Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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EFFECTIVE MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 7389 39-1292200
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
12000 West Park Place
Milwaukee, Wisconsin 53224
(414) 359-9800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Michael D. Dunham, President and Chief Executive Officer
Effective Management Systems, Inc.
12000 West Park Place
Milwaukee, Wisconsin 53224
(414) 359-9800
Facsimile (414) 359-9011
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Phillip J. Hanrahan
Jay O. Rothman
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-2400
Facsimile: (414) 297-4900
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered(1) Offering Price Per Aggregate Offering Registration Fee
Share(4) Price
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Common Stock, par value $.01 per
share (2) 54,714 $2.09 $114,353 $ 32
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Common Stock, par value $.01 per
share (3) (4) 892,500 $2.09 $1,865,325 $519
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(1) In accordance with Rule 416, this Registration Statement includes an
indeterminable number of shares of common stock, par value $.01 per share
(the "Common Stock"), of Effective Management Systems, Inc. (the "Company"),
which may be necessary to adjust the number of shares to be issued upon
exercise or conversion of: (i) certain warrants (the "Warrants") to purchase
up to 54,714 shares of the Common Stock of the Company at an exercise price
of $3.60 per share and (ii) the Company's Series B 8% Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock").
(2) Represents shares of the Common Stock underlying the Warrants.
(3) Represents shares of the Common Stock underlying the Series B Preferred
Stock. Because the conversion price of the Series B Preferred Stock is
subject to adjustment based on the future market value of the Common Stock,
the Company is registering the maximum number of shares that could be
issuable following such adjustment.
(4) Pursuant to Rule 457(c), the proposed maximum offering price per share has
been calculated based on the average of the bid and asked prices for the
Common Stock on December 11, 1998.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Dated December 14, 1998
PROSPECTUS
947,214 Shares
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Common Stock
(par value $.01 per share)
This Prospectus relates to the public offering of common stock, par
value $.01 per share (the "Common Stock"), of Effective Management Systems, Inc.
("we" or the "Company"). We are registering 947,214 shares of the Common Stock
for sale by certain selling shareholders (each a "Selling Shareholder,"
collectively the "Selling Shareholders"), as follows:
- 54,714 shares of the Common Stock that may be issued upon
the exercise of certain warrants (the "Warrants"). We issued
the Warrants in connection with the sale of the Company's
Series A 8% Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock") and the Company's Series B 8%
Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock").
- Up to 892,500 shares of the Common Stock issuable in
connection with the conversion of the Series B Preferred
Stock. The conversion price for the Series B Preferred Stock
is subject to adjustment depending on the future market
value of the Common Stock. The 892,500 shares represents the
maximum number of shares of Common Stock that would be
issuable if the adjustment applies to the fullest extent
possible. This amount does not necessarily represent the
actual total number of shares of the Common Stock that these
holders of Series B Preferred Stock would receive if they
convert all of their shares because the conversion price is
also subject to certain anti-dilution adjustments.
We will not be selling any of the shares of the Common Stock that are
registered under this Prospectus. No underwriters will be used in selling the
shares. While we will pay the expenses incurred in registering the Common Stock,
including legal and accounting fees, we will not receive any proceeds from the
sale of these shares. However, we may receive gross cash proceeds of up to an
aggregate of $196,970 upon the exercise of the Warrants.
The Selling Shareholders may offer their shares of the Common Stock in
public or private transactions, on or off the OTC Bulletin Board, at prevailing
market prices, or at privately negotiated prices. In such transactions, the
Selling Shareholders and any broker-dealers through whom such Common Stock are
sold may be deemed to be underwriters within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), as more fully described herein. Any
commissions paid or concessions allowed to any broker-dealer, and, if any
broker-dealer purchases such Common Stock as a principal, any profits received
on the resale of such shares may be deemed to be underwriting discounts and
commissions under the Securities Act.
All selling and other expenses, including brokerage fees and any
underwriting discounts or commissions, incurred by individual Selling
Shareholders will be borne by such Selling Shareholders.
Each share of the Series B Preferred Stock is presently convertible at
any time at the option of the holders at a conversion price of $3.00, subject to
certain adjustments.
Investing in the Common Stock involves certain risks. See "Risks
Factors" beginning on page 8.
The Common Stock is traded on the OTC Bulletin Board and, as a result,
the market for the Common Stock is not particularly liquid. The price at which
the Common Stock trades may fluctuate and any
market for the Common Stock may be subject to disruptions that could make it
difficult or impossible for the holders of the Common Stock to sell shares in a
timely manner, if at all, or to recoup their investment in the Common Stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Our principal executive offices are located at 12000 West Park Place,
Milwaukee, Wisconsin 53224, and our telephone number is (414) 359-9800.
The date of this Prospectus is __________, 1999
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document we file at the SEC's public
reference room at the following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically.
You can access the electronic versions of these filings on the Internet at the
SEC's website, located at http://www.sec.gov.
We have included this Prospectus in our registration statement that we
filed with the SEC (the "Registration Statement"). The Registration Statement
provides additional information that we are not required to include in the
Prospectus. You can receive a copy of the entire Registration Statement as
described above. Please note that the Registration Statement also includes
complete copies of the documents described in the Prospectus.
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Prospectus are "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as the Company or we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe the Company's
future plans, objectives or goals are forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including those described in the section captioned "Risk Factors" below.
These factors are not exhaustive, and should be read in conjunction
with other cautionary statements that are included in this Prospectus. The
forward-looking statements made herein are only made as of the date of this
report and we are not obligated to publicly update forward-looking statements to
reflect subsequent events or circumstances.
PROSPECTUS SUMMARY
As used in this Prospectus, unless the context otherwise requires, the
terms "we," "us" or "Company" mean Effective Management Systems, Inc. and its
subsidiaries. This summary highlights information contained elsewhere in this
Prospectus, and is not complete and may not contain all the information you
should consider before investing in the Common Stock. You should read the entire
Prospectus carefully.
THE COMPANY
Overview
We develop, procure, market and support integrated manufacturing and
business management software. We design our Time Critical Manufacturing/R/
("TCM/R/") software with the underlying philosophy that time is a crucial
element in manufacturing, and that reducing time in the manufacturing process
leads directly to increased profits for the manufacturer. TCM/R/ software
integrates technologies such as electronic data interchange, imaging,
bar-coding, factory automation, engineering system integration, distributed
numerical control, statistical process control and fourth generation language
tools with the Company's proprietary algorithms for scheduling and production,
to optimize the customer's labor, capital and inventory utilization. The
software we offer functions on the Windows NT, IBM AIX, Open VMS, and HP-UX
operating systems. We also provide services support for our software products
and sell computer hardware.
The software products we offer include: TCM/R/, which is a
pre-integrated 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. We also offer the manufacturing software of the Baan Company
("Baan"), which is an enterprise resource planning and accounting system that
will ultimately be combined with our manufacturing execution system. Our
distributor arrangement with Baan was entered into in April 1998.
Our 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.
We typically focus our sales and marketing efforts on discrete
("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) manufacturing
plants. We have licensed our software products to over 1,700 customer sites.
We distribute our products in the United States through eight branch
offices and through six joint ventures and independent distributors. We have
also established distribution channels through independent distributors in
Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, we
have a joint venture in China to support these distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary, and in 1996, we acquired the remaining interest in Darwin Data
Systems Corporation, another joint venture subsidiary. For further details
regarding these acquisitions, see Note 2 of Notes to the Company's Consolidated
Financial Statements.
1
Strategy
Our objective is to grow as a leading provider of integrated business
software systems for discrete manufacturing plants within our target market. We
have identified three strategic initiatives to achieve this goal.
Focus on Time Critical Manufacturing. We believe that manufacturers
are striving to become more "time competitive," and that manufacturing software
which focuses solely on providing information for planning and on recording
information for historical analysis will be inadequate to meet the needs and
demands of manufacturers in the years to come. To be effective in the future, we
believe that manufacturing software will be required to empower individuals at
all levels of an organization to make immediate decisions regarding production
processes and business activities. With few exceptions, we believe that the
limited number of information system implementations currently in place which
have this "time" focus have been developed on an individual customized basis. We
are not aware of other major products available in our target market for
discrete manufacturers which offers both planning and execution systems and has
a strategy of focusing on time.
Commitment to Manufacturing Execution Systems. We believe that
discrete manufacturers can gain significant competitive advantage by
implementing Manufacturing Execution Systems. These systems bring together the
data and information from Enterprise Resource Planning Systems, Industrial
Control Systems and Engineering Systems.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our
experience in the marketplace resulted in the 1995 introduction of the first
"pre-integrated" Enterprise Resource Planning/Manufacturing Execution
System/Controls software offering for discrete manufacturers. The acquisition of
Intercim Corporation facilitated this pre-integration initiative.
Software pre-integration means that a customer can buy a comprehensive
set of software from the Company which has already been integrated and proven to
function. 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
also are proven in advance are available to facilitate interaction with these
software products. Implementation time frames for pre-integrated software are
between nine and eighteen months. We plan to continue to focus on the
pre-integrated software marketplace.
We believe that "pre-integration" of much of our software reduces the
time and cost of system implementations and increases the business value to the
manufacturer similar to the way that "suites" of desktop software have affected
that marketplace as compared to custom integration of word processing, data base
and spreadsheet desktop products.
Software Products
We develop, market and support TCM/R/ application software for
discrete manufacturing companies. We currently offer licenses for three software
products: (a) TCM/R/, which is a full function business and Enterprise Resource
Planning software system, including a pre-integrated Manufacturing Execution
System providing production management, shop floor scheduling and operations
support; (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; and (c) the Baan product offering, which is a
full function business Enterprise Resource Planning and accounting system for
large companies that will be complemented by our pre-integrated Manufacturing
Execution System.
Markets and Customers
We primarily target companies operating discrete manufacturing plants
in the United States and Canada. These plants may be owned by privately held
companies or by large, multi-national public
2
corporations. Our customers include, among others, capital equipment
manufacturers, job shops, high volume manufacturers, automotive suppliers,
consumer product manufacturers and aerospace equipment manufacturers.
Sales and Marketing
In the United States and Canada, we license our products and offer
services through seventeen branch offices and seven joint ventures and
independent distributors.
We market our products through advertising campaigns in national trade
periodicals and through direct mailings. We supplement these efforts with
listings in relevant directories and trade show and conference appearances. We
also receive leads regarding potential customers from hardware and services
vendors, existing customers and various accounting and consulting firms.
Sales cycles for our products vary substantially based on the degree
of integration, consulting and training required and also on the status of the
customer's hardware system implementation. A sales cycle is usually three to
twelve months from the time an initial sales presentation is made until the time
a signed license agreement is entered into with a customer.
Product Development
We believe we must continue to enhance, broaden and modify our
existing line of software products to meet the constantly evolving needs of
discrete manufacturers within our target market. We have relied on internal
development, outside procurement, and development related to customized projects
implemented at field sites to extend, enhance and support our software products,
and develop and integrate new capabilities.
Software development efforts currently in progress include the
development of product enhancements such as enhanced manufacturing functionality
(including visual scheduling and touch screen data collection), support for
Microsoft SQL server, electronic commerce, extended operation on various
relational database products, and other enhanced functional capability. There
can be no assurance, however, that these development efforts will result in
product enhancements that we will be able to market successfully. Certain of
these enhancements are dependent upon the development efforts of third party
suppliers over whom we have no control. In the event the development efforts of
the third party suppliers are delayed or are unsuccessful, our software
developments would be similarly delayed. Software development is, however, an
evolutionary process and the Company's 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 our products.
Some of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than we have.
Restructuring
In the quarter ended May 31, 1998, we 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 our
financial performance. In April 1998, we signed an agreement to resell the
manufacturing software of Baan. We intend to combine our manufacturing execution
software with the Baan software product to serve the high end of the
manufacturing mid-market. We have the right to represent the Baan product in the
entire United States, but we will focus our offering in a 19-state market
including much of the Midwest and Eastern regions of the United States.
The restructuring charge included $553,000 relating to the refocusing
of our geographic markets and the closing of operations in the West and
Southwest regions of the United States. From a geographic
3
standpoint, the charge also includes $1,213,000 for exit costs and software
write-off related to international operations. In line with the introduction of
the new product for the high end of the mid-market, we are refocusing our
current TCM/R/ product to the lower end of the mid-market and we will continue
to develop and support our product for this marketplace. We also intend 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 included $2,656,000
for both the write-off of capitalized software pertaining to large company
functionality which is now 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. We have also reduced certain of our
operating expenses primarily in development, marketing and administration
through the termination of employees and other expense reductions which resulted
in a charge of $573,000.
Employees
As of November 30, 1998, we had 299 full-time employees, of whom 60
were engaged in sales and marketing; 58 in product development; 140 in customer
service; and 41 in management, finance and administration. Our employees are not
represented by any collective bargaining organization and we have never
experienced a work stoppage. We consider our employee relations to be good.
THE SERIES B 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK OFFERING
In October, 1998, we sold 780 shares of our Series B Preferred Stock,
at a purchase price of $1,000 per share, for an aggregate gross purchase price
of $780,000. In addition, we exchanged 1,005 shares of our Series B Preferred
Stock for a like number of shares of our Series A Preferred Stock. We had issued
the Series A Preferred Stock in August, 1998 for an aggregate gross purchase
price of $1,005,000. Dividends accrue on the Series B Preferred Stock at a rate
of 8% per year and are cumulative. The holders of the Series B Preferred Stock
may convert their shares at any time into shares of the Common Stock at a
conversion price of $3.00 per share, subject to adjustment.
In addition, we issued the Warrants to purchase a total of up to
54,714 shares of Common Stock, in connection with the sale of the Series A and
Series B Preferred Stock. The Warrants are exercisable at a price of $3.60 per
share.
This Prospectus relates to the shares of the Common Stock that may be
issued upon conversion of the Series B Preferred Stock and upon the exercise of
the Warrants.
RISK FACTORS
An investment in the Common Stock involves certain risks that a
potential investor should carefully evaluate prior to making an investment. A
discussion of certain factors to be considered in evaluating the Company, its
business and an investment in the Common Stock is included in the section titled
"Risk Factors" immediately following this Summary.
4
Summary Historical Consolidated Financial and Operating Data
Year Ended November 30, Nine Months Ended
August 31,
(Dollars in Thousands) (Dollars in Thousands)
------------------------------------------------------------ ----------------------
1993 1994 1995(4) 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
Income Statement Data:
Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748
Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573
Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455
-------- -------- -------- -------- -------- -------- --------
Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776
Cost of third party software
license fees 405 797 1,149 2,484 3,065 1,906 1,886
Software development
amortization 342 515 879 1,591 2,535 2,077 2,277
Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175
Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112
-------- -------- -------- -------- -------- -------- --------
Total cost of products/
services 9,397 9,925 15,300 21,163 22,860 16,641 15,450
Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326
-------- -------- -------- -------- -------- -------- --------
Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043
General and administrative
expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837
Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118
Restructuring and other charges 0 0 0 0 0 0 6,836
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284
Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508)
Other income (expense) (32) 342 80 (118) (337) (176) (481)
Income (loss) before income
taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989)
Income tax expense (benefits) 650 975 79 112 (618) (883) (33)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45)
Weighted average common and
common equivalent share
outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038
======== ======== ======== ======== ======== ======== ========
Other Data:
Software investment as a
percentage of software
license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2%
Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918
1
Balance Sheet Data:
Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575)
Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683
Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848
Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541
- ---------------
(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, and $3,207 and $2,800 for the
nine months ended August 31, 1997 and 1998, respectively.
(2) Weighted 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.
5
RISK FACTORS
The risk factors set forth below, as well as other information
appearing in this Prospectus should be carefully considered before making an
investment in the Common Stock. Certain statements in this Prospectus, including
statements relating to our expected operations and financing activities, are
forward-looking statements that involve certain risks and uncertainties. See
"Special Note Regarding Forward-Looking Statements."
