U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended November 30, 1997;
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ____________ to __________________
Commission File Number 0-23438
Effective Management Systems, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1292200
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 West Park Place, Milwaukee, WI 53224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 359-9800
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Title of Class
Common Stock $.01 Par Value Warrants to Purchase Common Stock
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
periods 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting and non-voting common equity
held by non-affiliates of the registrant at February 1, 1998 was
$8,987,325.
The number of common shares outstanding at February 1, 1998 was 4,079,455
DOCUMENTS INCORPORATED BY REFERENCE:
Effective Management Systems, Inc. Proxy Statement for the 1998 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
Registrant's fiscal year and, and upon such filing, to be incorporated by
reference into Part III).
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Index to Annual Report on Form 10-K
For the Fiscal Year Ended
November 30, 1997
Page
Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Description of Business . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . 16
Item 5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Selected Financial Data (In thousands, except per
share data) . . . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation (for the fiscal
years ended November 30, 1997, 1996, and 1995) . . . . 20
Item 7A Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . 26
Item 8. Financial Statement and Supplementary Data. . . . . . 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 53
Item 10. Directors and Executive Officers of the Registrant . . 53
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 53
Item 13. Certain Relationships and Related Transactions . . . . 53
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . 53
Part I
Item 1. Description of Business
Overview
Effective Management Systems, Inc. ("EMS") develops, markets
and supports integrated manufacturing and business management software.
EMS' Time Critical Manufacturing/TM/ ("TCMJ/TM/") software is designed
with the underlying philosophy that time is a crucial element in
manufacturing, and that reducing time in the manufacturing process leads
directly to increased profits for the manufacturer. TCMJ software
integrates technologies such as electronic data interchange ("EDI"),
imaging, bar-coding, factory automation, engineering system integration,
distributed numerical control ("DNC"), statistical process control
("SPC"), and fourth generation language ("4GL") tools with EMS'
proprietary algorithms for scheduling and production, to optimize the
customer's labor, capital and inventory utilization. Software offered by
EMS functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX
operating systems. EMS also provides services support for its software
products and, on a selective basis, sells computer hardware.
Software products offered by EMS include: TCM/R/, which is a
pre-integrated enterprise resource planning, accounting and manufacturing
execution system; and FACTORYnet/R/ I/S, which is an integrated
Manufacturing Execution System, providing production management, shop
floor scheduling, and operations support. These software products are
usually integrated with a bar code data collection system or direct
machine controls, and provide up-to-the-minute information to track
production and business operations. This facilitates real-time decision
making and enables employees throughout an organization to respond quickly
to marketplace demands and unanticipated events.
EMS typically focuses its sales and marketing efforts on
discrete manufacturing plants. According to Advanced Manufacturing
Research ("AMR") data from December 1995 there are over 24,000 discrete
plant sites in the United States in the market segments EMS targets. EMS
has licensed its software products to over 1,500 customer sites.
EMS distributes its products in the United States through
seventeen branch offices and through seven joint ventures and independent
distributors. EMS also has established distribution channels through
independent distributors in Japan, Korea, China, the United Kingdom,
Belgium and Poland. In addition, the Company has joint ventures in Poland
and China to support these distributors.
EMS was incorporated in Wisconsin in 1978. EMS became a
publicly held company as a result of its initial public offering which was
completed in February 1994. During 1995, EMS acquired Intercim
Corporation and the remaining interest in Effective Management Systems of
Illinois, Inc., a joint venture subsidiary. In 1996, EMS acquired the
remaining interest in Darwin Data Systems Corporation another joint
venture subsidiary. For further details regarding these acquisitions, see
Note 2 of Notes to EMS' Consolidated Financial Statements, which
disclosure is included elsewhere in this Annual Report on Form 10-K and
incorporated herein by reference.
Business Risk Factors
This Annual Report on Form 10-K and other information that is
provided from time to time by EMS contain statements that, with the
exception of historical facts, are forward-looking statements including,
but not limited to, statements about: (i) EMS' strategies, uses and
expectations for existing and new products, services, technologies and
opportunities, (ii) the potential future profitability of EMS' operations,
(iii) the demand for and acceptance of new and existing products and
services, (iv) EMS' plan to reduce its cost structure, and (v) the
adequacy of EMS' resources to fund its operations, including research and
development. These statements are forward-looking statements that are
subject to important risks and uncertainties, which could affect EMS'
actual results and could cause such results to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These important risks and uncertainties
include, but are not limited to, the following:
Dependence on Principal Products. A significant portion of EMS'
revenue is derived from license fees for TCM/R/ and 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 EMS' results of operations. EMS' future
financial performance will depend, in part, on the continued development
and introduction of new and enhanced versions of TCM/R/, FACTORYnet/R/ I/S
and other products, and customer acceptance of such new and enhanced
products.
Dependence on Third Party Software. TCM/R/ and FACTORYnet/R/ I/S
incorporate and use software technology and software products developed by
other companies. 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 cease to do business or abandon or fail to
enhance a particular product line, EMS may need to seek other suppliers.
This could result in EMS having to significantly alter its product lines
which could have a material adverse effect on EMS' results of operations.
There also can be no assurance that EMS' current suppliers will not
significantly alter their pricing in a manner adverse to EMS.
New Products and Technological Change. The market for EMS' products
is characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying
new technologies and the emergence of new industry standards could render
EMS' existing products and products currently under development obsolete
and unmarketable. EMS' future success will depend upon its ability to
enhance its current products and to develop and introduce new products
that keep pace with technological developments, respond to evolving end-
user requirements and achieve market acceptance. Any failure by EMS to
anticipate or respond adequately to technological developments or end-user
requirements, or any significant delays in product development or
introduction, could result in a loss of competitiveness or revenues.
There can be no assurance that EMS will be successful in developing and
marketing new products or product enhancements on a timely basis or that
EMS will not experience significant delays in the future, which could have
a material adverse effect on EMS' results of operations.
Variability of Quarterly Operating Results; Limited Backlog. EMS'
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 EMS' target market; delays
in the introduction of products or product enhancements by EMS 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. EMS 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 dependent on orders booked and shipped during that quarter.
A significant portion of EMS' operating expenses are based on anticipated
revenue levels and are relatively fixed in nature. If revenue does not
meet EMS' expectations in any given quarter, operating results may be
adversely affected.
Competition. The management information systems industry is
intensely competitive and rapidly changing. A number of companies offer
products similar to EMS' products. Some of EMS' existing competitors, as
well as a number of potential competitors, have larger technical staffs,
more established and larger marketing and sales organizations and
significantly greater financial resources than EMS. There can be no
assurance that such competitors will not develop products that are
superior to EMS' products or that achieve greater market acceptance. EMS'
future success will depend, in part, upon its ability to increase software
license fee revenues in its target markets. There can be no assurance
that EMS will be able to compete successfully against its competitors or
that the competitive pressures faced by EMS will not adversely affect its
financial performance.
Expansion Plans. EMS plans to expand its business through continued
product development and expansion of its distribution network in the
United States and internationally with the objective of increasing total
net revenues and profits. There can be no assurance, however, that the
efforts and funds directed to product development, and to expanding EMS'
distribution network, will result in revenue and profit growth. Any
future growth of EMS will also depend on, among other things, EMS' ability
to gain market acceptance for its products in new geographic areas and to
monitor and control the additional costs and expenses associated with
expansion. No assurance can be given that EMS will be able to
successfully manage these aspects of its business.
Intellectual Property and Proprietary Rights. EMS regards its
software products as proprietary, in that title to and ownership of its
software generally reside exclusively with EMS. EMS attempts to protect
ownership of its software with a combination of copyright, trademark and
trade secret laws, employee and third-party nondisclosure 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 EMS' products or to obtain and use
information that EMS regards as proprietary. Like many software firms,
EMS presently has no patents. EMS licenses the source code for its
software to some customers for customization. Although EMS' source code
license contained confidentiality and nondisclosure provisions, there can
be no assurances that such customers will take adequate precautions to
protect such code. In addition, the laws of some foreign countries do not
protect EMS' proprietary rights to the same extent as do the laws of the
United States. There can be no assurance that the mechanisms used by EMS
to protect its software will be adequate or that EMS' competitors will not
independently develop software products that are substantially equivalent
or superior to EMS' software products. Although EMS does not believe that
its products infringe on the existing proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against EMS.
Dependence on Key Employees. EMS' success is dependent to a
significant extent on its executive officers and other key personnel, the
loss of one or more of whom could have a material adverse effect on EMS.
The future success of EMS will depend in large part on its ability to
attract and retain talented and qualified employees. Competition in the
recruiting of highly-qualified personnel in the management information
systems industry is intense. While EMS has not experienced any difficulty
in attracting and retaining talented and qualified employees to date,
there can be no assurance that EMS can retain its key employees or that it
can attract, assimilate and retain other qualified personnel in the
future.
Industry Background
In the early 1970's, the Material Requirements Planning ("MRP")
approach was developed to enable manufacturing companies, with the aid of
computers, to plan and manage their businesses more efficiently by
managing the flow of materials at various stages of the manufacturing
process. In the 1980's, this management approach evolved into
Manufacturing Resource Planning ("MRP II"), which considers labor and
equipment planning for the manufacturing process as part of an iterative
materials planning approach. Concurrently with the evolution of MRP II,
manufacturing companies (predominantly in Japan) developed a management
technique which emphasizes the supply of component parts to "assembly-
oriented" manufacturing plants on a "just-in-time" basis. This technique
not only was the first to emphasize "time" in its orientation, but also
had other desirable outcomes for manufacturers, including improved
quality, lower costs and lower inventory levels.
In the 1990's, new management approaches for manufacturing
companies have emerged which focus on "time" as the critical element in
the manufacturing process. In these management approaches, the
manufacturer analyzes the component of time across its entire organization
with the goal of correlating the expenditure of time to the addition of
value to the finished product or service. Beyond the production focus of
the "just-in-time" environment, this new approach focuses on time in all
areas of the operation from engineering to manufacturing and from customer
order processing to shipment. This new approach differs from MRP II in
that it often focuses on improving business operations by treating plant
capacity and labor resources as the primary scheduling items and treating
material availability as a secondary consideration in manufacturing
planning. The new approach emphasizes "operations decision-making"
support in contrast to the planning emphasis of MRP II and more recently
developed planning systems such as Enterprise Resource Planning ("ERP").
In addition, a category of information systems has been identified as
Manufacturing Execution Systems which compliments ERP systems by making
available real-time information from the factory floor and enhancing
production performance and decision-making associated with plant
operations. EMS believes that these Manufacturing Execution Systems
represent a relatively new marketplace with substantial benefit potential
for manufacturers. EMS believes that this "time emphasis" in
manufacturing management, which is the focus of EMS' TCM/R/ and
FACTORYnet/R/ I/S products, will be an essential component of the
management approach for many manufacturers in the future.
During 1997, the Gartner Group of Stamford, Connecticut included
EMS in its evaluations for North American mid-market ERP solutions, Shop
Floor Control solutions and Computerized Maintenance Management Systems.
In these evaluations, EMS compared favorably relative to many of its
competitors. EMS was also the only corporation within the industry to have
a product offering evaluated in all three of these areas for discrete
manufacturing. Management believes this reflects the fact that EMS is the
only provider currently offering software for all of these dimensions of a
discrete manufacturer.
Strategy
EMS' objective is to grow as a leading provider of integrated
business software systems for discrete manufacturing plants within its
target market. EMS has identified three strategic initiatives to achieve
this goal.
