscal 1999 than
in fiscal 1998, our interest expense would increase by approximately $80,000.
This amount is determined by considering the impact of the hypothetical interest
rate on our borrowing cost, but does not consider the effects of the reduced
level of economic activity that could exist in such an environment. We have not
historically used financial instruments to hedge interest rate exposure and we
do not use financial instruments for trading purposes and are not a party to any
leveraged derivatives.
Year 2000 Compliance
We face "Year 2000" compliance issues similar to other companies in the
manufacturing software industry. The problem relates to software systems and
programs that use only two digits , rather than four digits, to represent a
year. This does not allow processing of dates beyond the year 1999 and may
result in incorrect calculations, reports or other information. Additionally,
this may cause system failures from processors that are embedded in a multitude
of devices.
To address the Year 2000 problem, we established a corporate readiness
program which began in fiscal 1994 with the a detailed analysis of our software
products sold to our customers. We had originally started addressing the changes
to the program code of our software products for Year 2000 issues in 1985. We
later, in 1998, added the analysis of internal systems and third party suppliers
of both software and any other goods that may have Year 2000 problems. We plan
to complete our detailed assessment plan on or around March of fiscal 1999. A
formal review and approval by the Board of Directors is expected to occur
immediately thereafter.
State of Readiness
Company's Products
Our current products have been designed and tested for Year 2000
compliance. However, due to the complexity of the software product, there can be
no absolute assurance that our software products contain all the necessary date
code changes. The versions of our software prior to version 5.1.2 in 1994 are
known to contain code that is not Year 2000 compliant. In 1996, we notified
customers of prior versions, and subsequently, of this non-compliance and
customers were offered upgrades and implementation assistance to migrate to a
Year 2000 compliant version. Our agreements with the customers since 1992 do not
expressly
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obligate us to furnish an updated version of the software that is Year 2000
compliant. Our analysis of contracts prior to 1992 indicate an immaterial level
of obligation to furnish updated software.
Internal Systems
We are in the process of assessing the Year 2000 readiness of our
internal computer information system and non-computer systems, such as
telecommunications equipment, network equipment, etc., to determine whether such
systems are Year 2000 compliant. Even though substantial work has already been
completed, a complete detailed plan to address any assessed Year 2000 problems
should be available on or around March 1999. We expect to complete deployment of
Year 2000 corrections on or around September 1999.
Third Party Reseller and Key Suppliers
We plan to assess the Year 2000 readiness of our resellers and key
suppliers during the first and second quarter of fiscal 1999. With respect to
certain of our most significant resellers and suppliers, we have already made
inquiries to assess their readiness and have obtained published information
indicating that they are in compliance.
Costs
We estimate the historical costs to remediate the Year 2000 issues have
totaled $968,000 and future costs to remediate will be approximately $500,000.
Risk
Failure to correct critical Year 2000 issues could cause a serious
interruption in our business operations. Such interruptions could have a
material impact on our results of operations, liquidity, and financial
condition. We are taking actions to minimize these issues, but no assurance can
be given that all potential issues can be eliminated. Additionally, the effects
of potential litigation can not be estimated and such litigation could have a
material effect on the results of operations. Finally, factors outside our
control could also cause disruption of business activities which could
materially affect the results of operations.
Contingency Plans
We are in the process of evaluating contingency plans to handle the
controllable risks regarding Year 2000 compliance. Certain of the risks such as
lengthy power outages or communication failures may not be circumvented. A
detailed plan of controllable risks is expected to be available on or around
September 1999.
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BUSINESS
Overview
We develop, market and support integrated manufacturing and business
management software. Our 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.
Our software integrates technologies that allow our customers to optimize their
labor, capital and inventory utilization. The software we offer functions on the
Windows NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX operating systems. We also
provide support services for our software products and, on a selective basis,
sell computer hardware.
Software products offered by us include: TCM(R), which is a
Manufacturing Execution System, and FACTORYnet(R) I/S, which is an integrated
Manufacturing Execution System, providing production management, shop floor
scheduling, and operations support. We also offer Baan software. These software
products 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.
We typically focus our sales and marketing efforts on "discrete"
manufacturing plants. 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. We have licensed our software products to over 1,700 customer sites.
We distribute our products in the United States through eleven branch offices
and through seven joint ventures and independent distributors.
We typically focus our sales and marketing efforts on discrete
manufacturing plants. We have licensed our software products to over 1,700
customer sites. We distribute our products in the United States through eleven
branch offices and through seven joint ventures and independent distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary. In 1996, we acquired the remaining interest in Darwin Data Systems
Corporation another joint venture subsidiary. For further details regarding the
Darwin Acquisition, see Note 2 of Notes to the Company's Consolidated Financial
Statements.
In April 1998, we undertook a major restructuring and recorded a
restructuring charge of approximately $6.8 million. The restructuring included
entering into the distribution agreement with Baan and various cost reduction
aimed at improving our financial performance. In connection with the
restructuring, we closed facilities both in the United States and
internationally and decreased our workforce, particularly in development,
marketing and administration. For additional information regarding the
restructuring, see Notes 3 and 4 of Notes to our Consolidated Financial
Statements.
For our fiscal year ended November 30, 1998, we incurred a net loss of
approximately $10.6 million, inclusive of the restructuring charge. Our audit
report for the 1998 fiscal year contains a going concern explanatory paragraph,
pursuant to which our auditors have expressed substantial doubt as to our
ability to continue as a going concern.
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 approach evolved into manufacturing resource planning ("MRP II"), which
considers labor and equipment planning for the
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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 had 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"). Manufacturing Execution Systems, a
new category of information systems, complement ERP systems by making available
real-time information from the factory floor and enhancing production
performance and decision-making associated with plant operations. We believe
that Manufacturing Execution Systems represent a relatively new marketplace with
substantial benefit potential for manufacturers. We believe that this "time
emphasis" in manufacturing management, which is the focus of our TCM(R), Baan,
and FACTORYnet(R) I/S products, will be an essential component of the management
approach for many manufacturers in the future.
According to an industry publication, consolidation in the
manufacturing systems software industry resulted in the top ten ERP software
companies garnering 82% of the industry's revenues in 1997. Historically, five
of these top ten ERP software companies have focused on providing their products
to large manufacturing companies. This group of companies is referred to as the
"Tier 1" ERP software companies. Each Tier 1 ERP software company spends
annually in excess of $100,000,000 on research and development.
Such levels of expenditure on research and development present a
challenge to mid-sized ERP software companies like us to provide competitive
products to mid-sized to upper mid-sized manufacturing companies at an
affordable price. We do not have equivalent levels of expenditures on research
and development. Also, for the first time, Tier 1 ERP software products have
become practical for mid-sized to upper mid-sized manufacturing companies to
use.
Strategy
Our objective is to become a leading provider of integrated business
software systems for discrete manufacturing plants. We have identified three
strategic initiatives to achieve this goal.
Focus on Time Critical Manufacturing. We believe 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, we
believe 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, we have focused our resources on
developing software to assist time-oriented manufacturing management. Our
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, we believe that the limited number of
information system implementations currently in place which have this "time"
focus have been developed on an individual customized basis. We are not aware of
other major products available in our target market for discrete manufacturers
which offer both planning and execution systems and have a strategy of focusing
on time.
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Commitment to Manufacturing Execution Systems. We believe that discrete
manufacturers can gain significant competitive advantage by implementing
Manufacturing Execution Systems.
We offered our first Manufacturing Execution System package in 1988 and
believe that it is currently a leader in this software segment. Typical business
functions included in a Manufacturing Execution System are described below.
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, we
believe that the value manufacturers realize from implementing a Manufacturing
Execution System extends far beyond this realm. We believe, based on the
experience of our customers, that the major benefit of implementing a
Manufacturing Execution System 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. We currently offer
two Manufacturing Execution System products, one which is pre-integrated with a
total software offering for the entire enterprise (TCM(R)) and the second is
FACTORYnet(R) I/S in which our personnel use Manufacturing Execution System
software to "round out" and complete partial manufacturing execution system
initiatives already undertaken by the customer.
Our management believes Manufacturing Execution Systems software
provide a significant market opportunity for us and, correspondingly, has
strategically committed us to enhancing our Manufacturing Execution System
software offerings and marketplace presence.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our
experience in the marketplace resulted in the 1995 introduction of the first
"pre-integrated" Manufacturing Execution System software offering for discrete
manufacturers. Software pre-integration means that a customer can buy a
comprehensive set of software which has already been integrated and proven to
function. We believe that "pre-integration" of much of our 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.
Software Products
We develop, market and support TCM(R) application software for discrete
manufacturing companies. We offer licenses for several software products: (a)
TCM(R), which is a full function business and ERP software system, including a
pre-integrated Manufacturing Execution System providing production management,
shop floor scheduling and operations support and (b) FACTORYnet(R) I/S, which is
a Manufacturing Execution System 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. In addition, we market
Baan software, which includes an ERP software system and is designed for
mid-sized to upper mid-sized manufacturing companies.
Our 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. Our focus on
discrete manufacturers includes the market segments of repetitive and
electronics manufacturers which some people identify as additional market
segments.
Time Critical Manufacturing Software Products
Our software provides assistance for a broad range of tasks identified
in the six categories set forth below. TCM(R) and FACTORYnet(R) I/S provide
different capabilities within the Manufacturing Execution System and Decision
Support Tools categories described below. We anticipate that over time the two
Manufacturing Execution System product offerings will evolve into a single
product which is more comprehensive than either of them separately.
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<TABLE>
<CAPTION>
<S> <C> <C>
I. PLANNING
Master Production Scheduling Manufacturing Resource Planning II Capacity Planning
II. PRODUCT DATA MANAMENT
Product Configurator Engineering Change Control Standard Bills of Material
Standard Routings Computer Aided Manufacturing ("CAM") Document Library
Item Master Computer Aided Design ("CAD") Standard Cost Build Up
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 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
VII. BAAN SOFTWARE PRODUCTS
Capacity Requirements Planning Project Network Planning
Engineering Change Control Repetitive Manufacturing
Engineering Data Management
Master Production Scheduling
Material Requirements Planning
Product Classification
Product Configuration
Production Control
Production Planning
Project Budgeting
Project Control
*These Products Are Provided Based On Third Party Sublicensing Alliances.
</TABLE>
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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 interfaces with industry popular CAD systems and CAM software.
III. Supply Chain Management.
The 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 table
and multiple order types, including telephone orders, blanket orders and
releases, over-the-counter orders and credit memos. We believe that our 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.
The inventory management modules provide engineering data control and
offer inventory record keeping, availability projections and replenishment
planning. These modules provide bin, lot and serial number control,
multi-location support, cycle counting and physical inventory control.
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(R) and FACTORYnet(R) I/S software products offer integrated
Manufacturing Execution Systems 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 machine tool and/or CAD systems. The products also
include quality systems integration for statistical process control analysis.
These Manufacturing Execution Systems may operate as stand-alone systems or be
integrated into existing customer systems, and are pre-integrated with the
remainder of our 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, fixed assets, and
payroll software products sold by us.
VI. Decision Support Tools.
These software modules are a combination of internally developed and
third party software sold by us which facilitate data management, analysis,
customization, communication, etc., with and between our software and other
software in the customer's computing environment.
VII. Baan Software Products
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In 1998, we became a value-added authorized reseller of Baan software.
We look to Baan, a leader in dynamic enterprise modeling software, to expand our
ability to deliver business value to our customers. Not only does Baan software
offer outstanding features, all the Baan applications are fully integrated to
provide consistency and visibility for all activities across entire operations.
All Baan software applications can be configured to reflect business
relationships between multiple sites. Further comprehensive international
capabilities make it easy for companies to integrate Baan software applications
across international borders.
Our 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 a 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
We invest in a wide range of software technologies which are important
not only for our end user customer but also for our internal software
development and distribution. In appropriate circumstances, we have licensed
software developed by others and integrated various features of that software
into our own software products. For example, our 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). Our products also include EDI.
The Baan product line provides mid-sized to upper mid-sized
manufacturing companies with technology that utilizes Baan's proprietary
toolset, which has been recognized as leading technology for large and mid-sized
manufacturing companies.
For internal software development, we employ software language tools
that we believe are instrumental in achieving software productivity improvements
and allow end users flexibility to customize their software systems. We have
also developed proprietary software which facilitates the conversion of our
software products into various foreign languages, including complex Asian
languages. We believe that this technology is useful not only in penetrating
foreign software markets, but also in assisting customers which use our software
products on a multi-national basis.
