U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MAY 31, 1998
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 Identification No.)
incorporation or organization)
12000 West Park Place, Milwaukee, WI 53224
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (414) 359-9800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X___
No _______
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Class Outstanding as of May 31, 1998
Common Stock, $.01 par value 4,082,955
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Form 10-Q
May 31, 1998
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets at
May 31, 1998 and November 30, 1997 3
Consolidated Statements of Operations Three and Six
Months Ended May 31, 1998 and May 31, 1997 5
Consolidated Statements of Cash Flows - Six 6
Months Ended May 31, 1998 and May 31, 1997
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 20
PART I Financial Information
Item 1 Financial Statements
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1997
amounts)
ASSETS 31-May 30-Nov
1998 1997
CURRENT ASSETS
Cash $231 $14
Accounts Receivable:
Trade, less allowance for
doubtful accounts 9,110 12,370
Related Parties 1,012 604
Inventories 266 280
Refundable Income Taxes 312 312
Deferred Income Taxes 0 0
Prepaid Expenses and Other
Current Assets 349 146
------- -------
TOTAL CURRENT ASSETS 11,280 13,726
LONG TERM ASSETS
Computer Software, net 3,566 7,717
Investments in and Advances to
Unconsolidated Joint Ventures 182 182
Equipment and Leasehold
Improvements, net 3,478 3,917
Intangible Assets, net 2,327 2,444
Other Assets 795 811
-------- --------
TOTAL LONG TERM ASSETS 10,348 15,071
-------- --------
TOTAL ASSETS $21,628 $28,797
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited except for November 30, 1997
amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 31-May 30-Nov
1998 1997
CURRENT LIABILITIES
Accounts Payable $1,949 $2,272
Accrued Liabilities 2,373 2,773
Deferred Revenues 5,775 5,887
Customer Deposits 538 63
Current portion of
Long-term Obligations 976 946
-------- --------
TOTAL CURRENT LIABILITIES 11,611 11,941
LONG TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 1,113 317
Long-term Obligations 5,219 3,966
Deferred Income Taxes 0 0
------- --------
TOTAL LONG TERM LIABILITIES 6,332 4,283
Commitments and Contingencies 0 0
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; authorized
3,000,000 shares; none issued or outstanding 0 0
Common Stock, $.01 par value; authorized
20,000,000 shares; issued 4,082,955 and 4,067,310
shares; outstanding 4,070,330 and 4,054,685 shares 41 41
Common Stock Warrants 4 4
Additional Paid- in Capital 11,369 11,328
Retained Earnings (Deficit) (7,669) 1,260
Cost of Common Stock in Treasury(12,625 shares) (60) (60)
------- -------
TOTAL STOCKHOLDERS' EQUITY 3,685 12,573
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,628 $28,797
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
31-May 31-May 31-May 31-May
1998 1997 1998 1997
NET REVENUES:
Software license fees $4,372 $5,317 $9,707 $9,528
Services 4,532 4,020 8,771 8,266
Hardware 444 1,045 1,116 2,063
------- ------- ------- -------
Total net revenues 9,348 10,382 19,594 19,857
COST OF PRODUCTS AND SERVICES
Software license fees 1,381 1,485 3,104 2,662
Services 3,374 3,496 6,594 7,197
Hardware 353 724 880 1,606
------- ------- ------- -------
Total cost of products
and services 5,108 5,705 10,578 11,465
Selling and marketing expenses 3,401 3,463 7,026 6,844
General and administrative
expenses 1,019 1,297 2,213 2,362
Product development expenses 684 492 1,521 1,196
Restructuring and Other Charges 6,836 0 6,836 0
------- ------- ------- -------
Total costs and operating
expenses 17,048 10,957 28,174 21,867
------- ------- ------- -------
LOSS FROM OPERATIONS (7,700) (575) (8,580) (2,010)
Other (Income)/ Expense
Equity in (earnings)/loss of
unconsolidated joint ventures (1) (4) (1) (2)
Interest (income) (10) (13) (20) (28)
Interest expense 184 92 337 167
------- ------- ------ -------
173 75 316 137
------- ------- ------ -------
LOSS BEFORE INCOME TAXES (7,873) (650) (8,896) (2,147)
Income tax (benefit) expense 0 (269) 33 (883)
------- ------- ------ -------
NET LOSS ($7,873) ($381) ($8,929) ($1,264)
======= ======= ====== =======
Loss per share - basic and diluted ($1.93) ($0.09) ($2.19) ($0.31)
======= ======= ====== =======
The accompanying notes are an integral part of these consolidated
financial statements.