Focus on Time Critical Manufacturing. EMS believes that
manufacturers are striving to become more "time competitive," and that
manufacturing software which focuses solely on providing information for
planning and on recording information for historical analysis will be
inadequate to meet the needs and demands of manufacturers in the years to
come. To be effective in the future, EMS believes that manufacturing
software will be required to empower individuals at all levels of an
organization to make immediate decisions regarding production processes
and business activities. Since 1988, EMS has focused its resources on
developing software to assist time-oriented manufacturing management.
EMS' software facilitates real-time decision-making by employees enabling
them to change processes proactively and react quickly to marketplace
demands and unanticipated events. With few exceptions, EMS believes that
the limited number of information system implementations currently in
place which have this "time" focus have been developed on an individual
customized basis. EMS is not aware of other major products available in
its target market for discrete manufacturers which offers both planning
and execution systems and has a strategy of focusing on time.
Commitment to Manufacturing Execution Systems. EMS believes
that discrete manufacturers can gain significant competitive advantage by
implementing Manufacturing Execution Systems. These systems bring
together the data and information from ERP Systems, Industrial Control
Systems, and Engineering Systems as illustrated below.
[FIGURE OMITTED]
[Description of omitted figure: This figure illustrates the
necessary integration of data and information throughout the manufacturing
organization. The functional areas of engineering, manufacturing business
systems, and office automation depend on information from each other to
perform efficiently and with quality. Separate software solutions for each
of these functional areas causes quality loss through communications errors,
time loss through redundant entry of data, and incompatibilities of
necessary data.]
EMS offered its first Manufacturing Execution System package in
1988 and believes that it is currently a leader in this software segment.
Typical business functions included in a Manufacturing Execution System are
described below (see - "Time Critical Manufacturing - - EMS Software
Products"). Although the people in an organization which use this
software on a minute-to-minute and hour-to-hour basis are the factory
operations personnel, EMS believes that the value manufacturers realize
from implementing a Manufacturing Execution System extends far beyond this
realm. EMS believes, based on the experience of its 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. EMS currently offers 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 EMS personnel use Manufacturing Execution
System software to "round out" and complete partial manufacturing
execution system initiatives already undertaken by the customer. AMR
reported in December 1995 that Manufacturing Execution System software
packages had at that time penetrated the U.S. market by the percentages
set forth below:
Industry % Penetration
Electronics 7%
Discrete 4%
Repetitive 0%
Management believes Manufacturing Execution Systems provide a significant
market opportunity for EMS and, correspondingly, has strategically
committed EMS to enhancing its Manufacturing Execution System offerings
and marketplace presence.
Emphasis on Pre-Integrated Software for Discrete Manufacturing.
EMS' experience in the marketplace resulted in the 1995 introduction of
the first "pre-integrated" ERP/Manufacturing Execution System/Controls
software offering for discrete manufacturers. This pre-integration
initiative was facilitated by the acquisition of Intercim Corporation. The
figure set forth below illustrates three risk and capital capacity curves
which relate to the eras of "custom" software, "custom systems integrated"
software, and "pre-integrated" software.
[FIGURE OMITTED]
[Description of omitted figure: This figure illustrates the
evolution of business software and the relationship of risk/capital
capacity to corporation size. "Custom" software systems and "Custom
System Integrated" software systems represent the past and current eras
of software development and implementation. Formerly, only large
corporations could afford the cost and risk of customized software. Today,
with pre-integrated software from EMS, all manufacturers can enjoy the
benefits of enterprise-wide solutions without the customization risk.]
The illustration depicts how, in the first era of "Custom" software, only
large corporations could afford the risk and capital outlays necessary to
develop such software. Results from these software investments were mixed
and implementation times generally spanned from five years to infinity.
During the 1980's the industry entered its second era of "Custom Systems
Integrated" software. During this era, which actually spans from the mid-
1980's until the present time, systems integration organizations worked
with manufacturing companies to procure software components (for example,
ERP, Statistical Process Control, Plant Maintenance, etc.) and integrated
them on a custom basis for a given facility or corporation. The advent of
this era dramatically reduced risk and capital capacity and for the first
time made such products affordable for mid-sized corporations.
Implementation time frames were reduced to three to five years. This
approach represents the state-of-the-art for many manufacturers today.
EMS introduced the "pre-integrated" era in 1995 when it offered the first
pre-integrated software package for discrete manufacturers. Software pre-
integration means that a customer can buy a comprehensive set of software
from EMS which has already been integrated and proven to function. The
various software components may be built by EMS or suppliers to EMS. In
the case where there are suppliers to EMS, EMS has generally established
alliances so that it can have design influence over the software. The
pre-integration package also contemplates that other software, for
example, Computer Aided Design systems, may already be in place at the
customer site. "Off-the-shelf interfaces" for popular Computer Aided
Design systems which once again are proven in advance are available to
facilitate interaction with these software products. The figure above
illustrates that pre-integrated software reduces risk and cost for the
manufacturing company and also allows manufacturers of varying sizes to
take advantage of the features offered by the software. Implementation
time frames for pre-integrated software are between nine and eighteen
months. EMS plans to continue to focus on the pre-integrated software
marketplace. During 1996, Version 5.3 of TCM/R/ became the first industry
product to span the business functions from ERP through Manufacturing
Execution Systems to Statistical Process Control (SPC) and Direct
Numerical Control (DNC) as illustrated below. This was followed in 1997
by Version 6.0 of TCM/R/, which brought this functionality into a
Graphical User Interface (GUI) product, which improved the software's
ease of use.
[FIGURE OMITTED]
[Description of omitted figure: This figure illustrates the
integration of ERP, MES, Controls, SPC, and actual physical devices on the
shop floor. The figure shows the inter-relationships of these systems
and actual physical devices on the shop floor. The figure shows the inter-
relationships of these systems and the necessary feedback loops. The
figure illustrates the value of integrated solutions through pre-defined
communications between various software systems.]
EMS believes that "pre-integration" of much of this software
reduces the time and cost of system implementations and increases the
business value to the manufacturer similar to the way that "suites" of
desktop software have affected that marketplace as compared to custom
integration of word processing, data base, and spreadsheet desktop
products.
Software Products
EMS develops, markets and supports TCM/TM/ application software
for discrete manufacturing companies. EMS currently offers licenses for
two software products: (a) TCM/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. EMS' software
products are intended to provide a set of "tactical tools" which will
enable the customer to achieve its strategic goals by correlating the
expenditure of time to the addition of value to the finished product or
service.
EMS' products are designed for discrete manufacturers, including
both stand-alone manufacturing plants and autonomous divisions of large
corporations. "Discrete" manufacturers assemble or fabricate parts into
finished products as distinguished from "process" manufacturers which mix,
separate and otherwise combine or control ingredients to create finished
products. EMS' focus on discrete manufacturers includes the market
segments of repetitive and electronics manufacturers which some people
identify as additional market segments.
Time Critical Manufacturing -- EMS Software Products
EMS software provides assistance for a broad range of tasks identified in
the six categories set forth below. The TCM/R/ product can include
software from all of these six categories. TCM/R/ and FACTORYnet/R/ I/S
provide different capabilities within the Manufacturing Execution System
and Decision Support Tools categories described below. EMS has plans that
over time the two Manufacturing Execution System product offerings will
evolve into a single product which is more comprehensive than either of
the current Manufacturing Execution System offerings.
Time Critical Manufacturing Software Suites
I. PLANNING
Master Production Scheduling Manufacturing Resource Capacity Planning
Planning II
Forecasting Interface
II. PRODUCT DATA MANAGEMENT
Product Configurator Engineering Change Control Standard Bills of Material
Standard Routings Computer Aided Document Library
Manufacturing ("CAM")
Item Master Computer Aided Design Standard Cost Build Up
("CAD") Interface
III. SUPPLY CHAIN MANAGEMENT
Customer Service Inventory Control Procurement
Estimate/Quote Inventory Management Requisitions
Customer Maintenance Distribution Management Vendor Maintenance
Customer Order Processing Purchase Orders
Shipping Vendor Performance
Liability & Warranty Electronic Data Interchange ("EDI")
Electronic Data Interchange
("EDI")*
IV. MANUFACTURING EXECUTION SYSTEM
Shop Floor Management Job Cost
Bar Code Factory Data Time & Attendance
Collection
Plant & Equipment Maintenance Shop Fllor Scheduling
"As Built History" Quality Management*
Electronic Traveler Machine Interface
Messaging & Alarms EMS Gateway
Electronic Work Instructions
Distributed Numerical Control
("DNC")
V. FINANCE, ACCOUNTING AND ADMINISTRATION
Accounts Receivable General Ledger Fixed Assets*
Accounts Payable Human Resources*
Standard Cost Payroll*
VI. DECISION SUPPORT TOOLS
Executive Information System Document Library
Report Writer E-Mail
Database Internet
Notification Services ODBC Access
* These Products Are Provided Based On Third Party Sublicensing
Alliances.
I. Planning. The planning modules provide master
production scheduling capability integrated with rough cut capacity
planning to assist production organizations in planning materials
requirements and manufacturing resource levels for the manufacturing
facility.
II. Product Data Management ("PDM"). PDM modules allow for
product definition and control of engineering changes and
relationships among component parts. These modules include software
which interface with industry popular Computer Aided Design ("CAD")
systems and offer Computer Aided Manufacturing ("CAM") software.
III. Supply Chain Management.
Customer Service. Modules provide control over the
customer order cycle, including quotations, order entry,
acknowledgment printing, pick ticket printing, shipping and
invoicing. These modules allow for flexible pricing tables and
multiple order types, including telephone orders, blanket orders and
releases, over-the-counter orders and credit memos. EMS believes
that its software for EDI, which facilitates electronic order entry
and advance shipping notification, is particularly useful in meeting
the needs of the automotive and retail supply industries.
Inventory Management. The Inventory Management
modules provide engineering data control and offer inventory
recordkeeping, availability projections and replenishment planning.
These modules provide bin, lot and serial number control, multi-
location support, cycle counting and physical inventory control.
Procurement. The Procurement modules provide
control of the purchasing cycle, including authorized vendor price
quotations, purchase order entry and printing, receipts entry and
vendor performance analysis. These modules coordinate blanket
orders and releases, one-time purchase orders, orders for non-
productive materials and electronic mail notification upon receipt.
IV. Manufacturing Execution System. The TCM/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 NC/CNC machine
tool and/or CAD systems. The products also include quality systems
integration for statistical process control ("SPC") 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 the EMS software.
V. Finance, Accounting and Administration. These modules
provide general accounting and financial assistance in tracking and
estimating planned and actual work-in-process costs. Any
information from the finance and accounting database may be readily
pulled into personal computer spreadsheet systems for further
analysis and reporting. These modules also interface with third
party human resource, fixed assets, and payroll software products
sold by EMS.
VI. Decision Support Tools. These software modules are a
combination of internally developed and third party software sold by
EMS which facilitate easy data management, analysis, customization,
communication, etc., with and between the EMS software and other
software in the customer's computing environment.
EMS software modules may be licensed individually or in
combination to allow companies with differing business needs and
schedules to have flexibility in the implementation of the software
system. Customers generally license between $30,000 and $1,000,000
of software per plant, with the total license fees per plant based
on the modules licensed and a per seat license fee.
