U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO
____________
Commission file number 0-23438
Effective Management Systems, Inc.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1292200
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
12000 West Park Place, Milwaukee, WI 53224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 359-9800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X___ No _______
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding as of February 28, 1999
- ---------------------------------- ------------------------------------
Common Stock, $.01 par value 4,118,486
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
February 28, 1999
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 Financial Statements
Consolidated Balance Sheets at
February 28, 1999 and November 30, 1998 2
Consolidated Statements of Operations - Three
Months Ended February 28, 1999 and February 28, 1998 5
Consolidated Statements of Cash Flows - Three 6
Months Ended February 28, 1999 and February 28, 1998
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
- ---------------------------
Item 2 Changes in Securities and Use of Proceeds 19
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES
1
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Part I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited)
- ------------------------------------------------------------------------------
ASSETS 28-Feb 30-Nov
1999 1998
==============================================================================
CURRENT ASSETS
Cash $6 $21
Accounts Receivable:
Trade, less allowance
for doubtful accounts 8,626 12,871
Related Parties 437 426
Inventories 480 275
Prepaid Expenses and Other Current Assets 272 225
-------------------------
TOTAL CURRENT ASSETS 9,821 13,818
LONG TERM ASSETS
Computer Software, net 4,718 4,373
Investments in and Advances to
Unconsolidated Joint Ventures 291 291
Equipment and Leasehold Improvements, net 3,001 3,202
Intangible Assets, net 2,074 2,129
Other Assets 386 347
-------------------------
TOTAL LONG TERM ASSETS 10,470 10,342
-------------------------
TOTAL ASSETS $20,291 $24,160
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
2
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EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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LIABILITIES AND STOCKHOLDERS' EQUITY 28-Feb 30-Nov
1999 1998
=============================================================================
CURRENT LIABILITIES
Accounts Payable $4,607 $3,662
Accrued Liabilities 1,499 2,937
Deferred Revenues 6,319 6,522
Customer Deposits 133 113
Current portion of
Long-term Obligations 5,244 6,194
-----------------------
TOTAL CURRENT LIABILITIES 17,802 19,428
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 771 858
Long-term Obligations 259 242
-----------------------
TOTAL LONG TERM LIABILITIES 1,030 1,100
Commitments and Contingencies
3
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STOCKHOLDERS' EQUITY
Preferred Stock; authorized 3,000,000
shares of which 5,000 shares are
designated as Series B 8% Convertible
Redeemable Preferred Stock ("Series
B") 1,875.37 shares, of
Series B, issued and outstanding 1,394 1,411
(liquidation preference at $1000 per share)
Common Stock, $.01 par value; authorized
20,000,000 shares; issued 4,118,486 and
4,106,377 shares; Outstanding 4,105,861 and
4,093,752 shares 41 41
Common Stock Warrants 144 144
Additional Paid- in Capital 11,444 11,426
Retained Earnings (Deficit) (11,504) (9,330)
Cost of Common Stock in Treasury(12,625 shares) (60) (60)
------------------------
TOTAL STOCKHOLDERS' EQUITY 1,459 3,632
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,291 $24,160
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
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EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
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THREE MONTHS ENDED
28-Feb 28-Feb
1999 1998
=================================================== ============= ==========
NET REVENUES:
Software license fees $3,156 $5,335
Services 3,994 4,239
Hardware 326 672
----------- ----------
Total net revenues 7,476 10,246
COST OF PRODUCTS AND SERVICES
Software license fees 916 1,723
Services 3,811 3,220
Hardware 281 527
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Total cost of products and services 5,008 5,470
Selling and marketing expenses 2,821 3,625
General and administrative expenses 784 1,194
Product development expenses 881 837
----------- ----------
Total costs and operating expenses 9,494 11,126
----------- ----------
LOSS FROM OPERATIONS (2,018) (880)
Other (Income)/ Expense
Interest (income) (8) (10)
Interest expense 174 153
----------- ----------
166 143
----------- ----------
LOSS BEFORE INCOME TAXES (2,184) (1,023)
Income tax (benefit) expense (9) 33
----------- ----------
NET LOSS ($2,175) ($1,056)
=========== ==========
Loss per share - basic and diluted ($0.53) ($0.26)
=================================================== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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THREE MONTHS ENDED
28-Feb 28-Feb
1999 1998
===============================================================================
OPERATING ACTIVITIES
Net Loss ($2,175) ($1,056)
Adjustments to reconcile net loss to
Net cash provided by (used in)
operating activities:
Depreciation and amortization 343 352
Amortization of capitalized computer
software development costs 475 954
Equity in earnings of joint ventures - -
Goodwill Amortization 55 58
Deferred income taxes - -
Restructuring and Other Charges - -
Changes in operating assets and
liabilities:
Accounts Receivable 4,486 1,270
Inventories and other current assets (504) (1)
Accounts payable and other liabilities (764) (538)
------------------------
Total adjustments 4,091 2,095
------------------------
Net cash provided by operating activities 1,916 1,039