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
SIX MONTHS ENDED
31-May 31-May
1998 1997
OPERATING ACTIVITIES
Net Loss ($8,929) ($1,264)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 693 570
Amortization of capitalized computer
software development costs 1891 1348
Equity in earnings of joint
ventures 0 0
Goodwill Amortization 117 113
Deferred income taxes 0 0
Restructuring and Other Charges 6836
Changes in operating assets and
liabilities:
Accounts Receivable 2251 1112
Inventories and other current assets (560) (661)
Accounts payable and other liabilities (1,106) (1,792)
------ ------
Total adjustments 10,122 690
------ ------
Net cash provided by(used in) in
operating activities 1193 (574)
INVESTING ACTIVITIES
Additions to equipment and leasehold
improvements (254) (870)
Proceeds from sale of securities - 504
Software development costs
capitalized (2,063) (2,162)
Other 17 (23)
------- -------
Net cash (used in) investing
activities (2,300) (2,551)
FINANCING ACTIVITIES
Proceeds on long-term debt and
other notes payable 1,283 2,455
Proceeds from sale of stock 41 82
------ -------
Net cash provided by financing
activities 1324 2537
------ -------
Net increase(decrease) in cash $217 ($588)
Cash-beginning of period $14 $866
====== ======
Cash-end of period $231 $278
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1998
(Unaudited) (In Thousands)
Note 1 - Basis of Presentation
The accompanying consolidated interim financial statements included
herein have been prepared by Effective Management Systems, Inc. (the
"Company"), without an audit, in accordance with generally accepted
accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
made are adequate to make the information presented not misleading.
In the opinion of management, the information furnished for the three
and six month periods ended May 31, 1998 and May 31, 1997 includes all
adjustments, consisting solely of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations
for the interim periods. The results of operations for the six months
ended May 31, 1998 are not necessarily indicative of the results of
operations to be expected for the entire fiscal year ending November 30,
1998. It is suggested that the interim financial statements be read in
conjunction with the audited consolidated financial statements for the
year ended November 30, 1997 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
Note 2 - Additional Financial Disclosure
Equipment and leasehold improvements consisted of the following:
31-May-1998 30-Nov-1997
Gross $9,526 $9,359
Less: Accumulated Depreciation (6,048) (5,442)
------ ------
Net $3,478 $3,917
Allowance for doubtful accounts consisted of the following:
31-May-1998 30-Nov-1997
Balance $ 484 $ 462
Provision for doubtful accounts consisted of the following:
31-May-1998 30-Nov-1997
$ 26 $ 17
Note 3 - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Earnings per share amounts for
all periods have been presented and, where appropriate, restated to
conform to SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share.
Three Months Ended
May 31,
1998 1997
Denominator
Denominator for basic
earnings per share -
weighted average common
shares 4,080 4,041
Effect of dilutive securities
- stock options
and warrants 0 0
------ ------
Denominator for diluted
earnings per share -
adjusted weighted average
common shares 4,080 4,041
====== ======
Six Months Ended
May 31,
1998 1997
Denominator
Denominator for basic
earnings per share -
weighted average common
shares 4,077 4,031
Effect of dilutive
securities - stock options
and warrants 0 0
------ ------
Denominator for diluted
earnings per share -
adjusted weighted average
common shares 4,077 4,031
====== ======
Note 4 - Restructuring and Other Charges
In the second quarter of fiscal 1998, the Company recorded a
restructuring charge aggregating $6,836 related to entering into a
distribution arrangement with the Baan Company and cost reductions
aimed at improving the Company's financial performance. The components
of the restructuring charge are described below.