Losses from Operations.
For the three and nine months ended August 31, 1998, we had operating
losses of $1,093,000 and $10,022,000, respectively, compared to operating losses
of $1,044,000 and $2,308,000 for the corresponding periods in 1997. As to the
operating losses for the nine months ended August 31, 1998, $6,836,000
represented restructuring and other charges. As of August 31, 1998, we had a
deficit in retained earnings of $8,761,000 compared to retained earnings of
$1,260,000 at November 30, 1997. Although we have taken steps to improve our
financial performance, we are unable to give any assurance that these actions
will reverse our pattern of net losses.
Net Income (Loss) for the Last Three Years.
For the fiscal year ended November 30, 1997 we had net loss of
$2,160,000. For the fiscal years ended November 30, 1996 and 1995, we had net
income of $153,000 and $131,000, respectively.
Absence Of Market For Common Stock
There is currently no formal trading market for the Common Stock.
Currently, the Common Stock trades only on the OTC Bulletin Board and, as a
result, the market for the Common Stock is not particularly liquid. The price at
which the Common Stock may trade may fluctuate and the market for the Common
Stock may be subject to disruptions that could make it difficult or impossible
for the holders of the Common Stock to sell shares in a timely manner, if at
all. In addition, if trading markets do develop, they may be unstable and
illiquid for an indeterminate period of time.
Dependence on Principal Products.
A significant portion of our revenue is derived from license fees for
TCM/R/ and for FACTORYnet/R/ I/S and the sale of related support services.
Accordingly, any event that could adversely affect license fees for TCM/R/ or
FACTORYnet/R/ I/S, such as significant flaws or incompatibility, negative
publicity or evaluation, or obsolescence of the hardware platforms on which the
systems run, could have a material adverse effect on our results of operation.
Our 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.
Use of Proceeds.
We are not selling any of the shares offered in this Prospectus, and
we will not receive any of the proceeds from the sale of those shares. However,
we may receive gross cash proceeds from the exercise of the Warrants in an
amount equal to the number of Warrants exercised multiplied by $3.60 per share,
subject to adjustment. We will bear all of the costs and expenses associated
with registering the shares. The gross cash proceeds that we receive from the
exercise of these securities will be reduced by the amount of related expenses.
We anticipate that we will use the gross cash proceeds, if any, for working
capital and general corporate purposes.
6
Dependence on Third Party Software.
We recently entered into an arrangement pursuant to which we license
certain software products from Baan to sell into a segment of our marketplace.
As a result of this arrangement, we have refocused our current TCM/R/ product to
the lower end of the mid-market and will rely on the Baan product to service the
high end of the mid-market. There can be no assurance that we will be successful
in marketing the Baan product offering, that such offering will remain viable in
our target market or that Baan will continue such relationship after the
expiration of its initial term. In addition to the Baan relationship, internally
developed software products incorporate and use software technology and software
products developed by other third parties. There can be no assurance that all of
these companies will remain in business or that their product lines will remain
viable. If any of these companies fails to remain in business or abandons or
fails to enhance a particular product line, we may need to seek other suppliers.
This could result in us having to significantly alter our internally developed
product lines which could have a material adverse effect on our results of
operations. There also can be no assurance that our current suppliers will not
significantly alter their pricing in a manner adverse to us.
Dependence on Key Employees.
Our success is dependent to a significant extent on our executive
officers and other key personnel (including technical and sales personnel), the
loss of whom could have a material adverse effect on the Company. Our future
success will depend in large part on our 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 and there
can be no assurance that we can retain our key employees or that it can attract,
assimilate and retain other qualified personnel in the future. We have recently
experienced attrition at rates higher than our historical experience. We have
taken steps to curtail the attrition, but we can give no assurance that these
steps will be successful or that further attrition will not materially impact
our financial performance.
New Products and Technical Change.
The market for our products (including third-party supplied 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 our existing product offering
and products currently under development obsolete and unmarketable. Our future
success will depend upon our ability to enhance our current products and to
develop and introduce or obtain from third-party suppliers new products that
keep pace with technological developments, respond to evolving end-user
requirements and achieve market acceptance. Any failure by us to anticipate or
respond adequately to technological developments or end-user requirements, or
any significant delays in product development, acquisition or introduction,
could result in a loss of competitiveness or revenues. There can be no assurance
that we will be successful in developing, acquiring and marketing new products
or product enhancements on a timely basis or that we will not experience
significant delays in the future, which could have a material adverse effect on
our results of operation.
Success of Recent Restructuring.
In April 1998, we effected a major restructuring and recorded a
restructuring charge of approximately $6.8 million. The restructuring related to
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving our financial
performance. In connection with the restructuring, we closed facilities both in
the United States and internationally and took actions to rationalize our
workforce, particularly in the development, marketing and administrative areas.
Although we expect the restructuring to impact our financial performance
positively, no assurance can be given that the restructuring will be successful
or that it will not have unanticipated effects, such as the loss of significant
customers and/or key employees.
7
Intellectual Property and Property Rights.
We regard our software products as proprietary, in that title to and
ownership of our software generally reside exclusively with the Company. We
attempt to protect ownership of our software with a combination of copyright,
trademark and trade secret laws, employee and third-party disclosure agreements
and other methods of protection common in the industry. Despite these
precautions, it may be possible for unauthorized third parties to copy or
reverse-engineer certain portions of our products or to obtain and use
information that we regard as proprietary. Like many software firms, we
presently have no patents. We license the source code for our software to some
customers for customization. Although our source code license contains
confidentiality and nondisclosure provisions, there can be no assurances that
such customers will take adequate precautions to protect such code. In addition,
the laws of some foreign countries do not protect the our proprietary rights to
the same extent as do the laws of the United States. There can be no assurance
that the mechanisms we use to protect our software will be adequate or that our
competitors will not independently develop software products that are
substantially equivalent or superior to our software products. Although we do
not believe that our products infringe on the existing proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against us.
Variability of Quarterly Operating Results; Limited Backlog.
Our operating results can vary substantially from quarter to quarter
due to various factors, including, among others: the size and timing of customer
orders; the buying patterns of manufacturers in our target market; delays in the
introduction of products or product enhancements by the Company or by other
providers of hardware, software and components for the management information
systems market; competition and pricing in the software industry; customer order
deferrals in anticipation of new products; market acceptance of new products;
reduction in demand for existing products; changes in operating expenses; and
general economic conditions. We have historically operated with little backlog
because software orders are generally shipped as orders are received. As a
result, product revenue in any quarter is dependent on orders booked and shipped
during that quarter. A significant portion of our operating expenses are based
on anticipated revenue levels and are relatively fixed in nature. If revenue
does not meet our expectations in any given quarter, operating results may be
adversely affected.
Competition.
The management information systems industry is intensely competitive
and rapidly changing. A number of companies offer products similar to the
products we offer. Some of our existing competitors, as well as a number of
potential competitors, have larger technical staffs, more established and larger
marketing and sale organizations and significantly greater financial resources
than the Company and its third-party suppliers. There can be no assurance that
such competitors will not develop products that are superior to the products we
offer or that achieve greater market acceptance. Our future success will depend,
in part, upon our ability to increase software license fee revenues in our
target markets. There can be no assurance that we will be able to compete
successfully against our competitors or that the competitive pressures we face
will not adversely affect our financial performance.
Expansion Plans.
We plan to expand our business within our distribution network in the
United States with the objective of increasing total net revenues and profits.
There can be no assurance, however, that the efforts and funds directed towards
enhancing our product offering and expanding within our distribution network
will result in revenue and profit growth. Any future growth of the Company will
also depend on, among other things, our ability to gain market acceptance for
our product offering in target geographic areas and to monitor and control the
additional costs and expenses associated with expansion. We are also dependent
upon securing services at competitive rates from third-party service providers.
No assurance can be given that we will be able to successfully manage these
aspects of our business.
8
Financial Covenants and Limitations.
Our credit agreement with our primary lender contains certain
restrictive covenants, including covenants relating to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and tangible net worth. As a
result of our recent financial performance and restructuring, we have been
obligated to obtain and have obtained covenant relief from our lender relating
to the EBITDA and tangible net worth covenants. In the event that our financial
performance does not improve and if we are unable to secure additional
investment capital, we will require additional covenant relief. In the event
that such covenant relief is not obtained, it would likely have a material
adverse effect on our liquidity, including our ability to fund continuing
operations at current levels. In addition, our current credit facility contains
limits on the amount we may borrow based on the level of our outstanding
accounts receivable. At December 1, 1998, we had borrowing availability of
$559,000 under our credit agreement.
"Penny Stock" Rules.
The Common Stock is currently traded on the OTC Bulletin Board after
having been delisted from the Nasdaq National Market for failing to meet minimum
eligibility requirements. Since the Common Stock is not traded on the Nasdaq
National Market or the Nasdaq Small Cap Market, if no other exclusion from the
definition of "penny stock" under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is available, then any broker engaging in a
transaction in the Company's securities is required to provide any customer with
a risk disclosure document and the compensation of the broker/dealer in the
transaction and monthly account statements showing the market values of the
Company's securities held in the customer's accounts. The bid and offer
quotations and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. If brokers are
subject to the "penny stock" rules when engaging in transactions in our
securities, they may be less willing to engage in such transactions.
Control by Management.
Our management currently holds approximately 37% of the outstanding
Common Stock. As a result, management personnel have a significant impact, if
they act together, on the election of directors and shareholder approval of
various corporate actions.
No Dividends.
We have never paid any cash dividends on the Common Stock and do not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The payment of dividends on the Common Stock by the Company will depend on our
earnings, financial condition and other business and economic factors affecting
the Company at that time as the Board of Directors may consider relevant.
Anti-Takeover Provisions of Charter, Bylaws and Wisconsin Law.
Certain provisions of our charter and bylaws may delay or frustrate
the removal of incumbent directors and may prevent or delay a merger, tender
offer or proxy contest involving the Company that is not approved by the Board
of Directors, even if such events may be beneficial to the interests of
shareholders. For example, our charter authorizes the Board of Directors,
without shareholder approval, to issue preferred stock in addition to the Series
A Preferred Stock and the Series B Preferred Stock with voting or conversion
rights which could adversely affect the voting power of the holders of the
Common Stock. In addition, the Wisconsin Business Corporation Law contains
provisions that may have the effect of delaying or making more difficult
attempts by others to obtain control of the Company without the approval of the
Board of Directors.
Year 2000 Compliance.
Many computer programs and applications define the applicable year
using two digits rather than four in order to save memory and enhance the speed
of repeated date-based calculations. The "Year 2000
9
problem" refers to the inability of these computer programs on and after January
1, 2000 to recognize that "00" refers to "2000" rather than "1900." The term
"Year 2000-compliant" means a computer or a computer system which has been
designed or modified to recognize dates on and after January 1, 2000.
We utilize a combination of our own software and custom-written
systems for running our own operations. Based on our own evaluation, we believe
that we will incur no significant costs associated with ensuring Year 2000
compliance of our internal systems. Since the release of version 5.1.2 of the
Company's software product, our software product has been Year 2000 compliant.
Effect Of Future Sales Of Common Stock; Registration Rights
We cannot predict the effect, if any, that future sales or issuance of
the Common Stock or the availability of the Common Stock for future sale or
issuance will have on future market prices of the Common Stock. Sales of
substantial amounts of the Common Stock or the perception that such sales may
occur, could adversely affect prevailing market prices for the Common Stock.
The agreement under which we sold the Series B Preferred Stock (the
"Purchase Agreement") obligates us, at our sole cost and expense, to file a
registration statement covering shares of the Common Stock issuable upon
conversion of the Series B Preferred Stock and to use our best efforts to have
such registration statement declared effective as soon as possible after filing
and to keep the registration statement effective for up to three years. The
Registration Statement of which this Prospectus is a part is the registration
statement referred to in the Purchase Agreement. The Purchase Agreement also
provides for certain demand and piggyback registration rights. See "Description
of Capital Stock."
10
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
the Common Stock by the Selling Shareholders. If all of the Warrants are
exercised at the exercise price of $3.60, we will receive gross cash proceeds of
approximately $196,970. See "Plan of Distribution." The proceeds may be used for
working capital and general corporate purposes.
SELLING SECURITY HOLDERS
The following table sets forth the number of Shares (as hereinafter
defined) and the total number of Shares assuming the conversion or exercise of
all the Series B Preferred Stock and the Warrants owned by each of the Selling
Shareholders and registered hereunder. Because the Selling Shareholders may
offer all or part of the shares of the Common Stock received upon conversion or
exercise of the Series B Preferred Stock or the Warrants (the "Shares"), which
they hold pursuant to the offering contemplated by this Prospectus, and because
their offering is not being underwritten on a firm commitment basis, no estimate
can be given as to the amount of the Series B Preferred Stock or the Warrants
that will be held upon termination of this offering. The Shares offered by this
Prospectus may be offered from time to time by the Selling Shareholders named
below.
11
Shares underlying the Series B Preferred Stock and Warrants to be registered and
offered by the Selling Shareholders.
Shares Beneficially Owned Shares Beneficially Owned After
Prior to Offering Offering (1)
Amount and Number of Amount and
Name and Address of Nature of Percentage Shares Offered Nature of Percentage of
Beneficial Owner Ownership of Class Hereby Ownership Class
Selling Shareholders(2)(3):
Alvin R. Bonnette, Trustee 16,667 * 16,667 0 *
Arthur D. Sterling and Marie
Sterling 8,333 * 8,333 0 *
Christopher Schreiber(4) 6,145 * 6,145 0 *
Carl M. Birkelbach(7) 2,100 * 2,100 0 *
David H. Padden 1983 Trust 6,667 * 6,667 0 *
David Random 8,333 * 8,333 0 *
Donald Gross 3,333 * 3,333 0 *
Donald T. McKiernan(7) 3,200 * 3,200 0 *
Douglas E. Hailey(5) 14,965 * 14,965 0 *
EmJayco 10,000 * 10,000 0 *
Gary Arnold 50,000 1.1% 50,000 0 *
George N. Gaynor 6,667 * 6,667 0 *
Gustave Levinson and Lydia F
Levinson 8,333 * 8,333 0 *
JDN Partners, L.P. 66,667 1.4% 66,667 0 *
John Clifford 33,333 * 33,333 0 *
John D. Holley 50,000 1.1% 75,000 0 *
John L. Palazzola and Maria
Palazzola 8,333 * 8,333 0 *
John R. Bertsch 6,667 * 6,667 0 *
John R. Graham, Trustee of
the John R. Graham Trust
dated 1/3/92 3,333 * 3,333 0 *
Joseph G. D'Amadeo(7) 6,515 * 6,515 0 *
Laura A. Conroy(7) 2,400 * 2,400 0 *
Lawrence S. Smith 3,333 * 3,333 0 *
Lewco Securities as Nominee
for Schroder & Co. Custodian
f/b/o Ron Magruder and
Elizabeth Magruder 33,333 * 33,333 0 *
Lone Star Holdings Partners,
L.P 66,667 1.4% 66,667 0 *
Michael E. Recca(7) 7,754 * 7,754 0 *
Michael Taglich(6) 14,850 * 14,850 0 *
Morton Topfer 83,333 1.6% 83,333 0 *
Rafael Caballero 16,667 * 16,667 0 *
Richard C. Oh(7) 1,000 * 1,000 0 *
Robert C. Schroeder(7) 1,600 * 1,600 0 *
Robert F. Taglich(6) 8,333 * 8,333 0 *
Robert L DeBruyn and Tracey
H. DeBruyn 3,333 * 3,333 0 *
Sanford R. Penn Jr 16,667 * 16,667 0 *
Shadow Capital LLC 16,667 * 16,667 0 *
Thomas J. Waggoner and Patsy
Ann Waggoner 3,333 * 3,333 0 *
Thomas P. Morrisey 10,000 * 10,000 0 *
U.S. Bank, National
Association, as Trustee for
the Dorsey & Whitney Master
Trust FBO Stanley Rein 6,667 * 6,667 0 *
Vincent M. Palmieri(7) 1,000 * 1,000 0 *
William C. Smith Jr 3,333 * 3,333 0 *
William J. Easton Jr 3,333 * 3,333 0 *
William Kuntz 10,000 * 10,000 0 *
William Wieck & Elizabeth
Wieck 5,000 * 5,000 0 *
Wulf Paulick and Renate
Paulick 5,000 * 5,000 0 *
- -------------
* represents less than 1%.