INVESTING ACTIVITIES
Additions to equipment and leasehold
improvements (143) (74)
Proceeds from sale of securities - -
Software development costs capitalized (819) (1,008)
Other (38) 8
------------------------
Net cash (used in) investing activities (1,000) (1,074)
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FINANCING ACTIVITIES
Proceeds on long-term debt and other
notes payable (932) 272
Additional paid-in capital
18 33
Preferred stock dividend
(17) -
------------------------
Net cash provided (used) by financing
activities (931) 305
------------------------
Net increase (decrease) in cash ($15) $270
Cash-beginning of period $21 $14
========================
Cash-end of period $6 $284
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999
(Unaudited) (In Thousands)
Note 1 - Basis of Presentation
The accompanying consolidated interim financial statements included
herein have been prepared by Effective Management Systems, Inc. (the "Company"),
without an audit, in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
In the opinion of management, the information furnished for the
three-month periods ended February 28, 1999 and February 28, 1998 includes all
adjustments, consisting solely of normal recurring accruals, necessary for a
fair presentation of the financial position and results of operations for the
interim periods. The results of operations for the three months ended February
28, 1999 are not necessarily indicative of the results of operations to be
expected for the entire fiscal year ending November 30, 1999. It is suggested
that the interim financial statements be read in conjunction with the audited
consolidated financial statements for the year ended November 30, 1998 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Note 2 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the following:
28-February-1999 30-Nov-1998
---------------- -----------
Gross $10,055 $9,913
Less: Accumulated Depreciation ( 7,054 ) ( 6,711 )
---------- ----------
Net $3,001 $3,202
Allowance for doubtful accounts
consisted of the following:
28-February-1999 30-Nov-1998
---------------- -----------
Balance $ 326 $ 506
Provision for doubtful accounts
consisted of the following:
28-February-1999 30-Nov-1998
---------------- -----------
$ 48 $ 17
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Note 3 - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options and warrants.
Earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share.
Three Months Ended
February 28,
1999 1998
---- ----
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,114 4,075
Effect of dilutive securities -
stock options and warrants 0 0
Effect of dilutive securities -
preferred stock 0 0
--------------------------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,114 4,075
================================
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company incurred a 27% decrease in net revenues and a net loss of $2,175,000
for the first quarter of fiscal 1999 compared with a net loss of $1,056,000 for
the first quarter of fiscal 1998. The first quarter of fiscal 1999 and 1998 do
not reflect a tax benefit relating to the loss since for book purposes the
Company is in a loss carryforward position. Software revenues were down 40.8% in
the first quarter of fiscal 1999 compared to the same period in the prior year.
Management believes this decrease in software revenues was mainly the result of
a general decline in the Enterprise Resource Planning ("ERP") industry, delays
in the sales of the Baan products distributed by the Company, an insufficient
level of leads for Baan prospects, a decline in the Company's proprietary TCM
product revenues and reduced revenues from restructured operations (a reduction
of $249,000 from the first quarter of 1998).
Although the Company has taken various actions with the objective of returning
the Company to profitability, no assurance can be given that these measures will
actually result in the achievement of this objective. In addition, as a result
of the recent losses, the Company has been required to obtain waivers from its
primary lender for covenant violations. In the event that in the near term, that
the Company's financial performance does not improve or if it is unable to
secure additional investment capital or sell assets to bolster its financial
position, the Company will continue to require covenant relief in fiscal 1999.
In the event that such covenant relief cannot be obtained, it would likely have
a material adverse effect on the Company's liquidity, including its ability to
fund current operations. The Company's ability to borrow additional funds under
its existing credit facility remains limited. As a result of its financial
situation, all of the Company's debt has been classified as short-term and its
fiscal 1998 audit report contains an explanatory paragraph for going concern
uncertainty, pursuant to which the auditors expressed substantial doubt as to
the Company's ability to continue as a going concern.
The Company's on-going operations are also dependent on its ability to attract
and retain a highly qualified sales, development and service staff. The Company
has recently experienced attrition at rates higher than historical levels. The
Company has 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 the Company's financial performance.
Results of Operations
Total Revenues
Net revenues decreased to $7,476,000 for the three months ended February 28,
1999, which represented a 27.0% decrease from the $10,246,000 in revenues for
the same quarter in the previous year. The mix of revenues comparing software,
services, and
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hardware revenues as a percentage of net revenues was 42.2%, 53.4%, and 4.4%,
respectively, in the first quarter of fiscal 1999, as compared with 52.1%,
41.4%, and 6.7%, respectively, in the first quarter of fiscal 1998.