The restructuring charge includes $553 relating to the closing of
operations in the West and Southwest regions of the United States and
$1,213 for the exit costs and software write-off related to international
operations. The Company established a relationship with former employees
who purchased 80% of EMS Asia Pacific, Inc., a former wholly owned
subsidiary of the Company, to handle future Asian international
operations. The Company is a 20% partner in the venture, but has no
ongoing responsibilities to fund any future operations. EMS-Asia Pacific,
Inc. is responsible for future support, translation efforts and other
activities supporting the Asian marketplace. In return for these efforts,
the Company will transfer all accounts receivable, fixed assets, and cash
to EMS-Asia Pacific, Inc.
In addition, the charge includes $2,656 for both the write-off of
capitalized software pertaining to the large company market, which
software the Company now obtains through its relationship with Baan, and
the write-off of other software whose future value was impaired by
restructuring actions. The charge also reflects costs of $1,841
associated with the write-off of capitalized software mainly related to
technology, the future value of which was impaired by restructuring
actions and management's assumptions regarding future technological
changes.
As part of the restructuring, the Company also reduced certain of its
operating expenses primarily in development, marketing, and administration
though the termination of employees and other expense reductions resulting
in a charge of $573. Approximately $6,402 of the total charge will not
result in future cash expenditures , and the Company expects that all
material restructuring actions will be completed by the end of the third
quarter of fiscal 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company recorded a decrease of 10.0% in net revenues and a net loss of
$7,873,000 for the second quarter of fiscal 1998 compared with a net loss
of $381,000 for the second quarter of fiscal 1997. The second quarter of
fiscal 1998 does not reflect a tax benefit relating to the loss since
because the Company is in a loss carryforward position for financial
reporting purposes. On April 13, 1998, the Company announced a major
restructuring plan in which the Company established a distribution
relationship with the Baan Company (a software developer with over $800
million in revenues) and took steps to reduce expenses to improve the
Company's financial performance (see Restructuring and Other Charges
below). The Baan distribution relationship is intended to enhance the
Company's ability to market its manufacturing execution systems (MES) to
larger size prospects. The Company intends to continue selling its
TCM/MES product line to small to medium sized manufacturers. On May 29,
1998, the Company announced an agreement with former employees to sell a
majority position in the Company's Asian distribution subsidiary. The
former employees have assumed operational control of the venture and will
handle ongoing responsibilities for future support, translation and other
efforts.
Before the restructuring charges, the Company recorded a loss from
operations of $864,000 for the second quarter of fiscal 1998 compared with
a loss from operations of $575,000 for the second quarter of fiscal 1997.
Software revenues were down 17.8% in the second quarter of fiscal 1998
compared to the same period in the prior year. Management believes this
decrease in software revenues was mainly the result of the attention
focused on the restructuring, including the Company's decision to withdraw
from certain geographic markets. The Company expects the restructuring to
be substantially completed during the third fiscal quarter of 1998. The
aggregate savings in operating expenses attributable to the restructuring
are estimated to be $1,400,000 per quarter, although not all of such
savings will be immediately recognizable and such savings may be offset, in
part, by other changes in the Company's operations. The results of the
second quarter of 1998 do not reflect the savings in operating expenses
for the entire period, since the restructuring efforts began on April 13,
1998. The Company recorded a decrease in net revenues of 1.3% and a net
loss of $8,929,000 for the first half of fiscal 1998 compared with a net
loss of $1,264,000 for the first half of fiscal 1997.
Although the goal of the restructuring is to return the Company to
profitability, no assurance can be given that these various measures will
actually result in the achievement of this goal. The Company's long term
success is also dependent on its ability to attract and retain a highly
qualified sales, development and service staff. The Company has recently
experienced attrition at rates higher than its historical experience. The
Company has taken steps to curtail the attrition, but no assurance can be
given that these steps will be successful or that further attrition will
not materially impact the Company's financial performance.