(1) Assumes the sale of all of the Shares offered by each Selling Shareholder.
13
(2) Percentage ownership for Selling Shareholders is based on 4,755,700
(4,105,986 outstanding as of October 22, 1998, plus 54,714 exercisable
through the Warrants and 595,000 exercisable through conversion of the
Series B Preferred Stock at $3.00) shares of the Common Stock outstanding.
(3) The number of shares beneficially owned with respect to Selling
Shareholders holding the Series B Preferred Stock is based on conversion at
the current conversion price of $3.00.
(4) Includes (i) 1,667 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 4,478 issuable upon exercise of
certain of the Warrants.
(5) Includes (i) 3,333 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 11,632 issuable upon exercise
of certain of the Warrants.
(6) Includes (i) 8,333 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock and (ii) 6,517 issuable upon exercise of
certain of the Warrants.
(7) Represents shares issuable upon exercise of certain of the Warrants.
14
DIVIDEND POLICY
We have no present intention of paying any dividends on the Common
Stock. We expect that, except for the dividends required to be paid or payable
to the holders of the Series A or Series B Preferred Stock, we will retain our
earnings, if any, to finance operations.
The declaration and payment of future dividends to holders of the
Common Stock will be at the discretion of the Company's Board of Directors and
will depend upon many factors, including the Company's financial condition,
earnings, the capital requirements of its operating subsidiaries, legal
requirements and such other factors as the Board of Directors deems relevant.
MARKET FOR THE COMMON STOCK
There is currently no established public trading market for the Common
Stock. The Common Stock is traded on the OTC Bulletin Board. See "Risk
Factors--Absence of Market for Common Stock." As of October 15, 1998, we had 432
record holders of the Common Stock and 304 record holders of certain publicly
traded warrants to purchase Common Stock (the "Public Warrants"). See
"Description of Capital Stock".
PRICE RANGE OF COMMON STOCK
The Company's Common Stock was traded on the Nasdaq National Market
for fiscal years ended November 30, 1996 and 1997, and through November 6, 1998
for the fiscal year ended November 30, 1998. Currently, the Company's Common
Stock is traded on the OTC Bulletin Board.
The range of high and low bid closing quotations for the Common Stock
and the Public Warrants for each fiscal quarter for the two (2) completed fiscal
years and the most current fiscal year, are as follows:
Common Stock Public Warrants
1999 High Low High Low
First Quarter $ ______ $ ______ $ ______ $ ______
(through _______,
1999)
1998 High Low High Low
First Quarter $ 4-3/8 $ 2-1/16 $ 2 $ 1-1/8
Second Quarter $ 5-7/8 $ 3 $ 1-5/8 $ 1
Third Quarter $ 2-7/8 $ 5-3/8 $ 1-1/2 $ 1/2
Fourth Quarter $ 3-3/4 $ 1-7/8 $ 1-1/8 $ 3/8
1997 High Low High Low
First Quarter $ 7-3/4 $ 5-1/2 $ 3-3/16 $ 2-1/2
15
Common Stock Public Warrants
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
16
Selected Historical Consolidated Financial Data
The following table sets forth the selected historical financial data
of the Company for each of the preceding five years ended November 30, 1997 and
for the nine month periods ended August 31, 1997 and 1998. The selected
historical data for each of the preceding five years ended November 30, 1997 are
derived from the audited consolidated financial statements of the Company. The
selected historical data for each of the nine month periods ended August 31,
1997 and 1998 are derived from the unaudited interim consolidated financial
statements of the Company. In the opinion of management, the interim
consolidated financial statements reflect all adjustments (consisting only of
normal and recurring adjustments necessary to fairly present the information
presented for such periods.) The selected historical financial data presented
herein are qualified in their entirety by, and should be read in conjunction
with, the Company's Consolidated Financial Statements and Notes thereto included
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Summary Historical Consolidated Financial and Operating Data
Year Ended November 30, Nine Months Ended
August 31,
(Dollars in Thousands) (Dollars in Thousands)
------------------------------------------------------------ ----------------------
1993 1994 1995(4) 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
Income Statement Data:
Services $ 5,928 $ 7,256 $ 10,962 $ 15,412 $ 16,781 $ 12,361 $ 12,748
Software license 7,146 10,163 11,534 19,094 21,752 14,491 13,573
Hardware 6,220 5,245 6,528 6,751 4,112 2,687 1,455
-------- -------- -------- -------- -------- -------- --------
Total net revenues 19,294 22,664 29,024 41,257 42,645 29,539 27,776
Cost of third party software
license fees 405 797 1,149 2,484 3,065 1,906 1,886
Software development
amortization 342 515 879 1,591 2,535 2,077 2,277
Cost of services 3,898 4,467 7,884 12,109 14,000 10,584 10,175
Cost of hardware 4,752 4,146 5,118 4,979 3,260 2,074 1,112
-------- -------- -------- -------- -------- -------- --------
Total cost of products/
services 9,397 9,925 15,300 21,163 22,860 16,641 15,450
Gross margin 9,897 12,739 13,724 20,094 19,785 12,898 12,326
-------- -------- -------- -------- -------- -------- --------
Selling and marketing expenses 5,546 7,407 9,479 14,060 15,957 11,103 10,043
General and administrative
expenses 2,038 2,227 3,029 3,416 3,838 2,993 2,837
Software development expenses (1) 621 752 1,086 2,235 2,391 1,817 2,118
Restructuring and other charges 0 0 0 0 0 0 6,836
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 8,205 10,386 13,594 19,711 22,186 32,554 37,284
Operating income (loss) 1,692 2,353 130 383 (2,401) (3,015) (9,508)
Other income (expense) (32) 342 80 (118) (337) (176) (481)
Income (loss) before income
taxes 1,660 2,695 210 265 (2,778) (3,191) (9,989)
Income tax expense (benefits) 650 975 79 112 (618) (883) (33)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1,010 $ 1,720 $ 131 $ 153 $ (2,160) $ (2,308) $(10,022)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share $ 0.39 $ 0.53 $ 0.04 $ 0.04 $ 0.53 $ (0.57) $ (2.45)
Weighted average common and
common equivalent share
outstanding (2) 2,574 3,268 3,669 3,965 4,048 4,084 4,038
======== ======== ======== ======== ======== ======== ========
Other Data:
Software investment as a
percentage of software
license fees 18.4% 18.3% 29.5% 29.4% 31.5% 34.6% 36.2%
Software investment (3) $ 1,312 $ 1,857 $ 3,407 $ 5,607 $ 6,862 $ 5,024 $ 4,918
1
Balance Sheet Data:
Working capital deficit $ 42 $ 4,749 $ 4,677 $ 4,396 $ 1,785 $ (1,012) $ (1,575)
Total Assets 8,043 17,903 24,332 27,446 28,797 27,650 19,683
Long-term debt obligations 580 50 21 2,123 3,966 1,088 4,848
Stockholders' equity 1,541 10,354 14,177 14,597 12,573 12,421 3,541
- ---------------
(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, and $3,207 and
$2,800 for the nine months ended August 31, 1997 and 1998,
respectively.
(2) Weighted 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.
17
(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.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations - At and for the Three and Nine Months Ended August 31, 1998
Compared to the Three AND Nine Months Ended August 31, 1997.
Overview
The Company recorded a decrease of 15.5% in net revenues and a net
loss of $1,093,000 for the third quarter of fiscal 1998 compared with a net loss
of $1,044,000 for the third quarter of fiscal 1997. The third quarter of fiscal
1998 does not reflect a tax benefit relating to the loss because the Company is
in a loss carry forward position for financial reporting purposes. Software
revenues were down 22.1% in the third 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 and efforts spent in the
transition to adding the new Baan product line, reduced revenues from
restructured operations (a reduction of $716,000 from the third quarter of 1997)
and reduced revenues due to lower levels of personnel caused by attrition. The
Company recorded a decrease in net revenues of 6.0% and a net loss of
$10,022,000 (including a $6,836,000 restructuring charge incurred in the second
quarter of 1998) for the first three quarters of fiscal 1998, compared with a
net loss of $2,308,000 for the first three quarters of fiscal 1997. Although the
goal of the Company is to return to profitability, no assurance can be given
that the various measures that the Company has taken will actually result in the
achievement of this goal. Our long term success is also dependent on our ability
to attract and retain a highly qualified sales, development and service staff.
We have recently experienced attrition at rates higher than our historical
experience. We have taken steps to curtail the attrition, but no assurance can
be given that these steps will be successful or that further attrition will not
materially impact our financial performance.
Results of Operations
Net Revenues
Net revenues were $8,182,000 for the three months ended August 31,
1998, which was a decrease of 15.5% from the $9,682,000 for the same quarter in
the previous year. Net revenues were $27,776,000 for the nine months ended
August 31, 1998, which was a decrease of 6.0% from the $29,539,000 for the same
period in the previous year. the overall decrease in revenues for the three
months ended August 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 47.3%, 48.6%, and 4.1%, respectively, in the third quarter of
fiscal 1998, as compared with 51.3%, 42.3%, and 6.4%, respectively, in the third
quarter of fiscal 1997. The mix of revenues comparing software, services and
hardware revenues as a percentage of net revenues was 48.9%, 45.9%, and 5.2%,
respectively, in the first three quarters of fiscal 1998, as compared with
49.1%, 41.8%, and 9.1%, respectively, in the first three quarters 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 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 22.1% to $3,866,000
in the third quarter of fiscal 1998 from $4,963,000 in the third quarter of
fiscal 1997. The decrease in software license fees was mainly attributable to
the attention and efforts spent in the transition to adding the new Baan product
lines, reduced revenues from restructured operations (a reduction of $664,000
from the third quarter of fiscal 1997), and reduced revenues due to lower levels
of sales personnel caused by attrition. As additional sales personnel continue
to train in the Baan products, sales productivity temporarily decreases. The
length of the sales cycle can range from two to twelve months depending on such
factors as the size of the prospect or complexity of the prospect need. The
Company is also in the process of building a sufficient level of prospect leads
to maintain and enhance necessary levels of
19
sales activity. Management expects that this decrease in productivity will
mainly continue during the next fiscal quarter, and, thereafter, productivity is
expected to increase. Management is also actively recruiting new sales talent
through various methods. Software license fees decreased 6.3% to $13,573,000 in
the first three quarters of fiscal 1998 from $14,491,000 in the first three
quarters of fiscal 1997. The decrease was mainly attributable to the reasons
mentioned above for the third quarter of the 1998 fiscal year except that
software revenues rose in the first quarter of fiscal 1998 due to the
introduction of new products.
Service Revenues
We offer a number of optional services to our customers, including
such services as a telephone support program, systems integration, custom
software development, implementation consulting, and formal classroom and
on-site training. Service revenues decreased to $3,977,000 for the three months
ended August 31, 1998, as compared with $4,095,000 for the same period of the
prior year. This decrease was mainly the result of a lower level of service
personnel though attrition. Service revenues increased to $12,748,000 for the
nine months ended August 31, 1998, as compared with $12,361,000 for the same
period of the prior year. Management expects the level of service demand to grow
as the Company transitions to the addition of the Baan product line and
recognizes the incremental revenues associated with that transition. We have
expanded our recruiting efforts and have begun to hire additional service
personnel.
Hardware Revenues
Hardware revenues decreased 45.7% to $339,000 in the third quarter of
fiscal 1998 compared with $624,000 for the corresponding period of 1997.
Hardware revenues decreased 45.9% to $1,455,000 in the first three quarters of
fiscal 1998 compared with $2,687,000 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 $93,000 and
$334,000 from the third quarter and first three quarters 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 27.4% for the third quarter of fiscal 1998, an increase from 26.6% for the
corresponding period of 1997. The cost of software license fees as a percentage
of related revenue was 30.7% for the first three quarters of fiscal 1998, an
increase from 27.5% 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. We wrote off a
substantial portion of our past investment in software development in
conjunction with our restructuring efforts in the quarter ended May 31, 1998.
(See the discussion under the caption "Restructuring and Other Charges" in the
section of the Company's Form 10-Q for the period ended May 31, 1998 titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). Software amortization decreased $343,000 in the third quarter of
fiscal 1998 as compared to the same period of 1997 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 third party costs includes costs
associated with the new Baan product line revenues and vary directly with those
revenues. The remaining increases in the cost of software license fees as a
percentage of related revenue was due to these third party costs and to lower
levels of software revenue.
20
Cost of Services
The cost of services as a percentage of related revenue increased to
90.0% for the three months ended August 31, 1998 as compared with 82.7% for the
same quarter in the previous year. The increase was mainly due to additional
compensation for current personnel, higher costs of outside sourced labor, and
additional warranty work associated with new versions of the Company's software.
The cost of services as a percentage of related revenue decreased to 79.8% for
the nine months ended August 31, 1998 as compared with 85.6% for the same period
in the previous year. The decrease was mainly due to increased levels of
customer billing generated by existing personnel less the factors listed above
for performance during the third quarter of fiscal 1998. We have experienced
increased levels of service business from our customer base and a reduction in
employees through attrition. The current service backlog exceeds current
capacity and the Company continues 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. We also continue to take further steps to reduce the level of
customer warranty work by enhancing the quality of our software through improved
internal processes.
Cost of Hardware
The cost of hardware as a percentage of related revenue decreased to
68.4% in the third quarter of fiscal 1998 from 75.0% in the third quarter of
fiscal 1997. The cost of hardware as a percentage of related revenue decreased
to 76.4% in the first three quarters of fiscal 1998 from 77.2% in the first
three quarters 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 $93,000 in the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997 and declined by $334,000 in the first three quarters of
fiscal 1998 compared to the first three quarters of fiscal 1997.
Selling and Marketing Expenses
Selling and marketing expenses decreased $1,242,000, or 29.2%, from
$4,259,000 in the third quarter of fiscal 1997 to $3,017,000 in the third
quarter of fiscal 1998. Selling and marketing expenses decreased $1,060,000, or
9.5%, from $11,103,000 in the first three quarters of fiscal 1997 to $10,043,000
in the first three quarters of fiscal 1998. This decrease was mainly due to the
restructuring resulting in reduced staffing and closed locations, and reduced
marketing expense. The Company also experienced lower compensation expense
related to employee attrition.
General and Administrative Expenses
General and administrative expenses decreased $7,000, or 1.1%, from
$631,000 in the third quarter of fiscal 1997 to $624,000 in the third quarter of
fiscal 1998. General and administrative expenses decreased $156,000, or 5.2%,
from $2,993,000 in the first three quarters of fiscal 1997 to $2,837,000 in the
first three quarters of fiscal 1998. The decrease in general and administrative
expenses was mainly due to a reduction of expense related to the restructuring.
As a percentage of net revenues, general and administrative expenses were 7.6%
and 6.5% in the third quarter of fiscal 1998 and 1997, respectively. As a
percentage of net revenues, general and administrative expenses were 10.2% and
10.1% in the first three quarters of fiscal 1998 and 1997, respectively. The
increase in general and administrative expenses as a percentage of net revenues
was mainly attributable to the reduced level of revenues during the transition
to adding the Baan product line.