Customer Services
We offer comprehensive services for our customers. Services provided by
us 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 all
of our software products, can be provided entirely by us 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
us, are offered on an unbundled basis for either an annual or a multi-year
subscription period. All of the services offered by us are optional, except that
we require first-time licensees of our software to subscribe for at least two
years of telephone support. We believe that the availability of effective
customer services is critical for customer satisfaction and to increase software
license fee revenues. We further believe 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, 1998, 1997, and 1996, services
revenues accounted for 43.0%, 39.4% and 37.4% of our total net revenues,
respectively.
The following is a brief description of the various customer services
we provide:
Telephone Support Program. Our telephone support program is a
comprehensive, fee-based program designed to help customers obtain the maximum
benefit from our business management software. The telephone support program is
handled out of our Minnesota, Illinois, and Wisconsin offices and is staffed by
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thirty 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. We offer system
integration and custom software development services, on a fee basis, to meet
specific customer requirements and to integrate our software with a customer's
existing computer system. We have developed a Time Critical Implementation
Methodology ("TCIM"), which is a proprietary implementation methodology intended
to facilitate integration and efficient implementation of our 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 us to all customers who elect to
purchase custom software development services.
Implementation Consulting. We provide consulting services, on a fee
basis, to assist customers in implementing our TCM(R) or Baan software systems
using the TCIM approach. These services include value-added implementation
planning, project management and specialized customer training. We employ a
full-time professional services staff to provide these and other services.
Training. We offer customers a series of both classroom and on-site
training options. Training includes classroom and personal instruction at a
number of our locations or at the customer's plant site. Standardized training
is offered for a fixed fee per class.
Hardware Products
We sell computer hardware and data collection equipment in order to
facilitate sales of our software products to customers requiring a complete
management information system. We sell, among other hardware, factory data
collection equipment, CAMates(R) (a small specialized computer allowing users to
monitor and collect data from production machines), bar coding systems,
networking and communication equipment, and occasionally 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. We also offer our customers networking
and communication hardware and server and client computing hardware which we
purchase from original manufacturers, including Intermec Corporation, plus two
distributors, Keylink SystemsSM and Ingram Micro, Inc. During the past several
years, we have focused our efforts on generating an increasing percentage of our
net revenues from software license fees, which have a higher margin than
hardware revenues.
Markets and Customers
We target companies operating discrete manufacturing plants
predominantly in the Eastern half of the United States. These plants may be
owned by privately held companies or by large, multi-national public
corporations. Our customers include, among others, capital equipment
manufacturers, job shops, high volume manufacturers, automotive suppliers,
consumer product manufacturers, and aerospace equipment manufacturers. During
each of the past three fiscal years, no one customer has accounted for more than
10% of our total net revenues.
Sales and Marketing
In the United States and Canada, we license our products and offer
services through a direct branch office sales force, joint ventures and
independent distributors as reflected in the table below:
Branch Office Independent Distributor Joint Venture Location
Locations Territories
Austin, TX Miller Place, NY
Boston, MA Menomonee, MI
Chicago, IL Pittsburgh, PA
Cincinnati, OH Wausau, WI
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Detroit, MI West Des Moines, IA
Houston, TX Brainerd, MN
Los Angeles, CA
Milwaukee, WI
Minneapolis, MN
Norwalk, CN
Port St. Lucie, FL
Rockford, IL
We own 50% of the joint venture operating in Cleveland. We obtained our
interest in this joint venture primarily in exchange for technical knowledge and
management expertise. We have no obligation to fund any losses that may be
incurred by the joint venture.
Our direct sales personnel are compensated on a salary plus commission
basis. Our 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 us 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 our software to keep
the agreements in effect. We also maintain a staff of systems consultants who
offer pre- and post-sales support to the sales and distribution network.
We market our 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. We
are also given leads regarding potential customers by our hardware and services
vendors, existing customers and various accounting and consulting firms.
Sales cycles for our 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.
Strategic Arrangements
A facet of our strategy is to establish arrangements with suppliers of
state of the art information systems technology. Over the last five years we
have worked to expand the number of our strategic relationships.
We have distributor relationships with Keylink SystemsSM, a subsidiary
of Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which
supply computers, associated peripherals and third party software. We have
arrangements with Intermec Corporation relating to bar code data collection
systems which are integrated on an "off-the-shelf" basis into our software
products. Our software has been integrated with other bar coding systems on a
customized basis. We also have a relationship with the Datamyte Division of
Rockwell Automation for its Quantum quality control software product line.
In addition to our relationships with equipment providers, we have
relationships with numerous software product suppliers. These companies provide
software which we use within TCM(R) and FACTORYnet(R) I/S software. Synergex
International Corporation has provided us with the Synergy 4GL Applications
Development Environment since 1990. We purchase EDI software from Supply Tech
and Radley Corporation.
We have a relationship with Baan of the Netherlands by which we are
licensed to resell their software throughout the United States. We focus our
efforts on Baan sales in nineteen states within the Eastern half of the United
States. These states represent over 50% of the mid-sized discrete manufacturing
companies in the United States. We are the first mid-sized ERP software company
to establish such a relationship with respect to a Tier 1 manufacturing software
product.
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Our relationship with the equipment and software product suppliers
described above is basically that of a reseller of such suppliers' products. As
such, we are entitled to volume discounts on products which we purchase and are
generally entitled to the benefits of cooperative marketing programs.
Product Development
We believe we must continue to enhance and broaden our software
products to meet the constantly evolving needs of discrete manufacturers within
our target market. We rely on internal development and development related to
customized projects implemented at field sites to extend, enhance and support
our software products, and develop and integrate new capabilities.
In general, we have historically made one new product release each
year. These formal releases are supplemented by periodic releases for our EDI
software to respond to ongoing changes in trading partner requirements.
During the fiscal years ended November 30, 1996, 1997, and 1998, our
total software investment (consisting of product development expenses and
capitalized software development costs) was $5.6 million, $6.9 million and $6.2
million, respectively. Product development expenditures which were expensed and
not capitalized during those three fiscal years totaled $2.2 million, $2.4
million and $2.8 million, respectively.
Software development efforts currently in progress include the
development of product enhancements such as additional object orientation
features within our 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
we will be able to market successfully. Certain of these enhancements are
dependent upon the development efforts of third party suppliers over whom we
have no control. In the event the development efforts of the third party
suppliers are delayed or are unsuccessful, our software developments would be
similarly delayed. Software development is, however, an evolutionary process and
our management believes we could eventually find other suppliers or, if
unsuccessful in our search, that we could successfully re-engineer existing
products to fulfill our requirements.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to our products.
Some of our 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 us.
We believe that our employees' understanding of diverse manufacturing
operations and processes and the potential business benefits of the TCM(R)
management approach to such operations allow us to differentiate ourselves 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 1997, Gartner Group identified twenty-four competitors in the North
American mid-market ERP area for discrete manufacturers. Additionally, that firm
identified eight competitors in the Manufacturing Execution Systems market as of
June 1997. Although Gartner Group identified a limited number of competitors in
its Manufacturing Execution Systems study, we generally do not encounter these
competitors in the marketplace. We believe that our primary competition for our
Manufacturing Execution System products are customized software products
developed by internal data processing staffs or by third party offerings for
both ERP and Manufacturing Execution System discrete manufacturers.
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Intellectual Property
We have registered or have applied for registration of our "EMS" and
"TCM(R)" 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 we currently do business. Among others, we have also received
or applied for trademarks for products marketed under the names FACTORYnet(R)
I/S and CAMate(R).
We regard our software products as proprietary in that title to and
ownership of our software reside exclusively with us. We attempt to protect our
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 our software
products. While our competitive position could conceivably be threatened by our
inability to protect our proprietary information, we believe that copyright and
trademark protection are less important to our success than other factors such
as the knowledge, ability and experience of our personnel, name recognition and
ongoing product development and support.
Employees
As of March 31, 1999, we had 295 full-time employees, of whom 72 were
engaged in sales and marketing; 73 in product development; 83 in customer
service; and 67 in management, finance and administration. Our employees are not
represented by any collective bargaining organization and we have never
experienced a work stoppage. We consider our employee relations to be good.
Properties
Our 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. We lease additional facilities domestically in
Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Detroit, Michigan;
Houston, Texas; Minneapolis, Minnesota; Port St. Lucie, Florida; Rockford,
Illinois and Los Angeles, California. We lease office space internationally in
Hong Kong, and China. See Note 8 of the Notes to Consolidated Financial
Statements for information regarding our total lease obligations.
Legal Proceedings
As of the date of this filing, neither we nor any of our subsidiaries
is a party to any legal proceedings, the adverse outcome of which, in our
management's opinion, would have a material effect on our results of operations
or financial position. In December 1998, a judgment was issued in a legal
proceeding that resulted in us being ordered to pay $212,000.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position of each
person who, as of March 10, 1999, is a director nominee for director and/or an
executive officer of the Company:
Name Age Position
Helmut M. Adam 48 Director
Michael D. Dunham 53 President and Chief Executive Officer;
Director
Thomas M. Dykstra 57 Vice President, Secretary and Treasurer;
Director
Jeffry J. Fossum 45 Chief Financial Officer and Assistant
Treasurer
Richard W. Grelck 56 Chief Operating Officer
Scott J. Mermel 51 Director
Elliot Wassarman 59 Director
Wayne T. Wedell 40 Vice President - Services
Robert E. Weisenberg 49 Director
Helmut M. Adam, 48, has served as President of Olympus Flag & Banner,
Inc., a manufacturer of banners, flags and display products, since 1992. Prior
thereto, Mr. Adam was President of Ransomes Inc., a manufacturer of commercial
grass mowing equipment. Mr. Adam is a Certified Public Accountant. Mr. Adam has
both B.B.A. and M.B.A. degrees from the University of Wisconsin and an M.S.
degree in Accounting from the University of Wisconsin-Milwaukee.
Director since: 1987
Michael D. Dunham, 53, our co-founder, has served as our President and
Chief Executive Officer since our inception in 1978. Mr. Dunham has over 20
years of experience in management, sales, consulting, software design and
development in the manufacturing and distribution software industry. Mr. Dunham
has a B.S. degree in electrical engineering from the University of Denver and a
Masters of Management Science degree from the Stevens Institute of Technology.
Mr. Dunham is a Fellow of the American Production and Inventory Control Society.
Director since: 1978
Thomas M. Dykstra, 57, our co-founder, has served as our Vice President
and as Secretary and Treasurer since our incorporation in 1978. During his
tenure, Mr. Dykstra has managed several different functions including product
development, marketing, affiliate sales, finance, and administration and
support. Mr. Dykstra has a degree in mathematics from Hope College and an M.B.A.
degree from the University of Chicago. Mr. Dykstra is a Fellow of the American
Production and Inventory Control Society.
Director since: 1978
Jeffrey J. Fossum, 45, has served as our Chief Financial Officer since
1987 and as Assistant Treasurer since December 1993. From 1983 to 1987, Mr.
Fossum was the Controller of Berg Company, a
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manufacturer of restaurant equipment. Mr. Fossum received his B.A. degree from
the University of Wisconsin-Eau Claire. Mr. Fossum is a Certified Public
Accountant.
Richard W. Grelck, 56, has served as our Chief Operating Officer since
April 1998. From June 1997 to April 1998, Mr. Grelck served as Vice President of
Technology Development and from February 1995 to June 1997 he served as Vice
President of Manufacturing Technology. Also from February 1995 to June 1997 he
served as Vice President and General Manager of a wholly-owned subsidiary that
sells and services our software products in Illinois and Indiana. Prior to
February 1995 that subsidiary, EMS of Illinois, Inc., was a 50% EMS owned joint
venture in which Mr. Grelck held the position of Chief Executive Officer from
its founding in 1983 to 1995. Mr. Grelck has a B.S. degree in Electrical
Engineering from Northwestern University.
Scott J. Mermel, 51, is a private investor. From April 1997 to July
1998, Mr. Mermel served as Vice President, Marketing of Metrix, Inc., a
developer and marketer of customer service and product support software. From
1980 to April 1997, Mr. Mermel was a floor trading member of the Chicago
Mercantile Exchange. Prior to that, he held several managerial positions with
Xerox Computer Services, a developer and marketer of software systems for
manufacturing companies. Mr. Mermel has a B.S. degree and an M.S. degree in
Industrial Management from MIT.
Director since: 1987
Elliot Wassarman, 59, is an independent consultant to the high
technology market. In 1998, Mr. Wassarman served as President, Chief Executive
Officer, and a Director of Mitek Systems, Inc., a developer of neural networked
intelligent-character-recognition and advanced forms processing software. From
1996 to 1997, he served as President, Chief Executive Officer, and a Director of
Electric Classifieds, Inc. (k/n/a InstantObjects, Inc.), an internet e-commerce
products and services startup. During 1996, Mr. Wassarman also served as
President, Chief Operating Officer, and a Director of Teralinx Communications
Corp. From 1990 to 1996, Mr. Wassarman served as President, Chief Executive
Officer, and a Director of Promis Systems Corp., a software company. Mr.