International revenues represented less than 10% of net revenues for all periods
presented.
The Company's operating revenues can vary substantially from quarter to quarter
based on the size and timing of customer orders and market acceptance of new
products. The Company has historically operated with little backlog because
software orders are generally shipped as orders are received. As a result,
product revenue in any quarter is substantially dependent on orders booked and
shipped during that quarter.
Software License Fees
Software license fees are customer charges for the right to use the Company's
software products. Software license fees decreased 40.8% to $3,156,000 in the
first quarter of fiscal 1999 from $5,335,000 in the first quarter of fiscal
1998. Management believes this decrease in software revenues was mainly the
result of a general decline in the ERP industry, delays in the sales of Baan
products, an insufficient level of leads for Baan prospects, a decline in the
Company's proprietary TCM product revenues (a trend that is likely to continue),
reduced revenues from restructured operations (a reduction of $249,000 from the
first quarter of 1998) and subsequent attrition.
Service Revenues
The Company offers a number of optional services to its customers, including
such services as a telephone support program, systems integration, custom
software development, implementation consulting, and formal classroom and
on-site training. Service revenues decreased to $3,994,000 for the three months
ended February 28, 1999, as compared with $4,239,000 for the same period of the
prior year. The decrease in revenues was mainly the result of a reduced level of
personnel due to the restructuring the Company implemented in the quarter ended
May 31, 1998 and subsequent attrition.
Hardware Revenues
Hardware revenues decreased 51.5% to $326,000 in the first quarter of fiscal
1999 compared with $672,000 for the corresponding period of 1998. This decrease
was mainly due to increased sales of software on platforms for which the Company
does not supply hardware and a reduction in new TCM system sales. The Company
has decided to reduce its sales of commodity-priced hardware products and those
which require specific expertise beyond the scope of the Company's product
focus. In turn, the Company has developed relationships with various system
integrators which sell the hardware and provide these value-added hardware
services.
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Management expects the trend of declining hardware sales to continue due to
both the increasing sales of software licenses operating on the Microsoft
Windows NT platform and the reduced level of new TCM system sales. Hardware used
with the Microsoft Windows NT platform is either generally already in place at
the customer site or readily available from local suppliers who can also provide
local support.
Cost of Software License Fees
The cost of software license fees as a percentage of related revenue was 29.0%
for the first quarter of fiscal 1999, a decrease from 32.3% for the
corresponding period of 1998. Cost of software license fees is composed of both
amortization of past investment in software development and the third party
costs associated with the software revenues. Software amortization is related to
past investment in software development and does not vary consistently with
variations in software revenues. The Company wrote off a substantial portion of
its past investment in software development in conjunction with its
restructuring efforts in the quarter ended May 31, 1998. Software amortization
decreased $479,000 in the first quarter of fiscal 1999 as compared to the same
period of 1998 as a result of the amounts written off of previously capitalized
development costs in the restructuring. The cost of software license fees is
also dependent on the level of third party costs associated with certain
software revenues and includes such items as purchased licenses and other
components.
Cost of Services
The cost of services as a percentage of related revenue increased to 95.4% for
the three months ended February 28, 1999, as compared with 76.0% for the same
quarter in the previous year. The increase was mainly due to additional
compensation for current personnel, lower levels of productivity for new
personnel, higher costs of outside-sourced labor, and additional warranty work
associated with new versions of the Company's software. The Company has also
initiated a group of personnel to implement the Baan software solutions which
has raised the level of training costs and other initial non-billable
activities. Last, the Company has been implementing a new call management system
for the hot line telephone support area which has also temporarily raised costs.
The Company has raised the billing rates for its services in line with industry
practice, but the effects will not be fully realized until the third quarter of
the 1999 fiscal year.
Cost of Hardware
The cost of hardware as a percentage of related revenue increased to 86.2% in
the first quarter of fiscal 1999 from 78.4% in the first quarter of fiscal 1998.
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 pressure of the customer sale. The cost of hardware as a percentage
of related revenue also varies with the amount of low margin hardware sales to
affiliates. Hardware sales to affiliates declined in the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998.
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Selling and Marketing Expenses
Selling and marketing expenses decreased $804,000, or 22.2%, from $3,625,000 in
the first quarter of fiscal 1998 to $2,821,000 in the first quarter of fiscal
1999. This decrease in selling and marketing expense was mainly due to reduced
levels of personnel through attrition, and reduced levels of expense resulting
from the Company's restructuring. The Company has also restructured compensation
levels to more effectively match industry practice in the upper mid-market. As a
percentage of total revenues, selling and marketing expense was 37.7% in the
first quarter of fiscal 1999 compared to 35.4% in the corresponding period of
1998. This increase was mainly attributable to a reduction in revenues (see
Software Revenues above).