Product Development Expense
Product development expense decreased 3.9% from $621,000 in the third
quarter of fiscal 1997 to $597,000 in the third quarter of fiscal 1998. Product
development expense, exclusive of reductions for capitalized software, decreased
by $24,000, and capitalized software decreased by $308,000. Product
21
development expense increased 16.6% from $1,817,000 in the first three quarters
of fiscal 1997 to $2,118,000 in the first three quarters of fiscal 1998. The
Company capitalizes costs in accordance with Statement of Financial Accounting
Standard (SFAS) No. 86. The Company capitalized $737,000 of product development
costs in the third quarter of fiscal 1998 compared to $1,045,000 in the third
quarter of fiscal 1997. The Company capitalized $2,800,000 of product
development costs in the first three quarters of fiscal 1998 compared to
$3,207,000 in the first three quarters 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.
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. Approximately $6,600,000 of the
total charge has been paid or expensed as of August 31, 1998. The Company
anticipates the remaining liability of approximately $200,000 to be paid in the
fourth quarter of fiscal 1998, which will be financed through working capital.
Other Income (Expense)
Other income (expense) was $39,000 of expense for the third quarter of
fiscal 1997 compared to $165,000 of expense for the third quarter of fiscal
1998. Other income (expense) was $176,000 of expense for the first three
quarters of fiscal 1997 compared to $481,000 of expense for the first three
quarters 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 third quarter of fiscal
1998 or the third 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
three quarters of fiscal 1998 compared to a benefit of $883,000 for the first
three quarters of fiscal 1997. At August 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 August 31, 1998, the Company had cash and marketable securities
aggregating $8,000. During the first three quarters of fiscal 1998, the
Company's operating activities provided $1,656,000 of cash compared to using
$160,000 of cash for the same period of the prior year. This decrease in the use
of cash was mainly attributable to the restructuring of our operations and the
reduction in accounts receivable. On September 29, 1998, the Company received
payment in full of $307,000 on a note from EMS Solutions, Inc. which was,
"previously to be paid over a six year term beginning January 1, 1998. Investing
activities used cash of $2,712,000 in the first three quarters of fiscal 1998
compared to using $3,901,000 of cash in the first three quarters of fiscal 1997.
The principal use of the cash in the first three quarters of fiscal 1998 was
$2,800,000 capitalized product development. The principal uses of cash in the
first three quarters of fiscal 1997 included $3,207,000 for capitalized product
development and $1,101,000 for purchases of equipment and furniture. Financing
activities provided $1,050,000 of cash in the first three quarters of fiscal
1998 compared with providing $3,602,000 of cash in the first three quarters of
fiscal 1997. The cash provided in fiscal 1998 mainly reflected the equity
contribution from the Company's preferred stock offering. (See Note 5 to the
Consolidated Financial Statements) As of August 31, 1998, we, based on the level
of eligible accounts receivable, had $1,828,000 of availability under our then
$6,000,000 line of credit. As of September 30, 1998, we had $569,000 of
availability under our line of credit. The Company's credit agreement with
Foothill Capital Corporation also contains certain restrictive covenants
relating to income (EBITDA), tangible net worth, and level of capital
22
expenditures. On October 6, 1998, we amended our loan facility to reset the
tangible net worth and EBITDA covenants to levels in keeping with the Company's
current financial position. The amendment also restructured the loan facility to
increase the term loan by $776,553 with an amortization period of 36 months and
to reduce the revolving line of credit to a limit of $5,000,000. These changes
will provide the Company with additional short-term working capital. In order to
meet financial 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. We are continuing
our review of alternative sources of financing to deal with our 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 we are 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.
Year 2000
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 it will incur 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - AT AND FOR THE FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995.
Overview
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 3 1,1995, 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 56.75. The acquisition
was accounted for as a purchase. Goodwill of $1,437,000 resulted from the
transaction, which is being amortized
23
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 42.1% 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 $4,622,000 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-Parry 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.
24
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, In:., 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-affiliated 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, tie 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 effort 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 31.5%, 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
25
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 22.1%,
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
26
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 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.
BUSINESS
Overview
We develop, market and support integrated manufacturing and business
management software. Our 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/TM/ 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 our proprietary algorithms for scheduling and
production, to optimize the customer's labor, capital and inventory utilization.
The software we offer functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix,
and HP-UX operating systems. We also provide services support for its software
products and, on a selective basis, sells computer hardware.
Software products offered by the Company 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.
We typically focus our sales and marketing efforts on discrete
manufacturing plants. We have licensed our software products to over 1,500
customer sites. We distribute our products in the United States through eight
branch offices and through six joint ventures and independent distributors. We
have also established distribution channels through independent distributors in
Japan, Korea, China, the United Kingdom, Belgium and Poland. In addition, the
Company has joint ventures in China to support these distributors.
We were incorporated in Wisconsin in 1978. We became a publicly held
company as a result of our initial public offering which was completed in
February 1994. During 1995, we acquired Intercim Corporation and the remaining
interest in Effective Management Systems of Illinois, Inc., a joint venture
subsidiary. In 1996, we acquired the remaining interest in Darwin Data Systems
Corporation another joint
27
venture subsidiary. For further details regarding these acquisitions, see Note 2
of Notes to the Company's Consolidated Financial Statements.
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. We believe that these Manufacturing Execution
Systems represent a relatively new marketplace with substantial benefit
potential for manufacturers. We believe that this "time emphasis" in
manufacturing management, which is the focus of our TCM/R/ and FACTORYnet/R/ I/S
products, will be an essential component of the management approach for many
manufacturers in the future.
Strategy
Our objective is to grow as a leading provider of integrated business
software systems for discrete manufacturing plants within its target market. We
have identified three strategic initiatives to achieve this goal.
Focus on Time Critical Manufacturing. We believe that manufacturers
are striving to become more "time competitive," and that manufacturing software
which focuses solely on providing information for planning and on recording
information for historical analysis will be inadequate to meet the needs and
demands of manufacturers in the years to come. To be effective in the future, we
believe that manufacturing software will be required to empower individuals at
all levels of an organization to make immediate decisions regarding production
processes and business activities. Since 1988, we have focused our resources on
developing software to assist time-oriented manufacturing management. Our
software facilitates real-time decision-making by enabling employees to change
processes proactively and react quickly to marketplace demands and unanticipated
events. With few exceptions, we believe that the limited number of information
system implementations currently in place which have this "time" focus have been
developed on an individual customized basis. We are not aware of other major
products available in its target market for discrete manufacturers which offers
both planning and execution systems and has a strategy of focusing on time.
28
Commitment to Manufacturing Execution Systems. We believe 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.
We offered our first Manufacturing Execution System package in 1988 and believe
that it is currently a leader in this software segment. Typical business
functions included in a Manufacturing Execution System are described below (see
- - "Time Critical Manufacturing - 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, we believe that the value
manufacturers realize from implementing a Manufacturing Execution System extends
far beyond this realm. We believe, based on the experience of our customers,
that the major benefit of implementing a Manufacturing Execution System within
an organization is improved customer service and competitiveness. These systems
allow an organization to reduce non-value added elapsed time in the overall
business process. We currently offer two Manufacturing Execution System
products, one which is pre-integrated with a total software offering for the
entire enterprise (TCM/R/) and the second is FACTORYnet/R/ I/S in which our
personnel use Manufacturing Execution System software to "round out" and
complete partial manufacturing execution system initiatives already undertaken
by the customer.
Management believes Manufacturing Execution Systems provide a
significant market opportunity for us and, correspondingly, has strategically
committed the Company to enhancing its Manufacturing Execution System offerings
and marketplace presence.
Emphasis on Pre-Integrated Software for Discrete Manufacturing. Our
experience in the marketplace resulted in the 1995 introduction of the first
"pre-integrated" ERP/Manufacturing Execution System/Controls software offering
for discrete manufacturers. This pre-integration initiative was facilitated by
the acquisition of Intercim Corporation. 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.
We introduced the "pre-integrated" era in 1995 when we 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 us which has already been integrated and proven to function. The various
software components may be built by us or suppliers to us. In the case where
there are suppliers to us, we have 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 also are proven in advance are
available to facilitate interaction with these software products. 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. We plan 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). 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.
We believe 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
29
software have affected that marketplace as compared to custom integration of
word processing, data base, and spreadsheet desktop products.
Software Products
We develop, market and support TCM/TM/ application software for
discrete manufacturing companies. We currently offer 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. Our 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.
Our products are designed for discrete manufacturers, including both
stand-alone manufacturing plants and autonomous divisions of large corporations.
"Discrete" manufacturers assemble or fabricate parts into finished products as
distinguished from "process" manufacturers which mix, separate and otherwise
combine or control ingredients to create finished products. Our focus on
discrete manufacturers includes the market segments of repetitive and
electronics manufacturers which some people identify as additional market
segments.
Time Critical Manufacturing -- Software Products
Our software provides assistance for a broad range of tasks identified
in the six categories set forth below. 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. We anticipate that over time the two
Manufacturing Execution System product offerings will evolve into a single
product which is more comprehensive than either of the current Manufacturing
Execution System offerings.
Time Critical Manufacturing Software Suites
I. PLANNING
Master Production Scheduling Manufacturing Resource Planning II Capacity Planning
II. PRODUCT DATA MANAGEMENT
Product Configurator Engineering Change Control Standard Bills of Material
Standard Routings Computer Aided Manufacturing ("CAM") Document Library
Item Master Computer Aided Design ("CAD") Standard Cost Build Up
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
Electronic Data Interchange
IV. MANUFACTURING EXECUTION SYSTEM
Shop Floor management Job Cost
Bar Code Factory Data Collection Time & Attendance
Plant & Equipment Maintenance Shop Floor Scheduling
"As Built History" Quality Management*
Electronic Traveler Machine Interface
Message & Alarms EMS Gateway
Electronic Work Instructions
Distributed Numerical Control
V. FINANCE, ACCOUNTING AND
30
ADMINISTRATION General Ledger Fixed Assets*
Accounts Receivable Human Resources*
Accounts Payable Payroll*
Standard Cost
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 CAD systems and offer 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. We believe that our software
for EDI, which facilitates electronic order entry and advance shipping
notification, is particularly useful in meeting the needs of the automotive and
retail supply industries.
Inventory Management. The Inventory Management modules provide
engineering data control and offer inventory record keeping, availability
projections and replenishment planning. These modules provide bin, lot and
serial number control, multi-location support, cycle counting and physical
inventory control.
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 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 our software.
31
V. Finance, Accounting and Administration.
These modules provide general accounting and financial assistance in
tracking and estimating planned and actual work-in-process costs. Any
information from the finance and accounting database may be readily pulled into
personal computer spreadsheet systems for further analysis and reporting. These
modules also interface with third party human resource, fixed assets, and
payroll software products sold by us.
VI. Decision Support Tools.
These software modules are a combination of internally developed and
third party software sold by us which facilitate easy data management, analysis,
customization, communication, etc., with and between the our software and other
software in the customer's computing environment.
Our software modules may be licensed individually or in combination to
allow companies with differing business needs and schedules to have flexibility
in the implementation of 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
We invest in a wide range of software technologies which are important
not only for the our end user customer but also for our internal software
development and distribution. In appropriate circumstances, we have licensed
software developed by others and integrated various features of that software
into its own software products. For example, our software products incorporate
imaging technology, which enables the user to store and interactively display
images such as photographs of steps in a particular production process, diagrams
of manufacturing sub-assemblies or motion video depicting the proper operation
of a machine. This imaging capability facilitates manufacturing and production
set-up and also assists users in satisfying ISO 9000 certification criteria (a
set of international quality standards). Our products also include EDI, which
facilitates electronic order entry and advance shipping notification.
For internal software development, we employ 4GL sets of development
tools which we believe are instrumental in achieving software productivity
improvements and allow end users flexibility to customize their software
systems. We have also developed proprietary software which facilitates the
conversion of our software products into various foreign languages, including
complex Asian languages. We believe that this technology is useful not only in
penetrating foreign software markets, but also in assisting customers which use
our software products on a multi-national basis.
For a further discussion of our ongoing efforts to develop new
software technologies, see "Product Development."
Customer Services
We offer comprehensive services for customers. Services provided by us
include a telephone support program, system integration, custom software
development, implementation consulting, and formal classroom and on-site
training. At the customer's option, these services, which are available for both
of our software products, can be provided entirely by us or may be supplied in
part by the customer or another third party such as a systems integrator or
consulting firm. These services, which provide a recurring stream of revenue for
us, are offered on an unbundled basis for either an annual or a multi-year
subscription period. All of the services offered by us are optional, except that
we require first-time licensees of our software to subscribe for at least two
years of telephone support. We believe that the availability of effective
customer services is critical for customer satisfaction and to increase software
license fee revenues. We further believe that services can provide a continuing
and more predictable source of revenue as compared to software license fee
revenues. For the years ended November 30, 1995, 1996, 1997 and the nine months
ended August 31, 1998, services revenues accounted for 37.8%, 37.4%, 39.4% and
45.9% of our total net revenues, respectively.
32
The following is a brief description of the various services we provide:
Telephone Support Program. Our telephone support program is a
comprehensive, fee-based program designed to help customers obtain the maximum
benefit from our business management software. The telephone support program is
handled out of our Minnesota, Illinois, and Wisconsin offices and is staffed by
thirty trained professionals. The program includes, among other services,
answering technical questions regarding standard software, and diagnosing and
resolving equipment and software problems.
System Integration and Custom Software Development. We offer system
integration and custom software development services, on a fee basis, to meet
specific customer requirements and to integrate our software with a customer's
existing computer system. We have developed a Time Critical Implementation
Methodology ("TCIM"), which is a proprietary implementation methodology intended
to facilitate integration and efficient implementation of our products at
customer sites. This approach is designed to allow the customer to obtain
business benefits sooner than with less structured methodologies. Ongoing
technical support is also available from us to all customers who elect to
purchase custom software development services.
Implementation Consulting. We provide consulting services, on a fee
basis, to assist customers in implementing our software systems using the TCIM
approach. These services include value-added implementation planning, project
management and specialized customer training. We employ a full-time professional
services staff to provide these and other services.
Training. We offer customers a series of both classroom and on-site
training options. Training includes classroom and personal instruction at a
number of our locations or at the customer's plant site. Standardized training
is offered for a fixed fee per class.
Hardware Products
We sell computer hardware and data collection equipment in order to
facilitate sales of our software products to customers requiring a complete
management information system. We sell, among other hardware, factory data
collection equipment, CAMates/R/ (a small specialized computer allowing users to
monitor and collect data from production machines), bar coding systems,
networking and communication equipment, and occasionally server and client
computer hardware. The factory data collection and bar coding hardware is
purchased from the original manufacturers and resold on a project basis. This
equipment ranges from fixed mount bar code scanners and printers to portable
units and radio frequency network units. We also offer our customers networking
and communication hardware and server and client computing hardware which we
purchase from original manufacturers, including Intermec Corporation, plus two
distributors, Keylink SystemsSM and Ingram Micro, Inc. During the past several
years, we have focused our efforts on generating an increasing percentage of our
net revenues from software license fees, which have a higher margin than
hardware revenues.
Markets and Customers
We target companies operating discrete manufacturing plants 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. Our
customers include, among others, capital equipment manufacturers, job shops,
high volume manufacturers, automotive suppliers, consumer product manufacturers,
and aerospace equipment manufacturers. During each of the past three fiscal
years, no one customer has accounted for more than 10% of our total net
revenues.