Wassarman has a B.A. degree from Suffolk University.
Director since: 1999
Wayne T. Wedell, 40, joined us in 1981 and has held positions of
Account Manager, Senior Account Manager, Group Manager as well as Professional
Services Manager, and was promoted to Vice President-Services in 1992. Mr.
Wedell holds a B.A. degree in business administration from the University of
Wisconsin-Milwaukee.
Robert E. Weisenberg, 49, is President of Northwoods Software
Development, Inc., a software development firm. From December 1989 to December
1997, Mr. Weisenberg was our Vice President - Operations and General Manager.
Mr. Weisenberg also served as our Assistant Secretary from December 1993 until
December 1997. Mr. Weisenberg has a B.A. degree from Stanford University and is
a Certified Public Accountant.
Director since: 1993
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<PAGE>
Director Compensation
Directors who are officers or employees of the Company receive no
compensation as such for service as members of either the Board of Directors or
committees thereof. In fiscal 1998, the non-employee directors received a cash
retainer fee of $3,500. In addition, non-employee directors are entitled to
receive grants of options to purchase the common stock under the 1993 Stock
Option Plan (the "1993 Plan"). Under the 1993 Plan, each person who is first
elected as a non-employee director automatically receives on the date of his or
her election an option to purchase 2,030 shares of the common stock. On the day
following the annual meeting of shareholders in each year, each non-employee
director is also entitled to receive an option to purchase 1,500 shares of the
common stock for serving on the Board of Directors and an option to purchase
1,000 shares of the common stock for each Board of Directors committee on which
the director serves. Options granted to non-employee directors have a per share
exercise price of 100% of the fair market value of a share of the common stock
on the date of grant. Non-employee director options under the 1993 Plan vest as
to 10% of the shares subject thereto on the first anniversary of the grant date,
an additional 20% on the second anniversary of the grant date, an additional 30%
on the third anniversary of the grant date, and the final 40% on the fourth
anniversary of the grant date, except that if the non-employee director ceases
to be a director by reason of death, disability or retirement during such
period, or in the event of a change in control, the option will become
immediately exercisable in full. Options granted to non-employee directors will
terminate on the earlier of (a) ten years after the date of grant, (b) six
months after the non-employee director ceases to be a director by reason of
death, or (c) three months after the non-employee director ceases to be a
director for any reason other than death. Under the terms of the 1993 Plan,
Messrs. Adam and Mermel each received in fiscal 1998 an option to purchase 3,500
shares of, and Mr. Weisenberg received an option to purchase 1,500 shares of,
the common stock at a per share exercise price of $3-7/16. No options were
exercised by the non-employee directors during fiscal 1998.
Mr. Wassarman, when he was first elected as a non-employee director
effective February 1, 1999, received under the terms of the 1993 Plan an option
to purchase 2,030 shares of the common stock at a per share exercise price of
$1-7/16. In addition, on February 1, 1999, (i) Mr. Wassarman was granted an
option to purchase 20,000 shares of common stock and (ii) Messrs. Adam, Mermel
and Weisenberg were each granted an option to purchase 10,000 shares of the
common stock. All of these options were granted outside of the 1993 Plan and are
exercisable at a price of $1-7/16 and have a ten-year term. These options vest
and become exercisable (i) as to 30% of the shares of the common stock subject
thereto immediately, (ii) as to an additional 30% of the shares of the common
stock subject thereto after one year has elapsed from the date of grant and
(iii) as to the remaining 40% of the shares of the common stock subject thereto
after two years has elapsed from the date of grant.
Board of Directors Committees
The Board of Directors has standing Audit and Compensation Committees.
The Audit Committee is responsible for recommending to the Board of Directors
the appointment of independent auditors, approving the scope of the annual audit
activities of the auditors, approving the audit fee payable to the auditors and
reviewing audit results. Messrs. Adam, Dunham and Mermel are members of the
Audit Committee. The Audit Committee held one meeting in fiscal 1998.
The Compensation Committee (a) reviews and recommends to the Board of
Directors the compensation structure for our directors, officers and other
managerial personnel, including salary rates, participation in any incentive
bonus plans, fringe benefits, non-cash perquisites and other forms of
compensation, and (b) administers the 1993 Plan and the 1998 Employee Stock
Purchase Plan. Messrs. Adam and Mermel are members of the Compensation
Committee. The Compensation Committee held five meetings in fiscal 1998.
The Board of Directors has no standing nominating committee. The Board
of Directors selects the director nominees to stand for election at our annual
meeting of shareholders and to fill vacancies occurring on the Board of
Directors. The Board of Directors will consider nominees recommended by
shareholders, but has no established procedures which shareholders must follow
to make a recommendation. Our Bylaws also provide for shareholder nominations of
candidates for election as directors. These provisions require such nominations
to be made pursuant to timely notice (as specified in the Bylaws) in writing to
our Secretary. The
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<PAGE>
shareholder's notice of nomination must contain information relating to the
nominee which is required to be disclosed by our Bylaws and the Securities
Exchange Act of 1934.
The Board of Directors held ten meetings in fiscal 1998. Other than Mr.
Adam, who missed one meeting of the Board of Directors, each director attended
(a) all of the meetings of the Board of Directors and (b) all of the meetings
held by all committees of the Board of Directors on which such director served
during the year.
Executive Compensation
The following table sets forth certain information concerning
compensation paid for the last three fiscal years to (i) our Chief Executive
Officer and (ii) each of our four most highly compensated executive officers who
earned cash compensation in excess of $100,000 for the fiscal year ended
November 30, 1998. The persons named in the table are sometimes referred to
herein as the "Named Executive Officers."
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
--------------
Awards
--------------
Securities
Underlying
Stock
Name and Principal Annual Compensation(1) Options (#) All Other Compensation(2)
Position Year Salary ($) Bonus ($)
<S> <C> <C> <C> <C> <C>
Michael D. Dunham 1998 $185,819 $--- --- $---
President and Chief Executive 1997 185,586 --- --- ---
Officer 1996 175,148 --- --- ---
Thomas M. Dykstra 1998 176,439 --- --- ---
Vice President, Secretary and 1997 176,308 --- --- ---
Treasurer 1996 164,739 --- --- ---
Richard W. Grelck 1998 171,087 --- 43,000 ---
Chief Operating Officer 1997 122,191 125,000 --- ---
1996 122,929 58,000 --- ---
Wayne T. Wedell 1998 107,550 27,225 5,000 3,273
Vice President Corporate 1997 71,520 35,500 4,500 ---
Services 1996 67,008 6,120 10,000 ---
Jeffrey J. Fossum 1998 104,544 5,000 --- 3,160
Chief Financial Officer and 1997 95,460 5,000 --- ---
Assistant Treasurer 1996 90,832 --- 10,000 ---
- ----------
(1) Certain personal benefits provided by us and our subsidiaries to the Named
Executive Officers are not included in the table. Such benefits consisted
of Company-provided automobiles and reimbursement of certain medical
expenses. The aggregate amount of such benefits for each Named Executive
Officer in each year reflected in the table did not exceed 10% of the sum
of such officer's salary and bonus in each respective year.
(2) Consists of matching contributions made by the Company under its 401(k)
plan.
</TABLE>
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<PAGE>
Stock Options
We have in effect the 1993 Plan pursuant to which options to purchase
common stock may be granted to our employees (including executive officers) and
employees of our subsidiaries. The following table presents certain information
as to grants of stock options made during fiscal 1998 to the Named Executive
Officers. Messrs. Dunham, Dykstra and Fossum were not granted options in the
1998 fiscal year.
<TABLE>
<CAPTION>
Option Grants in 1998 Fiscal Year
Potential
Realizable Value
at
Assumed Annual
Rates of Stock
Price
Individual Grants Appreciation for
--------------------------------------------------------------------------------------------- Option Term (2)
-----------------
Number of Percentage of
Securities Total Options At 5% At 10%
Underlying Granted to Exercise or Annual Annual
Options Employees in Base Price Expiration Growth Growth
Name Granted (1) Fiscal Year ($/share) Date Rate Rate
---- ----------- ------------- ---------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Richard W. Grelck........... 43,000 11% $1.4375 10/13/08 $38,872 $98,513
Wayne T. Wedell............. 5,000 1.3% $1.4375 10/13/08 $ 4,520 $11,455
- --------------------
(1) The options reflected in the table (which are non-qualified options for
purposes of the Internal Revenue Code) were granted under the 1993 Plan and
vest and become exercisable (i) as to 30% of the shares of common stock
subject thereto immediately, (ii) as to an additional 30% of the shares of
common stock subject thereto after one year has elapsed from the date of
grant and (iii) as to the remaining 40% of the shares of common stock
subject thereto after two years has elapsed from the date of grant.
(2) This presentation is intended to disclose a potential value which would
accrue to the optionee if the option were exercised the day before it would
expire and if the per share value had appreciated at the compounded annual
rate indicated in each column. The assumed rates of appreciation of 5% and
10% are prescribed by the rules of the SEC regarding disclosure of
executive compensation. The assumed annual rates of appreciation are not
intended to forecast possible future appreciation, if any, with respect to
the price of the common stock.
</TABLE>
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<PAGE>
The following table sets forth information regarding the exercise of
stock options by Named Executive Officers during the 1998 fiscal year and the
fiscal year-end value of unexercised options held by Named Executive Officers.
Messrs. Dunham and Dykstra do not hold any stock options.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities
Shares Value Underlying Unexercised Value of Unexercised
Acquired on Realized Options at Fiscal In-the-Money Options
Name Exercise (#) ($)(1) Year-End (#) at Fiscal Year-End ($)(1)
---- ------------ ------ ------------ -------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Richard W. Grelck --- --- 202,704 30,100 --- ---
Wayne T. Wedell 3,500 $312.50 12,105 10,650 --- ---
Jeffrey J. Fossum --- --- 12,265 4,000 --- ---
- ---------------
(1) The dollar values are calculated by determining the difference between the
fair market value of the underlying common stock and the exercise price of
the options at exercise or fiscal year-end, as the case may be.
</TABLE>
Employment Arrangements
Each of Messrs. Dunham, Dykstra and Grelck has an Employment,
Confidentiality, Non-Competition and Severance Agreement with us that provides
that while he remains employed with us, subject to either party terminating the
agreement, his base salary shall not be reduced (unless there is a corporate
wide reduction applicable to all of our executives) and he shall continue to
perform his duties. Pursuant to the agreements, each of Messrs. Dunham, Dykstra
and Grelck continues to receive benefits equivalent to those he presently
receives and he remains eligible for bonuses and stock options, as determined by
the Compensation Committee. Each of Messrs. Dunham, Dykstra and Grelck will
receive severance payments if, in connection with a change of control, he
voluntarily terminates because we materially change his duties as President and
Chief Executive Officer, Vice President, Secretary and Treasurer or Chief
Operating Officer, respectively, subject to certain restrictions, or he is
terminated without cause. Each of Messrs. Dunham, Dykstra and Grelck will
receive severance payments for up to twelve months if he voluntarily terminates
or is terminated prior to a change in control. Each of Messrs. Dunham, Dykstra
and Grelck will receive severance payments for up to eighteen months if he
voluntarily terminates or is terminated following a change in control related to
the sale of our assets. Each of Messrs. Dunham, Dykstra and Grelck will receive
severance payments for up to fifteen months if he voluntarily terminates or is
terminated following a change in control related to the sale of outstanding
shares of our voting stock. Upon separation, the agreements limit the ability of
each of Messrs. Dunham, Dykstra and Grelck to solicit our employees. The ability
of each of Messrs. Dunham, Dykstra and Grelck to compete against us is limited
upon severance. As a severance payment, each of Messrs. Dunham, Dykstra and
Grelck will receive his base salary, including continuation during the severance
period of health, dental, group life and disability insurance, and will have use
for six months of a Company-supplied car, use of an executive outplacement
service and certain other benefits. In addition, upon severance all of the
unvested options held by Messrs. Dunham, Dykstra and Grelck shall immediately
vest.
Mr. Wedell has an Employment and Separation Agreement with us that
provides for his employment at the level of Vice President or higher through
December 31, 2006, subject to earlier termination by either party and subject to
future extension. Among other benefits, the agreement provides for an initial
annual base salary of $90,000, subject to upward adjustment, and annual bonus
opportunities. In addition, Mr. Wedell's agreement provides for a termination
payment of up to 75% of his highest annual base salary in the event of his
termination by the Company, termination following a change in control involving
us or upon his resignation following a change in control and a diminution in the
level of his responsibilities with us. Mr. Wedell would also be entitled to
insurance benefits and use of an automobile for up to twelve months following
such termination.