Software Technology
EMS invests in a wide range of software technologies
which are important not only for the EMS end user customer but also
for EMS' internal software development and distribution. In
appropriate circumstances, EMS has licensed software developed by
others and integrated various features of that software into its own
software products. For example, EMS' software products incorporate
imaging technology, which enables the user to store and
interactively display images such as photographs of steps in a
particular production process, diagrams of manufacturing sub-
assemblies or motion video depicting the proper operation of a
machine. This imaging capability facilitates manufacturing and
production set-up and also assists users in satisfying ISO 9000
certification criteria (a set of international quality standards).
EMS' products also include EDI, which facilitates electronic order
entry and advance shipping notification.
For internal software development, EMS employs 4GL sets
of development tools which EMS believes are instrumental in
achieving software productivity improvements and allow end users
flexibility to customize their software systems. EMS has also
developed proprietary software which facilitates the conversion of
EMS' software products into various foreign languages, including
complex Asian languages. EMS believes that this technology is
useful not only in penetrating foreign software markets, but also in
assisting customers which use EMS' software products on a multi-
national basis.
For a further discussion of EMS' ongoing efforts to
develop new software technologies, see "- Product Development."
Customer Services
EMS offers comprehensive services for customers.
Services provided by EMS include a telephone support program, system
integration, custom software development, implementation consulting,
and formal classroom and on-site training. At the customer's
option, these services, which are available for both of EMS'
software products, can be provided entirely by EMS or may be
supplied in part by the customer or another third party such as a
systems integrator or consulting firm. These services, which
provide a recurring stream of revenue for EMS, are offered on an
unbundled basis for either an annual or a multi-year subscription
period. All of the services offered by EMS are optional, except
that EMS requires first-time licensees of its software to subscribe
for at least two years of telephone support. EMS believes that the
availability of effective customer services is critical for customer
satisfaction and to increase software license fee revenues. EMS
further believes that services can provide a continuing and more
predictable source of revenue as compared to software license fee
revenues. For the years ended November 30, 1995, 1996 and 1997,
services revenues accounted for 37.8%, 37.4%, and 39.4% of EMS'
total net revenues, respectively.
The following is a brief description of the various
services provided by EMS:
Telephone Support Program. EMS' telephone support
program is a comprehensive, fee-based program designed to help
customers obtain the maximum benefit from EMS' business management
software. The telephone support program is handled out of EMS'
Minnesota, Illinois, and Wisconsin offices and is staffed by 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. EMS
offers system integration and custom software development services,
on a fee basis, to meet specific customer requirements and to
integrate its software with a customer's existing computer system.
EMS has developed a Time Critical Implementation Methodology
("TCIMJ"), which is a proprietary implementation methodology
intended to facilitate integration and efficient implementation of
EMS' products at customer sites. This approach is designed to allow
the customer to obtain business benefits sooner than with less
structured methodologies. Ongoing technical support is also
available from EMS to all customers who elect to purchase custom
software development services.
Implementation Consulting. EMS provides consulting
services, on a fee basis, to assist customers in implementing EMS'
software systems using the TCIMJ approach. These services include
value-added implementation planning, project management and
specialized customer training. EMS employs a full-time professional
services staff to provide these and other services.
Training. EMS offers customers a series of both
classroom and on-site training options. Training includes classroom
and personal instruction at a number of EMS' locations or at the
customer's plant site. Standardized training is offered for a fixed
fee per class.
Hardware Products
EMS sells computer hardware and data collection
equipment in order to facilitate sales of its software products to
customers requiring a complete management information system. EMS
sells, among other hardware, factory data collection equipment,
CAMates/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. EMS also offers its customers networking and
communication hardware and server and client computing hardware
which EMS purchases from original manufacturers, including Intermec
Corporation, plus two distributors, Keylink SystemsSM and Ingram
Micro, Inc. During the past several years, EMS has focused its
efforts on generating an increasing percentage of its net revenues
from software license fees, which have a higher margin than hardware
revenues.
Markets and Customers
EMS targets companies operating discrete manufacturing
plants in the United States, Canada, the Pacific Rim, and Europe.
These plants may be owned by privately held companies or by large,
multi-national public corporations. EMS' customers include, among
others, capital equipment manufacturers, job shops, high volume
manufacturers, automotive suppliers, consumer product manufacturers,
and aerospace equipment manufacturers. Based on December 1995 data
compiled by AMR, there are approximately 24,000 discrete
manufacturing plants in the United States. EMS believes that there
are at least as many discrete manufacturers within this section of
the market outside of the United States. During each of the past
three fiscal years, no one customer has accounted for more than 10%
of EMS' total net revenues.
Sales and Marketing
In the United States and Canada, EMS licenses its
products and offers services through a direct branch office sales
force, joint ventures and independent distributors as reflected in
the table below:
Branch Office Locations
-Austin, TX
-Baltimore, MD
-Boston, MA
-Chicago, IL
-Cincinnati, OH
-Detroit, MI
-Green Bay, WI
-Houston, TX
-Indianapolis, IN
-Los Angeles, CA
-Milwaukee, WI
-Minneapolis, MN
-Norwalk, CN
-Philadelphia, PA
-Port St. Lucie, FL
-Rockford, IL
-San Jose, CA
Independent Distributor Territories
-Camarillo, CA
-Miller Place, NY
-Menominee, MI
-Pittsburgh, PA
-Wausau, WI
-West Des Moines, IA
Joint Venture Location
-Cleveland, OH
EMS owns 50% of the joint venture operating in Cleveland. EMS
obtained its interest in this joint venture primarily in exchange
for technical knowledge and management expertise. EMS has no
obligation to fund any losses that may be incurred by the joint
venture.
EMS' direct sales personnel are compensated on a salary
plus commission basis. EMS' joint venture and independent
distributor agreements generally provide that sales will be made by
authorized resellers from offices within a designated territory.
The agreements obligate EMS to license the reseller at specified
prices and to provide training to each reseller. Resellers are
normally obligated to sell a specified minimum amount of EMS'
software to keep the agreements in effect. EMS also maintains a
staff of systems consultants who offer pre- and post-sales support
to the sales and distribution network.
EMS markets its products through advertising campaigns
in national trade periodicals and through direct mailings. These
efforts are supplemented by listings in relevant directories and
trade show and conference appearances. EMS is also given leads
regarding potential customers by its hardware and services vendors,
existing customers and various accounting and consulting firms.
Sales cycles for EMS' products vary substantially based
on the degree of integration, consulting and training required and
also on the status of the customer's hardware system implementation.
A sales cycle is usually three to twelve months from the time an
initial sales presentation is made until the time a signed license
agreement is entered into with a customer.
In addition to its domestic markets, EMS over the last
several years has begun efforts to develop a market for its products
in the Pacific Rim and Europe. EMS has established independent
distributor relationships in Japan, South Korea, The Peoples
Republic of China, the United Kingdom, Belgium, and Poland. In each
of these countries, EMS' software products have been or are in the
process of being converted to the local language. EMS has an office
in Hong Kong to support its Asian distributors.
Strategic Arrangements
A facet of EMS' strategy is to establish arrangements
with suppliers of state of the art information systems technology.
EMS over the last five years has worked to expand the number of its
strategic relationships.
EMS has 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. EMS has arrangements with
Intermec Corporation relating to bar code data collection systems
which are integrated on an "off-the-shelf" basis into EMS' software
products. EMS' software has been integrated with other bar coding
systems on a customized basis. EMS also has a relationship with
the Datamyte Division of Rockwell Automation for its Quantum quality
control software product line.
In addition to its relationships with equipment
providers, EMS has relationships with numerous software product
suppliers. These companies provide software which EMS uses within
its TCM/R/ and FACTORYnet/R/ I/S software. Synergex International
Corporation has provided the Synergy 4GL Applications Development
Environment since 1990. EMS purchases EDI software from Supply Tech
and Radley Corporation.
EMS' relationship with the equipment and software
product suppliers described above is basically that of a
reseller of such suppliers' products. As such, EMS is entitled
to volume discounts on products which it purchases and is
generally entitled to the benefits of cooperative marketing
programs.
Product Development
EMS believes it must continue to enhance, broaden and modify its
existing line of software products to meet the constantly evolving needs
of discrete manufacturers within its target market. EMS has relied on
internal development and development related to customized projects
implemented at field sites to extend, enhance and support its software
products, and develop and integrate new capabilities.
In general, EMS has historically made one new product release
each year. These formal releases are supplemented by periodic releases
for its EDI software to respond to ongoing changes in trading partner
requirements.
During the fiscal years ended November 30, 1995, 1996 and 1997,
EMS' total software investment (consisting of product development expenses
and capitalized software development costs) was $3.4 million, $5.6 million
and $6.9 million, respectively. Product development expenditures which
were expensed and not capitalized during those three fiscal years totaled
$1.1 million, $2.2 million and $2.4 million, respectively.
Software development efforts currently in progress include the
development of product enhancements such as additional object orientation
features within EMS' products, enhanced client-server network operations
on various operating systems, extended operation on various relational
database products, and enhanced functional capability. There can be no
assurance, however, that these development efforts will result in product
enhancements that EMS will be able to market successfully. Certain of
these enhancements are dependent upon the development efforts of third
party suppliers over whom EMS has no control. In the event the
development efforts of the third party suppliers are delayed or are
unsuccessful, the software developments of EMS would be similarly delayed.
Software development is, however, an evolutionary process and EMS
management believes it could eventually find other suppliers or, if
unsuccessful in its search, that it could successfully re-engineer
existing products to fulfill its requirements.
Competition
The manufacturing software industry is intensely competitive and
rapidly changing. A number of companies offer products similar to EMS'
products. Some of EMS' existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and
larger marketing and sales organizations and significantly greater
financial resources than EMS.
EMS believes that its employees' understanding of diverse
manufacturing operations and processes and the potential business benefits
of the TCMJ management approach to such operations allow EMS to
differentiate itself from competitors. Other competitive factors include
software product features and functions, product architecture, the ability
to function on a variety of operating systems, technical support and other
related services, ease of product integration with third party application
software, price, and performance. In December 1997, Gartner Group
identified twenty-four competitors of EMS in the North American mid-market
Enterprise Resource Planning 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, EMS generally does not encounter these competitors in the
marketplace. EMS believes that its primary competition for its
Manufacturing Execution System products are customized software products
developed by internal data processing staffs or by third party customized
software developers. None of the competitors identified by Gartner Group
had product offerings for both ERP and Manufacturing Execution System
discrete manufacturers.
Intellectual Property
EMS has registered or has applied for registration of its
"EMS/TM/" and "TCMJ" trademarks for software services and products with
the United States Patent and Trademark Office and with the equivalent
offices of most foreign countries in which EMS currently does business.
Among others, EMS has also received or applied for trademarks for products
marketed under the names FACTORYnet/R/ I/S and CAMate/R/.
EMS regards its software products as proprietary in that title
to and ownership of its software reside exclusively with EMS. EMS
attempts to protect its rights with a combination of trademark, copyright
and employee and third-party nondisclosure agreements. Despite these
precautions, it may be possible for unauthorized parties to copy or
reverse-engineer portions of EMS' software products. While EMS'
competitive position could conceivably be threatened by its inability to
protect its proprietary information, EMS believes that copyright and
trademark protection are less important to EMS' success than other factors
such as the knowledge, ability and experience of EMS' personnel, name
recognition and ongoing product development and support.
Employees
As of November 30, 1997, EMS had 349 full-time employees, of whom 79 were
engaged in sales and marketing; 78 in product development; 153 in customer
service; and 39 in management, finance and administration. EMS employees
are not represented by any collective bargaining organization and EMS has
never experienced a work stoppage. EMS considers its employee relations to
be good.