Sales and Marketing
In the United States and Canada, we license our products and offer
services through a direct branch office sales force, joint ventures and
independent distributors as reflected in the table below:
33
Branch Office Locations Independent Distributor Joint Venture
Territories Location
Austin, TX Camarillo, CA Cleveland, OH
Baltimore, MA Miller Place, NY
Boston, MA Menomonee, MI
Chicago, IL Pittsburgh, PA
Cincinnati, OH Wausau, WI
Detroit, MI West Des Moines, IA
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
We own 50% of the joint venture operating in Cleveland. We obtained
our interest in this joint venture primarily in exchange for technical knowledge
and management expertise. We have no obligation to fund any losses that may be
incurred by the joint venture.
Our direct sales personnel are compensated on a salary plus commission
basis. Our joint venture and independent distributor agreements generally
provide that sales will be made by authorized resellers from offices within a
designated territory. The agreements obligate us to license the reseller at
specified prices and to provide training to each reseller. Resellers are
normally obligated to sell a specified minimum amount of our software to keep
the agreements in effect. We also maintain a staff of systems consultants who
offer pre- and post-sales support to the sales and distribution network.
We market our products through advertising campaigns in national trade
periodicals and through direct mailings. These efforts are supplemented by
listings in relevant directories and trade show and conference appearances. We
are also given leads regarding potential customers by its hardware and services
vendors, existing customers and various accounting and consulting firms.
Sales cycles for our products vary substantially based on the degree
of integration, consulting and training required and also on the status of the
customer's hardware system implementation. A sales cycle is usually three to
twelve months from the time an initial sales presentation is made until the time
a signed license agreement is entered into with a customer.
In addition to our domestic markets, over the last several years we
have begun efforts to develop a market for its products in the Pacific Rim and
Europe. We have established independent distributor relationships in Japan,
South Korea, the Peoples Republic of China, the United Kingdom, and Belgium. In
each of these countries, our software products have been or are in the process
of being converted to the local language. We have, as part of a 20% owned joint
venture, an office in Hong Kong to support our Asian distributors.
Strategic Arrangements
A facet of our strategy is to establish arrangements with suppliers of
state of the art information systems technology. Over the last five years we
have worked to expand the number of its strategic relationships.
34
We have distributor relationships with Keylink SystemsSM, a subsidiary
of Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which
supply computers, associated peripherals and third party software. We have
arrangements with Intermec Corporation relating to bar code data collection
systems which are integrated on an "off-the-shelf" basis into our software
products. Our software has been integrated with other bar coding systems on a
customized basis. We also have a relationship with the Datamyte Division of
Rockwell Automation for its Quantum quality control software product line.
In addition to its relationships with equipment providers, we have
relationships with numerous software product suppliers. These companies provide
software which we use within its TCM/R/ and FACTORYnet/R/ I/S software. Synergex
International Corporation has provided the Synergy 4GL Applications Development
Environment since 1990. We purchase EDI software from Supply Tech and Radley
Corporation.
Our relationship with the equipment and software product suppliers
described above is basically that of a reseller of such suppliers' products. As
such, we are entitled to volume discounts on products which it purchases and is
generally entitled to the benefits of cooperative marketing programs.
Product Development
We believe 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. We have 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, we have 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, our
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 our products, enhanced client-server network operations on
various operating systems, extended operation on various relational database
products, and enhanced functional capability. There can be no assurance,
however, that these development efforts will result in product enhancements that
we will be able to market successfully. Certain of these enhancements are
dependent upon the development efforts of third party suppliers over whom we
have no control. In the event the development efforts of the third party
suppliers are delayed or are unsuccessful, our software developments would be
similarly delayed. Software development is, however, an evolutionary process and
our management believes 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 our products.
Some of our existing competitors, as well as a number of potential competitors,
have larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than us.
We believe that its employees' understanding of diverse manufacturing
operations and processes and the potential business benefits of the TCMJ
management approach to such operations allow us to differentiate itself from
competitors. Other competitive factors include software product features and
functions, product
35
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 the Company 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, we generally do not encounter these competitors in the
marketplace. We believe that our 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 integrated product offerings for
both ERP and Manufacturing Execution System discrete manufacturers.
Intellectual Property
We have registered or have applied for registration of our "EMS" 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 we currently do business. Among others, we have also received
or applied for trademarks for products marketed under the names FACTORYnet/R/
I/S and CAMate/R/.
We regard our software products as proprietary in that title to and
ownership of our software reside exclusively with us. We attempt to protect our
rights with a combination of trademark, copyright and employee and third-party
nondisclosure agreements. Despite these precautions, it may be possible for
unauthorized parties to copy or reverse-engineer portions of our software
products. While our competitive position could conceivably be threatened by our
inability to protect our proprietary information, we believe that copyright and
trademark protection are less important to our success than other factors such
as the knowledge, ability and experience of our personnel, name recognition and
ongoing product development and support.
Employees
As of November 30, 1998, we had 299 full-time employees, of whom 60
were engaged in sales and marketing; 58 in product development; 140 in customer
service; and 41 in management, finance and administration. Our employees are not
represented by any collective bargaining organization and we have never
experienced a work stoppage. We consider our employee relations to be good.
Properties
Our Corporate headquarters are located in Milwaukee, Wisconsin, in a
leased office consisting of approximately 42,000 square feet under a lease
expiring November 30, 2003. We lease additional facilities domestically in
Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati, Ohio;
Detroit, Michigan; Hartford, Connecticut; Houston, Texas; Indianapolis, Indiana;
Minneapolis, Minnesota; Philadelphia, Pennsylvania; Port St. Lucie, Florida;
Rockford, Illinois and San Jose, California. We lease office space
internationally in Hong Kong, and China. See Note 7 of the Notes to Consolidated
Financial Statements for information regarding our total lease obligations.
Legal Proceedings
As of the date of this filing, neither we nor any of our subsidiaries
is a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material effect on our results of operations
or financial position. In December, 1998, a judgement was issued in a legal
proceeding that resulted in the Company being ordered to pay $212,000.
36
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position with the
Company of each person who, as of November 30, 1998, is a director, nominee for
director, and/or executive officer of the Company:
Name Age Position with the Company
Helmut M. Adam 47 Director
Jeffrey J. Fossum 45 Chief Financial Officer and Assistant
Treasurer
Michael D. Dunham 53 President and Chief Executive Officer;
Director
Robert E. Weisenberg 49 Director
Scott J. Mermel 50 Director
Thomas M. Dykstra 57 Vice President, Secretary and Treasurer;
Director
Wayne T. Wedell 39 Vice President - Services
Helmut M. Adam, 47, a director since 1987, has served as President of
Olympus Flag & Banner, Inc., a manufacturer of banners, flags and display
products, since 1992. Prior thereto, Mr. Adam was President of Ransomes, Inc., a
manufacturer of commercial grass mowing equipment. Mr. Adam is a Certified
Public Accountant.
Michael D. Dunham, 53, a director since 1978 and co-founder of the
Company, has served as President and Chief Executive Officer of the Company
since its inception in 1978. Mr. Dunham has over 20 years of experience in
management, sales, consulting, software design and development in the
manufacturing and distribution software industry. Mr. Dunham has a B.S. degree
in electrical engineering from the University of Denver and a Masters of
Management Science degree from the Stevens Institute of Technology. Mr. Dunham
is a Fellow of the American Production and Inventory Control Society.
Scott J. Mermel, 50, a director since 1987, is a private investor.
From April 1997 to July 1998, Mr. Mermel served as Vice President, Marketing of
Metrix, Inc., a developer and marketer of customer service and product support
software. From 1980 to April 1997, Mr. Mermel was a floor trading member of the
Chicago Mercantile Exchange. Prior to that, he held several managerial positions
with Xerox Computer Services, a developer and marketer of software systems for
manufacturing companies.
Robert E. Weisenberg, 49, a director since 1993, is President of
Northwoods Software Development, Inc., a software development firm. From
December 1989 to December 1997, Mr. Weisenberg was Vice President - Operations
and General Manager of the Company. Mr. Weisenberg also served as Assistant
Secretary of the Company from December 1993 until December 1997. Mr. Weisenberg
has a B.A. from Stanford University and is a Certified Public Accountant.
Thomas M. Dykstra, 57, a director since 1978 and a co-founder of the
Company, has served as a Vice President and as Secretary and Treasurer of the
Company since its incorporation in 1978. During his tenure with the Company, Mr.
Dykstra has managed several different functions including product development,
marketing, affiliate sales, finance, and administration and support. Mr. Dykstra
has a degree in mathematics from Hope College and an M.B.A. degree from the
University of Chicago. Mr. Dykstra is a Fellow of the American Production and
Inventory Control Society.
37
Jeffrey J. Fossum, 45, has served as Chief Financial Officer of the
Company since 1987 and as Assistant Treasurer since December 1993. From 1983 to
1987, Mr. Fossum was the Controller of Berg Company, a manufacturer of
restaurant equipment. Mr. Fossum received his B.A. degree from the University of
Wisconsin-Eau Claire. Mr. Fossum is a Certified Public Accountant.
Wayne T. Wedell, 39, joined the Company in 1981 and has held positions
of Account Manager, Senior Account Manager, Group Manager as well as
Professional Services Manager, and was promoted to Vice President - Services in
1992. Mr. Wedell holds a B.A. degree in business administration from the
University of Wisconsin-Milwaukee.
Executive Compensation
The following table sets forth certain information concerning
compensation paid for the last three fiscal years to the Company's Chief
Executive Officers and each of the Company's other executive officers who earned
cash compensation in excess of $100,000 for the fiscal year ended November 30,
1998. The persons named in the table are sometimes referred to herein as the
"Named Executive Officers."
Name and Other
Principal Position Year Salary(1) Bonus Compensation
Michael D. Dunham 1998 $170,351 $ -0- $ -0-
President and CEO 1997 $185,586 -0- -0-
1996 $175,148 -0- -0-
Thomas M. Dykstra 1998 $161,735 $ -0- $ -0-
Vice President, Secretary 1997 $176,308 -0- -0-
and Treasurer 1996 $164,739 -0- -0-
(1) Certain personal benefits provided by the Company and its subsidiaries
to the Named Executive Officers are not included in the table. Such
benefits consisted of Company-provided automobiles and reimbursement of
certain medical expenses. The aggregate amount of such benefits for
each Named Executive Officer in each year reflected in the table did
not exceed 10% of the sum of such officer's salary and bonus in each
respective year.
Director Compensation
Directors who are officers or employees of the Company receive no
compensation as such for service as members of either the Board or committees
thereof. In fiscal 1998, the non-employee directors received a cash retainer fee
of $3,500. In addition, non-employee directors of the Company are entitled to
receive grants of options to purchase Common Stock under the Company's 1993
Stock Option Plan (the "1993 Plan"). Under the 1993 Plan, each person who is
first elected as a non-employee director automatically receives on the date of
his or her election an option to purchase 2,030 shares of the Common Stock. On
the day following the annual meeting of shareholders in each year, each
non-employee director is also entitled to receive an option to purchase 1,500
shares of the Common Stock for serving on the Board and an option to purchase
1,000 shares of the Common Stock for each Board committee on which the director
serves. Options granted to non-employee directors have a per share exerciser
price of 100% of the fair market value of a share of the Common Stock on the
date of the grant. Non-employee director options under the 1993 Plan vest as to
10% of the shares subject thereto on the first anniversary of the grant date, an
additional 20% on the second anniversary of the grant date, an additional 30% on
the third anniversary of the grant date, and the final 40% on the fourth
anniversary of the grant date, except that if the non-employee director ceases
to be a director by reason of death, disability or retirement during such
period, or in the event of a change in control of the Company, the option will
become immediately exercisable in full. Options granted to non-employee
directors will terminate on the earlier of (a) ten years after the date of
grant, (b) six months after the non-employee director ceases to be a director of
the
38
Company by reason of death, or (c) three months after the non-employee director
ceases to be a director of the Company for any reason other than death. Under
the terms of the 1993 Plan, Messrs. Mermel and Adam each received in fiscal 1998
an option to purchase 3,500 shares, and Mr. Weisenberg received an option to
purchase 1,500 shares, of the Common Stock at a per share exercise price of
$3-7/16. No options were exercised by the non-employee directors during fiscal
1998.
Board of Directors Committees
The Board has standing Audit and Compensation Committees. The Audit
Committee is responsible for recommending to the Board the appointment of
independent auditors, approving the scope of the annual audit activities of the
auditors, approving the audit fee payable to the auditors and reviewing audit
results. Messrs. Adam, Dunham and Mermel are members of the Audit Committee. The
Audit Committee held one meeting in fiscal 1998.
The Compensation Committee (a) reviews and recommends to the Board the
compensation structure for the Company's directors, officers and other
managerial personnel, including salary rates, participation in any incentive
bonus plans, fringe benefits, non-cash perquisites and other forms of
compensation, and (b) administers the Company's 1993 Plan and the 1994 Employee
Stock Purchase Plan. The Compensation Committee also administers the 1998 Stock
Purchase Plan. Messrs. Adam and Mermel are members of the Compensation
Committee. The Compensation Committee held five meeting in fiscal 1998.
The Board has no standing nominating committee. The Board selects the
director nominees to stand for election at the Company's annual meetings of
shareholders and to fill vacancies occurring on the Board. The Board will
consider nominees recommended by shareholders, but has no established procedures
which shareholders must follow to make a recommendation. The Company's Bylaws
also provide for shareholder nominations of candidates for election as
directors. These provisions require such nominations to be made pursuant to
timely notice (as specified in the Bylaws) in writing to the Secretary of the
Company. The shareholder's notice of nomination must contain information
relating to the nominee which is required to be disclosed by the Company's
Bylaws and the Exchange Act.
Stock Options
The Company has in effect the 1993 Plan pursuant to which options to
purchase the Common Stock may be granted to employees (including executive
officers) of the Company and its subsidiaries. No options were granted to the
Named Executive Officers during fiscal 1998 and no Named Executive Officer held
options to acquire the Common Stock during fiscal 1998.
Employment Agreements
Messrs. Fossum and Wedell have entered into Special Compensation and
Separation Agreements. Mr. Fossum's Agreement obligates the Company to
compensate Mr. Fossum at a level consistent with his position relative to other
executives, but the Agreement may be terminated at any time with certain
exceptions related to the Company closing a transaction with an alliance partner
prior to July 1, 1999. Mr. Wedell's Agreement is for eight years and obligates
the Company to compensate Mr. Wedell at an initial salary of $90,000 (future
salary to be set by the Compensation Committee of the Company), and pursuant to
his Agreement, the Company, under certain circumstances, must pay consideration
in the event it terminates Mr. Wedell prior to the end of the eight-year term.
Related Party Transactions
Michael D. Dunham, the Company's President, Thomas M. Dykstra, the
Company's Vice President, Secretary and Treasurer, Robert E. Weisenberg, the
former Vice President-Operations and General Manager and Assistant Secretary of
the Company, and Donald W. Vahlsing, an employee of the Company, own all of the
outstanding common stock of EMS Solutions, Inc. ("EMS Solutions"). EMS Solutions
employs 18
39
people, including a full-time Vice President and General Manager. Although
Messrs. Dunham and Dykstra are shareholders and directors and Messrs. Weisenberg
and Vahlsing are shareholders of EMS Solutions, they are not involved in the
daily management of its operations.
EMS Solutions develops and sells computer software and related
hardware to the food vending and food distribution industry. In the past, the
Company provided office space, accounting and administrative services, computer
processing time, and other miscellaneous services to EMS Solutions. Fees
received for these services amounted to approximately $122,000 for the fiscal
year ended November 30, 1997. Management believes that the fees charged for
these services were comparable to the fees that would have been charged by
unaffiliated third parties. The Company also sold computer hardware to EMS
Solutions. Sales of such hardware to EMS Solutions by the Company totaled
approximately $331,000 for the fiscal year ended November 30, 1997. At November
30, 1997, EMS Solutions had debt outstanding to the Company of approximately
$404,000. Such debt represented trade payables for services and equipment
provided by the Company to EMS Solutions. Interest was paid by EMS Solutions
with respect to these trade payables at a rate equal to the Company's cost of
funds under its revolving line of credit. The rate of interest charged (which
was recalculated monthly) on the trade payables of EMS Solutions was 9.5% at
November 30, 1997. On July 1, 1997, EMS Solutions moved to new facilities and no
longer utilizes office space or other material services of the Company. In
addition, EMS Solutions no longer purchases computer hardware from the Company.