General and Administrative Expenses
General and administrative expenses decreased $410,000, or 34.3%, from
$1,194,000 in the first quarter of fiscal 1998 to $786,000 in the first quarter
of fiscal 1999. The decrease in general and administrative expenses was mainly
due to reduced expense levels as a result of the Company's restructuring. As a
percentage of net revenues, general and administrative expenses were 10.5% and
11.7% in the first quarter of fiscal 1999 and 1998, respectively.
Product Development Expense
Product development expense increased 5.3% from $837,000 in the first quarter of
fiscal 1998 to $881,000 in the first quarter of fiscal 1999. This increase
primarily related to a $189,000 decrease in the amount of software capitalized.
The Company capitalizes costs in accordance with Statement of Financial
Accounting Standard (SFAS) No. 86. The Company capitalized $819,000 of product
development costs in the first quarter of fiscal 1999 compared to $1,008,000 in
the first quarter of fiscal 1998. As a percentage of software license fees, the
total amount invested in software development was 53.6% and 34.7% in the first
quarter of fiscal 1999 and fiscal 1998, respectively. Management expects to
reduce the level of software development expense in the next two fiscal
quarters.
Restructuring Charges
In the second quarter of fiscal 1998, the Company recorded a restructuring
charge of $6,836,000 related to entering into a new distributor arrangement for
the Baan manufacturing software, and a reduction of costs focused on improving
the Company's financial performance. The full amount of the restructuring charge
has been paid or expensed as of February 28, 1999.
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Other Income\Expense-Net
Other income\expense-net was $143,000 of expense for the first quarter of fiscal
1998 compared to $166,000 of expense for the first quarter of fiscal 1999. The
increase in the level of expense was mainly the result of an increase in
interest expense as a result of increased borrowings under the Company's
borrowing facilities.
Income Tax
A tax expense of $33,000 (for state and local taxes) and no income tax benefit
was recorded for the first quarter of fiscal 1998 compared to a tax expense of
$9,000 for the first quarter of fiscal 1999. For some time, the Company, for
book purposes, has been in a tax loss carryforward position. Generally accepted
accounting principles prohibit the Company from recording a tax benefit under
the circumstances.
Liquidity and Capital Resources
At February 28, 1999, the Company had cash and marketable securities aggregating
$6,000. During the first quarter of fiscal 1999, the Company's operating
activities provided $1,916,000 of cash compared to providing $1,039,000 of cash
for the same period of the prior year. This increase in the cash provided was
mainly attributable to the Company's improved collection of accounts receivable.
Investing activities used cash of $1,000,000 in the first quarter of fiscal 1999
compared to $1,074,000 of cash in the first quarter of fiscal 1998. The
principal use of the cash in the first quarter of fiscal 1999 was $819,000 for
capitalized product development. The principal uses of cash in the first quarter
of fiscal 1998 included $1,008,000 for capitalized product development.
Financing activities used $931,000 of cash in the first quarter of fiscal 1999
compared with providing $305,000 in the first quarter of fiscal 1998. The cash
used in fiscal 1999 mainly reflected payments under the Company's borrowing
facilities. As of February 28, 1999, the Company had $ 891,000 of availability
under its $5,000,000 line of credit, which is based on the level of eligible
accounts receivable.
The Company's credit agreement with Foothill Capital Corporation contains
certain restrictive covenants relating to income (EBITDA), tangible net worth,
and level of capital expenditures. On April 13, 1999 the Company obtained a
waiver from the lender as a result of its 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, the Company will need positive operational
results in the short term. In the event that the Company's performance does not
improve in the short term, the Company will need to secure additional waivers
and/or alternative sources of financing which could include the sale of assets.
The Company is continuing its review of alternative sources of financing to deal
with its current financial status. Although 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 the Company
on acceptable
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terms. In the event that the Company is unable to secure necessary waivers or
additional financing, it would likely have a material adverse effect on the
Company's liquidity, including its ability to fund continuing operations at
current levels.
The Company currently has past due amounts with certain vendors. The Company has
secured extended payment arrangements with some of these vendors and is in the
process of securing similar arrangements with other vendors. There can be no
assurance that the Company will be successful in extending these amounts owed to
other vendors or that funds will be available to pay obligations as they arise.
The Company is dependent on success in its selling efforts to build collateral
to meet these obligations, whereby a lack of success could substantially impact
the Company's ability to continue as a going concern.