Results of Operations
Total Revenues
Net revenues were $9,348,000 for the three months ended May 31, 1998,
which was a decrease of 10.1% from the $10,382,000 for the same quarter in
the previous year. Net revenues were $19,594,000 for the six months ended
May 31, 1998, which was a decrease of 1.3% from the $19,857,000 for the
same period in the previous year. The overall decrease in revenues for the
three months ended May 31, 1998 was attributable primarily to the
attention and efforts spent planning and executing the restructuring plan.
The mix of revenues comparing software, services and hardware revenues as
a percentage of net revenues was 46.8%, 48.5%, and 4.7%, respectively, in
the second quarter of fiscal 1998, as compared with 51.2%, 38.7%, and
10.1%, respectively, in the second quarter of fiscal 1997. The mix of
revenues comparing software, services and hardware revenues as a
percentage of net revenues was 49.5%, 44.8%, and 5.7%, respectively, in
the first half of fiscal 1998, as compared with 48.0%, 41.6%, and 10.4%,
respectively, in the first half of fiscal 1997. International revenues
represented less than 10% of net revenues for all periods presented.
The Company's operating revenues can vary substantially from quarter to
quarter based on the size and timing of customer software orders and
market acceptance of new products. The Company has historically operated
with little software backlog because software orders are generally shipped
as orders are received. As a result, product revenue in any quarter is
substantially dependent on software orders booked and shipped during that
quarter.
Software License Fees
Software license fees are customer charges for the right to use the
Company's software products. Software license fees decreased 17.8% to
$4,372,000 in the second quarter of fiscal 1998 from $5,317,000 in the
second quarter of fiscal 1997. The decrease in software license fees was
mainly attributable to the attention and efforts spent in the
restructuring process. In addition, certain sales personnel have begun
training in the Baan products now offered by the Company, which, in turn,
has caused sales productivity to decrease. Management expects that this
decrease in productivity will continue during the next two fiscal quarters
and thereafter productivity is expected to increase. Software license
fees increased 1.9% to $9,707,000 in the first half of fiscal 1998 from
$9,528,000 in the first half of fiscal 1997. The increase was
attributable to increasing revenues from the Company's TCM products.
Service Revenues
The Company offers a number of optional services to its customers,
including such services as a telephone support program, systems
integration, custom software development, implementation consulting, and
formal classroom and on-site training. Service revenues increased to
$4,532,000 for the three months ended May 31, 1998, as compared with
$4,020,000 for the same period of the prior year. Service revenues
increased to $8,771,000 for the six months ended May 31, 1998, as
compared with $8,266,000 for the same period of the prior year. The
Company has generated a growing backlog of service work, particularly in
the Central region of the United States, and has increased recruiting
efforts to hire additional service personnel.
Hardware Revenues
Hardware revenues decreased 57.5% to $444,000 in the second quarter of
fiscal 1998 compared with $1,045,000 for the corresponding period of 1997.
Hardware revenues decreased 45.9% to $1,116,000 in the first half of
fiscal 1998 compared with $2,063,000 for the corresponding period of 1997.
The decrease was mainly due to increased sales of software on platforms
for which the Company does not supply hardware and the discontinuation of
hardware sales to an affiliate of the Company, EMS Solutions, Inc. (a
decrease of $66,000 and $241,000 from the second quarter and first half of
1997, respectively)(See General and Administrative Expense below).
Management expects the trend of declining hardware sales to continue due
to the increasing sales of software licenses operating on the Microsoft
Windows NT platform. Hardware used with the Microsoft Windows NT platform
is either generally already in place at the customer site or readily
available from local suppliers who can also provide local support.