<PAGE>
Mr. Fossum has a Special Compensation and Separation Agreement with us.
Pursuant to this agreement, Mr. Fossum, assuming he remains an employee, is
entitled to receive a $25,000 bonus in the event we enter into a business
combination prior to July 1, 1999. In addition, if Mr. Fossum is terminated
within twenty-four months of such event, he will be entitled to receive his base
salary and insurance benefits for up to twelve months, certain tuition
reimbursement, the acceleration of unvested options and use for twelve months of
an automobile. For purposes of his agreement, Mr. Fossum will, in addition to an
actual termination, be deemed to be terminated if his compensation or
responsibilities are reduced or if he is asked to relocated outside of the
Milwaukee, Wisconsin area.
Related Party Transactions
Michael D. Dunham, our President, Thomas M. Dykstra, our Vice
President, Secretary and Treasurer, Robert E. Weisenberg, one of our directors,
and Donald W. Vahlsing, who was one of our employees until his resignation on
March 1, 1999, own all of the outstanding common stock of EMS Solutions, Inc.
("EMS Solutions"). EMS Solutions develops and sells computer software and
related hardware to the food vending and food distribution industry. EMS
Solutions employs 18 people, including a full-time Vice President and General
Manager. Although Messrs. Dunham and Dykstra are shareholders and directors and
Messrs. Weisenberg and Vahlsing are shareholders of EMS Solutions, they are not
involved in the daily management of its operations.
In September 1998, EMS Solutions paid in full debt outstanding to us,
having a balance at the time of approximately $312,000. Prior to the repayment
of such debt, EMS Solutions paid interest thereon at a
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<PAGE>
rate equal to our cost of funds under our revolving line of credit. We continue
to provide administrative services to EMS Solutions. Fees received for these
services amounted to approximately $75,000 for the fiscal year ended November
30, 1998. We believe that the fees charged for these services are comparable to
fees that would be charged to unaffiliated third parties.
PRINCIPAL SHAREHOLDERS
Management
The following table sets forth information, as of March 10, 1999,
regarding beneficial ownership of the common stock by each director, each of the
persons named in the Summary Compensation Table, and all of the directors and
executive officers as a group. Except as otherwise noted, each of the persons
listed has sole voting and investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner(1) Beneficial Ownership(2) of Class
------------------------ -------------------- --------
<S> <C> <C>
Helmut M. Adam...................... 28,835 *
Michael D. Dunham................... 640,300 15.5%
Thomas M. Dykstra................... 575,000(3) 14.0%
Jeffrey J. Fossum................. 20,821 *
Richard W. Grelck................... 229,204 5.3%
Scott J. Mermel..................... 28,835 *
Elliot Wassarman.................... 6,000 *
Wayne T. Wedell..................... 29,110 *
Robert E. Weisenberg................ 246,200 6.0%
All directors and executive
officers as a group
(9 persons)....................... 1,804,305(4) 40.9%
- ----------
* Less than one percent (1%).
(1) The address of each person who holds in excess of 5% of the common stock
identified in this table is 12000 West Park Place, Milwaukee, Wisconsin
53224.
(2) Includes the following shares subject to stock options or warrants which
were exercisable as of or within 60 days of March 1, 1999: Mr. Adam,
26,835; Mr. Dunham, 3,000 shares; Mr. Grelck, 202,704 shares; Mr. Mermel,
26,835 shares; Mr. Wassarman, 6,000 shares; Mr. Weisenberg, 3,000 shares;
and all directors and executive officers as a group, 292,744 shares. Other
than Mr. Dunham who holds warrants, all of the foregoing shares relate to
outstanding options.
(3) Consists of (a) 165,000 shares held by the Dykstra Family Limited
Partnership for which Mr. Dykstra acts as managing general partner and (b)
410,000 shares held by a family trust for which Mr. Dykstra serves as
trustee.
(4) Assumes the exercise of all options and warrants held by the group
which were exercisable as of or within 60 days of March 1, 1999.
</TABLE>
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<PAGE>
Other Beneficial Owners
The following table sets forth information, as of December 31, 1998,
regarding beneficial ownership by the only other persons known to us to own
beneficially more than 5% of the outstanding common stock as of such date. The
beneficial ownership set forth below has been reported on filings made by such
beneficial owners on Schedule 13G with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Ownership
of Beneficial Owners Voting Power Investment Power
- -------------------- ------------ ---------------- Percent
Sole Shared Sole Shared Aggregate of Class
---- ------ ---- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Heartland Advisors, Inc.(1)
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 378,200 0 826,200 0 826,200 20.1%
Donald W. Vahlsing
12000 West Park Place
Milwaukee, Wisconsin 53224 229,900 0 229,900 0 229,900 5.6%
- ---------------
(1) The filing made by Heartland Advisors, Inc. indicates that the common
stock as to which it is deemed to be beneficial owner is held in
various investment advisory accounts.
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of twenty million (20,000,000)
shares of the common stock and three million (3,000,000) shares of preferred
stock.
The common stock is entitled to such dividends as may be declared from
time to time by our Board of Directors in accordance with applicable law.
Except as provided under Wisconsin law, and except for the voting
rights of holders of Series B Preferred Stock, only the holders of the common
stock are entitled to vote for the election of directors and on all other
matters. Holders of the common stock are entitled to one vote for each share of
the common stock held by them subject to section 180.1150 of the Wisconsin
Statutes. (See "Certain Statutory Provisions" below). Holders of the common
stock do not have cumulative voting rights in connection with the election of
directors, which means that holders of shares entitled to exercise more than 50%
of the voting power represented at any meeting of shareholders have the power to
elect all of the directors to be elected at any such meeting.
All shares of the common stock are entitled to participate equally in
distributions in liquidation subject to any preferential right of holders of
preferred stock. Except as the Board of Directors may in its discretion
otherwise determine, holders of the common stock have no preemptive rights to
subscribe for or to purchase shares of our capital stock. There are no
conversion rights, sinking fund, or redemption provisions applicable to the
common stock. Section 180.0622(2)(b) of the Wisconsin Statutes and judicial
interpretations thereof provide that shareholders are personally liable for
debts owing to employees of the company for services performed (not to exceed
six months' service in any one case).
Certain Statutory Provisions
Section 180.1150 of the Wisconsin Statutes provides that the voting
power of shares held by any person or persons acting as a group that is greater
than 20% of the voting power in the election of directors is limited to 10% of
the full voting power of those shares. This restriction does not apply to shares
acquired directly from us or in certain specified transactions or shares for
which full voting power has been restored pursuant to a vote of shareholders.
Sections 180.1140 to 180.1144 of the Wisconsin Statutes contain certain
limitations and special voting provisions applicable to specified business
combinations involving us and a significant shareholder, unless the Board of
Directors approves the business combination or the shareholder's acquisition of
shares before such shares are acquired. Similarly, sections 180.1130 to 180.1133
of the Wisconsin Statutes contain special voting provisions applicable to
certain business combinations, unless specified minimum price and procedural
requirements are met.
Following commencement of a takeover offer, section 180.1134 of the
Wisconsin Statutes imposes special voting requirements on certain share
repurchases effected at a premium to the market and on certain asset sales by
us, unless, as it relates to the potential sale of assets, the corporation has
at least three independent directors and a majority of the independent directors
vote not to have the provision apply to the corporation.
The foregoing provisions of the Wisconsin Statutes could have the
effect of delaying, deterring, or preventing a change in control.
Restated Articles of Incorporation
Under our Restated Articles of Incorporation (the "Restated Articles of
Incorporation") and Bylaws, the Board of Directors is comprised of six members,
who are divided into three classes, each class
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<PAGE>
serving a three year term. The Restated Articles of Incorporation provide that
any vacancies on the Board of Directors are filled only by the affirmative vote
of a majority of the directors in office, even if less than a quorum. Any
director so elected will serve until the term for the class to which he or she
is elected expires, and until his or her successor is duly elected and
qualified.
The Restated Articles of Incorporation provide that any director may be
removed from office with or without cause, but only by the affirmative vote of
at least sixty-six and two-thirds percent of the voting power of the then
outstanding shares entitled to vote in the election of directors.
The provisions of the Restated Articles of Incorporation summarized
above could have the effect of delaying, deterring, or preventing a change in
control.
Preferred Stock
We have the authority to issue, in one or more series, up to 3,000,000
shares of preferred stock. The preferred stock is issuable in series, each of
which may vary as determined by the Board of Directors as to the designation and
minimum number of shares of each series, the voting power of the holders
thereof, the dividend rate, redemption terms and prices, voluntary and
involuntary liquidation preferences, conversion rights and sinking fund
requirements, if any. As of the date of this prospectus, the only shares of
preferred stock issued and outstanding are the shares of Series B Preferred
Stock.
Series B Preferred Stock
General. The Series B Preferred Stock has been authorized as a series
consisting of a maximum of five thousand (5,000) shares of which 1,819.65 shares
are issued and outstanding.
Dividends. Holders of the Series B Preferred Stock are entitled to
receive cumulative preferential dividends payable quarterly in cash on January
2, April 1, July 1 and October 1 of each year at the rate of eight (8%) percent
per annum. Commencing with the quarterly period beginning January 2, 2002, the
annual dividend rate will increase each quarterly period beginning January 2,
2002, the annual dividend rate will increase each quarterly period by two (2%)
percent up to a maximum dividend of eighteen (18%) percent per annum (e.g., the
annual dividend rate for the quarterly period commencing January 2, 2002 will be
ten (10%) percent per annum and the annual dividend rate for the quarterly
period commencing April 1, 2002 will be twelve (12%) per annum). In the event we
cannot, as determined by the Board of Directors in its sole discretion, pay
dividends in cash on a dividend payment date, we will pay dividends in shares of
the Series B Preferred Stock valued at eighty (80%) percent of the lesser of :
(i) $1,000 and (b) the Conversion Price (as defined in the Restated Articles of
Incorporation).
Voting Rights. The holders of the Series B Preferred Stock shall be
entitled to vote, on all matters in which holders of the common stock are
entitled to vote, voting together with the common stock. The holders of the
Series B Preferred Stock shall have the number of votes that they would have
assuming conversion of the Series B Preferred Stock into the common stock as of
the record date for the meeting of shareholders, with fractional shares being
disregarded. The holders of the Series B Preferred Stock shall be entitled to
receive all communications sent by us to the holders of the common stock. The
holders of the Series B Preferred Stock are entitled to vote together as a class
on the issuance of any class of equity securities which ranks equal or senior to
the Series B Preferred Stock, and on any change or repeal of any of the express
terms of the Series B Preferred Stock. When voting as a separate class, the
affirmative vote of not less than a majority of the outstanding shares of the
Series B Preferred Stock shall be required for approval of such matters.
Liquidation. On any liquidation, dissolution, or winding up, after
payment of all our creditors, the holders of the Series B Preferred Stock will
have the right to receive out of our remaining assets, before the holders of any
other equity interest are entitled to receive anything, the sum of one thousand
dollars ($1,000) per share, plus any accrued and unpaid dividends.
-40-
<PAGE>
Voluntary Conversion. Each share of the Series B Preferred Stock is
convertible, at the option of the holder, into shares of the common stock at any
time prior to the effective date of a forced conversion or redemption at a
conversion price of $2.00 (the "Conversion Price"), subject to adjustment. We
will not issue fractional shares of the common stock upon conversion of the
Series B Preferred Stock, but will pay a cash adjustment for any such fraction.