As a result of its current financial situation, the Company, in accordance with
generally accepted accounting principles, has reclassified all of its
outstanding debt under the credit facility as short-term debt. All debt
pertaining to the credit facility having cross-default provisions has been so
reclassified regardless of whether or not covenant violations have occurred or
are anticipated. The Company's report from its independent accountants for the
year ended November 30, 1998, contains a going concern explanatory paragraph,
pursuant to which the auditors expressed substantial doubt as to the Company's
ability to continue as a going concern.
Market Risk
Due to the variable rate paid on the revolver portion of its credit facility,
the Company is 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, the Company's interest expense would increase by $80,000. This amount is
determined by considering the impact of the hypothetical interest rate on the
Company's borrowing cost, but does not consider the effects of the reduced level
of economic activity that could exist in such an environment. The Company has
not historically used financial instruments to hedge interest rate exposure and
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives.
Year 2000 Compliance
The Company faces "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, the Company established a corporate readiness
program which began in fiscal 1994 with the a detailed analysis of the Company's
software products sold to its customers. The Company had originally started
addressing the changes to the program code of its software products for Year
2000 issues in 1985.
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The Company 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. The Company plans to complete its detailed assessment plan on or
around May 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
The Company's 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 the Company's software products contain all the
necessary date code changes. The Company's versions of the software prior to
version 5.1.2 in 1994 are known to contain code that is not Year 2000 compliant.
In 1996, the Company 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. The Company's agreements
with the customers since 1992 do not expressly obligate the Company to furnish
an updated version of the software that is Year 2000 compliant. The Company's
analysis of contracts prior to 1992 indicate an immaterial level of Company
obligation to furnish updated software..
Internal Systems
The Company is in the process of assessing the Year 2000 readiness of its
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 May, 1999. The Company expects to complete
deployment of Year 2000 corrections on or around September of 1999.
Third Party Reseller and Key Suppliers
The Company plans to assess the Year 2000 readiness of its resellers and key
suppliers over the second quarter of fiscal 1999. With respect to certain of its
most significant resellers and suppliers, the Company has already made inquiries
to assess their readiness and has obtained published information indicating that
they are in compliance.
Costs
The Company estimates the historical costs to remediate the Year 2000 issues
have totaled $968,000 and future costs to remediate will be approximately
$500,000. The Company expects to fund the future costs of remedation from
operations.
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Risk
Failure to correct critical Year 2000 issues could cause a serious interruption
in business operations of the Company's customers and/or internal systems. Such
interruptions could have a material impact on the Company's results of
operations, liquidity, and financial condition. The Company is 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 could also have a material effect on the results of operations.
Finally, factors outside the Company's control could also cause disruption of
business activities which could materially affect the results of operations.
Contingency Plans
The Company is 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.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE
ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED
IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH
UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DESCRIBED
IN THE SECTION CAPTIONED "BUSINESS RISK FACTORS" IN ITEM 1 OF THE ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998, WHICH INCLUDE, BUT ARE
NOT LIMITED TO, THE BUSINESS CONTINUING TO BE UNPROFITABLE DESPITE STEPS TO
IMPROVE PERFORMANCE, THE INABILITY TO OBTAIN COVENANT RELIEF LEADING TO
LIQUIDITY PROBLEMS AND AN INABILITY TO FUND CONTINUING OPERATIONS, THE
RESTRUCTURING FAILING TO IMPROVE OUR FINANCIAL PERFORMANCE AND PERHAPS EVEN
HAVING A NEGATIVE IMPACT ON OUR PERFORMANCE, OUR POOR FINANCIAL PERFORMANCE
MAKING IT DIFFICULT TO CONTINUE AS A GOING CONCERN, THE INABILITY TO OBTAIN
PRINCIPAL PRODUCTS NEGATIVELY IMPACTING OUR OPERATIONS, THE BAAN RELATIONSHIP
FAILING AND THE LOSS OF KEY EMPLOYEES NEGATIVELY IMPACTING OUR OPERATIONS.
17
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Reference is made to the information in Item 2 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operation-Market
Risk," which information is incorporated herein by reference.
18
<PAGE>
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the terms of the Company's Series B 8% Convertible
Redeemable Preferred Stock (the "Series B"), the Company was obligated to
provide cumulative preferential dividends to the holders of the Series B on
January 2, 1999 and April 1, 1999.
With respect to each of the above-referenced dividend payment dates,
the Board of Directors of the Company, in accordance with the terms of the
Series B, having reviewed the cash situation of the Company, determined that the
Company would pay the dividends in shares of Series B. Thus, on (i) January 2,
1999, in accordance with and pursuant to the terms of the Series B, 34.74 shares
of the Series B were issued in payment of the dividends due the holders of the
Series B and (ii) on April 1, 1999, in accordance with and pursuant to the terms
of the Series B, 55.63 shares of the Series B were issued in payment of the
dividends due the holders of the Series B.