Item 2. Properties
EMS' Corporate headquarters are located in Milwaukee, Wisconsin, in a
leased office consisting of approximately 42,000 square feet under a lease
expiring November 30, 2003. EMS leases additional facilities domestically
in Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati,
Ohio; Detroit, Michigan; Hartford, Connecticut; Houston, Texas;
Indianapolis, Indiana; Minneapolis, Minnesota; Philadelphia, Pennsylvania;
Port St. Lucie, Florida; Rockford, Illinois and San Jose, California. EMS
leases office space internationally in Hong Kong, and China. Additional
space may be required within the next twelve months, but EMS believes that
suitable additional space will be available as required. See Note 7 of
the Notes to Consolidated Financial Statements for information regarding
EMS total lease obligations.
Item 3. Legal Proceedings
As of the date of this filing, neither EMS nor any of its subsidiaries is
a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material effect on EMS' results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended November 30, 1997.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The common stock and common stock warrants of EMS are traded on The Nasdaq
Stock Market under the symbols EMSI and EMSIW, respectively.
The table below represents the high and low sales prices for the EMS
common stock and warrants as reported on The Nasdaq Stock Market for
fiscal 1996 and 1997:
Common Stock Warrants
1996 High Low High Low
First Quarter $ 5-3/4 $ 4-1/4 $ 2-1/8 $ 1-1/4
Second Quarter $ 7-3/4 $ 4-1/4 $ 3 $ 1-1/4
Third Quarter $ 8 $ 5-1/4 $ 3-1/8 $ 2-1/2
Fourth Quarter $ 8-1/4 $ 5-1/4 $ 3-1/4 $ 2-1/2
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
As of February 1, 1998, there were 446 shareholders of record of EMS's
common stock and 306 holders of record of the warrants. EMS has not
declared or paid cash dividends on its common stock in the past, and
currently intends to retain any earnings for use in its business.
Therefore, EMS does not anticipate paying any cash dividends in the
foreseeable future. EMS's credit facility also contains provisions
limiting its ability to pay cash dividends.
Item 6.
Selected Financial Data (In thousands, except per share data)
Year ended November 30
1993 1994 1995(4) 1996 1997
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $ 7,146 $10,163 $11,534 $19,094 $21,752
Services $ 5,928 $ 7,256 $10,962 $15,412 $16,781
Hardware $ 6,220 $ 5,245 $ 6,528 $ 6,751 $ 4,112
======== ======= ======== ======= =======
Total net revenues $19,294 $22,664 $29,024 $41,257 $42,645
Cost of products and services:
Cost of third party software license fees $ 405 $ 797 $ 1,419 $ 2,484 $ 3,065
Software development amortization $ 342 $ 515 $ 879 $ 1,591 $ 2,535
Cost of services $ 3,898 $ 4,467 $ 7,884 $ 12,109 $ 14,000
Cost of hardware $ 4,752 $ 4,146 $ 5,118 $ 4,979 $ 3,260
======== ========= ======== ======== ========
Total cost of products/services $ 9,397 $ 9,925 $15,300 $21,163 $22,860
Gross Margin $ 9,897 $12,739 $13,724 $20,094 $19,785
======== ======= ======= ======= =======
Selling and marketing expenses $ 5,546 $ 7,407 $ 9,479 $14,060 $15,957
General and administrative expenses $ 2,038 $ 2,227 $ 3,029 $ 3,416 $ 3,838
Software development expenses (1) $ 621 $ 752 $ 1,086 $ 2,235 $ 2,391
======== ======== ======== ======== ========
Total Operating Expenses $ 8,205 $10,386 $13,594 $19,711 $22,186
Operating income (loss) $ 1,692 $ 2,353 $ 130 $ 383 $ (2,401)
Other income (expense) $ (32) $ 342 $ 80 $ (118) $ (377)
Income (loss) before income taxes $ 1,660 $ 2,695 $ 210 $ 265 $ (2,778)
Income tax expense (benefit) $ 650 $ 975 $ 79 $ 112 $ (618)
======== ======== ========= ========= ========
Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160)
Net income per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ (0.53)
======== ======== ========= ========= ========
Weighed average common and common equivalent
share outstanding (2) 2,574 3,268 3,669 3,965 4,048
Other Statistical Data:
Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862
Software investment as a percentage of
software license fees 18.4% 18.3% 29.5% 29.4% 31.6%
Balance Sheet Data:
Working Capital $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785
Capitalized software development
costs, net $ 1,271 $ 1,861 $ 4,000 $ 5,781 $ 7,717
======== ======== ======== ======== ========
Total assets $ 8,043 $17,903 $24,332 $27,446 $28,797
Long-term obligations $ 580 $ 50 $ 21 $ 2,123 $ 3,966
Stockholder's equity $ 1,541 $ 10,354 $ 14,177 $ 14,597 $ 12,573
(1) Does not include capitalized software development costs of $691, $1,105, $2,321, $3,372, and $4,471 recorded for the
years ended November 1993, 1994, 1995, 1996, and 1997, respectively.
(2) Weighed average common and common equivalent shares outstanding for the periods shown include the effect of common
stock equivalents, if dilutive.
(3) Software investment consists of product development expense and capitalized software development costs.
(4) Includes results of Effective Management Systems of Illinois, Inc. and Intercim Corporation since being acquired
effective March 31, 1995 and September 6, 1995, respectively.
CONDENSED QUARTERLY RESULTS (UNAUDITED)
(In thousands, except per share data)
The following table sets forth certain unaudited condensed operating results
for each of the eight quarters in the two-year period ended November 30,
1997. This information has been prepared by EMS on the same basis as the
Consolidated Financial Statements appearing elsewhere in this report and
includes, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information when read in conjunction with the Consolidated Financial
Statements and notes thereto included elsewhere herein. EMS's operating
results for any one quarter are not necessarily indicative of results for
any future period.
Three Months Ended
Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30
1996 1996 1996 1996 1997 1997 1997 1997
Statements of
Operations Data:
Net Revenues:
Software license fees $ 3,675 $ 4,255 $ 4,040 $ 7,124 $ 4,211 $ 5,317 $ 4,963 $ 7,261
Services $ 3,617 $ 3,780 $ 3,755 $ 4,260 $ 4,246 $ 4,020 $ 4,095 $ 4,420
Hardware $ 2,351 $ 1,668 $ 1,278 $ 1,454 $ 1,018 $ 1,045 $ 624 $ 1,425
======== ======== ======== ======== ======== ======== ======== ========
Total Net Revenues $ 9,643 $ 9,703 $ 9,073 $12,838 $ 9,475 $10,382 $ 9,682 $13,106
Cost of Products & Total
Operating Expenses
$ 9,818 $ 9,861 $ 9,616 $11,579 $10,910 $10,957 $10,687 $12,492
======== ======== ======== ======= ======= ======= ======= =======
Operating income (loss) $ (175) $ (158) $ (543) $ 1,259 $ (1,435) $ (575) $ (1,005) $ 614
Net income (loss) $ (91) $ (87) $ (333) $ 664 $ (883) $ (381) $ (1,044) $ 148
Net income per share $ (.02) $ (.02) $ (.08) $ 0.17 $ (0.22) $ (0.09) $ (0.26) $ 0.04
Weighed average common and
equivalent shares outstanding 3,932 3,950 3,973 4,006 4,025 4,041 4,054 4,048
-------- ------- ------- ------- -------- -------- -------- --------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation (for the fiscal years ended November 30, 1997,
1996, and 1995)
Overview
Effective Management Systems, Inc.("EMS" or the "Company") 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 operation
was due in part to the delayed introduction of version 6.0 of the
Company's TCM software product as well as increased service costs
associated with the implementation of new products and technologies. On
November 26, 1997, the Company released version 6.0 of its TCM product
which management believes will positively impact the Company's position in
the market. TCM version 6.0 of the Company's product basically completed
the application of a Windows compliant interface, the lack of which had
negatively impacted software sales in the past. Also in fiscal 1997, the
Company initiated a cost reduction program (the "1997 Cost Reduction")
with the goal of reducing costs by $2 million per annum. The Company also
announced a restructuring of executive management, which included the
departure of two executives. The results of both these cost reductions
are expected to be fully realized as fiscal 1998 progresses.
The Company recorded a small increase in net income for fiscal 1996
compared with fiscal 1995. The increase was mainly the result of the
introduction of new products and technologies along with the expansion of
new market channels. During fiscal 1996, the Company became the first
pre-integrated supplier of manufacturing software to fully integrate
customer service, engineering, production control, dispatching, quality
control and machine tool communication.
Effective March 31,1995, the Company acquired the remaining 50% interest
(in addition to the 50% interest previously owned) in Effective Management
System of Illinois, Inc. ("EMS-ILL") for a cost of approximately $793,000
in Company common stock, cash, and related direct acquisition costs. The
acquisition was accounted for as a purchase and resulted in the Company
recording $395,000 of goodwill, which is being amortized over a twenty-
year period.
On September 6, 1995, the Company acquired all of the common stock of
Intercim Corporation ("Intercim") for a cost of approximately $3,355,000
in Company common stock , warrants and related direct acquisition costs.
The warrants have a ten-year term and an exercise price of $6.75. The
acquisition was accounted for as a purchase. Goodwill of $1,437,000
resulted from the transaction, which is being amortized over a twelve-year
period. The acquisitions of EMS-ILL and Intercim are herein referred to
as the "1995 Acquisitions".
Results of Operations
Total Revenue
Total revenue for fiscal 1997 increased 3.4% to $42,645,000 from
$41,257,000 in fiscal 1996 and grew 42.2% from $29,024,000 in fiscal 1995
to fiscal 1996. The mix of software, services, and hardware revenues was
51.0%, 39.4%, and 9.6%, respectively, in fiscal 1997 as compared to 46.3%,
37.4%, and 16.3%, respectively, in 1996, and 39.7%, 37.8%, and 22.5%,
respectively, in 1995. The growth in software and service revenues as a
percentage of total revenues during these years was the result of a
strategic decision by the Company to focus its marketing and selling
efforts on generating an increased percentage of its 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
the Company's software products. These 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. Software license fee revenues increased to
$19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995
Acquisitions accounted for $4,623,000 of the fiscal 1996 increase in
revenues. Exclusive of the revenues from the 1995 Acquisitions, the
increase in software license fees during fiscal 1996 was mainly the result
of new sales from a marketing relationship with International Business
Machines Corporation, the hiring of additional sales personnel, and
increased productivity of existing sales personnel.
Service Revenues
The Company offers both mandatory and optional services to its customers.
Services provided include a telephone support program, systems
integration, custom software development, implementation consulting, and
formal classroom and on-site training. Service revenues increased 8.9% to
$16,781,000 in fiscal 1997 from $15,412,000 in fiscal 1996. Service
revenues increased 40.6% to $15,412,000 from $10,962,000 in fiscal 1995.
These increases were primarily due to growth in the customer base and
normal price increases. Of the increase in fiscal 1996, $4,496,000 was
attributable to the 1995 Acquisitions.
Hardware Revenues
As an option, the Company sells computer hardware manufactured by others,
along with the Company's software and services, to provide its customers
"integrated" solutions to their management information system needs.
Hardware revenues decreased 39.1% to $4,112,000 in fiscal 1997 from
$6,751,000 in fiscal 1996. The decrease was mainly due to increased sales
of software on platforms for which the Company does not supply hardware.