Forced Conversion. We have the right to force conversion of the Series
B Preferred Stock into shares of the common stock at any time after issuance of
the Series B Preferred Stock, provided: (i) that on the Forced Conversion Notice
Date and on the Forced Conversion Date (each as defined in the Restated Articles
of Incorporation) the common stock issuable upon conversion of the Series B
Preferred Stock has been registered pursuant to the Securities Act of 1933 and
such registration is then currently effective; and (ii) the average of the
closing bid price of the common stock as listed on the NASDAQ, the New York
Stock Exchange, the American Stock Exchange or wherever the common stock then
trades, is at least one hundred seventy-five (175%) percent of the Conversion
Price for twenty (20) trading days within any thirty (30) consecutive trading
day period ending no more than ten (10) days prior to the Forced Conversion
Notice Date. Any notice of forced conversion must be given to all holders no
less than thirty (30) nor more than forty-five (45) days prior to the Forced
Conversion Date. On the Forced Conversion Date, we will pay to all registered
holders of the Series B Preferred Stock all accrued and unpaid dividends through
and including the Forced Conversion Date. In the event that the Board of
Directors approves a transaction whereby the holders of common stock would be
paid a per share price equal to or in excess of one hundred seventy-five (175%)
percent of the Conversion Price (the "Sale Event") and on the Forced Conversion
Notice Date and on the Forced Conversion Date the condition set forth in
subsection (i) above has been satisfied, we can require all holders of the
Series B Preferred Stock to convert their shares of the Series B Preferred Stock
into shares of the common stock immediately prior to the closing of the Sale
Event. Notwithstanding anything to the contrary, holders of the Series B
Preferred Stock shall not have the right to vote together with the holders of
the common stock or as a separate class on whether to approve the Sale Event
(although a holder of the Series B Preferred Stock that converts the Series B
Preferred Stock into the common stock prior to the record date for the
shareholders' meeting to vote on the Sale Event wold be entitled to vote such
shares of the common stock) during the one hundred fifty (150) day period
following the Forced Conversion Notice Date. In the event that the foregoing
does not eliminate the voting rights of the Series B Preferred Stock with
respect to a Sale Event, then the holders of such Series B Preferred Stock shall
be deemed to have granted to the President and Secretary of the Company (and
each of them individually) an irrevocable proxy for such one hundred fifty (150)
day period to vote the Series B Preferred Stock for the approval of the Sale
Event. In the event that the Sale Event would result in the holders of the
Series B Preferred Stock receiving securities, it is a condition to our right to
force conversion resulting from a Sales Event that the securities to be received
by the holders of the Series B Preferred Stock are registered under the
Securities Act of 1933 and are freely transferable.
Adjustment to Conversion Price. The shares of the Series B Preferred
Stock provide for adjustment to the Conversion Price upon (i) any subdivision or
reverse split of the outstanding shares of the common stock into a greater or
lesser number of shares of the common stock; (ii) any declaration of a dividend
or other distribution by us upon the common stock payable in shares of the
common stock; or (iii) any capital reorganization or reclassification of our
capital stock. If we, through either a private placement or a public offering
(but other than pursuant to options granted under our directors' and employee
stock option and stock purchase plans or shares or options issued in an
acquisition or shares issuable pursuant to the exercise of the Warrants) issues
shares of the common stock, or options to purchase the common stock or rights to
subscribe for the common stock or securities convertible into or exchangeable
for the common stock at a price (such price, if other than cash, as determined
by our Board of Directors) less than the then market price on the date of sale,
the Conversion Price then in effect shall automatically be reduced by
multiplying the then Conversion Price by a fraction, the numerator of which
shall be the number of shares of the common stock outstanding immediately prior
to such issuance, sale or distribution plus the number of shares of the common
stock which the aggregate consideration received or to be received by us for
such issuance, sale or distribution would purchase at the market price per
share, and the denominator of which shall be the number of shares of the common
stock outstanding immediately after giving effect to such issuance, sale or
distribution. We will not issue fractional shares of the common stock upon
conversion of the Series B Preferred Stock, but will pay a cash adjustment for
any such fraction. There will be no adjustment in the event that we pay a
dividend in cash to holders of common stock;
-41-
<PAGE>
provided, however, that we will give the holders of the Series B Preferred Stock
written notice at least thirty (30) days prior to the record date for the cash
dividend, that we intend to declare a cash dividend.
Redemption. Commencing three (3) years after October 30, 1998, we may
redeem all of the outstanding Series B Preferred Stock at any time at a
redemption price of one thousand dollars ($1,000) per share, plus all accrued
and unpaid dividends, if any, to the date fixed for redemption. Notice of
redemption shall be on not less than thirty (30) nor more than forty-five (45)
days' notice prior to the date fixed for redemption.
Change in Control. When an Event (as defined in the Restated Articles
of Incorporation) occurs, each holder of shares of the Series B Preferred Stock
shall have the option to (i) convert the Series B Preferred Stock into shares of
the common stock immediately prior to the Event at a price equal to the lesser
of (a) the Conversion Price or (b) the price per share of the common stock in
the Event; provided, however, that the Conversion Price shall not be reduced
under this subsection (i)(b) by more than thirty (30%) percent or (ii) retain
ownership of the Series B Preferred Stock, in which event appropriate provisions
shall be made so that the Series B Preferred Stock will become convertible at
the holder's option into shares of common stock of the surviving or acquiring
entity.
Restrictions on Transfer. The Series B Preferred Stock has not been
registered under the Securities Act of 1933 or any state securities laws.
Consequently, the shares of the Series B Preferred Stock may not be offered,
sold or resold unless they are (a) registered or (b) exempt from the
registration requirements of the Securities Act of 1933 and all applicable state
securities laws. We have agreed to register the common stock issuable upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants.
Warrants
In connection with the issuance of the Series B Preferred Stock, we
issued the Warrants to purchase in the aggregate 54,714 shares of the common
stock. The Warrants are immediately exercisable at a price of $3.60 per share,
and expire on October 31, 2003. The exercise price is subject to adjustment
pursuant to certain anti-dilution provisions in the event we take certain
actions, such as, but not limited to, a stock dividend or reclassification of
the common stock.
Public Warrants
In connection with the acquisition of all the common stock of Intercim
Corporation, we issued the Public Warrants. The Public Warrants have a ten-year
term and an exercise price of $6.75.
Registration Rights
We have entered into a Purchase Agreement pursuant to which we agreed
to (i) use our reasonable best efforts to file a registration statement for a
shelf offering within forty-five (45) days after October 30, 1998 (the "Shelf
Registration"), (ii) use our reasonable best efforts to cause the Shelf
Registration to be declared effective within one hundred eighty (180) days of
October 30, 1998 and (iii) to keep such Shelf Registration continuously
effective, supplemented and amended until the disposition of all registerable
securities under the Shelf Registration or as otherwise provided in the Purchase
Agreement. This prospectus has been filed as part of the required Shelf
Registration.
If we propose to file a registration statement for our own account
(other than a registration statement on Form S-4 or S-8 (or any successor form
thereto)), then we will offer the selling shareholders the opportunity to
register the number of registerable securities as each such holder may request
(a "Piggyback Registration"). If we are advised by an underwriter that the
amount of the shares to be registered in the Piggyback Registration would
adversely affect the marketability of the shares to be offered, then we will be
able to minimize the adverse effect by reducing pro rata (based on the number of
registerable securities requested to be included) the number of shares to be
registered. Shareholders participating in a Piggyback Registration may
-42-
<PAGE>
withdraw any or all of their registerable securities from the registration by
giving notice to us prior to the effectiveness of the relevant registration
statement.
The Purchase Agreement also sets forth the procedures which are to be
followed in effecting any registration required under the Purchase Agreement. We
will bear all of the expenses relating to our compliance with the
above-referenced agreements, including all registration and filing fees, fees
and expenses of our own counsel and accountants, and all delivery, printing and
copying expenses. However, participating selling shareholders shall pay all
underwriting discounts, commissions and transfer taxes as well as their own
counsel fees.
We will indemnify each holder of registerable securities, each
affiliate of such holder, each person who controls (within the meaning of the
Securities Act of 1933) such holder, and their respective officers, directors,
employees, shareholders, investment advisor and agents against all losses,
claims, damages, liabilities and expenses (collectively, the "Losses") caused
by, resulting from or relating to any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or caused by any
omission or alleged omission of material fact required to be stated therein or a
fact necessary to make the statements therein not misleading, except where such
misstatement or omission was caused by information provided to us by the holder
or where the holder failed to deliver materials furnished to it by us.
Each holder of registerable securities participating in an offering
agrees to indemnify and hold harmless the Company, and its directors, officers,
employees, advisors, agents and each person who controls (within the meaning of
the Securities Act of 1933 and the Securities Exchange Act of 1934) us for any
material misstatement or omission in the offering materials that was caused by
information provided by such holder to us; provided, however, that the liability
of any such holder will be limited to the amount of the net proceeds received by
such holder in the offering giving rise to such liability.
PLAN OF DISTRIBUTION
The selling shareholders may, from time to time, sell all or a portion
of their shares on the OTC Bulletin Board (or any exchange on which the common
stock may from time to time be trading), in privately negotiated transactions or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices.
We will receive no proceeds from this offering. The common stock may be
sold from time to time to purchasers directly by any of the selling
shareholders. Alternatively, any of the selling shareholders may from time to
time, offer the common stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling shareholders and/or the purchasers of the common
stock for whom they may act at agent. The selling shareholders and any
underwriters, dealers or agents that participate in the distribution of the
common stock may be deemed to be underwriters, and any profit on the sale of the
common stock by them and any discounts, commissions or concessions received by
any such underwriters, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933. If we are advised
that an underwriter has been engaged with respect to the sale of any the common
stock offered hereby, or in the event of any other material change in the plan
of distribution, we will cause appropriate amendments to the registration
statement of which this prospectus forms a part to be filed with the SEC
reflecting such engagement or other change.
At the time a particular offer of the common stock is made, to the
extent required, a prospectus supplement will be provided by us and distributed
by the relevant selling shareholder which will set forth the aggregate amount of
the common stock being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commission and
other items constituting compensation from the selling shareholders and any
discount, commissions or concessions allowed or reallowed or paid to dealers.
-43-
<PAGE>
The common stock may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the selling shareholders or by agreement between the selling
shareholders and underwriters or dealers.
Under applicable rules and regulations under the Securities Exchange
Act of 1934 any person engaged in a distribution of the common stock may not
simultaneously engage in market-making activities with respect to such common
stock for a period of nine business days prior to the commencement of such
distribution and ending upon the completion of such distribution. In addition to
and without limiting the foregoing, each selling shareholder will be subject to
applicable provisions of the Securities Exchange Act of 1934 and the rules and
regulations thereunder, including without limitation Regulation M, which
provisions may limit the timing of purchases and sales of any of the common
stock by the selling shareholders. All of the foregoing may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
Pursuant to the Purchase Agreement, we are obligated to pay
substantially all of the expenses incident to the registration and offering of
the common stock of the selling shareholders to the public other than
commissions and discounts of underwriters, dealers or agents. The selling
shareholder or shareholders bear all selling and other expenses.
We have agreed to indemnify in certain circumstances the selling
shareholders against certain liabilities, including liabilities under the
Securities Act of 1933. The selling shareholders have agreed to indemnify us in
certain circumstances against certain liabilities, including liabilities under
the Securities Act of 1933.
EXPERTS
Our consolidated financial statements, as of November 30, 1998 and
1997, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as indicated in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of the
common stock offered hereby will be passed upon for us by Foley & Lardner,
Milwaukee, Wisconsin.
-44-
<PAGE>
Effective Management Systems, Inc.
Consolidated Financial Statements
Years ended November 30, 1998, 1997 and 1996
Contents
Report of Ernst & Young LLP, Independent Auditors.................F-2
Consolidated Financial Statements
Balance Sheets....................................................F-3
Statements of Operations..........................................F-5
Statements of Stockholders' Equity................................F-6
Statements of Cash Flows..........................................F-8
Notes to Consolidated Financial Statements.......................F-10
F-1
<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, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended November
30, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended November 30, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 4, the Company
has incurred recurring losses and has a working capital deficiency. In addition,
the Company does not expect to be in compliance with certain covenants of the
loan agreement with its lender during fiscal 1999, thereby requiring that
waivers will need to be obtained from the lender in order for the debt not to be
considered in default. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 4. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young
Milwaukee, Wisconsin
January 18, 1999
F-2
<PAGE>
Effective Management Systems, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
November 30
1998 1997
-----------------------------------
Assets
Current assets (Note 8):
Cash and cash equivalents $ 21 $ 14
Accounts receivable:
Trade, less allowance for
doubtful accounts of
$506--1998; $462--1997 12,871 12,370
Related parties 426 604
-----------------------------------
13,297 12,974
Refundable income taxes - 312
Inventories 275 280
Prepaid expenses and other
current assets 225 146
-----------------------------------
Total current assets 13,818 13,726
Software development costs, net 4,373 7,717
Investments in and advances to
unconsolidated joint ventures 291 182
Equipment and leasehold
improvements, net (Note 5) 3,202 3,917
Intangible assets, net (Note 6) 2,129 2,444
Other assets 347 811
-----------------------------------
Total assets $ 24,160 $28,797
===================================
See accompanying notes.