19
<PAGE>
Exhibit Index
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number
(a) Exhibits
4.1 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 April 13, 1999.
10.1 Form of Nonstatutory Stock Option Agreement, dated February 1,
1999.
27 Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
April 14, 1999 By: /s/ MICHAEL D. DUNHAM
Michael D. Dunham
President (principal executive officer)
By: /s/JEFFREY J. FOSSUM
Jeffrey J. Fossum
Chief Financial Officer and Assistant
Treasurer (principal financial and
accounting officer)
21
Exhibit 4.1
WAIVER
THIS WAIVER (this "Waiver") is entered into as of April 13, 1999, among
Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation, EMS-East,
Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of
Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS, EMS-East and
EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"),
and Foothill Capital Corporation ("Lender").
WHEREAS, Borrowers and Lender are parties to a Loan and Security
Agreement dated as of December 30, 1997, as amended (the "Loan Agreement");
WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net
Worth (as defined in the Loan Agreement) for the fiscal quarter ended February
28, 1999 is approximately negative Six Million Seven Hundred Nineteen Thousand
Dollars (-$6,719,000);
WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as
defined in the Loan Agreement) for the three month period ending February 28,
1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand
Dollars (-$2,175,000); WHEREAS, as a result of the foregoing, Borrowers have
breached Sections 7.20(a) and 7.20(b) of the Loan Agreement and Events of
Default exist under Section 8.2 of the Loan Agreement;
WHEREAS, Borrowers have requested that Lender waive the foregoing
Events of Default and Lender has agreed to do so subject to the terms hereof;
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. Waiver. Subject to the reaffirmation by each Borrower of its
representations and warranties under the Loan Agreement and its representations
and warranties set forth herein and receipt by Lender of the waiver fee referred
to below, Lender hereby waives the Events of Default arising solely as a result
of the (i) Tangible Net Worth of Borrowers not being at least Four Million
Dollars ($4,000,000) for the fiscal quarter ended February 28, 1999 and (ii)
EBITDA of Borrowers not being at least negative Five Hundred Thousand Dollars
(-$500,000) for the three month period ending February 28, 1999. The foregoing
waiver shall not constitute a waiver of any other Event of Default that may
exist, or a wavier of any future Event of Default that may occur (including,
without limitation, any Event of Default occurring as a result of a breach of
<PAGE>
Section 7.20(a) or Section 7.20(b) as of any date or for any period ending after
February 28, 1999).
3. Representations. In order to induce Lender to enter into this
Waiver, Borrower hereby represents and warrants to Lender that:
(a) The representations and warranties of each Borrower contained in
the Loan Agreement, are true and correct as of the date hereof as if made on the
date hereof;
(b) No Event of Default or event which, with giving of notice or the
passage of time, or both would become an Event of Default, exists as of the date
hereof (other than as described in Section 2 above);
(c) The Tangible Net Worth of Borrowers as of February 28, 1999 is
approximately negative Six Million Seven Hundred Nineteen Thousand Dollars
(-$6,719,000); and
(d) The EBITDA of Borrowers for the three month ending February 28,
1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand
Dollars (-$2,175,000).
4. Waiver Fee. In consideration of the waiver described above,
Borrowers agree to pay Lender a waiver fee of Five Thousand Dollars ($5,000) on
the date hereof.
The remainder of the page is intentionally left blank
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
executed by their respective officers thereunto duly authorized and delivered as
of the date first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.,
a Wisconsin corporation
By
Its
EMS-EAST, INC., a Massachusetts corporation
By
Its
EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an
Illinois corporation
By
Its
FOOTHILL CAPITAL CORPORATION
By
Its
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (this "Stock Option Agreement"),
dated as of this 1st day of February, 1999, by and between Effective Management
Systems, Inc., a Wisconsin corporation (the "Company"), and
______________________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, in recognition of the Optionee's service as a non-employee
director of the Company, the Board of Directors has deemed it appropriate to
grant the Optionee an option to purchase shares of the Company's common stock,
par value $0.01 per share (the "Common Stock"); and
WHEREAS, the parties deem it appropriate to memorialize the grant of such
option.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements herein set forth, the parties hereby mutually covenant and agree as
follows:
1. Grant of Option. Subject to the terms and conditions of this Stock
Option Agreement, the Company hereby grants to the Optionee an option (the
"Option") to purchase from the Company all or any part of the aggregate amount
of ______________ shares of Common Stock (the "Optioned Shares"). The Option is
intended to constitute a nonstatutory stock option and shall not be treated as
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
2. Option Price. The price to be paid for the Optioned Shares shall be
$1-7/16 per share.