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. The Company has developed relationships with
various system integrators which sell the hardware and provide these
value-added hardware services. Hardware revenues increased 3.4% to
$6,751,000 in fiscal 1996 from $6,528,000 in fiscal 1995. This increase
was primarily attributable to the 1995 Acquisitions.
Cost of Third-Party Software License Fees
Most of the Company's system sales also include the sale of a report
writer, a word processor, and/or other software components provided by
outside suppliers. The integration of these products into the Company's
software products generally requires that the Company pay royalties to
these suppliers. Cost of third-party software license fees increased to
$3,065,000 in fiscal 1997 from $2,484,000 in fiscal 1996, and from
$1,419,000 in fiscal 1995. Since these third-party software products are
generally sold in conjunction with the Company's software license, the
increase was primarily attributable to a rise in the level of the
Company's software license fees. In fiscal 1996, the 1995 Acquisitions
added $470,000 to the cost of third-party software license fees.
Software Development Amortization
Software development amortization represents the amortization of past
investments made by the Company in product development. Software
development amortization increased from $879,000 in fiscal 1995 to
$1,591,000 in fiscal 1996, and to $2,535,000 in fiscal 1997. In 1994, the
Company made a decision to significantly advance software products and
technologies. This strategic decision resulted in a substantial increase
in the Company's investment in software product development. During the
three-year period ended November 30, 1997 and prior to the final
completion of the software products, growth in software development
amortization exceeded the growth of software license fees.
Cost of Services
Cost of services as a percentage of related revenues increased to 83.4% in
1997 from 78.6% in 1996. The main reasons for the increases include
allocation of resources to assist in developing new product, educational
costs related to new products and technologies, training costs associated
with new personnel, increased costs related to warranty work, and the
costs of establishing a sales and service presence in China ($245,000).
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 services as a percentage of related revenues increased to 78.6% in
fiscal 1996 from 71.9% in fiscal 1995. The increase was attributable to a
rising cost of labor; additional management expense relating to expanding
the service organization; additional expenses to further develop a
worldwide learning initiative related to new selling relationships (3.5%
of related revenues in fiscal 1996); and the training expense related to
newly-hired employees.
Cost of Hardware
Cost of hardware as a percentage of related revenues increased to 79.3% in
fiscal 1997 compared to 73.8% in fiscal 1996. Cost of hardware as a
percentage of hardware revenues decreased to 73.8% in 1996 from 78.4% in
fiscal 1995. Cost of hardware as a percentage of related revenues varies
with the amount of price discounting, the proportion of high margin
hardware sales where the Company brings technical expertise to the
process, and the proportion of customers who purchase low margin hardware
from the Company. Cost of hardware as a percentage of related revenues
can rise or fall depending on the mix of these factors. 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 the Company's
joint ventures and affiliates, which were $534,000, $1,264,000, and
$1,091,000 in fiscal 1997, 1996, and 1995, respectively. Commencing
January 1, 1996, the Company began charging 11% over cost on hardware
sales (previously sold at cost) to EMS Solutions, Inc., an affiliated
entity owned by certain officers of the Company, to match similar terms
offered to the Company's joint ventures. In June, 1997, EMS Solutions,
Inc. ceased the purchase of hardware from the Company and began sourcing
the hardware through non-affliated outside vendors. Sales of hardware to
EMS Solutions, Inc. were $331,000 in fiscal 1997, $851,000 in fiscal 1996
and $926,000 in fiscal 1995.
Net Product Development Expenses
Product development expenses, net of amounts capitalized, increased from
$1,086,000 in fiscal 1995 to $2,235,000 in fiscal 1996 and to $2,391,000
in fiscal 1997. These increases were mainly the result of the Company's
strategic initiative to increase investment in the development of future
products, including the incorporation of various new technologies into the
Company's software products. The 1997 Cost Reduction lowered new product
development expense by $876,000 through reduction of the use of third-
party consultants and a work force reduction. Management does not expect
the reductions to impair the Company's research and development since
such cost reductions represent a reduction in a temporary ramp-up to
speed delivery of version 6.0 of the Company's software and a reduction in
the number of consultants retained in respect to a customer project which
was subsequently discontinued by the customer. In fiscal 1996, the 1995
Acquisitions added $659,000 to product expense, excluding $1,329,000
which was capitalized in accordance with Statement of Financial Standards
(SFAS) No. 86. Management expects product development expense to
stabilize in 1998 as efforts relating to the incorporation of certain new
technologies concludes. Total development expense (defined as net
development expense plus amounts capitalized) increased to $6,862,000 in
fiscal 1997 from $5,607,000 in fiscal 1996 and from $3,407,000 in fiscal
1995. These expenses expressed as a percent of related software revenues
were 31.6%, 29.4% and 29.5% in fiscal 1997, 1996 and 1995, respectively.
Selling and Marketing Expenses
Selling and marketing expenses increased to $15,957,000 in fiscal 1997
from $14,060,000 in fiscal 1996 and $9,479,000 in fiscal 1995. As a
percent of gross margin (total net revenues minus total costs of products
and services), selling and marketing expense increased from 70.0% to
80.7% between fiscal 1996 and fiscal 1997, and from 69.1% to 70.0% between
fiscal 1995 and fiscal 1996, respectively. 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) concern of prospective
customers regarding the Company's negative operational 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 work force reduction.
The 1995 Acquisitions accounted for $1,756,000 of the increase in the
selling and marketing expenses in fiscal 1996.
General and Administrative Expenses
For fiscal 1997, general and administrative expense increased to
$3,838,000 from $3,416,000 in fiscal 1996 and from $3,029,000 in fiscal
1995. As a percent of gross margin (total net revenues minus total costs
of products and services), these expenses were 22.0%, 17.0% and 19.4% in
fiscal 1995, 1996 and 1997, respectively. 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.
The 1995 Acquisitions increased general and administrative expense by
$1,009,000 in fiscal 1996. Other primary reasons for the increase in
fiscal 1996 compared to fiscal 1995 include additional depreciation from
rising levels of capital purchases ($161,000); added support personnel for
system and facilities needs ($71,000); and additional administrative costs
attributable to the growth in hardware and service revenues.
Other Income/Expense
Other income/expense provided $377,000 of expense for fiscal 1997 compared
with $118,000 of expense for fiscal 1996 and $80,000 of income for fiscal
1995. Equity losses from affiliates were $25,000 in fiscal 1997 compared
with $25,000 of income for fiscal 1996 and $31,000 of losses in fiscal
1995. The equity earnings for fiscal 1995 declined , in part, due to the
merger with EMS-ILL, which resulted in reduced equity earnings from this
former joint venture. Interest expense and interest income were $399,000
and $47,000, respectively, in fiscal 1997; $145,000 and $89,000,
respectively, in fiscal 1996; and $52,000 and $176,000, respectively, in
fiscal 1995. The decrease in interest income and the simultaneous rise in
interest expense were mainly due to the Company's reduction in cash and
short-term assets to fund investments in products, distribution channels,
and service infrastructure. The Company anticipates that interest expense
will continue to rise in the short-term with continued application of cash
for operating and capital expenditure purposes.
Income Tax Expense
The effective income tax benefit rate was 22.2% for fiscal 1997 versus an
effective income tax rate of 42.3% for fiscal 1996 and 37.6% for fiscal
1995. In fiscal 1997, the Company recorded a valuation allowance equal to
100% of the net deferred tax assets based on uncertainty regarding
realization of such assets and thereby reduced the amount of tax benefit
recorded by $329,000. In fiscal 1996, the effective income tax rate was
higher than in fiscal 1995 due to reduced tax-exempt interest income and
non-deductible meals and entertainment expenses.
Liquidity and Capital Resources
Cash provided by operations was $1,733,000 in fiscal 1997, $2,906,000 in
fiscal 1996 and $1,915,000 in fiscal 1995. Non-cash expenditures,
including both depreciation relating to capital expenditures and
amortization associated with software product development, contributed to
the cash provided.
Investment activities used cash of $5,363,000 in fiscal 1997 compared to
$4,163,000 of cash in fiscal 1996 and $1,850,000 of cash in fiscal 1995.
The cash was used to fund capital expenditures of $1,177,000, $1,424,000,
and $1,430,000 in fiscal 1997, 1996, and 1995, respectively, and to fund
investment in capitalized software product development of $4,471,000,
$3,372,000 and $2,321,000 in fiscal 1997, 1996, and 1995, respectively.
The Company sold $505,000 of available-for-sale securities in fiscal 1997,
$1,247,000 of available-for-sale securities in fiscal 1996, and $1,584,000
of available-for-sale securities and $743,000 hold-to-maturity
securities in fiscal 1995, which funded, in part, the capital expenditures
and capitalized product development. For fiscal 1998, the Company
estimates that capital expenditures will approximate $1,000,000 and
capitalized software product development will approximate $4,000,000.
Financing activities provided $2,778,000 of cash in fiscal 1997,
$1,788,000 of cash in fiscal 1996, and used $10,000 of cash in fiscal
1995. As of November 30, 1997, the Company had $ 2,538,000 of
availability under its then existing $6,300,000 revolving line of credit
based on the level of the Company's eligible accounts receivable. On
December 31, 1997, the Company entered into a new borrowing agreement with
Foothill Capital Corporation to replace its prior facility. The new
facility includes a $6,000,000 revolving line of credit and a three-year
term note for $3,112,500. Interest on the revolver is payable monthly
based on the bank's base rate plus .75% (9.25% on December 31, 1997); the
term note bears interest at 13.5% per year. The new agreement does
contain certain restrictive covenants relating to income (EBITDA) ,
tangible net worth and level of capital expenditures. In order to meet
these covenants, the Company will need positive operational results in
fiscal 1998. As of December 31, 1997, the Company had $3,751,000 of
availability under the new revolving line of credit.
The Company believes its cash flows from operations and funds available
under its line of credit will be adequate to finance capital expenditures
and working capital requirements for at least the next twelve months.
The Company utilizes a combination of its own software and custom written
systems for running its own operations. Based on its own evaluation, the
Company believes that there will be no significant costs associated with
ensuring year 2000 compliance of its internal systems. Since the release
of version 5.1.2 of the Company's software product, the Company's software
product has been year 2000 compliant.
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 the Company beginning December 1, 1998. SOP
97-2 addresses various aspects of the recognition of revenue on software
transactions and supersedes SOP 91-1, the policy currently followed by the
Company. 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. The
Company is currently evaluating the impact SOP 97-2 will have on the
Company's consolidated financial statements.
Note Regarding Forward-Looking Statements
Certain matters discussed in Management's Discussion and Analysis (as well
as elsewhere in the Company's Annual Report) are "forward-looking
statements" intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995.
Statements other than statements of historical fact are forward-looking
statements. Such forward-looking statements are subject to certain risks
and uncertainties which could cause actual results to differ materially
from those currently anticipated. In addition to the factors set forth in
Item 1 of Part I of this Annual Report on Form 10-K (See "Business-
Business Risk Factors"), risks and uncertainties include customer
acceptance of version 6.0 of the Company's software product, the Company's
ability to implement successfully its cost reduction initiatives,
generation of adequate cash to fund on-going research and development
needs and requirements, and maintenance of an experienced level of sales
and service personnel. Shareholders, potential investors, and other
parties are urged to consider these factors carefully in evaluating the
forward-looking statements and are cautioned not to place undue reliance
on such forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 8. Financial Statements and Supplementary Data
Effective Management Systems, Inc.