Cost of Software License Fees
The cost of software license fees as a percentage of related revenue was
31.6% for the second quarter of fiscal 1998, an increase from 27.9% for
the corresponding period of 1997. The cost of software license fees as a
percentage of related revenue was 32.0% for the first half of fiscal 1998,
an increase from 27.9% for the corresponding period of 1997. Cost of
software license fees is composed of both amortization of past investment
in software development and the third party costs associated with the
software revenues. Software amortization is related to past investment in
software development and does not vary consistently with variations in
software revenues. Software amortization accounted for an increase of
2.1% in the cost of software license fees as a percentage of software
license fee revenues for the second quarter of fiscal 1998 as compared to
the second quarter of fiscal 1997. Software amortization accounted for an
increase of 2.5% in the cost of software license fees as a percentage of
software license fee revenues for the first half of fiscal 1998 as
compared to the first half of fiscal 1997. The Company wrote off a
substantial portion of its past investment in software development in
conjunction with its restructuring efforts. (See Restructuring and Other
Charges below). Software amortization will decrease in future fiscal
quarters as a result of the amounts written off of previously capitalized
development costs in the restructuring. The cost of software license fees
is also dependent on the level of third party costs associated with
certain software revenues and includes such items as purchased licenses
and other components. The remaining increases in the cost of software
license fees as a percentage of related revenue was due to these third
party costs.
Cost of Services
The cost of services as a percentage of related revenue decreased to 74.5%
for the three months ended May 31, 1998 as compared with 87.0% for the
same quarter in the previous year. The cost of services as a percentage of
related revenue decreased to 75.2% for the six months ended May 31, 1998
as compared with 87.1% for the same period in the previous year. The
decrease was mainly due to increased levels of customer billing generated
by existing personnel. The Company has experienced increased levels of
service business from its customer base and a reduction in employees
through attrition. The current backlog has grown to the point where the
Company has begun efforts to hire additional service personnel.
Management expects the cost of services as a percentage of related revenue
to increase slightly with the additional training costs associated with
the hiring of new personnel. The Company has also refocused its service
staff to reduce the level of non-billable projects and increase the level
of billable customer work. The Company has also taken further steps to
reduce the level of customer warranty work by enhancing the quality of its
software through improved internal processes.
Cost of Hardware
The cost of hardware as a percentage of related revenue increased to 79.5%
in the second quarter of fiscal 1998 from 69.3% in the second quarter of
fiscal 1997. The cost of hardware as a percentage of related revenue
increased to 78.9% in the first half of fiscal 1998 from 77.8% in the
first half of fiscal 1997. The cost of hardware as a percentage of
related revenue varies with the size of the system, the margin mix of
items comprising the system being sold, and the competitive pressure of
the customer sale. The cost of hardware as a percentage of related
revenue also varies with the amount of low margin hardware sales to
affiliates. Hardware sales to affiliates declined by $61,000 in the
second quarter of fiscal 1998 compared to the second quarter of fiscal
1997 and declined by $226,000 in the first half of fiscal 1998 compared to
the first half of fiscal 1997.
Selling and Marketing Expenses
Selling and marketing expenses decreased $62,000, or 1.8%, from $3,463,000
in the second quarter of fiscal 1997 to $3,401,000 in the second quarter
of fiscal 1998. This decrease was mainly due to reduction in staffing in
the marketing area as a result of the restructuring (See Restructuring
Charges below). Selling and marketing expenses increased $182,000, or
2.7%, from $6,844,000 in the first half of fiscal 1997 to $7,026,000 in
the first half of fiscal 1998. This increase in selling and marketing
expenses was mainly due to increased levels of compensation related to the
corresponding growth in software revenues.
General and Administrative Expenses
General and administrative expenses decreased $278,000, or 21.4%, from
$1,297,000 in the second quarter of fiscal 1997 to $1,019,000 in the
second quarter of fiscal 1998. General and administrative expenses
decreased $149,000, or 6.7%, from $2,362,000 in the first half of fiscal
1997 to $2,213,000 in the first half of fiscal 1998. The decrease in
general and administrative expenses was mainly due to a reduction of
expense related to the restructuring. (See Restructuring and Other Charges
below). As a percentage of net revenues, general and administrative
expenses were 10.9% and 12.5% in the second quarter of fiscal 1998 and
1997, respectively. As a percentage of net revenues, general and
administrative expenses were 11.3% and 11.9% in the first half of fiscal
1998 and 1997, respectively. During the third quarter of fiscal 1997, the
Company discontinued the practice of providing office space, accounting
and administrative services, computer processing time, and other
miscellaneous services to EMS Solutions, Inc., an affiliated entity. EMS
Solutions, Inc. now operates as a stand-alone entity with no material
ongoing relationship with the Company.