On September 29, 1998, the Company received payment in full of $307,000 on a
note from EMS Solutions, Inc.
STOCK HELD BY OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the
beneficial ownership of shares of the Common Stock on November 30, 1998 by: (i)
each director of the Company, (ii) each executive officer of the Company, and
(iii) all director and current executive officers as a group. None of these
individuals are selling Common Stock pursuant to this Prospectus.
Shares Beneficially Owned
Prior to Offering
Name and Address of Amount and Percentage
Beneficial Owner(1) Nature of of Class
Ownership(1) (1)(2)
Directors and Officers(7)(8):
Michael D. Dunham 637,300 15.6%
Thomas M. Dykstra 575,000(3) 14%
Robert E. Wiesenberg(4) 283,200 6.9%
Donald W. Vahlsing(5) 250,900 6.1%
Richard W. Grelck 216,304 5.2%
Helmut M. Adam 24,435 *
Scott J. Mermel 24,435 *
Wayne T. Wedell 27,460 *
Jeffrey J. Fossum 20,821 *
All Directors and Executive
Officers as a Group (7 1,808,955(6) 44%
persons)
40
- ------------
* Represents less than 1%.
(1) The address of each person who holds in excess of 5% of the Common
Stock identified in this table is 12000 West Park Place, Milwaukee,
Wisconsin 53224.
(2) Includes the following shares subject to stock options which were
exercisable as of or within 60 days of November 30, 1998: Mr. Grelck,
189,804 shares; Mr. Adam, 22,435 shares; Mr. Mermel, 22,435 shares;
and all directors and executive officers as a group, 257,394 shares.
(3) Consists of (a) 165,000 shares held by the Dykstra Family Limited
Partnership for which Mr. Dykstra acts as managing general partner and
(b) 410,000 shares held by a family trust for which Mr. Dykstra serves
as trustee.
(4) Mr. Weisenberg resigned as Vice President--Operations and General
Manager and Assistant Secretary of the Company on December 31, 1997.
(5) Mr. Vahlsing works part-time for the Company.
(6) Assumes the exercise of all options held by the group which were
exercisable as of or within 60 days of November 30, 1998. The number
of shares reflected as beneficially owned by all directors and
executive officers does not include the shares owned by Mr. Vahlsing.
Other Beneficial Owner
The following tables sets forth information, as of December 31, 1997,
regarding beneficial ownership by the only other person known to the Company to
own beneficially more than 5% of the outstanding Common Stock as of such date.
The beneficial ownership set forth has been reported on a filing made by such
beneficial owner on Schedule 13G with the Securities and Exchange Commission.
Amount and Nature of Beneficial Ownership
Voting Power Investment Power
Name and Address Sole Shared Sole Shared Aggregate Percent of
of Beneficial Owner Class
Heartland Advisors, Inc.(1) 707,800 0 780,800 0 780,000 19.1%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
- -------------
(1) The filing made by Heartland Advisors, Inc. indicates that the Common Stock as to which it is deemed to be beneficial owner is
held in various investment advisory accounts.
41
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of twenty million
(20,000,000) shares of the Common Stock and three million (3,000,000) shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock").
The Common Stock is entitled to such dividends as may be declared from
time to time by the Board of Directors of the Company in accordance with
applicable law.
Except as provided under Wisconsin law, and except for the voting
rights of holders of Series B Preferred Stock, only the holders of the Common
Stock are entitled to vote for the election of directors of the Company and on
all other matters. Holders of the Common Stock are entitled to one vote for each
share of the Common Stock held by them subject to section 180.1150 of the
Wisconsin Statutes. (See "Certain Statutory Provisions" below). Holders of the
Common Stock do not have cumulative voting rights in connection with the
election of directors, which means that holders of shares entitled to exercise
more than 50% of the voting power represented at any meeting of shareholders
have the power to elect all of the directors to be elected at any such meeting.
All shares of the Common Stock are entitled to participate equally in
distributions in liquidation subject to any preferential right of holders of
Preferred Stock. Except as the Board of Directors may in its discretion
otherwise determine, holders of the Common Stock have no preemptive rights to
subscribe for or to purchase shares of the Company's capital stock. There are no
conversion rights, sinking fund, or redemption provisions applicable to the
Common Stock. Section 180.0622(2)(b) of the Wisconsin Statutes and judicial
interpretations thereof provide that shareholders are personally liable for
debts owing to employees of the company for services performed (not to exceed
six months' service in any one case).
Certain Statutory Provisions
Section 180.1150 of the Wisconsin Statutes provides that the voting
power of shares held by any person or persons acting as a group that is greater
than 20% of the voting power in the election of directors is limited to 10% of
the full voting power of those shares. This restriction does not apply to shares
acquired directly from the Company or in certain specified transactions or
shares for which full voting power has been restored pursuant to a vote of
shareholders.
Sections 180.1140 to 180.1144 of the Wisconsin Statutes contain
certain limitations and special voting provisions applicable to specified
business combinations involving the Company and a significant shareholder,
unless the Board of Directors approves the business combination or the
shareholder's acquisition of shares before such shares are acquired. Similarly,
sections 180.1130 to 180.1133 of the Wisconsin Statutes contain special voting
provisions applicable to certain business combinations, unless specified minimum
price and procedural requirements are met.
Following commencement of a takeover offer, section 180.1134 of the
Wisconsin Statutes imposes special voting requirements on certain share
repurchases effected at a premium to the market and on certain asset sales by
the Company, unless, as it relates to the potential sale of assets, the
corporation has at least three independent directors and a majority of the
independent directors vote not to have the provision apply to the corporation.
The foregoing provisions of the Wisconsin Statutes could have the
effect of delaying, deterring, or preventing a change in control of the Company.
42
Restated Articles of Incorporation
Under the Restated Articles of Incorporation of the Company (the
"Restated Articles of Incorporation") and Bylaws of the Company, the Board of
Directors is comprised of five members who are elected by the shareholders for
three year terms at the annual meeting of shareholders. The Restated Articles of
Incorporation provide that any vacancies on the board of Directors are filled
only by the affirmative vote of a majority of the directors in office, even if
less than a quorum. Any director so elected will serve until the next election
of directors and until his or her successor is duly elected and qualified.
The Restated Articles of Incorporation provide that any director may
be removed from office with or without cause, but only by the affirmative vote
of at least sixty-six and two-thirds percent of the voting power of the then
outstanding shares entitled to vote in the election of directors.
The provisions of the Restated Articles of Incorporation summarized
above could have the effect of delaying, deterring, or preventing a change in
control of the Company.
Preferred Stock
The Company has the authority to issue, in one or more series, up to
3,000,000 shares of Preferred Stock. The Preferred Stock is issuable in series,
each of which may vary as determined by the Board of Directors as to the
designation and minimum number of shares of each series, the voting power of the
holders thereof, the dividend rate, redemption terms and prices, voluntary and
involuntary liquidation preferences, conversion rights and sinking fund
requirements, if any. As of the date of this Prospectus, the only shares of
Preferred Stock issued and outstanding are the shares of Series B Preferred
Stock.
Series B Preferred Stock
General. The Series B Preferred Stock has been authorized as a series
consisting of a maximum of five thousand (5,000) shares of which 1,785 shares
are issued and outstanding.
Dividends. Holders of the Series B Preferred Stock are entitled to
receive cumulative preferential dividends payable quarterly in cash on January
2, April 1, July 1 and October 1 of each year at the rate of eight (8%) percent
per annum. The first dividend payment date with respect to the Series B
Preferred Stock shall be January 2, 1999, which dividend shall be paid on a pro
rata basis for the period such shares of the Series B Preferred Stock are
outstanding. Commencing with the quarterly period beginning January 2, 2002, the
annual dividend rate will increase each quarterly period beginning January 2,
2002, the annual dividend rate will increase each quarterly period by two (2%)
percent up to a maximum dividend of eighteen (18%) percent per annum (e.g., the
annual dividend rate for the quarterly period commencing January 2, 2002 will be
ten (10%) percent per annum and the annual dividend rate for the quarterly
period commencing April 1, 2002 will be twelve (12%) per annum). In the event
that the Company cannot, as determined by the Board of Directors in its sole
discretion, pay dividends in cash on a dividend payment date, the Company shall
pay dividends in shares of the Series B Preferred Stock valued at eighty (80%)
percent of the lesser of : (i) $1,000 and (b) the Conversion Price (as defined
in the Company's Restated Articles of Incorporation).
Voting Rights. The holders of the Series B Preferred Stock shall be
entitled to vote, on all matters in which holders of the Common Stock are
entitled to vote, voting together with the Common Stock. The holders of the
Series B Preferred Stock shall have the number of votes that they would have
assuming conversion of the Series B Preferred Stock into the Common Stock as of
the record date for the meeting of the Company's shareholders, with fractional
shares being disregarded. The holders of the Series B Preferred Stock shall be
entitled to receive all communications sent by the Company to the holders of the
Common Stock. The holders of the Series B Preferred Stock are entitled to vote
together as a class on the issuance of any class of equity securities which
ranks equal or senior to the Series B Preferred Stock, and on any change or
repeal of any of the express terms of the Series B Preferred Stock. When voting
as a separate class, the affirmative vote of not less
43
than a majority of the outstanding shares of the Series B Preferred Stock shall
be required for approval of such matters.
Liquidation. On any liquidation, dissolution, or winding up of the
Company, after payment of all creditors of the Company, the holders of the
Series B Preferred Stock will have the right to receive out of the remaining
assets of the Company, before the holders of any other equity interest in the
Company are entitled to receive anything, the sum of one thousand dollars
($1,000) per share, plus any accrued and unpaid dividends.
Voluntary Conversion. Each share of the Series B Preferred Stock is
convertible, at the option of the holder, into shares of the Common Stock at any
time prior to the effective date of the forced conversion or redemption at the
Conversion Price, subject to adjustment, and subject to further reduction in the
Conversion Price in the event that the average closing price for the Common
Stock on the highest five (5) out of the last ten (10) trading days of the
calendar month of January 1999 is not five and 25/100 dollars ($5.25) per share
of the Common Stock or greater, then effective January 31, 1999, the Conversion
Price shall be reduced to the lowest closing bid price within thirty (30) days
after October 30, 1998, but in no event less than two dollars ($2.00) per share
of the Common Stock, subject to adjustment. In no event shall the Conversion
Price be increased as a result of the foregoing. The Company will not issue
fractional shares of the Common Stock upon conversion of the Series B Preferred
Stock, but will pay a cash adjustment for any such fraction.
Forced Conversion. The Company shall have the right to force
conversion of the Series B Preferred Stock into shares of the Common Stock at
any time after issuance of the Series B Preferred Stock, provided: (i) that on
the Forced Conversion Notice Date and on the Forced Conversion Date (each as
defined in the Restated Articles of Incorporation) the Common Stock issuable
upon conversion of the Series B Preferred Stock has been registered pursuant to
the Securities Act and such registration is then currently effective; and (ii)
the average of the closing bid price of the Common Stock as listed on the
NASDAQ, the NYSE, the ASE or wherever the Common Stock then trades, is at least
one hundred seventy-five (175%) percent of the Conversion Price for twenty (20)
trading days within any thirty (30) consecutive trading day period ending no
more than ten (10) days prior to the Forced Conversion Notice date. Any notice
of forced conversion must be given to all holders no less than thirty (30) nor
more than forty-five (45) days prior to the Forced Conversion Date. On the
Forced Conversion Date, the Company shall pay to all registered holders of the
Series B Preferred Stock all accrued and unpaid dividends through and including
the Forced Conversion Date. In the event that the Board of Directors of the
Company approves a transaction whereby the holders of Common Stock would be paid
a per share price equal to or in excess of one hundred seventy-five (175%)
percent of the Conversion Price (the "Sale Event") and on the Forced Conversion
Notice Date and on the Forced Conversion Date the condition set forth in
subsection (i) above has been satisfied, the Company can require all holders of
the Series B Preferred Stock to convert their shares of the Series B Preferred
Stock into shares of the Common Stock immediately prior to the closing of the
Sale Event. Notwithstanding anything to the contrary, holders of the Series B
Preferred Stock shall not have the right to vote together with the holders of
the Common Stock or as a separate class on whether to approve the Sale Event
(although a holder of the Series B Preferred Stock that converts the Series B
Preferred Stock into the Common Stock prior to the record date for the
shareholders' meeting to vote on the Sale Event wold be entitled to vote such
shares of the Common Stock) during the one hundred fifty (150) day period
following the Forced Conversion Notice Date. In the event that the foregoing
does not eliminate the voting rights of the Series B Preferred Stock with
respect to a Sale Event, then the holders of such Series B Preferred Stock shall
be deemed to have granted to the President and Secretary of the Company (and
each of them individually) an irrevocable proxy for such one hundred fifty (150)
day period to vote the Series B Preferred Stock for the approval of the Sale
Event. In the event that the Sale Event would result in the holders of the
Series B Preferred Stock receiving securities, it is a condition to the
Company's right to force conversion resulting from a Sales Event that the
securities to be received by the holders of the Series B Preferred Stock are
registered under the Securities Act and are freely transferable.
Adjustment to Conversion Price. The shares of the Series B Preferred
Stock provide for adjustment to the Conversion Price upon (i) any subdivision or
reverse split of the outstanding shares of the Common Stock into a greater or
lesser number of shares of the Common Stock; (ii) any declaration of a dividend
or other distribution by the Company upon the Common Stock payable in shares of
the Common Stock; or (iii) any capital reorganization or reclassification of the
capital stock of the Company. If the Company, through either
44
a private placement or a public offering (but other than pursuant to options
granted under the Company's directors' and employee stock option and stock
purchase plans or shares or options issued in an acquisition or shares issuable
pursuant to the exercise of the Warrants) issues shares of the Common Stock, or
options to purchase the Common Stock or rights to subscribe for the Common Stock
or securities convertible into or exchangeable for the Common Stock at a price
(such price, if other than cash, as determined by the Company's Board of
Directors) less than the then market price on the date of sale, the Conversion
Price then in effect shall automatically be reduced by multiplying the then
Conversion Price by a fraction, the numerator of which shall be the number of
shares of the Common Stock outstanding immediately prior to such issuance, sale
or distribution plus the number of shares of the Common Stock which the
aggregate consideration received or to be received by the Company for such
issuance, sale or distribution would purchase at the market price per share, and
the denominator of which shall be the number of shares of the Common Stock
outstanding immediately after giving effect to such issuance, sale or
distribution. The Company will not issue fractional shares of the Common Stock
upon conversion of the Series B Preferred Stock, but will pay a cash adjustment
for any such fraction. There will be no adjustment in the event that the Company
pays a dividend in cash to its holders of the Common Stock; provided, however,
the Company will give the holders of the Series B Preferred Stock written notice
at least thirty (30) days prior to the record date for the cash dividend, that
the Company intends to declare a cash dividend.
Redemption. Commencing three (3) years after October 30, 1998, the
Company may redeem all of the outstanding Series B Preferred Stock at any time
at a redemption price of one thousand dollars ($1,000) per share, plus all
accrued and unpaid dividends, if any, to the date fixed for redemption. Notice
of redemption shall be on not less than thirty (30) nor more than forty-five
(45) days' notice prior to the date fixed for redemption.