Consolidated Financial Statements
Years ended November 30, 1997, 1996 and 1995
Contents
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . 28
Consolidated Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . 31
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . 32
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 33
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the
period ended November 30, 1997. Our audits also included the financial
Statement Schedule listed in the Index at Item 14. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and schedule 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended November 30, 1997, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Ernst & Young
Milwaukee, Wisconsin
January 16, 1998
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Balance Sheets
(Dollars in Thousands)
November 30
Assets 1997 1996
Current Assets:
Cash and cash equivalents $ 14 $ 866
Investment in available-for-sale
securities (Note 3) - 505
Accounts receivable:
Trade, less allowance for doubtful
accounts of $462-1997; $346-1996 12,370 11,146
Related parties 604 693
------ ------
12,988 11,839
Refundable income taxes 312 159
Inventories 280 391
Deferred income taxes (Note 10) - 175
Prepaid expenses and other current assets 146 174
------ ------
Total current assets 13,726 14,109
Software development costs, net 7,717 5,781
Investments in and advances to
unconsolidated joint ventures 182 199
Equipment and leasehold improvements, net
(Note 4) 3,917 3,961
Intangible assets, net (Note 5) 2,444 2,690
Other assets 811 706
------ -------
Total assets $28,797 $27,446
====== =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,272 $ 2,026
Accrued liabilities 2,773 2,846
Deferred revenue 5,887 4,605
Customer deposits 63 109
Current portion of long-term obligations 946 127
(Note 7) ------- -------
Total current liabilities 11,941 9,713
Deferred revenue and other long-term
liabilities 317 453
Long-term obligations (Note 7) 3,966 2,123
Deferred income taxes (Note 10) - 560
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 3,000,000 shares, none issued
or outstanding - -
Common stock, $.01 par value; authorized
20,000,000 shares, issued 4,067,310 and
4,011,018 shares; outstanding 4,054,685
and 4,008,393 shares 41 41
Common stock warrants 4 4
Additional paid-in capital 11,328 11,137
Retained earnings 1,260 3,420
Cost of common stock in treasury
(12,625 and 2,625 shares) (60) (5)
------- -------
12,573 14,597
------- -------
Total liabilities and stockholders'
equity $28,797 $27,446
======= =======
See accompanying notes.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Operations
(In Thousands, except per share amounts)
Year Ended November 30
1997 1996 1995
Net revenues:
Software license fees $21,752 $19,094 $11,534
Services 16,781 15,412 10,962
Hardware 4,112 6,751 6,528
-------- -------- --------
42,645 41,257 29,024
Costs of products and services:
Cost of third-party software license fees 3,065 2,484 1,419
Software development amortization 2,535 1,591 879
Cost of services 14,000 12,109 7,884
Cost of hardware 3,260 4,979 5,118
-------- -------- --------
22,860 21,163 15,300
Selling and marketing expenses 15,957 14,060 9,479
General and administrative expenses 3,838 3,416 3,029
Software development expenses 2,391 2,235 1,086
-------- -------- --------
45,046 40,874 28,894
Income (loss) from operations (2,401) 383 130
Other income (expense):
Equity in earnings (losses) of unconsolidated
joint ventures (25) 25 (31)
Interest income 47 89 176
Interest expense (399) (145) (52)
Other - (87) (13)
-------- -------- -------
(377) (118) 80
Income (loss) before income taxes (2,778) 265 210
Income tax benefit (expense) 618 (112) (79)
-------- -------- -------
Net income (loss) $(2,160) $ 153 $ 131
======= ======== =======
Net income (loss) per common share -
Primary and fully diluted $(.53) $ .04 $ .04
======= ======= ======
Weighted average common and common equivalent
shares -
Primary and fully diluted 4,048 3,965 3,669
======== ======== =======
See accompanying notes
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
Common
Stock
and
Common Warrants
Common Stock to be Paid-in Retained Treasury
Shares Stock Warrants Issued Capital Earnings Stock Total
Balance, November 30, 1994 3,545,215 $36 $- $- $7,187 $3,136 $(5) $10,354
Issuance of common stock:
Acquisitions 328,393 3 - - 2,338 - - 2,341
Stock options 30,002 - - - 71 - - 71
Employee stock purchase
plan 18,671 - - - 96 - - 96
Issuance of common stock
warrants for acquisitions - - 3 - 970 - - 9763
Common stock and warrants to
be issued to complete Intercim
transaction - - - 211 - - - 211
Net income - - - - - 131 - 131
--------- ----- ---- ----- ------ ----- ----- ------
Balance, November 30, 1995 3,922,281 39 3 211 10,662 3,267 (5) 14,177
Issuance of common stock:
Acquisitions 24,000 - - - 132 - - 132
Stock options 35,000 1 - - 60 - - 61
Employee stock purchase
plan 29,718 - - - 113 - - 113
Warrants 19 - - - - - - -
Issuance of additional common
stock and warrants to complete
Intercim transaction - 1 1 (172) 170 - - -
Purchase of shares from
dissenting former Intercim
shareholder - - - (39) - - - (39)
Net income - - - - - 153 - 153
--------- ----- ---- ---- ------ ----- ---- ------
Balance, November 30, 1996 4,011,018 41 4 - 11,137 3,420 (5) 14,597
Issuance of common stock:
Stock options 39,500 - - - 68 - - 68
Employee stock purchase
plan 26,792 - - - 123 - - 123
Purchase of treasury shares (10,000) - - - - - (55) (55)
Net loss - - - - - (2,160) - (2,160)
--------- ----- ---- ---- ------- ------- ----- -------
Balance, November 30, 1997 4,067,310 $41 $4 $ - $11,328 $ 1,260 $(60) $12,573
========= ===== ==== ==== ======= ======= ===== =======
See accompanying notes.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year ended November 30
1997 1996 1995
Operating activities
Net income (loss) $(2,160) $ 153 $ 131
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 1,234 1,037 730
Amortization, other 246 189 82
Amortization of capitalized computer software
development costs 2,535 1,591 879
Equity in losses (earnings) of joint ventures 25 (25) 31
(Gain) loss on disposal of equipment and
leasehold improvements - (24) 4
Deferred income taxes (385) 202 554
Changes in operating assets and liabilities:
Accounts receivable (1,135) (1,770) (297)
Inventories and other current assets 100 341 265
Accounts payable and other liabilities 1,273 1,212 (464)
-------- -------- --------
Total adjustments 3,893 2,753 1,784
-------- -------- --------
Net cash provided by operating activities 1,733 2,906 1,915
Investing Activities
Acquisition of Darwin Data Systems, net of cash
received of $19 - (51) -
Acquisition of EMS-Illinois, net of cash received
of $160 - - (238)
Acquisition of Intercim - - (225)
Additions to equipment and leasehold
improvements (1,177) (1,424) (1,430)
Purchases of available-for-sale securities - (495) -
Proceeds from sales of available-for-sale
securities 505 1,247 1,584
Proceeds from sales of held-to-maturity securities - - 743
Proceeds from sale of equipment and leasehold
improvements 7 68 39
Increase in cash surrender value of life insurance (25) (25) (31)
Software development costs capitalized (4,471) (3,372) (2,321)
Other (202) (111) 29
------- -------- -------
Net cash used in investing activities (5,363) (4,163) (1,850)
Financing activities
Proceeds from issuance of stock to employees 191 174 167
Proceeds from increase in debt 2,797 1,864 -
Payments on long-term debt and capital lease
obligations (155) (250) (177)
Purchase of treasury stock (55) - -
Net cash provided by (used in) financing
activities 2,778 1,788 (10)
------- -------- ------
Net increase (decrease) in cash (852) 531 55
Cash:
Beginning of year 866 335 280
End of year $ 14 $ 866 $ 335
======= ======== =======
Supplemental cash flow information:
Interest paid $ 399 $ 133 $ 52
Income taxes paid (refunded), net (172) (464) 357
Noncash transactions:
Equipment recorded under capital lease
obligations 20 371 -
Issuance of common stock and warrants
for acquisitions - 132 3,525
See accompanying notes.
Effective Management Systems, Inc.
Notes to Consolidated Financial Statements
November 30, 1997
(Dollars in thousands, except per share amounts)
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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized in accordance with the provisions of AICPA Statement
of Position (SOP) 91-1, "Software Revenue Recognition," as follows:
Software and Hardware Sales
Revenue is recognized when the product is delivered.
Professional Fees and Services
Revenue is recognized as time and material costs are incurred.
Software Support Fees
Revenue is recognized ratably over the terms of the nonrefundable support
contract.
Annual Upgrade Fees
Revenue is recognized ratably over the nonrefundable annual upgrade
contract period.
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 them meet the standards of the new SOP.
Investments
Debt securities are classified as available-for-sale and are carried at
fair value, which approximates cost. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold is
based on the specific identification method. Interest on securities
classified as available-for-sale is included in interest income.
Inventory Valuation
Inventories are carried at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," the Company capitalizes internal costs in developing
software products upon determination that technological feasibility has
been established for the product, whereas costs incurred prior to the
establishment of technological feasibility are charged to product
development expense. When the product is available for general release to
customers, capitalization ceases and such costs are amortized on a
product-by-product basis based on current and future revenue with an
annual minimum equal to the straight-line amortization over the remaining
estimated economic useful life of the product.
Capitalized software development costs, stated at the lower of cost or net
realizable value, were $7,717 and $5,781 at November 30, 1997 and 1996,
respectively, which is net of accumulated amortization of $7,877 and
$5,342, respectively.
Investment in Unconsolidated Joint Ventures
Investments in unconsolidated joint ventures are accounted for on the
equity method wherein the Company's share of the joint ventures' net
earnings or losses is recorded as an adjustment to the investment.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are
depreciated using the straight-line method for financial reporting
purposes. The estimated useful lives used to calculate depreciation are as
follows:
Years
Leasehold improvements 5
Furniture and fixtures 10
Equipment 5
Assets under capital leases are amortized on a straight-line basis over
their useful lives.
Intangible Assets
Intangible assets are amortized using the straight-line method for
financial reporting purposes over the following estimated lives:
Years
Customer list 15
Goodwill 12-20
Other intangibles 6-40
Income Taxes
Deferred income taxes are provided for temporary differences between
financial reporting and income tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the weighted
average number of common shares outstanding for the periods presented. Net
income per common share includes the dilutive effect of stock options and
warrants calculated using the "treasury stock" method.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which is required to be adopted for periods ending after December 15,
1997. In the first quarter of fiscal 1998, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements, basic earnings per
share will exclude the dilutive effect of stock options and warrants.
Basic earnings per share for the year ended November 30, 1997 and 1996
would have been the same as previously reported primary earnings per
share. The impact of Statement No. 128 on the calculation of fully diluted
earnings per share is not expected to be material.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, marketable securities, trade receivables, related-party
receivables, trade payables and debt instruments. The book values of cash
and cash equivalents, marketable securities, trade receivables, related-
party receivables and trade payables are considered to be representative
of their respective fair values. None of the Company's debt instruments
that are outstanding as of November 30, 1997, 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 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 9.
New Pronouncements
The Company will be required to adopt SFAS No. 130, "Reporting
Comprehensive Income," for years beginning after December 15, 1997. 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. Since this standard applies only to the presentation
of comprehensive income, it will not have any impact on the Company's
results of operations, financial position or cash flows.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for years beginning after December 15, 1997.
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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. Acquisitions
Effective April 15, 1996, the Company completed the purchase of the
remaining 75% of Darwin Data Systems (Darwin). Consideration for this
acquisition was $303, consisting of $101 in notes payable, 24,000 shares
of the Company's common stock valued at $132 and $70 of acquisition costs.