F-3
<PAGE>
November 30
1998 1997
--------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,662 $ 2,272
Accrued liabilities 2,937 2,773
Deferred revenue 6,522 5,887
Customer deposits 113 63
Current portion of long-term debt
and capital lease obligations
(Note 8) 6,194 946
------------------------------
Total current liabilities 19,428 11,941
Deferred revenue and other long-term
liabilities 858 317
Long-term capital lease obligations
(Note 8) 242 3,966
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, Series B, $.01
par value; authorized 3,000,000
shares; 1,785 issued and
outstanding at November 30, 1998 1,411 -
Common stock, $. 01 par value;
authorized 20,000,000 shares;
issued 4,106,377 and 4,067,31
shares; outstanding 4,093,752
and 4,054,685 shares 41 41
Common stock warrants 144 4
Additional paid-in capital 11,426 11,328
Retained earnings (accumulated
deficit) (9,330) 1,260
Cost of common stock in treasury
(12,625 shares) (60) (60)
--------------------------------
3,632 12,573
--------------------------------
Total liabilities and
stockholders' equity $ 24,160 $28,797
================================
F-4
<PAGE>
<TABLE>
Effective Management Systems, Inc.
Consolidated Statements of Operations
(In Thousands, except per share amounts)
<CAPTION>
Year ended November 30
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Net revenues:
Software license fees $ 20,553 $21,752 $19,094
Services 16,846 16,781 15,412
Hardware 1,745 4,112 6,751
----------------------------------------------
39,144 42,645 41,257
Costs of products and services:
Cost of third-party software license fees 4,717 3,065 2,484
Software development amortization 2,243 2,535 1,591
Cost of services 14,430 14,000 12,109
Cost of hardware 1,386 3,260 4,979
----------------------------------------------
22,776 22,860 21,163
Selling and marketing expenses 13,280 15,957 14,060
General and administrative expenses 3,451 3,838 3,416
Software development expenses 2,804 2,391 2,235
Restructuring and other charges 6,836 - -
----------------------------------------------
49,147 45,046 40,874
----------------------------------------------
Income (loss) from operations (10,003) (2,401) 383
Other income (expense):
Equity in earnings (losses)
of unconsolidated joint
ventures 109 (25) 25
Interest income 51 47 89
Interest expense (714) (399) (145)
Other (33) - (87)
----------------------------------------------
(587) (377) (118)
----------------------------------------------
Income (loss) before income taxes (10,590) (2,778) 265
Income tax benefit (expense) - 618 (112)
----------------------------------------------
Net income (loss) $ (10,590) $ (2,160) $ 153
==============================================
Net income (loss) per common
share -
Basic and diluted $ (2.59) $ (.53) $ .04
==============================================
</TABLE>
F-5
<PAGE>
<TABLE>
Effective Management Systems, Inc.
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
<CAPTION>
Preferred Stock Common Stock Common
------------------------------------------------------------ Stock
Shares Amount Shares Amount Warrants
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1995 - $ - 3,922,281 $39 $ 3
Issuance of common stock:
Acquisitions - - 24,000 - -
Stock options - - 35,000 1 -
Employee stock purchase plan
- - 29,718 - -
Warrants - - 19 - -
Issuance of additional common
stock and warrants to
complete Intercim
transaction - - - 1 1
Purchase of shares from
dissenting former Intercim
shareholder - - - - -
Net income - - - - -
-------------------------------------------------------------------------
Balance, November 30, 1996 - - 4,011,018 41 4
Issuance of common stock:
Stock options - - 39,500 - -
Employee stock purchase plan
- - 26,792 - -
Purchase of common stock for
treasury - - (10,000) - -
Net loss - - - - -
-------------------------------------------------------------------------
Balance, November 30, 1997 - - 4,067,310 41 4
Issuance of common stock:
Stock options - - 14,000 - -
Employee stock purchase plan
- - 25,067 - -
Issuance of preferred stock
and warrants 1,785 1,411 - - 140
Net loss - - - - -
-------------------------------------------------------------------------
Balance, November 30, 1998 1,785 $1,411 4,106,377 $41 $144
=========================================================================
F-6
<PAGE>
<CAPTION>
Common
Stock and Retained
Warrants Earnings
to be Paid-In (Accumulated Treasury
Issued Capital Deficit) Stock Total
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 211 $10,662 $ 3,267 $ (5) $ 14,177
- 132 - - 132
- 60 - - 61
- 113 - - 113
- - - - -
(172) 170 - - -
(39) - - - (39)
- - 153 - 153
- ----------------------------------------------------------------------------
- 11,137 3,420 (5) 14,597
- 68 - - 68
- 123 - - 123
- - - (55) (55)
- - (2,160) - (2,160)
- ----------------------------------------------------------------------------
- 11,328 1,260 (60) 12,573
- 32 - - 32
- 66 - - 66
- - - - 1,551
- - (10,590) - (10,590)
- ----------------------------------------------------------------------------
$ - $11,426 $ (9,330) $(60) $ 3,632
============================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
<TABLE>
Effective Management Systems, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<CAPTION>
Year ended November 30
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(10,590) $(2,160) $ 153
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 1,315 1,234 1,037
Amortization, other 315 246 189
Amortization of capitalized computer
software development
costs 2,243 2,535 1,591
Restructuring charge 6,042 - -
Equity in losses (earnings) of joint
ventures (109) 25 (25)
(Gain) loss on disposal of equipment
and leasehold improvements 3 - (24)
Deferred income taxes - (385) 202
Changes in operating assets and liabilities:
Accounts receivable (1,161) (1,135) (1,770)
Inventories and other current assets 228 100 341
Accounts payable and other liabilities 2,125 1,273 1,212
----------------------------------------
Total adjustments 11,001 3,893 2,753
----------------------------------------
Net cash provided by operating activities 411 1,733 2,906
Investing activities
Acquisition of Darwin Data Systems, net of cash received of $19
- - (51)
Additions to equipment and leasehold improvements (170) (1,177) (1,424)
Purchases of available-for-sale securities - - (495)
Proceeds from sales of available-for-sale securities - 505 1,247
Proceeds from sale of equipment and leasehold improvements
1 7 68
Increase in cash surrender value of life insurance (25) (25) (25)
Software development costs capitalized (3,396) (4,471) (3,372)
Other assets 489 (202) (111)
----------------------------------------
Net cash used in investing activities (3,101) (5,363) (4,163)
</TABLE>
F-8
<PAGE>
<TABLE>
Effective Management Systems, Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in Thousands)
<CAPTION>
Year ended November 30
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Financing activities
Proceeds from issuance of stock to employees $ 98 $ 191 $ 174
Proceeds from issuance of preferred stock and warrants 1,551 - -
Proceeds from increase in debt 1,291 2,797 1,864
Payments on long-term debt and capital lease obligations (243) (155) (250)
Purchase of common stock for treasury - (55) -
---------------------------------------
Net cash provided by financing activities 2,697 2,778 1,788
---------------------------------------
Net increase (decrease) in cash 7 (852) 531
Cash:
Beginning of year 14 866 335
---------------------------------------
End of year $ 21 $ 14 $ 866
=======================================
Supplemental cash flow information:
Interest paid $ 653 $ 399 $ 133
Income taxes refunded, net of amounts paid - (172) (464)
Noncash transactions:
Equipment recorded under capital lease obligations 476 20 371
Issuance of common stock and warrants for acquisitions - - 132
</TABLE>
See accompanying notes
F-9
<PAGE>
1. Basis of Presentation and Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Effective Management Systems, Inc. (the Company) 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.
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.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which changes the requirements for revenue recognition and supersedes SOP 91-1
effective for transactions that the Company will enter into beginning December
1, 1998. The Company intends to review the provisions of its software license
contracts and make the changes necessary to have revenue recognition policies
meet the standards of the new SOP.
Inventory Valuation
Inventories are carried at the lower of cost or market with cost determined on a
first-in, first-out (FIFO) basis.
F-10
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
Software Development Costs
In accordance with generally accepted accounting principles, 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, stated at the lower of cost or net
realizable value, were $4,373 and $7,717 at November 30, 1998 and 1997,
respectively, which is net of accumulated amortization of $2,918 and $7,877,
respectively.
Software Developed or Obtained for Internal Use
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. Under SOP 98-1, companies are required
to capitalize certain qualified costs incurred to develop or obtain software for
internal use. The Company has adopted this SOP in 1998 and the impact was not
material.
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.
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
F-11
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
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 (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Denominator for basic and dilutive income (loss)
per share - weighted average common shares 4,090 4,048 3,965
===================================================
</TABLE>
For all years presented, basic and diluted are the same because common stock
equivalents are anti-dilutive.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, related-party receivables, trade payables and debt instruments. The
book values of cash, 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,
1998, 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
As is permitted under Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based 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. See Note 10.
New Pronouncements
The Company will be required to adopt SFAS No. 130, "Reporting Comprehensive
Income," effective December 1, 1998. This statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company does not have any
items that would create a difference between net income (loss) and comprehensive
income (loss).
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective December 1, 1998. This Statement changes the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. Management has not completed its review of SFAS No. 131, but does
not anticipate that the adoption of this Statement will have a significant
effect on the Company's reported segments.
F-12
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (Continued)
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because the
Company has not previously used derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on results of
operations or the financial position of the Company.
2. Acquisition
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. The acquisition has been
accounted for under the purchase method of accounting. Accordingly, the assets
and liabilities 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 have been included in the Company's consolidated financial
statements from the date of acquisition. Pro forma results have not been
presented because the impact was not significant.
3. Restructuring and Other Charges
In the second quarter of 1998, the Company incurred a restructuring charge
aggregating $6,836 related to entering into a distribution arrangement with the
Baan Company and cost reductions aimed at improving the Company's financial
performance. The components of the restructuring charge are described below.
The restructuring charge includes $553 relating to the closing of operations in
the West and Southwest regions of the United States and $1,213 for the exit
costs and software write-off related to international operations. The Company
established a relationship with former employees who purchased 80% of EMS Asia
Pacific, Inc., a former wholly owned subsidiary of the Company, to handle future
Asian international operations. The Company is a 20% partner in the venture, but
has no ongoing responsibilities to fund any future operations. EMS-Asia Pacific,
Inc. is responsible for future support, translation efforts and other activities
supporting the Asian marketplace. In return for these efforts, the Company
transferred all accounts receivable, fixed assets and cash to EMS-Asia Pacific,
Inc.
In addition, the charge includes $2,656 for both the write-off of capitalized
software pertaining to the large company market, which software the Company now
obtains through its relationship with Baan, and the write-off of other software
whose future value was impaired by restructuring actions. The charge also
reflects costs of $1,841 associated with the write-off of capitalized software,
the future value of which was impaired by restructuring actions and management's
assumptions regarding future technological changes. Fair value was based on the
estimated future cash flows of the software.
As part of the restructuring, the Company also reduced certain of its operating
expenses primarily in development, marketing and administration though the
termination of employees and other operating expense reductions resulting in a
charge of $573.
Approximately $6,042 of the total charge did not result in future cash
expenditures and all material restructuring actions were completed by the end of
the third quarter of 1998:
Restructuring accrual at May 30, 1998 $ 651
Less payments (639)
--------------
Restructuring accrual at November 30, 1998 $ 12
==============
F-13
<PAGE>
4. Liquidity and Management's Plans
The Company has experienced significant losses in 1997 and 1998. As of November
30, 1998, current liabilities exceeded current assets by $5,610, principally due
to classifying amounts due under the Company's debt agreement as current
liabilities due to covenant violations expected in 1999. In addition, the
Company has limited unused availability on its existing credit lines. If
operating results do not improve and/or alternative sources of financing are not
obtained, the Company will have difficulties meeting its working capital needs,
including payment of its bank obligations.
In April 1998, management approved a major restructuring plan and recorded a
restructuring charge of approximately $6.8 million. The restructuring included
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving the Company's financial
performance. In connection with the restructuring, the Company closed facilities
both in the United States and internationally and decreased its workforce,
particularly in development, marketing and administration. Management believes
the Company's operating results will improve in fiscal 1999. Management is also
pursuing additional financing sources or an amendment to its credit facilities.
Management believes that improved operating results and additional sources of
financing or other strategic transactions will generate sufficient cash flow to
fund its operations in fiscal 1999. Management is actively pursuing several
financial alternatives to assist in the funding of its strategic restructuring.
However, there are no assurances that such matters will be successfully
consummated.