Change in Control. When an Event (as defined in the Restated Articles
of Incorporation) occurs, each holder of shares of the Series B Preferred Stock
shall have the option to (i) convert the Series B Preferred Stock into shares of
the Common Stock immediately prior to the Event at a price equal to the lesser
of (a) the Conversion Price or (b) the price per share of the Common Stock in
the Event; provided, however, that the Conversion Price shall not be reduced
under this subsection (i)(b) by more than thirty (30%) percent or (ii) retain
ownership of the Series B Preferred Stock, in which event appropriate provisions
shall be made so that the Series B Preferred Stock will become convertible at
the holder's option into shares of common stock of the surviving or acquiring
entity.
Restrictions on Transfer. The Series B Preferred Stock has not been
registered under the Securities Act or any state securities laws. Consequently,
the shares of the Series B Preferred Stock may not be offered, sold or resold
unless they are (a) registered or (b) exempt from the registration requirements
of the Securities Act and all applicable state securities laws. As set forth
above, the Company has agreed to register the Common Stock issuable upon
conversion of the Series B Preferred Stock and upon exercise of the Warrants.
Warrants
In connection with the issuance of the Series B Preferred Stock, the
Company issued the Warrants to purchase in the aggregate 54,714 shares of the
Common Stock. The Warrants are immediately exercisable at a price of $3.60 per
share, and expire on October 31, 2003. The exercise price is subject to
adjustment pursuant to certain anti-dilution provisions in the event the Company
takes certain actions, such as, but not limited to, a stock dividend or
reclassification of the Common Stock.
45
Public Warrants
In connection with the acquisition of all the common stock of Intercim
Corporation, the Company issued the Public Warrants. The Public Warrants have a
ten-year term and an exercise price of $6.75.
Registration Rights
The Company has entered into the Purchase Agreement pursuant to which
the Company agreed to (i) use its reasonable best efforts to file a registration
statement for a shelf offering within forty-five (45) days after October 30,
1998 (the "Shelf Registration"), (ii) use its reasonable best efforts to cause
the Shelf Registration to be declared effective within one hundred eighty (180)
days of October 30, 1998 and (iii) to keep such Shelf Registration continuously
effective, supplemented and amended until the disposition of all registerable
securities under the Shelf Registration or as otherwise provided in the Purchase
Agreement. This Prospectus has been filed as part of the required Shelf
Registration.
If the Company proposes to file a registration statement for its own
account (other than a registration statement on Form S-4 or S-8 (or any
successor form thereto)), then the Company will offer the Selling Shareholders
the opportunity to register the number of registerable securities as each such
holder may request (a "Piggyback Registration"). If the Company is advised by an
underwriter that the amount of the shares to be registered in the Piggyback
Registration would adversely affect the marketability of the shares to be
offered, then the Company will be able to minimize the adverse effect by
reducing pro rata (based on the number of registerable securities requested to
be included) the number of Piggyback shares to be registered. Shareholders
participating in a Piggyback Registration may withdraw any or all of their
registerable securities from the registration by giving notice to the Company
prior to the effectiveness of the relevant registration statement.
The Purchase Agreement also sets forth the procedures which are to be
followed in effecting any registration required under the Purchase Agreement.
The Company will bear all of the expenses relating to its compliance with the
above-referenced agreements, including all registration and filing fees, fees
and expenses of the Company's own counsel and accountants, and all delivery,
printing and copying expenses. However, in the case of a Piggyback Registration,
participating Selling Shareholders shall pay all underwriting discounts,
commissions and transfer taxes as well as their own counsel fees.
The Company will indemnify each holder of registerable securities,
each affiliate of such holder, each person who controls (within the meaning of
the Securities Act) such holder, and their respective officers, directors,
employees, shareholders, investment advisor and agents against all losses,
claims, damages, liabilities and expenses (collectively, the "Losses") caused
by, resulting from or relating to any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or caused by any
omission or alleged omission of material fact required to be stated therein or a
fact necessary to make the statements therein not misleading, except where such
misstatement or omission was caused by information provided to the Company by
the holder or where the holder failed to deliver materials furnished to it by
the Company.
Each holder of registerable securities participating in an offering
agrees to indemnify and hold harmless the Company, and its directors, officers,
employees, advisors, agents and each person who controls (within the meaning of
the Securities Act and the Exchange Act) the Company for any material
misstatement or omission in the offering materials that was caused by
information provided by such holder to the Company; provided, however, that the
liability of any such holder will be limited to the amount of the net proceeds
received by such holder in the offering giving rise to such liability.
PLAN OF DISTRIBUTION
The Selling Shareholders may, from time to time, sell all or a portion
of the Shares on the OTC Bulletin Board (or any exchange on which the Common
Stock may from time to time be trading), in privately
46
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices.
The Company will receive no proceeds from this offering. The Common
Stock may be sold from time to time to purchasers directly by any of the Selling
Shareholders. Alternatively, any of the Selling Shareholders may from time to
time, offer the Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Shareholders and/or the purchasers of the Common
Stock for whom they may act at agent. The Selling Shareholders and any
underwriters, dealers or agents that participate in the distribution of the
Common Stock may be deemed to be underwriters, and any profit on the sale of the
Common Stock by them and any discounts, commissions or concessions received by
any such underwriters, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act. If the Company is advised
that an underwriter has been engaged with respect to the sale of any the Common
Stock offered hereby, or in the event of any other material change in the plan
of distribution, the Company will cause appropriate amendments to the
Registration Statement of which this prospectus forms a part to be filed with
the Commission reflecting such engagement or other change.
At the time a particular offer of the Common Stock is made, to the
extent required, a Prospectus Supplement will be provided by the Company and
distributed by the relevant Selling Shareholder which will set forth the
aggregate amount of the Common Stock being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commission and other items constituting compensation from the
Selling Shareholders and any discount, commissions or concessions allowed or
reallowed or paid to dealers.
The Common Stock may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the Selling Shareholders or by agreement between the Selling
Shareholders and underwriters or dealers.
There is no established public trading market for the Common Stock,
and as a result the market for the Common Stock is not particularly liquid. The
price at which the Common Stock trades may fluctuate and any market for the
Common Stock may be subject to disruptions that could make it difficult or
impossible for the holders of the Common Stock to sell in a timely manner, if at
all, or to recoup their investment in the Common Stock. See "Risk Factors --
Absence of Market for Common Stock."
Under applicable rules and regulations under the Exchange Act any
person engaged in a distribution of the Common Stock may not simultaneously
engage in market-making activities with respect to such Common Stock for a
period of nine business days prior to the commencement of such distribution and
ending upon the completion of such distribution. In addition to and without
limiting the foregoing, each Selling Shareholder will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Regulation M, which provisions may limit the timing
of purchases and sales of any of the Common Stock by the Selling Shareholders.
All of the foregoing may affect the marketability of the Common Stock and the
ability of any person or entity to engage in market-making activities with
respect to the Common Stock.
Pursuant to the Purchase Agreement, the Company is obligated to pay
substantially all of the expenses incident to the registration and offering of
the Common Stock of the Selling Shareholders to the public other than
commissions and discounts of underwriters, dealers or agents. The Selling
Shareholder or Shareholders bear all selling and other expenses.
The Company has agreed to indemnify in certain circumstances the
Selling Shareholders against certain liabilities, including liabilities under
the Securities Act. The Selling Shareholders have agreed to indemnify in certain
circumstances the Company against certain liabilities, including liabilities
under the Securities Act.
47
EXPERTS
The consolidated financial statements of the Company as of November
30, 1997 and 1996 and for each of the three years in the period ended November
30, 1997 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of the Common
Stock offered hereby will be passed upon for the Company by Foley & Lardner,
Milwaukee, Wisconsin.
48
INDEX TO FINANCIAL STATEMENTS
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Audited Financial Statements
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets as of November 30, 1996 and 1997........ F-3
Consolidated Statements of Operations for
the Years Ended November 30, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Stockholders Equity for
the Years Ended November 30, 1995, 1996 and 1997.............. F-6
Consolidated Statements of Cash Flows for
the Years Ended November 30, 1995, 1996 and 1997.............. F-7
Notes to Consolidated Financial Statements for
the Years Ended November 30, 1996 and 1997.................... F-9
Unaudited Interim Financial Statements
Unaudited Consolidated Condensed Balance Sheets as of
November 30, 1997 and August 31, 1998......................... F-21
Unaudited Consolidated Condensed Statements of Operations for
the Nine Months Ended August 31, 1997 and 1998................ F-23
Unaudited Consolidated Condensed Statements of Cash Flows for
the Nine Months Ended August 31, 1997 and 1998................ F-24
Notes to Unaudited Consolidated Condensed Financial Statements
for the Nine Months Ended August 31, 1997 and 1998............ F-25
F-1
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 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.
A - change to 1997 opinion (should go between the current 2nd and 3rd
paragraphs)
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated January 16, 1998,
the Company, as discussed in Note 12, has experienced significant operating
losses that adversely affect the Company's current results of operations and
liquidity. Note 12 describes management's plans to address these issues.
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.
/s/Ernst & Young
Milwaukee, Wisconsin
January 16, 1998
(except for Notes 12 and 13, as to which the date is December 14, 1998)
F-2
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Balance Sheets
(Dollars in Thousands)
November 30
1997 1996
---- ----
Assets
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
======== =======
F-3
November 30
1997 1996
---- ----
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
(Note 7) 946 127
-------- --------
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.
F-4
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.
F-5
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 -- -- 973
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 Imercim
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.
F-6
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)
See accompanying notes.
F-7
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year Ended November 30
1997 1996 1995
Financing activities
Proceeds from issuance 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.
F-8
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1997
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 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 contact
period.
F-9
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
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:
F-10
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
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.
F-11
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -------------------------------------------------------------------
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 SPAS 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.
SPAS 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 SPAS 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.
F-12
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 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 hay 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.
F-13
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS
The following is a summary of investment securities at November 30, 1996:
Available-for-Sale Securities
Gross
Unrealized
Gains Estimated
Obligations of states Cost (Losses) Fair Value
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.
NOTE 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
======== ========
F-14
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 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
======== ========
NOTE 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 ant 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 an 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.
NOTE 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.
F-15
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND LEASE COMMITMENTS(CONTINUED)
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.
NOTE 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.
NOTE 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
F-16
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED)
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:
Weighted
Number of Exercise Price Average
Shares Per 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
----------- --------------- -------------
Canceled or expired 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.
F-17
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLANS(CONTINUED)
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.
NOTE 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
============== =============== ===============
F-18
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES(CONTINUED)
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 carryforwards 442 448
Other, net 88 53
--------------- -------------
Total deferred tax assets 3,774 2,299
Valuation allowance (329) --
Net deferred tax liabilities $ -- $ 385
=============== ============
F-19
EFFECTIVE MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES(CONTINUED)
At November 30, 1997, the Company had net federal and state operating loss
carryforward (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.
NOTE 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.
NOTE 12 - LIQUIDITY AND MANAGEMENT'S PLAN
The Company has experienced significant recurring losses and negative cash flow
since November 30, 1997. As of August 31, 1998, current liabilities exceeded
current assets by $1,575.
In April 1998, management approved a major restructuring plan and recorded a
restructuring charge of approximately $6.8 million. The restructuring included
entering into a new distribution arrangement with Baan for manufacturing
software and various cost reductions aimed at improving the Company's financial
performance. In connection with the restructuring, the Company closed facilities
both in the United States and internationally and decreased it's workforce,
particularly in development, marketing and administration. In October, 1998, the
Company amended its credit facility to reset certain covenants. The amendment
also increased the term loan facility by $777.
Management believes that operations and additional sources of financing will
generate sufficient cash flow to fund its operations in fiscal 1999. The Company
is investigating alternative sources of financing. Accordingly, the financial
statements have been prepared on the basis of a going concern, which
contemplates realization of assets and satisfaction of liabilities in the normal
course of business.
NOTE 13 - SUBSEQUENT EVENT
The Company is a party to various legal proceedings arising in the ordinary
course of business. The Company believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
condition or results of operations. In December, 1998, a judgement was issued in
a legal proceeding that resulted in the Company being ordered to pay $212.
F-20
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1997 amounts)
ASSETS 31-Aug 30-Nov
1998 1997
- --------------------------------------- -------------------- -------------------
CURRENT ASSETS
Cash $8 $14
Accounts receivable:
trade, less allowance for
doubtful accounts 8,254 12,370
Related parties 785 604
Inventories 334 280
Refundable income taxes 0 312
Deferred income taxes 0 0
Prepaid expenses and other
Current assets 338 146
-------------------- -------------------
TOTAL CURRENT ASSETS 9,719 13,726
LONG TERM ASSETS
Computer software, net 3,917 7,717
Investments in and advances to
Unconsolidated joint ventures 182 182
Equipment and leasehold
Improvements, net 3,312 3,917
Intangible assets, net 2,269 2,444
Other assets 284 811
-------------------- -------------------
TOTAL LONG TERM ASSETS 9,964 15,071
-------------------- -------------------
TOTAL ASSETS $19,683 $28,797
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
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-Aug 30-Nov
1998 1997
- ------------------------------------------------ ---------------- --------------
CURRENT LIABILITIES
Accounts payable $2,301 $2,272
Accrued liabilities 1,881 2,773
Deferred revenues 5,810 5,887
Customer deposits 290 63
Current portion of
long-term obligations 1,012 946
---------------- --------------
TOTAL CURRENT LIABILITIES 11,294 11,941
LONG-TERM LIABILITIES
Deferred Revenue and Other
Long-term Liabilities 887 317
Long-term Obligations 3,961 3,966
Deferred Income Taxes 0 0
---------------- --------------
TOTAL LONG TERM LIABILITIES 4,848 4,283
Commitments and Contingencies 0 0
STOCKHOLDERS' EQUITY
Preferred Stock, $.0l par value;
authorized 3,000,000 shares, of
which 7,000 shares are designated
as Series A 8% Convertible
Redeemable Preferred Stock
("Series A") 1005 shares of
Series A issued and outstanding
(liquidation preference at $1,000
per share) 826 0
Common Stock, $.01 par value; authorized
20,000,000 shares; issued 4,102,486
and 4,067,408 shares; outstanding 4,089,861
and 4,054,783 shares 41 41
Common Stock Warrants 77 4
Additional Paid- in Capital 11,418 11,328
Retained Earnings (Deficit) (8,761) 1,260
Cost of Common Stock in Treasury (12,625
shares) (60) (60)
---------------- --------------
TOTAL STOCKHOLDERS' EQUITY 3,541 12,573
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,683 $28,797
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
31-Aug 31-Aug 31-Aug 31-Aug
1998 1997 1998 1997
NET REVENUES:
Software license fees $3,866 $4,963 $13,573 $14,491
Services 3,977 4,095 12,748 12,361
Hardware 339 624 1,455 2,687
------ ----- ------ ------
Total net revenues 8,182 9,682 27,776 29,539
COST OF PRODUCTS AND SERVICES
Software license fees 1,059 1,321 4,163 3,983
Services 3,581 3,387 10,175 10,584
Hardware 232 468 1,112 2,074
------ ----- ------ ------
Total cost of products and
services 4,872 5,176 15,450 16,641
Selling and marketing expenses 3,017 4,259 10,043 11,103
General and administrative expenses 624 631 2,837 2,993
Product development expenses 597 621 2,118 1,817
Restructuring and other charges 0 0 6,836 0
------ ----- ------ ------
Total costs and operating
expenses 9,110 10,687 37,284 32,554
------ ----- ------ ------
LOSS FROM OPERATIONS (928) (1,005) (9,508) (3,015)
Other (Income)/Expense
Equity in (earnings)/loss
of unconsolidated joint
ventures 0 (55) (1) (57)
Interest (income) (19) (13) (39) (41)
Interest expense 184 107 521 274
------ ----- ------ ------
165 39 481 176
------ ----- ------ ------
LOSS BEFORE INCOME TAXES (1,093) (1,044) (9,989) (3,191)
Income tax (benefit) expense 0 0 33 (883)
------ ----- ------ ------
NET LOSS ($1,093) ($1,044) ($10,022) ($2,308)
------ ----- ------ ------
Loss per share - basic and diluted ($0.27) ($0.26) ($2.45) ($0.57)
The accompanying notes are an integral part of these consolidated
financial statements.