3. Exercisability and Termination of Option.
a. The Option shall vest and become exercisable, but only during the time
that the Optionee is serving as a director of the Company, as to 30% of the
Optioned Shares immediately, as to an additional 30% after one calendar year has
elapsed from the date of this Stock Option Agreement, and as to the final 40%
after the second calendar year has elapsed from the date of this Stock Option
Agreement; provided, however, that if the Optionee ceases to be a director of
the Company by reason of death, disability, or retirement within two calendar
years after the date of this Stock Option Agreement or in the event of a Change
in Control (as defined in Section 3.b below), the Option shall become
immediately exercisable in full. The Option shall terminate on the earlier of:
(i) February 1, 2009; (ii) six months after the Optionee ceases to be a director
of the Company by reason of death; or (iii) three months after the Optionee
ceases to be a director of the Company for any reason other than death.
b. A "Change in Control" shall be deemed to have occurred if the events set
forth in any one of the following paragraphs shall have occurred:
<PAGE>
i. any "Person" (as such term is defined in section 3(a)(9) of the
Securities Exchange Act of 1934, as amended, as modified and used in
sections 13(d) and 14(d) thereof), other than (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under any
employee benefit plan of the Company or any of its subsidiaries, (C) an
underwriter temporarily holding securities pursuant to an offering of such
securities or (D) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportion as their
ownership of Common Stock in the Company ("Excluded Persons"), is or
becomes the "Beneficial Owner" (as defined in rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of
securities of the Company representing 25% or more of either the then
outstanding shares of Common Stock or the combined voting power of the
Company's the outstanding voting securities; or
ii. the shareholders of the Company approve a merger or consolidation
of the Company with any other corporation or approve the issuance of voting
securities of the Company in connection with a merger or consolidation of
the Company (or any direct or indirect subsidiary of the Company) pursuant
to applicable stock exchange requirements, other than (i) a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof) at least
50% of the combined voting power of the voting securities of the Company or
such surviving entity or any parent thereof outstanding immediately after
such merger or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in
which no Person (other than an Excluded Person) is or becomes the
Beneficial Owner, directly or indirectly, of securities of the Company
representing 25% or more of either the then outstanding shares of Common
Stock or the combined voting power of the Company's then outstanding voting
securities; or
iii. the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets (in one transaction or a series of related transactions within any
period of 24 consecutive months), other than a sale or disposition by the
Company of all or substantially all of the Company's assets to an entity at
least 75% of the combined voting power of the voting securities of which
are owned by Persons in substantially the same proportion as their
ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, no "Change in Control" shall be deemed to have
occurred if there is consummated any transaction or series of integrated
transactions immediately following which the record holders of the Common Stock
immediately prior to such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity that owns all or
substantially all of the assets of the Company immediately following such
transaction or series of transactions.
4. Manner of Exercise and Payment. Subject to the provisions of Paragraph 3
hereof, the Option may be exercised in full at any time or in part from time to
time by
-2-
<PAGE>
delivery to the Assistant Secretary of the Company at the Company's principal
office in Milwaukee, Wisconsin, of a written notice of exercise specifying the
number of shares with respect to which the Option is being exercised. The notice
of exercise must be accompanied by full payment of the option price of the
shares being purchased: (i) in cash or its equivalent; (ii) by tendering
previously acquired shares of Common Stock (valued at their fair market value as
of the date of exercise as determined in the manner as provided by the Board of
Directors); or (iii) by any combination of the means of payment set forth in
subparagraphs (i) and (ii). For purposes of subparagraphs (ii) and (iii) above,
the term "previously acquired shares of Common Stock" shall only include Common
Stock owned by the Optionee prior to the exercise of the Option and shall not
include shares of Common Stock which are being acquired pursuant to the exercise
of the Option. No Optioned Shares shall be issued until full payment therefor
has been made.
5. Nontransferability of the Option. The Option shall not be transferable
by the Optionee other than by will or the laws of descent and distribution. The
Option may be exercised during the life of the Optionee only by the Optionee or
the Optionee's guardian or legal representative.
6. Tax Withholding. The Company may deduct and withhold from any cash
otherwise payable to the Optionee (whether payable as director's fees, bonus or
other compensation) such amount as may be required for the purpose of satisfying
any obligation the Company may have to withhold federal, state or local taxes.
Further, in the event the amount so withheld is insufficient for such purpose,
the Company may require that the Optionee pay to the Company upon its demand or
otherwise make arrangements satisfactory to the Company for payment of such
amount as may be requested by the Company in order to satisfy its obligation to
withhold any such taxes.