5. Equipment and Leasehold Improvements
Equipment and leasehold improvements consisted of the following at November 30:
1998 1997
---------------------------
Equipment and software $ 7,256 $ 7,119
Furniture and fixtures 1,315 1,346
Leasehold improvements 468 478
Equipment under capital leases 874 416
---------------------------
9,913 9,359
Less accumulated depreciation and
amortization (6,711) (5,442)
---------------------------
Equipment and leasehold improvements, net $ 3,202 $ 3,917
===========================
6. Intangible Assets
Intangible assets consisted of the following at November 30:
1998 1997
---------------------------
Goodwill $1,284 $1,445
Customer list 1,400 1,400
Other 200 200
---------------------------
2,884 3,045
Less accumulated amortization (755) (601)
---------------------------
Intangible assets, net $2,129 $2,444
===========================
F-14
<PAGE>
7. Affiliated Companies
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 has provided certain services to Solutions for which the
Company received fees of $1, $122 and $269 in 1998, 1997 and 1996, respectively,
that are recorded as an offset to general and administrative expense. The
Company also sells computer hardware to Solutions that totaled $2, $331 and $851
in 1998, 1997 and 1996, respectively. Amounts due from Solutions were $0 and
$404 at November 30, 1998 and 1997, respectively. Material transactions with
Solutions must be approved by a majority of the Company's external directors.
On July 1, 1997, Solutions moved to new facilities and no longer utilizes office
space or other material services of the Company. In addition, Solutions no
longer purchases computer hardware from the Company.
The Company owns a 50% interest in Total Management Systems, Inc. (TMS), which
sells computer software and related hardware primarily in Ohio. The Company has
provided certain services to TMS and has sold computer hardware to TMS that
totaled $779, $550 and $486 in 1998, 1997 and 1996, respectively.
8. Long-Term Debt and Lease Commitments
Long-term debt and capital lease obligations consist of the following at
November 30:
1998 1997
--------------------------
Line of credit $ 2,552 $3,762
Notes payable 3,400 910
Capital lease obligations 484 240
--------------------------
6,436 4,912
Less amounts due within one year (6,194) (946)
--------------------------
$ 242 $3,966
==========================
On December 31, 1997, the Company entered into a loan and security agreement
(Agreement) with Foothill Capital Corporation (Foothill), which included a
revolving line of credit facility (Revolver) providing for maximum borrowings of
$6,000 and a three-year term note for $3,112. The term note was originally due
in 36 monthly payments of $65 with the remaining balance of principal due
December 30, 2000. The Agreement with Foothill was amended October 6, 1998, to
increase the term loan by $777 and to reduce the maximum borrowings on the
Revolver to $5,000. Borrowings available based on collateral at November 30,
1998 were $2,448,000. The term loan, as increased, is due in monthly payments of
35 installments of $100 with the remaining balance of principal due October 10,
2001. Interest on the Revolver is payable monthly based on the bank's base rate
plus .75% (8.5% at November 30, 1998); the term note bears interest at 13.5% per
year.
Borrowings under the Agreement are secured by substantially all assets of the
Company (except inventory subject to the lien of a vendor). The Company is
required to pay a monthly commitment fee of .50% per annum on the difference
between the commitment amount and balance outstanding under the Revolver in lieu
of a minimum monthly interest payment. In addition, the Agreement requires the
Company to maintain compliance with various covenants, including minimum levels
of tangible net worth and adjusted operating income. The Company was in
violation of these covenants as of November 30, 1998. Although the Company
obtained waivers for the violations as of November 30, 1998, it is unlikely the
Company will maintain compliance with the covenants throughout 1999.
Accordingly, the balance of the Revolver and note payable have been classified
as current obligations in the balance sheet.
F-15
<PAGE>
8. Long-Term Debt and Lease Commitments (Continued)
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, 1998, future payments under capital and noncancellable operating
leases were as follows:
Fiscal Year Ending Capital Operating
November 30 Leases Leases
1999 $293 $1,025
2000 196 988
2001 56 910
2002 - 713
2003 - 556
Thereafter - 294
--------------------------
Total minimum lease obligations 545 $4,486
=============
Amounts representing interest (61)
-------------
Capital lease obligations $484
=============
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 $1,563, $1,663 and
$1,404 in 1998, 1997 and 1996, respectively.
9. Stockholders' Equity
On August 28, 1998, the Company issued Series A preferred stock; thereafter the
Company exchanged all Series A preferred stock for Series B preferred stock. The
Series B preferred stock accrues cumulative dividends at an 8% rate per annum
(using a liquidation value of $1,000 per share), and all dividends in arrears
must be paid prior to any payment of dividends on common stock. Dividends, if
declared by the board of directors, may be paid in cash or with additional
shares of preferred stock at the Company's option. The first quarterly dividend
payment date was January 2, 1999. This dividend was paid through issuance of
additional shares of preferred stock. Commencing with the quarterly period
beginning January 2, 2002, the annual dividend rate will increase each quarterly
period by 2% up to a maximum annual dividend rate of 18%. The Series B preferred
stock is convertible to common stock at the preferred stockholders' option by
multiplying $1,000 times the number of shares of Series B being converted and
dividing such product by the conversion price (currently the conversion price is
$2.00). The Company may force conversion of all Series B into shares of common
stock if the average of the closing bid price of the common stock is at least
175% of the conversion price for 20 trading days within any 30 consecutive
trading periods ending no more than 10 days prior to the forced conversion date.
The Series B preferred stockholders are entitled to vote (voting as one class,
with holders of common stock) on each matter submitted to a vote of stockholders
and shall have the number of votes that they would have had assuming conversion
of the Series B into common stock. There are 5,000 shares of Series B preferred
stock, of which 1,785 shares are issued and outstanding, and 3,000,000 total
preferred shares are authorized for issuance.
F-16
<PAGE>
9. Stockholders' Equity (Continued)
In connection with the issuance of preferred stock in 1998, the Company issued
54,714 common stock purchase warrants at an initial exercise price of $3.60 per
share which expire in October 2003. As required by generally accepted accounting
principles, the Company calculated the fair value of the warrants using the
Black-Scholes option pricing model. The Company recorded the warrants at
$140,000, with the offset being recorded as a reduction in the carrying value of
preferred stock.
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 Corp. (Intercim) stockholders.
These amounts, which were classified as common stock and warrants to be issued
in stockholders' equity at November 30, 1996, were substantially issued in 1997.
In connection with the acquisition of Intercim, 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.
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 have been exercised or have
expired at November 30, 1998. No additional options will be granted under the
1986 Plan.
The Company maintains the Effective Management Systems, Inc. 1993 Stock Option
Plan, as amdended (the 1993 Plan). The 1993 Plan provides for the granting of
both incentive stock options and nonqualified stock options to employees and
nonqualified stock options to nonemployee independent directors of the Company
covering up to a maximum of 750,025 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, 1996, in conjunction with the merger of Intercim, 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.
F-17
<PAGE>
10. Stock Options and Employee Stock Purchase Plans (Continued)
Information with respect to stock options granted under all plans is as follows:
<TABLE>
<CAPTION>
Number Exercise Price Weighted Average
of Shares Per Share Exercise Price
------------------------------------------------------------
<S> <C> <C> <C>
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 $6.13
Granted 109,938 4.63 - 6.75 5.73
Exercised (39,500) 1.57 - 1.71 1.71
Canceled or expired (54,961) 4.75 - 7.50 6.63
------------------------------------------------------------
Outstanding at November 30, 1997 920,379 2.29 - 8.25 6.24
Granted 400,811 2.13 - 4.13 2.28
Exercised (14,000) 2.29 2.29
Canceled or expired (188,234) 2.29 - 7.50 5.76
------------------------------------------------------------
Outstanding at November 30, 1998 1,118,956 $2.13 - $8.25 $4.95
============================================================
</TABLE>
As of November 30, 1998, the range of exercise prices on outstanding options is
as follows:
<TABLE>
<CAPTION>
Number Weighted Average Number of Options
of Options Exercise Price Exercisable
---------------------------------------------------------------
<S> <C> <C> <C>
Price range $2.13 to $3.30,
weighted-average contractual
life of 9.9 years 364,374 $2.13 108,000
Price range $3.31 to $5.78,
weighted-average contractual
life of 8.27 years 107,273 5.21 13,342
Price range $5.79 to $8.25,
weighted-average contractual
life of 6.19 years 647,309 6.49 563,704
</TABLE>
In determining the effect of SFAS No. 123, the Black-Scholes option pricing
model was used with the following weighted-average assumptions for 1998:
risk-free interest rates of 5.50%, dividend yields of 0%, volatility factors of
the expected market price of the Company's common stock of .99, and a
weighted-average expected life of the options of 6.42 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
<PAGE>
10. Stock Options and Employee Stock Purchase Plans (Continued)
The Company's pro forma information, as if these options had been accounted for
in accordance with FASB Statement No. 123, follows:
1998 1997
--------------------------
Pro forma net income (loss) $(11,068) $(2,286)
Pro forma earnings (loss) per share (2.71) (.56)
In December 1993 and July 1998, respectively, the Board of Directors adopted the
1994 Employee Stock Purchase Plan (1994 Stock Purchase Plan) and the 1998
Employee Stock Purchase Plan (1998 Stock Purchase Plan), which permit 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 1998
and 1997, 25,067 and 26,792 shares, respectively, were purchased under the 1994
Stock Purchase Plan. The maximum cumulative number of shares that may be
purchased under both Stock Purchase Plans is 200,240.
The Company has reserved 2,324,634 shares of its common stock for potential
conversion of common stock warrants 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
1998 1997 1996
-------------------------------------------
Current:
Federal $ - $(233) $(170)
State - - 80
-------------------------------------------
- (233) (90)
Deferred 3,629 (56) 202
Change in valuation allowance (3,629) (329) -
===========================================
$ - $(618) $ 112
===========================================
F-19
<PAGE>
11. Income Taxes (continued)
The reconciliation of income tax expense (benefit) computed at the U.S. federal
statutory rate to income tax expense (benefit) is:
<TABLE>
<CAPTION>
Year ended November 30
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate of 34% $(3,617) $(945) $ 90
State income taxes, net of federal benefit - - 14
Nondeductible items - - 112
Tax-exempt investment income - - (13)
General business credits - - (98)
Change in valuation allowance 3,629 329 -
Other (12) (2) 7
----------------------------------------------------
$ - $(618) $112
====================================================
</TABLE>
The significant components of the deferred tax accounts recognized for financial
reporting purposes at November 30 were as follows:
1998 1997
-----------------------------------
Deferred tax liabilities:
Capitalized computer software costs $ 1,706 $3,087
Depreciation 336 342
Other, net 25 16
-----------------------------------
Total deferred tax liabilities 2,067 3,445
Deferred tax assets:
Net operating loss carryforwards 4,991 2,902
Allowance for doubtful accounts 216 185
Deferred revenue 268 127
Inventory 16 30
General business credit carryforwards 464 442
Other, net 70 88
-----------------------------------
Total deferred tax assets 6,025 3,774
Valuation allowance (3,958) (329)
-----------------------------------
Net deferred tax liabilities $ - $ -
===================================
At November 30, 1998, the Company had net federal and state operating loss
carryforwards (NOLs) of approximately $13.2 million and $13.6 million,
respectively, available to offset future federal and state 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 in 1996 and net operating
losses. In addition, the Company has general business credits totaling $464,000
which can be used to reduce federal taxable income through 2011.
In 1998 and 1997, a valuation allowance equal to 100% of the net deferred tax
assets has been recognized based on uncertainty regarding realization of such
assets.
F-20
<PAGE>
12. Savings Plans
The Company has 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 plan were $480, $310 and $345 for 1998, 1997 and
1996, respectively.
13. Legal Proceedings
The Company is a party to various legal proceedings arising in the ordinary
course of business. The Company believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
F-21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Effective Management Systems, Inc.
We have audited the consolidated financial statements of Effective Management
Systems, Inc. (the Company) as of November 30, 1998 and 1997, and for each of
the three years in the period ended November 30, 1998, and have issued our
report thereon dated January 18, 1999 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. The
financial statement schedule does not include any adjustments set forth therein.
The financial statement schedule does not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of the uncertainty regarding the Company's ability to continue as a going
concern.