Effective March 31, 1995, the Company completed the purchase for $793 of
the remaining 50% of the capital stock of EMS-Illinois not then owned by
the Company.
The purchase price consisted of 50,200 shares of the Company's common
stock valued at $395, $380 in cash and $18 of acquisition costs.
On September 6, 1995, the Company acquired all of the common stock of
Intercim for approximately $3,355, composed of 278,193 shares of the
Company's common stock valued at $7.50 per share and 278,193 of the
Company's warrants valued at $3.75 per share, and direct acquisition costs
of $225. Because the average trading price (Price) of the warrants for the
15 trading days prior to April 18, 1996, was less than $3.8075, the
Company was required to issue 123,719 additional warrants, which was equal
to the difference between the number of warrants originally issued and the
warrants which should have been issued at the Price above, had the Price
been known at September 6, 1995.
The acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the assets and liabilities of such companies have
been adjusted to their estimated fair values. The excess of cost over the
net assets acquired has been allocated to goodwill.
The results of operations for Darwin, EMS-Illinois and Intercim have been
included in the Company's consolidated financial statements from their
respective acquisition dates. The unaudited pro forma results of
operations below for EMS-Illinois and Intercim assume that the
acquisitions had occurred at the beginning of the period. In addition to
combining the historical results of all the entities, the pro forma
calculations include adjustments for amortization of various intangibles
acquired in conjunction with the acquisition and elimination of
intercompany transactions with EMS-Illinois. However, no adjustments have
been reflected for nonrecurring expenses as a result of the combination of
the entities.
Year ended November 30, 1995 (Unaudited):
Total net revenue $ 34,174
Net income (loss) (505)
Earnings per share (.13)
Pro forma results have not been included for 1996 for the Darwin
acquisition because the impact was not significant.
3. Investments
The following is a summary of investment securities at November 30, 1996:
Available-for-Sale Securities
Gross
Unrealized Estimate
Gains d Fair
Cost (Losses) Value
Obligations of states and
political subdivisions $505 $ - $505
All of the above securities were due in one year or less.
During the years ended November 30, 1997 and 1996, debt available-for-sale
and certain debt held-to-maturity securities with fair market value of
$505 and $1,247, respectively, were sold, with proceeds received
approximating cost. The sales were made to provide funding for certain
acquisitions, software development and normal operations. No unrealized
holding gains (losses) on available-for-sale securities, which would be
included as a separate component of shareholders' equity, have been
recorded as cost approximated estimated fair value as of November 30,
1996.
4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consisted of the following at
November 30:
1997 1996
Equipment $7,119 $6,090
Furniture and fixtures 1,346 1,199
Leasehold improvements 478 426
Equipment under capital leases 416 454
-------- -------
9,359 8,169
Less accumulated depreciation and
amortization (5,442) (4,208)
-------- -------
Equipment and leasehold improvements, net $3,917 $3,961
======== =======
5. Intangible Assets
Intangible assets consisted of the following at November 30:
1997 1996
Goodwill $1,445 $1,445
Customer list 1,400 1,400
Other 200 200
------- ------
3,045 3,045
Less accumulated amortization (601) (355)
------- ------
Intangible asset, net $2,444 $2,690
======= ======
6. Affiliated Company
Certain of the Company's stockholders also own all of the common stock of
an affiliated company, EMS Solutions, Inc. (Solutions), which develops and
sells computer software and related hardware to the food vending and food
distribution industry. The Company has provided certain services to
Solutions for which the Company received fees of $122, $269 and $321 in
1997, 1996 and 1995, respectively, that are recorded as an offset to
general and administrative expense. The Company also sells computer
hardware to Solutions that totaled $331, $851 and $926 in 1997, 1996 and
1995, respectively. Amounts due from Solutions were $404 and $445 at
November 30, 1997 and 1996, 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.
7. Long-Term Debt and Lease Commitments
Long-term obligations consist of the following at November 30:
1997 1996
Line of credit $3,762 $1,864
Notes payable 910 27
Capital lease obligations 240 359
-------- -------
4,912 2,250
Less amounts due within one year (946) (127)
-------- -------
$3,966 $2,123
======== =======
On December 31, 1997, the Company entered into a loan and security
agreement (Agreement) with Foothill Capital Corporation (Foothill), which
includes 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 calls for 36 monthly payments of $65 with the remaining balance
of principal due December 30, 2000. Amounts outstanding have been
classified as long-term based upon the stated maturity date and the
Company's estimates that borrowings will not decrease during fiscal 1998.
Interest on the Revolver is payable monthly based on the bank's base rate
plus .75% (9.25% at December 31, 1997); 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). 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 is also 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.
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, 1997, future payments under capital and noncancellable
operating leases were as follows:
Fiscal Year Ending November 30 Capital Leases Operating Leases
1998 $162 $1,198
1999 111 1,159
2000 - 1,132
2001 - 989
2002 - 713
Thereafter - 849
Total minimum lease obligations 273 $6,040
Amounts representing interest (33)
Capital lease obligations $240
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 $1,663,
$1,404 and $1,042 in 1997, 1996 and 1995, respectively.
8. Stockholders' Equity
As of November 30, 1995, the Company had 18,801 shares of common stock and
18,801 warrants with an aggregate value of $211 that were to be issued in
exchange for common stock of former Intercim stockholders. These amounts,
which were classified as common stock and warrants to be issued in
stockholders' equity at November 30, 1995, were substantially issued in
1996.
In connection with the acquisition of Intercim (see Note 2), the Company
issued common stock warrants. Each warrant entitles the holder, at any
time prior to September 6, 2005, to purchase one share of the Company's
common stock at $6.75 per share.
9. Stock Options and Employee Stock Purchase Plans
The Company maintains the 1986 Employees' Stock Option Plan (the 1986
Plan) pursuant to which executive officers and other key employees of the
Company have received options to purchase shares of the Company's common
stock. Options under the 1986 Plan were granted at exercise prices equal
to the fair market value of the common stock on the date of grant. Options
to purchase an aggregate of 57,000 shares have previously been granted and
remain outstanding at November 30, 1997. No additional options will be
granted under the 1986 Plan.
In December 1993, the Company's Board of Directors adopted the Effective
Management Systems, Inc. 1993 Stock Option Plan (the 1993 Plan). The 1993
Plan, as amended, provides for the granting of both incentive stock
options and nonqualified stock options to employees and nonqualified stock
options to non-employee directors of the Company covering up to a maximum
of 550,025 shares. Under the 1993 Plan, the exercise price of options
granted cannot be less than 100% of the fair market value of a share of
the Company's stock at the date of grant.
On September 6, 1995, in conjunction with the merger of Intercim (see Note
2), the Company adopted a new stock option plan, pursuant to which the
Company granted stock options to those holders who agreed to the
cancellation of their Intercim stock options.
The Company has also issued nonqualified stock options to certain of its
executives and other nonemployee directors. These options have various
vesting schedules.
Information with respect to stock options granted under all plans is as
follows:
Number of Exercise Price Per Weighted Average
Shares Share Exercise Price
Outstanding at November 30, 1994 389,424 $1.57-$8.00
Granted 518,352 6.125-7.25
Exercised (29,949) 1.57-6.25
Canceled or expired (47,399) 6.25
------- ---------- --------
Outstanding at November 30, 1995 830,428 1.57-8.00
Granted 124,043 4.75-7.00
Exercised (35,000) 1.71
Canceled or expired (14,569) 5.75-7.50
------- ---------- --------
Outstanding at November 30, 1996 904,902 1.71-7.50 $6.13
Granted 109,938 4.63-6.75 5.73
Exercised (39,500) 1.71-1.71 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
======= ========== ========
At November 30, 1997, options to purchase 513,287 shares were exercisable
under all plans, at a weighted average exercisable price of $6.29 and a
weighted average contractual life of 7.3 years.
In determining the effect of FASB Statement No. 123, the Black-Scholes
option pricing model was used with the following weighted-average
assumptions for 1997: risk-free interest rates of 5.36%, dividend yields
of 0%, volatility factors of the expected market price of the Company's
common stock of .92, and a weighted-average expected life of the options
of 4.93 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.
The Company's pro forma information, as if these options had been expensed
in accordance with FASB Statement No. 123, follows:
1997 1996
Pro forma net income (loss) $(2,286) $114
Pro forma earnings (loss) per share (.56) .03
In December 1993, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (Stock Purchase Plan), which permits employees to purchase
shares of the Company's common stock during six-month periods beginning on
June 1 and December 1 of each year. The purchase price of such shares will
be equal to the lesser of 85% of the fair market value of the stock at the
beginning or end of each six-month offering period. During fiscal 1997 and
1996, 26,792 and 29,718 shares, respectively, were purchased under the
Stock Purchase Plan. The maximum cumulative number of shares that may be
purchased under the Stock Purchase Plan is 100,240.
The Company has reserved 1,508,813 shares of its common stock for
potential conversion of common stock warrants and issuance under the stock
option and purchase plans described above.
10. Income Taxes
Income tax expense (credit) in the consolidated statement of operations
consists of the following:
Year ended November 30
1997 1996 1995
Current:
Federal $(233) $(170) $(485)
State - 80 10
------- ------- --------
(233) (90) (475)
Deferred (385) 202 554
------- ------- --------
$(618) $112 $ 79
======= ======= ========
The reconciliation of income tax expense (benefit) computed at the U.S.
federal statutory rate to income tax expense (benefit) is:
Year ended November 30
1997 1996 1995
Tax at U.S. statutory rate of 34% $(945) $ 90 $ 71
State income taxes, net of federal benefit - 14 7
Nondeductible items - 112 82
Tax-exempt investment income - (13) (32)
General business credits - (98) (69)
Change in valuation allowance 329 - 22
Other (2) 7 (2)
------ ------- -------
$(618) $112 $ 79
====== ======= =======
The significant components of the deferred tax accounts recognized for
financial reporting purposes at November 30 were as follows:
1997 1996
Deferred tax liabilities:
Capitalized computer software costs $3,087 $2,341
Depreciation 342 328
Other, net 16 15
------- -------
Total deferred tax liabilities 3,445 2,684
Deferred tax assets:
Net operating loss carryforwards 2,902 1,578
Allowance for doubtful accounts 185 108
Deferred revenue 127 72
Inventory 30 40
General business credit 442 448
carryforwards
Other, net 88 53
------- -------
Total deferred tax assets 3,774 2,299
Valuation allowance (329) -
Net deferred tax liabilities $ - $ 385
======= ========
At November 30, 1997, the Company had net federal and state operating loss
carryforwards (NOLs) of approximately $6.8 million and $8.3 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 Corp. (Intercim) in 1995 and net operating losses. In addition,
the Company has general business credits totaling $442,000 which can be
used to reduce federal taxable income through 2011.
In 1997, a valuation allowance equal to 100% of the net deferred tax
assets has been recognized based on uncertainty regarding realization of
such assets.
11. Savings Plan
The Company has a defined contribution 401(k) savings plans that covers
substantially all employees meeting certain minimum eligibility
requirements. Participating employees can elect to defer a portion of
their compensation and contribute it to the plan on a pretax basis. The
Company also matches certain amounts and/or provides additional
discretionary contributions, as defined. The Company's contributions to
the various plans were $310, $345 and $246 for 1997, 1996 and 1995,
respectively.