F-23
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
NINE MONTHS ENDED
31-Aug 31-Aug
1998 1997
OPERATING ACTIVITIES
Net loss ($10,022) ($ 2,308)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,044 862
Amortization of capitalized
computer software development costs 2,277 2,077
Equity in earnings of joint ventures -- --
Goodwill amortization 176 170
Deferred income taxes -- --
Restructuring and other charges 6,836
Changes in operating assets and
liabilities:
Accounts receivable 3,054 1,226
Inventories and other current assets (25) (1,266)
Accounts payable and other liabilities (1,684) (921)
-------- --------
Total adjustments 11,678 2,148
-------- --------
Net cash provided by (used in)
operating activities 1,656 (160)
INVESTING ACTIVITIES
Additions to equipment and
leasehold improvements (439) (1,101)
Proceeds from sale of securities -- 504
Software development costs capitalized (2,800) (3,207)
Other 527 (97)
-------- --------
Net cash used in investing
activities (2,712) (3,901)
FINANCING ACTIVITIES
Proceeds on long-term debt and
other notes payable 61 3,466
Additional paid-in capital 90 --
Proceeds from sale of stock 899 136
-------- --------
Net cash provided by financing activities 1,050 3,602
-------- --------
Net decrease in cash (6) (459)
Cash-beginning of period 14 866
-------- --------
Cash-end of period $ 8 $ 407
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
EFFECTIVE MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 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 nine
month periods ended August 31, 1998 and August 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 nine months ended August 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-August-1998 30-Nov-1997
------------------ ----------------
Gross $9,798 $9,359
Less: Accumulated
depreciation ( 6,486 ) ( 5,442)
------------------ ----------------
Net $3,312 $3,917
================== ================
Allowance for doubtful accounts consisted of the following:
31-August-1998 30-Nov-1997
------------------ ----------------
Balance $ 547 $ 462
Provision for doubtful accounts consisted of the following:
31-August-1998 30-Nov-1997
----------------- -----------------
$ 82 $ 17
F-25
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
August 3l,
1998 1997
------------- ----------------
------------- ----------------
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,098 4,054
Effect of dilutive securities - stock options
and warrants 0 0
Effect of dilutive securities - preferred stock 0 0
------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,098 4,054
============= ================
Nine Months Ended
August 31,
1998 1997
------------- ----------------
Denominator
Denominator for basic earnings per share -
weighted average common shares 4,084 4,038
Effect of dilutive securities - stock options
and warrants 0 0
Effect of dilutive securities - preferred stock 0 0
------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted average common shares 4,084 4,038
============= ================
Note 4 - Restructuring and Other Charges
The Company recorded charges for a restructuring in the second quarter of fiscal
1998 totaling $6.8 million, of which $6.6 million was paid or expensed as of
August 31, 1998. The Company anticipates the remaining liability of $.2 million
to be paid in the fourth quarter of fiscal 1998, which will be financed through
working capital.
Note 5 - Preferred Stock
On August 28, 1998, the Company issued 1,005 shares of Series A 8% Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock"). Legal and
investment banking fees of $101,000 were deducted from the total proceeds.
The Series A Preferred Stock accrues cumulative dividends at an 8% rate per
annum (using a liquidation value of $1,000 per share), and all dividends in
arrears must be paid prior to any payment of dividends on common stock.
Dividends, if declared by the board of directors, generally must be paid in
cash.
The Series A Preferred Stock is convertible into common stock at the preferred
shareholders' option at the initial conversion price of $3.50 per share, subject
to adjustment, with each share of Series A Preferred Stock valued at $1,000 for
purposes of conversion. An adjustment to the conversion rate may be made upon
any of the following circumstances: subdivision or reverse split of the
outstanding shares of common stock into a greater or lesser
F-26
number of shares of common stock, declaration of a dividend or other
distribution by the Company upon the common stock payable in common stock,
capital reorganization or reclassification of the common stock of the Company,
and in certain other instances. The Company may force conversion of the Series A
Preferred Stock under certain conditions.
The holders of the Series A Preferred Stock shall be entitled to vote and shall
receive the number of votes they would have assuming full conversion of the
Series A Preferred Stock into common stock.
There are 7,000 shares of Series A Preferred Stock authorized for issuance, with
1,005 shares being issued and outstanding. The Company has 3,000,000 shares of
Preferred Stock authorized for issuance. Such shares may be issued in separate
series. The Series A Preferred Stock is currently the only series of Preferred
Stock authorized, issued and outstanding.
F-27
==================================== ==========================================
No person has been authorized to
give any information or make any
representations other than those
contained in this Prospectus, and,
if given or made, such information
or representations must not be
relied upon as having been Effective Management
authorized. This Prospectus does not Systems, Inc.
constitute an offer to sell or the
solicitation of an offer to buy any
securities other than the securities
to which it relates or an offer to
sell or the solicitation of an offer
to buy such securities in any
circumstances in which such offer or Common Stock
solicitation is unlawful. Neither (par value $.01 per share)
the delivery of this Prospectus nor
any sale made hereunder shall, under
any circumstances, create any
implication that there has been no
change in the affairs of the Company
since the date hereof or that the
information contained herein is
correct as of any time subsequent to
its date.
-------------------
TABLE OF CONTENTS
Page
Forward-Looking Statements.....
Prospectus Summary............. ___________________
Risk Factors...................
The Company....................
Use of proceeds................
Market for Common Stock........
Dividend Policy................ PROSPECTUS
Capitalization.................
Selected Consolidated Financial
and Operating Data............
Management's Discussion and ___________________
Analysis of Financial
Condition and Results
of Operations at and for the
Three and Nine Months Ended
August 31, 1998...............
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations at and for
the Fiscal Years Ended .......
Business.......................
Management.....................
Principal Shareholders.........
Description of Certain
Indebtedness..................
Description of Capital Stock...
Plan of Distribution...........
Experts........................
Legal Matters..................
Additional Information.........
Index to Financial Statements..F-1
==================================== ==========================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission filing fee............ $551
Accountants' fees and expenses........................... *
Legal fees and expenses.................................. *
Miscellaneous............................................ *
Total........................................... *
------------------------
* To be filed by amendment.
The foregoing costs and expenses will be paid by the Company. Other
than the Securities and Exchange Commission filing fee, all fees and expenses
are estimated.
Item 14. Indemnification of Directors and Officers.
Pursuant to the provisions of the Wisconsin Business Corporation Law
and the Registrant's Bylaws, directors and officers of the Registrant are
entitled to mandatory indemnification from the Registrant against certain
liabilities and expenses (i) to the extent such officers or directors are
successful in the defense of a proceeding and (ii) in proceedings in which the
director or officer is not successful in defense thereof, unless (in the latter
case only) it is determined that the director or officer breached or failed to
perform his or her duties to the Registrant and such breach or failure
constituted: (a) a willful failure to deal fairly with the Registrant or its
shareholders in connection with a matter in which the director or officer had a
material conflict of interest; (b) a violation of the criminal law unless the
director or officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(c) a transaction from which the director or officer derived an improper
personal profit; or (d) willful misconduct. It should be noted that the
Wisconsin Business Corporation Law specifically states that it is the public
policy of Wisconsin to require or permit indemnification in connection with a
proceeding involving securities regulation, as described therein, to the extent
required or permitted as described above. Additionally, under the Wisconsin
Business Corporation Law, directors of the Registrant are not subject to
personal liability to the Registrant, its shareholders or any person asserting
rights on behalf thereof for certain breaches or failures to perform any duty
resulting solely from their status as directors, except in circumstances
paralleling those outlined in (a) through (d) above.
Expenses for the defense of any action for which indemnification may
be available may be advanced by the Company under certain circumstances.
The indemnification provided by the Wisconsin Business Corporation Law
and the Registrant's Bylaws is not exclusive of any other rights to which a
director or officer of the Registrant may be entitled.
The Company maintains a liability insurance policy for its directors
and officers as permitted by Wisconsin law which may extend to, among other
things, liability arising under the Securities Act of 1933, as amended.
Item 15. Recent Sales of Unregistered Securities.
Series A Preferred Stock
On August 28, 1998, the Company sold 1,005 shares of its Series A 8%
Convertible Redeemable Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), in a non-public offering exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) and Rule 506 of Regulation D thereunder. The Series A
Preferred Stock was sold at a price of $1,000 per share to accredited investors,
as such term is defined in Rule 501(a) under the Securities Act. All shares of
II-1
the Series A Preferred Stock were subsequently exchanged for shares of the
Series B 8% Convertible Redeemable Preferred Stock, par value $.01 per share
(the "Series B Preferred Stock"), and no shares of the Series A Preferred Stock
remain outstanding.
Series B Preferred Stock
On October 27, 1998, the Company issued 780 shares of the Series B
Preferred Stock, in a non-public offering exempt from registration pursuant to
Section 4(2) of the Securities Act, and Rule 506 of Regulation D thereunder. The
Series B Preferred Stock was sold at a price of $1,000 per share to accredited
investors, as such term is defined in Rule 501(a) under the Securities Act.
On October 27, 1998, as part of the Company's offering of its Series B
Preferred Stock, the Company issued to (i) certain warrants to purchase 28,714
shares of common stock, par value $.01 per share (the "Common Stock") and (ii)
certain warrants to purchase 26,000 shares of the Common Stock. The warrants are
immediately exercisable for a five year period at a price of $3.60 per share,
subject to certain adjustment as provided in the warrant agreement.
On October 30, 1998, the Company exchanged, on a one-for-one basis,
1,005 shares of the Series A Preferred Stock for 1,005 shares of its Series B
Preferred Stock.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The exhibits filed herewith are as specified on the
Exhibit Index included herein.
(b) Financial Statement Schedules. The schedules filed herewith are
as specified on the Index to Schedules included herein.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(i) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement;
(ii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement
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relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Milwaukee,
State of Wisconsin, on this 14th day of December, 1998.
EFFECTIVE MANAGEMENT SYSTEMS, INC.
By /s/ Michael D. Dunham
Michael D. Dunham
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below as of this 14th day of December,
1998 by the following persons in the capacities indicated. Each person whose
signature appears below constitutes and appoints Michael D. Dunham and Jeffrey
J. Fossum, and each of them individually, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and any additional registration statement to be filed pursuant to rule 462(b)
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title
/s/ Michael D. Dunham President and Director
Michael D. Dunham (Principal Executive Officer)
/s/ Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer
Jeffrey J. Fossum (Principal Financial and Accounting Officer)
/s/ Helmut M. Adam Director
Helmut M. Adam
/s/ Robert E. Weisenberg Director
Robert E. Weisenberg
/s/ Scott J. Mermel Director
Scott J. Mermel
/s/ Thomas M. Dykstra Director
Thomas M. Dykstra
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EXHIBIT INDEX
EFFECTIVE MANAGEMENT SYSTEMS, INC.
Exhibit
Number Exhibit
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. 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 Amendment to Restated Articles of Incorporation for the Series B
Preferred Stock.
3.2 Restated Articles of Incorporation of Effective Management
Systems, Inc., as amended
3.4 Bylaws of Effective Management Systems, Inc. [Incorporated by
reference to Exhibit 3.2 to Effective Management Systems, Inc.'s
Registration Statement on Form SB-2 (Registration No. 33-73354)].
4.1 Article 4 of the Restated Articles of Incorporation of Effective
Management Systems, Inc., as amended. [See exhibit 3.2].
4.2 Loan and Security Agreement by and between Foothill Capital
Corporation and Effective Management Systems, Inc EMS-East, Inc.
and Effective Management Systems of Illinois, Inc. dated December
31, 1997 [Incorporated by reference to Exhibit 4.14 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
4.3 Waiver and First Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc. and Effective Management Systems of Illinois, Inc.,
dated May 8, 1998 [Incorporated by reference to Exhibit 4.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
4.4 Waiver to Loan Agreement between Foothill Capital Corporation and
Effective Management Systems, Inc., EMS-East, Inc., and Effective
Management Systems of Illinois, Inc., dated July 13, 1998
[Incorporated by reference to Exhibit 4.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
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4.5 Waiver and Second Amendment to Loan Agreement between Foothill
Capital Corporation and Effective Management Systems, Inc.,
EMS-East, Inc., and Effective Management Systems of Illinois,
Inc., dated August, 1988 [Incorporated by reference to Exhibit 4.1
to Effective Management System, Inc.'s Quarterly Report on Form
10-Q for the quarter ended August 31, 1998].
4.6 Third Amendment to Loan Agreement between Foothill Capital
Corporation and Effective Management Systems, Inc., EMS-East,
Inc., and Effective Management Systems of Illinois, Inc., dated
October 6, 1998 [Incorporated by reference to Exhibit 4.2 to
Effective Management System, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended August 31, 1998].
4.7 Form of Common Stock Warrant Issued in Connection With the Sale of
the Series A Preferred Stock.
4.8 Form of Common Stock Warrant Issued in Connection With the Sale of
the Series B Preferred Stock.
5.1 Opinion of Foley & Lardner.
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 Systems, Inc.'s Registration Statement on
Form SB-2 (Registration No. 33-73354)].
10.5 Amendment No. 1 to Domestic Value Added Reseller Agreement between
Intermec Corporation and Effective Management Systems, Inc., dated
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)].
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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 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].
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].
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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 [Incorporated by reference to Exhibit 10.20 to Effective
Management Systems, Inc.'s Form 10-K for the year ended November
30, 1997].
10.21 Reseller Agreement and Addendum Number One by and between Baan
Midmarket Solutions, LLC and Effective Management Systems, Inc.,
dated April 9, 1998 [Incorporated by reference to Exhibit 10.1 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.22 Distribution Agreement between EMS Asia Pacific Limited and
Effective Management Systems, Inc. dated May 29, 1988
[Incorporated by reference to Exhibit 10.2 to Effective Management
Systems, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998].
10.23 Effective Management Systems, Inc. 1993 Stock Option Plan, as
amended [Incorporated by reference to Exhibit 10.3 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998].
10.24 Preferred Stock Placement Agreement, dated as of August 28, 1998
between Effective Management Systems, Inc. and Taglich Brothers,
D'Amadeo, Wagner & Company, Incorporated [Incorporated by
reference to Exhibit 10.1 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended August 31,
1998].
10.25 Loan Agreement by and between EMS Solutions, Inc. and Effective
Management Systems, Inc. dated January 1, 1998 [Incorporated by
reference to Exhibit 10.2 to Effective Management Systems, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended May 31, 1998].
10.26 Special Compensation and Separation Agreement by and between
Jeffrey J. Fossum and Effective Management Systems, Inc. effective
January 1, 1998 [Incorporated by reference to Exhibit 10.3 to
Effective Management Systems, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended May 31, 1998].
10.27 Special Compensation and Separation Agreement by and between Wayne
T. Wedell and Effective Management Systems, Inc. effective January
1, 1998 [Incorporated by reference to Exhibit 10.4 to Effective
Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1998].
10.28 Series B Preferred Stock Placement Agreement, dated as of October
27, 1998 between Effective Management Systems, Inc. and Taglich
Brothers, D'Amadeo, Wagner & Company, Incorporated.
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10.29 Series B Preferred Stock Purchase Agreement.
21 List of Subsidiaries of Effective Management Systems, Inc.
23 Consent of Ernst & Young, LLP.