/s/ Ernst & Young
Milwaukee, Wisconsin
January 18, 1999
F-22
<PAGE>
<TABLE>
<CAPTION>
Schedule II Valuation and qualifying accounts
==================================== ================= ====================================== ==================== =================
COL. A COL. B COL. C COL. D COL. E
==================================== ================= ====================================== ==================== =================
Additions
--------------------------------------
(1) (2)
- ------------------------------------ ----------------- ------------------- ------------------ -------------------- -----------------
Description Balance at Charged to costs Charged to other Deductions-describe Balance at end
beginning of and expenses accounts-describe of period
period
- ------------------------------------ ----------------- ------------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C> <C>
Years ended November 30, 1998
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts $462,000 $103,000 0 $59,000 $506,000
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Years ended November 30, 1997
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts $346,000 $120,000 0 $4,000 $462,000
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Years ended November 30, 1996
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts $312,000 $137,000 0 $103,000 $346,000
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Years ended November 30, 1995
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts $268,000 $79,000 0 $35,000 $312,000
- ------------------------------------ ----------------- ------------------ ------------------- -------------------- -----------------
</TABLE>
F-23
<PAGE>
===================================== ========================================
No person has been authorized to
give any information or make any
representations other than those
contained in this prospectus, and,
if given or made, such information
or representations must not be
relied upon as having been Effective Management
authorized. This prospectus does not Systems, Inc.
constitute an offer to sell or the
solicitation of an offer to buy any
securities other than the securities
to which it relates or an offer to
sell or the solicitation of an offer
to buy such securities in any Common Stock
circumstances in which such offer or (par value $.01 per share)
solicitation is unlawful. Neither
the delivery of this prospectus nor
any sale made hereunder shall, under
any circumstances, create any
implication that there has been no
change in the affairs of the Company
since the date hereof or that the
information contained herein is
correct as of any time subsequent to
its date.
-------------------
TABLE OF CONTENTS
Page ----------------
Prospectus Summary............ 1
Selected Financial Data....... 4 PROSPECTUS
Risk Factors.................. 5
Forward-Looking Statements.... 11 ----------------
Use of Proceeds............... 12
Selling Security Holders...... 12
Dividend Policy............... 15
Market for Common Stock....... 15
Price Range of Common Stock... 15
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations at and for the
Fiscal Years Ended 1998,
1997 and 1996................ 16
Business...................... 23
Management.................... 33
Principal Shareholders........ 39
Description of Capital
Stock........................ 42
Plan of Distribution.......... 46
Experts....................... 47
Legal Matters................. 47
Index to Financial
Statements................... F-1
Additional Information........ II-1
=================================== =======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission filing fee..... $551
Accountants' fees and expenses....................
Legal fees and expenses...........................
Miscellaneous.....................................
Total....................................
The foregoing costs and expenses will be paid by us. Other than the
Securities and Exchange Commission filing fee, all fees and expenses are
estimated.
Item 14. Indemnification of Directors and Officers.
Pursuant to the provisions of the Wisconsin Business Corporation Law and
the Registrant's Bylaws, directors and officers of the Registrant are entitled
to mandatory indemnification from the Registrant against certain liabilities and
expenses (i) to the extent such officers or directors are successful in the
defense of a proceeding and (ii) in proceedings in which the director or officer
is not successful in defense thereof, unless (in the latter case only) it is
determined that the director or officer breached or failed to perform his or her
duties to the Registrant and such breach or failure constituted: (a) a willful
failure to deal fairly with the Registrant or its shareholders in connection
with a matter in which the director or officer had a material conflict of
interest; (b) a violation of the criminal law unless the director or officer had
reasonable cause to believe his or her conduct was lawful or had no reasonable
cause to believe his or her conduct was unlawful; (c) a transaction from which
the director or officer derived an improper personal profit; or (d) willful
misconduct. It should be noted that the Wisconsin Business Corporation Law
specifically states that it is the public policy of Wisconsin to require or
permit indemnification in connection with a proceeding involving securities
regulation, as described therein, to the extent required or permitted as
described above. Additionally, under the Wisconsin Business Corporation Law,
directors of the Registrant are not subject to personal liability to the
Registrant, its shareholders or any person asserting rights on behalf thereof
for certain breaches or failures to perform any duty resulting solely from their
status as directors, except in circumstances paralleling those outlined in (a)
through (d) above.
Expenses for the defense of any action for which indemnification may be
available may be advanced by the Company under certain circumstances.
The indemnification provided by the Wisconsin Business Corporation Law
and the Registrant's Bylaws is not exclusive of any other rights to which a
director or officer of the Registrant may be entitled.
We maintain a liability insurance policy for our directors and officers
as permitted by Wisconsin law which may extend to, among other things, liability
arising under the Securities Act of 1933, as amended.
Item 15. Recent Sales of Unregistered Securities.
Series A Preferred Stock
On August 28, 1998, we sold 1,005 shares of our Series A Preferred Stock
in a non-public offering exempt from the registration requirements of the
Securities Act of 1933, pursuant to Section 4(2) and Rule 506 of Regulation D
thereunder. The Series A Preferred Stock was sold at a price of $1,000 per share
to accredited investors, as such term is defined in Rule 501(a) under the
Securities Act of 1933. All shares of the Series A Preferred Stock were
subsequently exchanged for shares of the Series B Preferred Stock, and no shares
of the Series A Preferred Stock remain outstanding.
II-1
<PAGE>
Series B Preferred Stock
On October 27, 1998, we issued 780 shares of our Series B Preferred
Stock, in a non-public offering exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder. The
Series B Preferred Stock was sold at a price of $1,000 per share to accredited
investors, as such term is defined in Rule 501(a) under the Securities Act of
1933.
On October 27, 1998, as part of our offering of our Series B Preferred
Stock, we issued to (i) certain warrants to purchase 28,714 shares of our common
stock and (ii) certain warrants to purchase 26,000 shares of our common stock.
All of these warrants are immediately exercisable for a five year period at a
price of $3.60 per share, subject to certain adjustment as provided in the
warrant agreement.
On October 30, 1998, we exchanged, on a one-for-one basis, 1,005 shares
of the Series A Preferred Stock for 1,005 shares of our Series B Preferred
Stock.
Item 16. Exhibits and Financial Statement Schedule.
(a) Exhibits. The exhibits filed herewith are as specified on the
Exhibit Index included herein.
(b) Financial Statement Schedule. The schedule filed herewith as
page F-23 of this Registration Statement.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(i) To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(ii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the information required to be included in
a post-effective amendment by those paragraphs is contained
in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-2
<PAGE>
(b) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant
in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of Milwaukee, State of Wisconsin, on this 5th day of April 1999.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By /s/ Michael D. Dunham
Michael D. Dunham
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below as of this 5th
day of April 1999 by the following persons in the capacities indicated.
Signature Title
/s/ Michael D. Dunham President and Director
Michael D. Dunham (Principal Executive Officer)
/s/ Jeffrey J. Fossum Chief Financial Officer and Assistant
Jeffrey J. Fossum Treasurer (Principal Financial and
Accounting Officer)
Helmut M. Adam* Director
Robert E. Weisenberg* Director
Scott J. Mermel* Director
Thomas M. Dykstra* Director
Director
Elliot Wassarman
*By /s/ Jeffrey J. Fossum
Jeffrey J. Fossum
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Exhibit
Number Exhibit
2.1 Agreement and Plan of Merger, dated 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 June 30, 1995 [Incorporated by reference to
Exhibit 2.2 to Effective Management Systems, Inc.'s 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 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 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., as amended [Incorporated by reference to Exhibit
3.2 to Effective Management Systems, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-68901)].
3.2 Bylaws 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., as amended [Incorporated by reference to
Exhibit 4.1 to Effective Management Systems, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-68901)].
4.2 Loan and Security Agreement by and between Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East, Inc.
and Effective Management Systems of Illinois, Inc., dated December
31, 1997 [Incorporated by reference to Exhibit 4.14 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
4.3 Waiver and First Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc. and Effective Management Systems of Illinois, Inc.,
dated May 8, 1998 [Incorporated by reference to Exhibit 4.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
4.4 Waiver to Loan Agreement between Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated July 13, 1998
[Incorporated by reference to Exhibit 4.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
Exhibit-1
<PAGE>
4.5 Waiver and Second Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc., and Effective Management Systems of Illinois,
Inc., dated August, 1988 [Incorporated by reference to Exhibit 4.1
to Effective Management System, Inc.'s Quarterly Report on Form
10-Q for the quarter ended August 31, 1998].
4.6 Third Amendment to Loan Agreement between Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East,
Inc., and Effective Management Systems of Illinois, Inc., dated
October 6, 1998 [Incorporated by reference to Exhibit 4.2 to
Effective Management System, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended August 31, 1998].
4.7 Waiver to Loan Agreement between Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated January 28, 1999
[Incorporated by reference to Exhibit 4.7 to Effective Management
Systems, Inc.'s Form 10-K for the year ended November 30, 1998].
4.8 Warrant Agreement between Effective Management Systems, Inc. and
American Stock Transfer & Trust Company, dated 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].
4.9 Form of Common Stock Warrant Issued in Connection With the Sale of
Effective Management Systems, Inc.'s Series A 8% Convertible
Redeemable Preferred Stock [Incorporated by reference to Exhibit
4.7 to Effective Management Systems, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-68901)].
4.10 Form of Common Stock Warrant Issued in Connection With the Sale of
Effective Management Systems, Inc.'s Series B 8% Convertible
Redeemable Preferred Stock [Incorporated by reference to Exhibit
4.8 to Effective Management Systems, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-68901)].
5.1 Opinion of Foley & Lardner [Incorporated by reference to Exhibit
5.1 to Effective Management Systems, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-68901)].
10.1 Business Agreement by and between Digital Equipment Corporation
and Effective Management Systems, Inc., effective 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
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)].
Exhibit-2
<PAGE>
10.3 Value Added Reseller Agreement by and between Digital Information
Systems Corporation and Effective Management Systems, Inc.,
effective 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 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
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
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. 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 Stock Option Agreement by and between Helmut M. Adam and Effective
Management Systems, Inc., dated 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)].
10.13 Stock Option Agreement by and between Scott J. Mermel and
Effective Management Systems, Inc., dated 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)].
Exhibit-3
<PAGE>
10.14 IBM Business Partner Agreement between International Business
Machines Corporation and Effective Management Systems, Inc., dated
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].
10.15 Software Reseller Agreement between International Business
Machines Corporation and Effective Management Systems, Inc., dated
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].
10.16 Distributor Agreement with Pioneer Standard Electronics, Inc.
[Incorporated by reference to Exhibit 10.1 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1997].
10.17 IBM Market Development Program Agreement, dated September 3, 1997
[Incorporated by reference to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended August 31,
1997].
10.18 Relationship Agreement with CIMX, an Ohio Limited Liability
Company and Effective Management Systems, Inc., dated December 31,
1997 [Incorporated by reference to Exhibit 10.20 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
10.19 Reseller Agreement and Addendum Number One by and between Baan
Midmarket Solutions, LLC and Effective Management Systems, Inc.,
dated April 9, 1998 [Incorporated by reference to Exhibit 10.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.20 Distribution Agreement between EMS Asia Pacific Limited and
Effective Management Systems, Inc., dated May 29, 1988
[Incorporated by reference to Exhibit 10.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
10.21 Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended [Incorporated by reference to Exhibit 10.3 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998].
10.22 Preferred Stock Placement Agreement, dated August 28, 1998 between
Effective Management Systems, Inc. and Taglich Brothers, D'Amadeo,
Wagner & Company, Incorporated [Incorporated by reference to
Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended August 31, 1998].
10.23 Loan Agreement by and between EMS Solutions, Inc. and Effective
Management Systems, Inc., dated January 1, 1998 [Incorporated by
reference to Exhibit 10.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May 31, 1998].
10.24 Special Compensation and Separation Agreement by and between
Jeffrey J. Fossum and Effective Management Systems, Inc.,
effective January 1, 1998 [Incorporated by reference to Exhibit
10.3 to Effective Management Systems, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended May 31, 1998].
Exhibit-4
<PAGE>
10.25 Special Compensation and Separation Agreement by and between Wayne
T. Wedell and Effective Management Systems, Inc., effective
January 1, 1998 [Incorporated by reference to Exhibit 10.4 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.26 Series B Preferred Stock Placement Agreement, dated October 27,
1998 between Effective Management Systems, Inc. and Taglich
Brothers, D'Amadeo, Wagner & Company, Incorporated [Incorporated
by reference to Exhibit 10.28 to Effective Management Systems,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-68901)].
10.27 Form of Series B Preferred Stock Purchase Agreement for Effective
Management Systems, Inc.'s Series B 8% Convertible Redeemable
Preferred Stock [Incorporated by reference to Exhibit 10.29 to
Effective Management Systems, Inc.'s Registration Statement on
Form S-1 (Registration No. 333-68901)].
21 List of Subsidiaries of Effective Management Systems, Inc.
[Incorporated by reference to Exhibit 21 to Effective Management
Systems, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-68901)].
23 Consent of Ernst & Young, LLP.
Exhibit-5
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 18, 1999 in Pre-Effective Amendment No. 1 to
Effective Management Systems, Inc.'s Registration Statement on Form S-1
(including the related Prospectus) for the registration of 947,214 shares of its
common stock.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
March 31, 1999