7. Capital Adjustments Affecting the Common Stock. In the event of a
capital adjustment resulting from a stock dividend (other than a stock dividend
in lieu of an ordinary cash dividend), stock split, reorganization, spin-off,
split-up or distribution of assets to shareholders, recapitalization, merger,
consolidation, combination or exchange of shares or the like, the number of
shares of Common Stock subject to the Option shall be adjusted in a manner
consistent with such capital adjustment; provided, however, that no such
adjustment shall require the Company to sell any fractional shares and the
adjustment shall be limited accordingly. The price of any shares under the
Option shall be adjusted so that there will be no change in the aggregate
purchase price payable upon exercise of the Option. The determination of the
Board of Directors of the Company as to any adjustment shall be final.
8. Representation by the Optionee. By execution of this Stock Option
Agreement, the Optionee represents to the Company that his acquisition of
Optioned Shares upon exercise of the Option will be for investment purposes only
for his own account and not with a view to resell or otherwise distribute such
shares. The Optionee acknowledges that the issuance of Optioned Shares upon
exercise of the Option will not be registered under the Securities Act of 1933,
as amended, or under any state securities laws, and that such shares cannot be
resold or otherwise transferred unless registered under said Act and laws or
unless an exemption from registration is available. The Optionee further
acknowledges that the certificate or certificate representing the Optioned
Shares acquired upon exercise of the Option shall bear the following legend:
-3-
<PAGE>
"The shares of common stock of Effective Management Systems, Inc.
represented by this certificate have not been registered under the
Securities Act of 1933, as amended, or any state securities laws, and
such shares may not be resold or otherwise transferred unless
registered under said Act and laws or unless an exemption from
registration is available."
9. Status of Optionee. The Optionee shall have no rights as a shareholder
with respect to Optioned Shares covered by the Option until the date of issuance
of stock certificates to the Optionee and only after such shares are fully paid.
The Option shall not confer upon the Optionee the right to continue as a
director of the Company.
10. Powers of the Company Not Affected. The existence of the Option shall
not affect in any way the right or power of the Company or its shareholders to
make or authorize any or all adjustments, recapitalizations, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Common Stock or the rights
thereof, or any dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business or any other corporate act
or proceeding, whether of a similar character or otherwise.
11. Interpretation by the Board of Directors. As a condition of the
granting of the Option, the Optionee agrees, for himself and his legal
representatives or guardians, that this Stock Option Agreement shall be
interpreted by the Board of Directors and that any interpretation by the Board
of the terms of this Stock Option Agreement and any determination made by the
Board pursuant to this Stock Option Agreement shall be final, binding and
conclusive.
12. Requirements of Law. The grant of the Option and the issuance of
Optioned Shares pursuant to this Stock Option Agreement are subject to all
applicable laws, statutes, rules and regulations.
13. Governing Law. This Stock Option Agreement shall be governed by and
construed in accordance with the internal laws of the State of Wisconsin.
14. Amendment. This Stock Option Agreement may not be amended, modified,
terminated or otherwise altered except by the written consent of the parties
hereto.
15. Severability. The parties agree that if any provision of this Stock
Option Agreement shall under any circumstances be deemed invalid or inoperative,
this Stock Option Agreement shall be construed with the invalid or inoperative
provision or provisions deleted and the rights and obligations of the parties
shall be construed and enforced accordingly.
16. Entire Agreement. This Stock Option Agreement evidences the entire
agreement between the parties hereto with respect to the matters provided for
herein and there are no agreements, representations or warranties with respect
to the matters provided herein other than those set forth herein.
-4-
<PAGE>
17. Headings. The headings for the paragraphs of this Stock Option
Agreement are inserted for convenience only and shall not constitute a part of
this Stock Option Agreement.
IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement to
be executed by its duly authorized officers and its corporate seal to be
hereunto affixed, and the Optionee has hereunto affixed his hand and seal as of
the day and year first above written.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By: _________________________________
[SEAL]
Attest: _____________________________
_____________________________________ [SEAL]
_________________, Optionee
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> NOV-30-1998
<PERIOD-END> FEB-28-1999
<CASH> 6
<SECURITIES> 0
<RECEIVABLES> 8,952
<ALLOWANCES> (326)
<INVENTORY> 480
<CURRENT-ASSETS> 9,821
<PP&E> 10,055
<DEPRECIATION> (7,054)
<TOTAL-ASSETS> 20,291
<CURRENT-LIABILITIES> 17,802
<BONDS> 0
0
1,394
<COMMON> 41
<OTHER-SE> 24
<TOTAL-LIABILITY-AND-EQUITY> 20,291
<SALES> 326
<TOTAL-REVENUES> 7,476
<CGS> 281
<TOTAL-COSTS> 14,502
<OTHER-EXPENSES> 166
<LOSS-PROVISION> 48
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> (2,184)
<INCOME-TAX> (9)
<INCOME-CONTINUING> (2,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,175)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not required to be calculated in accordance with generally accepted
accounting principles.
</FN>
</TABLE>