Product Development Expense
Product development expense increased 39.0% from $492,000 in the second
quarter of fiscal 1997 to $684,000 in the second quarter of fiscal 1998.
Product development expense increased 27.2% from $1,196,000 in the first
half of fiscal 1997 to $1,521,000 in the first half of fiscal 1998. The
Company capitalizes costs in accordance with Statement of Financial
Accounting Standard (SFAS) No. 86. The Company capitalized $979,000 of
product development costs in the second quarter of fiscal 1998 compared to
$1,224,000 in the second quarter of fiscal 1997. The Company capitalized
$1,987,000 of product development costs in the first half of fiscal 1998
compared to $2,162,000 in the first half of fiscal 1997. With the
completion of two major development projects and with the cessation of
development of software products for large customers which software is now
supplied through the relationship with Baan, the Company has reduced the
level of investment in product development. (See Restructuring Charges
below).
Restructuring and Other Charges
In the second quarter of fiscal 1998, the Company recorded a restructuring
charge of $6,836,000 related to entering into a new distributor
arrangement for manufacturing software, and a reduction of costs
focused on improving the Company's financial performance. On April 10,
1998, the Company signed an agreement to resell the manufacturing software
of the Baan Company, a developer of software for the manufacturing
industry. The Company intends to combine its manufacturing execution
software (MES) with the Baan software product to serve the high end of the
manufacturing mid-market. The Company has the right to represent the Baan
product in the entire United States, but will focus its offering in a 19-
state market including much of the Midwest and Eastern regions of the
United States. The components of the charges are described below.
The restructuring charge includes $553,000 relating to the refocusing of
the Company's geographic markets and the closing of operations in the West
and Southwest regions of the United States. From a geographic standpoint,
the charge also includes $1,213,000 for exit costs and software write-off
related to international operations. The Company established a
relationship with former employees who purchased 80% of EMS Asia Pacific,
Inc., a former wholly owned subsidiary of the Company, to handle future
Asian international operations. The Company is a 20% partner in the
venture, but has no ongoing responsibilities to fund any future
operations. EMS-Asia Pacific, Inc. is responsible for future support,
translation efforts and other activities supporting the Asian marketplace.
In return, the Company will transfer all accounts receivable, fixed
assets, and cash to EMS-Asia Pacific, Inc.
In line with the introduction of the new product for the high end of the
mid-market, the Company is refocusing its current TCM product to the lower
end of the mid-market and will continue to develop and support the product
for this marketplace. The Company also intends to provide a path to the
Baan product offering for those customers who are or may grow into the
need for a larger company solution. The charge includes $2,656,000 for
both the write-off of capitalized software pertaining to large company
functionality which will now be supplied through the Baan product offering
and the write-off of other software whose future value was impaired by
restructuring actions. The charge also reflects costs of $1,841,000
associated with the write-off of capitalized software mainly related to
technology, the future value of which was impaired by restructuring
actions and management's assumptions regarding future technological
changes.
The Company also reduced certain of its operating expenses primarily in
development, marketing, and administration though the termination of
employees and other expense reductions resulting in a charge of $573,000.
Management expects the level of remaining personnel to be sufficient in
these areas for the short term to provide positive results within the
Company's new strategy and positive results for all new and established
customers. The aggregate savings in operating expenses attributable to
the restructuring are estimated to be $1,400,000 per quarter, although not
all of such savings will be immediately recognizable and such savings may
be offset, in part, by other changes in the Company's operations.