Schedule II Valuation and qualifying accounts
COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Charged to Charged to
Balance at costs and other accounts- Deductions- Balance at end
Description beginning of period expenses describe describe of period
Years ended November 30, 1997
Deducted from Asset Accounts:
Allowance for doubtful accounts $346.00 0 $120.00 $4.00 $462.00
Years ended November 30, 1996
Deducted from Asset Accounts:
Allowance for doubtful accounts $262.00 0 $187.00 $103.00 $346.00
Years ended November 30, 1995
Deducted from Asset Accounts:
Allowance for doubtful accounts $228.00 $44.00 $25.00 $35.00 $262.00
Years ended November 30, 1994
Deducted from Asset Accounts:
Allowance for doubtful accounts $115.00 0 $178.00 $65.00 $228.00
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1998 annual meeting of shareholders under the captions "Election
of Directors", "Executive Officers" and "Miscellaneous-Other Matters".
The definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal
year.
Item 11. Executive Compensation
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1998 annual meeting of shareholders under the caption "Board of
Directors-Director Compensation" and "Executive Compensation"; provided,
however, that the subsection entitled "Executive Compensation-Report on
Executive Compensation" shall not be deemed to be incorporated herein by
reference. The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1998 annual meeting of shareholders under the caption "Principal
Shareholders". The definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G, information required by this item is hereby
incorporated by reference from the Company's definitive proxy statement
for its 1998 annual meeting of shareholders under the caption "Related
Party Transactions". The definitive proxy statement will be filed with
the Securities and Exchange Commission with 120 days after the end of the
Company's fiscal year.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Exhibits
Reference is made to the separate exhibit index contained on pages E-
1 through E-5 hereof.
2. Financial Statements and Financial Statement Schedules
Reference is made to the separate index in Item 8 of this Annual
Report on Form 10-K with respect to the financial statements and
schedule filed herewith.
3. Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter
of the Company's fiscal year ended November 30, 1997.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on February 23, 1998.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By: /s/ Michael D. Dunham
Michael D. Dunham
President
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities indicated on February 23, 1998.
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)
/s/ Helmut M. Adam Director
Helmut M. Adam
/s/ Thomas M. Dykstra Director
Thomas M. Dykstra
/s/ Scott J. Mermel Director
Scott J. Mermel
/s/ Robert E. Weisenberg Director
Robert E. Weisenberg
INDEX TO EXHIBITS
Exhibit Exhibit Description
No.
2.1 Agreement and Plan of Merger, dated as of February 17,
1995 among Effective Management Systems, Inc., EMS
Acquisition Corp. and Intercim Corporation
[Incorporated by reference to Exhibit 2.1 to Effective
Management Systems, Inc.'s Registration Statement on
Form S-4 (Registration No. 33-95338)]
2.2 Amendment No. 1 to Agreement and Plan of Merger
described in Exhibit 2.1, dated as of June 30, 1995
[Incorporated by reference to Exhibit 2.2 to Effective
Management Systems, Inc. Registration Statement on Form
S-4 (Registration No. 33-95338)]
2.3 Amendment No. 2 to Agreement and Plan of Merger
described in Exhibit 2.1, dated as of July 31, 1995
[Incorporated by reference to Exhibit 2.3 to Effective
management Systems, Inc.'s Registration Statement on
Form S-4 (Registration No. 33-95338)]
2.4 Agreement of Merger, dated as of March 22, 1995, among
Effective Management Systems, Inc., EMS Illinois
Acquisition Corp., Effective Management Systems of
Illinois, Inc., Richard W. Grelck and Daniel E. Long
[Incorporated by reference to Exhibit 2.2 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-
QSB for the quarter ended February 28, 1995]
3.1 Restated Articles of Incorporation of Effective
Management Systems, Inc. [Incorporated by reference to
Exhibit 3.1 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No.
33-73354)]
3.2 By-laws of Effective Management Systems, Inc.
[Incorporated by reference to Exhibit 3.2 to Effective
Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
4.1 Article 4 of the Restated Articles of Incorporation of
Effective Management Systems, Inc. [Incorporated by
reference to Exhibit 3.1 of Effective Management
Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
4.2 Loan and Security Agreement, dated November 9, 1992, by
and between Bank One, Milwaukee, National Association,
and Effective Management Systems, Inc. and certain
affiliated [Incorporated by reference to Exhibit 4.2 to
Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 (Registration No. 33-73354)]
4.3 First Amendment to Loan and Security Agreement, dated
April 23, 1993, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.3 to Effective Management Systems, Inc.'s
Registration Statement on Forms SB-2 (Registration No.
33-73354)]
4.4 Second Amendment to Loan and Security Agreement, dated
February 8, 1994, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.4 to Effective Management Systems, Inc.'s
Registration Statement on Forms SB-2 (Registration No.
33-73354)]
4.5 Third Amendment to Loan and Security Agreement, dated
May 11, 1995, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.1 to Effective Management systems, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended
February 29, 1996]
4.6 Fourth Amendment to Loan and Security Agreement dated
August 31, 1995, by and between Bank One, Milwaukee,
National Association, and Effective Management systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended
February 29, 1996]
4.7 Fifth Amendment to Loan and Security Agreement, dated
August 31, 1995, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc., and certain affiliates. [Incorporated by
reference to Form 10-KSB for the year ended November
30, 1996]
4.8 Sixth Amendment to Loan and Security Agreement, dated
October 31, 1996, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc., and certain affiliates. [Incorporated by
reference to Form 10-KSB for the year ended November
30, 1996]
4.9 Seventh Amendment to Loan and Security Agreement, dated
February 27, 1997 by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc., and certain affiliates [Incorporated by reference
to Exhibit 4.1 to Effective Management systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May
31, 1997]
4.10 Eighth Amendment to Loan and Security Agreement dated
July 11, 1997, by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc., and certain affiliates [Incorporated by reference
to Exhibit 4.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May
31, 1997]
4.11 Ninth Amendment to Loan and Security Agreement dated
September 9, 1997 by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.1 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 1997]
4.12 Tenth Amendment to Loan and Security Agreement dated
September 30, 1997 by and between Bank One, Milwaukee,
National Association, and Effective Management Systems,
Inc. and certain affiliates [Incorporated by reference
to Exhibit 4.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 1997]
4.13 Warrant Agreement between Effective Management Systems,
Inc. and American Stock Transfer & Trust company, dated
as of September 6, 1995 [Incorporated by reference to
Exhibit 4.2 to Effective management Systems, Inc.'s
Current Report on Form 8-K, dated September 6, 1995]
4.14 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
10.1 Business Agreement by and between Digital Equipment
Corporation and Effective Management Systems, Inc.,
effective as of February 8, 1994 [Incorporated by
reference to Exhibit 10.1 to Effective Management
Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.2 Addendum to Business Agreement by and between Digital
Equipment Corporation and Effective Management Systems,
Inc., effective as of February 8, 1994 [Incorporated by
reference to Exhibit 10.2 to Effective Management
Systems, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.3 Value Added Reseller Agreement by and between Digital
Information Systems corporation and Effective
Management Systems, Inc., effective as of November 9,
1992 [Incorporated by reference to Exhibit 10.3 to
Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 registration No. 33-73354)]
10.4 Domestic Value Added Reseller Agreement between
Intermec Corporation and Effective Management Systems,
Inc., dated as of March 4, 1991 [Incorporated by
reference to Exhibit 10.4 to Effective Management
system, Inc.'s Registration Statement on Form SB-2
(Registration No. 33-73354)]
10.5 Amendment No. 1 to domestic Value Added Reseller
Agreement between Intermec Corporation and Effective
Management Systems, Inc., dated as of October 29, 1991
[Incorporated by reference to Exhibit 10.5 to Effective
Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
10.6 Amendment No. 2 to Domestic Value Added Reseller
Agreement between Intermec Corporation and Effective
Management Systems, Inc., dated as of June 11, 1993
[Incorporated by reference to Exhibit 10.6 to Effective
Management Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)]
10.7 Software Supplier Agreement dated August 6, 1994, by
and between Effective Management Systems, Inc. and
Hewlett Packard Company [Incorporated by reference to
Exhibit 10.7 to Effective Management Systems, Inc.'s
Annual Report on Form 10-KSB for the year ended
November 30, 1994]
10.8 Joint Venture Agreement, dated September 15, 1985, by
and between Effective Management Systems, Inc. and
Joseph H. Schlanser, Aurinee M. Schansler and Barton R.
Benjamin [Incorporated by reference to Exhibit 10.9 to
Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 (Registration No. 33-73354)]
10.9 International Marketing Agreement, dated July 5, 1994,
by and between Effective Management Systems, Inc.
Systems, Inc. and Systems Technology Management
Corporation [Incorporated by reference to Exhibit 10.11
to Effective Management Systems, Inc.'s Annual Report
on Form 10-KSB for the year ended November 30, 1994]
10.10 Lease by and between Effective Management Systems, Inc.
and Milwaukee Park Place Limited Partnership, as
amended [Incorporated by reference to Exhibit 10.10 to
Effective Management Systems, Inc.'s Registration
Statement on Form SB-2 (Registration No. 33-73354)]
10.11 Effective Management Systems, Inc. 1986 Employee's
Stock Option Plan [Incorporated by reference to Exhibit
10.11 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No.
33-73354)]
10.12 Effective Management Systems, Inc. 1993 Stock Option
Plan, as amended [Incorporated by reference to Exhibit
10.1 to Effective Management Systems, Inc.'s Quarterly
Report on Form 10-QSB for the quarter ended May 31,
1996]
10.13 Stock Option Agreement by and between Helmut M. Adam
and Effective Management Systems, Inc., dated as of
December 17, 1993 [Incorporated by reference to Exhibit
10.13 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No.
33-73354)]
10.14 Stock Option Agreement by and between Scott J. Mermel
and Effective Management systems, Inc., dated as of
December 17, 1993 [Incorporated by reference to Exhibit
10.14 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No.
33-73354)]
10.15 Bonus Arrangement by and between Thomas G. Allen and
Effective Management Systems, Inc. [Incorporated by
reference to Exhibit 10.16 to Effective Management
Systems, Inc.'s Annual Report on Form 10-KSB for the
year ended November 30, 1994]
10.16 IBM Business Partner Agreement between International
Business Machines Corporation and Effective Management
Systems, Inc., dated as of March 3, 1995 [Incorporated
by reference to Exhibit 10.1 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-QSB for the
quarter ended February 28, 1995]
10.17 Software Reseller Agreement between International
Business Machines corporation and Effective Management
Systems, Inc., dated as of September 6, 1995
[Incorporated by reference to Exhibit 10.18 to
Effective Management Systems, Inc.'s Annual Report on
Form 10-KSB for the year ended November 30, 1995]
10.18 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]
10.19 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]
10.20 Relationship Agreement with CIMX, an Ohio Limited
Liability Company and Effective Management Systems,
Inc. dated December 31, 1997
21 List of subsidiaries of Effective Management Systems,
Inc.
23 Consent of Ernst & Young, LLP
27 Financial Data Schedule
99 Proxy Statement for 1998 Annual Meeting of Shareholders
The Proxy Statement for the 1998 Annual Meeting of
Shareholders will be filed with the Securities and
Exchange Commission under Regulation 14A within 120
days after the end of the Company's fiscal year; except
to the extent incorporated by reference, the Proxy
statement for the 1998 Annual Meeting of Shareholders
shall not be deemed to be filed with the Securities and
Exchange Commission as part of this Annual Report on
Form 10-K