Approximately $6,402,000 of the total charge will not result in
future cash expenditures, and the Company expects that all material
restructuring actions will be completed by the end of the third quarter of
fiscal 1998.
Other Income\Expense-Net
Other income\expense-net was $173,000 of expense for the second quarter of
fiscal 1997 compared to $75,000 of expense for the second quarter of
fiscal 1998. Other income\expense-net was $137,000 of expense for the
first half of fiscal 1997 compared to $316,000 of expense for the first
half of fiscal 1998. The increase in the level of expense was mainly the
result of an increase in interest expense as a result of increased
borrowings under the Company's borrowing facility.
Income Tax
No income tax benefit was recorded for the second quarter of fiscal 1998
compared to a benefit of $269,000 for the second quarter of fiscal 1997. A
small tax expense of $33,000 (for state and local taxes) and no income tax
benefit was recorded for the first half of fiscal 1998 compared to a
benefit of $883,000 for the first half of fiscal 1997. At May 31, 1998,
the Company, for financial reporting purposes, is in a tax loss
carryforward position. Generally accepted accounting principles prohibit
the Company from recording a tax benefit under these circumstances.
Liquidity and Capital Resources
At May 31, 1998, the Company had cash and marketable securities
aggregating $231,000. During the first half of fiscal 1998, the Company's
operating activities provided $1,117,000 of cash compared to using
$574,000 of cash for the same period of the prior year. This decrease in
the use of cash was mainly attributable to the Company's reduction in
accounts receivable, and an increase in non-cash charges to operating
income.
Investing activities used cash of $2,300,000 in the first half of fiscal
1998 compared to using $2,551,000 of cash in the first half of fiscal
1997. The principal use of the cash in the first half of fiscal 1998
was $2,063,000 for capitalized product development. The principal uses of
cash in the first half of fiscal 1997 included $2,162,000 for capitalized
product development and $870,000 for purchases of equipment and furniture.
Financing activities provided $1,324,000 of cash in the first half of
fiscal 1998 compared with providing $2,537,000 of cash in the first half
of fiscal 1997. The cash provided in fiscal 1998 mainly reflected
borrowings under the Company's borrowing facility. As of May 31, 1998,
the Company, based on the level of of eligible accounts receivables, had
$1,930,000 of availability under its $6,000,000 line of credit. On May 8,
1998, the Company amended its agreement with Foothill Capital Corporation
to allow an additional availability amount up to $750,000 beyond the
current arrangement through August 31, 1998. The availability of
$1,930,000 under the line of credit facility at May 31, 1998 includes the
$750,000 from the amended agreement. As of July 10, 1998, the Company had
$397,000 of availability under its line of credit.
The Company's credit agreement with Foothill Capital Corporation contains
certain restrictive covenants relating to income (EBITDA), tangible net
worth, and level of capital expenditures. On May 8, 1998 and July 9,
1998, the Company obtained waivers from the lender as a result of its
failure to meet the tangible net worth and EBITDA covenants. In order to
meet covenants in the future, the Company will need positive operational
results in the short term. In the event that the Company's performance
does not improve in the short term, the Company will need to secure
additional waivers and/or alternative sources of financing. The Company is
reviewing alternative sources of financing to deal with its current
financial status. Although management believes that waivers and/or
additional financing can be obtained, if needed, no assurance can be given
that waivers or such additional financing will be available to the Company
on acceptable terms. In the event that the Company is unable to secure
necessary waivers or additional financing, it would likely have a material
adverse effect on the Company's liquidity, including its ability to fund
continuing operations at current levels.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
of 1995
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING
FUTURE ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT.
STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF
A HISTORICAL NATURE ARE FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-
LOOKING STATEMENTS. SUCH UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT
LIMITED TO, PRODUCT DEMAND AND MARKET ACCEPTANCE FOR THE COMPANY'S AND
THIRD PARTY SUPPLIED PRODUCTS; THE COMPANY'S ABILITY TO SUCCESSFULLY
IMPLEMENT ITS RESTRUCTURING PLAN; THE COMPANY'S ABILITY TO SUCCESSFULLY
TRANSITION TO THE BAAN PRODUCT OFFERINGS; THE IMPACT OF COMPETITIVE
PRODUCTS; THE COMPANY'S ABILITY TO MAINTAIN EFFICIENT MARKETING AND
DISTRIBUTION OPERATIONS WITH RESPECT TO NEW PRODUCTS; FUTURE ECONOMIC,
COMPETITIVE AND MARKET CONDITIONS; THE COMPANY'S ABILITY TO RETAIN KEY
TECHNICAL AND MANAGEMENT PERSONNEL; THE COMPANY'S SUCCESS IN IMPROVING ITS
FINANCIAL PERFORMANCE; TO THE EXTENT NECESSARY, THE COMPANY'S ABILITY TO
SECURE AMENDMENTS, WAIVERS AND/OR REFINANCING OR EXTENSION OF ITS LINE
OF CREDIT; TIMING OF PRODUCT DEVELOPMENT; PRODUCT PRICING AND OTHER
FACTORS DETAILED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on April 30,
1998, Helmut Adam and Michael D. Dunham were elected as directors of the
Company for terms expiring at the annual meeting in 2001. The following
table sets forth certain information with respect to the election of
Messrs. Adam and Dunham as directors at the annual meeting:
Name of Nominee Shares Voted For Shares Withholding Authority
Helmut M. Adam 3,608,353 16,732
Michael D. Dunham 3,608,353 16,732
The following table sets forth the other directors of the Company
whose terms continued after the 1998 annual meeting:
Name of Director Term Expires
Scott J. Mermel 1999
Robert E. Weisenberg 1999
Thomas M. Dykstra 2000
At the annual meeting, shareholders also approved the Effective Management
Systems, Inc. 1998 Employee Stock Purchase Plan (the "1998 Plan") and the
Effective Management Systems, Inc. 1993 Stock Option Plan, as amended (the
"1993 Plan"). The votes For and Against and Abstentions with respect to the
1998 Plan were 2,417,225, 22,301, and 19,928, respectively, and the broker
non-votes totaled 1,165,631. The votes For and Against and Abstentions
with respect to the 1993 Plan were 2,381,757, 53,879, and 23,818,
respectively, and the broker non-votes totaled 1,165,631.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Waiver and First Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc., EMS-
East, Inc., and Effective Management Systems of Illinois, Inc.,
dated May 8, 1998.
4.2 Waiver to Loan Agreement between Foothill Capital Corporation
and Effective Management Systems, Inc., EMS-East, Inc., and
Effective Management Systems of Illinois, Inc., dated July 9,
1998.
10.1 Reseller Agreement and Addendum Number One by and between Baan
Midmarket Solutions, LLC and Effective Management Systems, Inc.,
dated April 10, 1998.
10.2 Distribution Agreement between EMS Asia Pacific Limited and
Effective Management Systems, Inc. dated May 29, 1998
10.3 Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended
27 Financial Data Schedule [EDGAR version only]
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
July 14, 1998 By: /s/ MICHAEL D. DUNHAM
Michael D. Dunham
President (principal executive officer)
By: /s/JEFFREY J. FOSSUM
Jeffrey J. Fossum
Chief Financial Officer and Assistant
Treasurer (principal financial and
accounting officer)
Exhibit Index
Exhibit
Number
4.1 Waiver and First Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc., EMS-
East, Inc., and Effective Management Systems of Illinois, Inc.,
dated May 8, 1998.
4.2 Waiver to Loan Agreement between Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated July 9, 1998.
10.1 Reseller Agreement and Addendum Number One by and between Baan
Midmarket Solutions, LLC and Effective Management Systems, Inc.,
dated April 10, 1998.
10.2 Distribution Agreement between EMS Asia Pacific Limited and
Effective Management Systems, Inc. dated May 29, 1998
10.3 Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended
27 Financial Data Schedule [EDGAR version only]