-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WlVKrmBGK8rL+lQSmgfQqw4pF9KyvuY/kNSA4aapCaJxKmVkLDGtjw2cZmZXfZQb 657ZmFztmJVMAGzeejBm3w== 0000897069-96-000193.txt : 19960726 0000897069-96-000193.hdr.sgml : 19960726 ACCESSION NUMBER: 0000897069-96-000193 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFFECTIVE MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000853372 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 391292200 STATE OF INCORPORATION: WI FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23438 FILM NUMBER: 96594640 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10QSB 1 EFFECTIVE MANAGEMENT SYSTEMS, INC. FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED May 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 0-23438 Effective Management Systems, Inc. (Exact name of the small business issuer as specified in its charter) Wisconsin 39-1292200 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12000 West Park Place Milwaukee, WI 53224 (Address of principal executive offices) 414-359-9800 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date. Class Outstanding as of May 31, 1996 Common Stock, $.01 par value 3,962,210 Transitional Small Business Disclosure Format: Yes No X EFFECTIVE MANAGEMENT SYSTEMS, INC. Form 10-QSB May 31, 1996 INDEX PART 1 - FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Consolidated Balance Sheets at May 31, 1996 and November 30, 1995 3 Consolidated Statements of Income for the Three and Six Month Periods Ended May, 31, 1996 and May 31, 1995 5 Consolidated Statements of Cash Flows for the Six Months Ended May 31, 1996 and May 31, 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PART I Financial Information Item 1 Financial Statements EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited except for November 30, 1995 amounts) ASSETS 31-May 30-Nov 1996 1995 CURRENT ASSETS Cash $141 $335 Investments in available-for-sale securities 1,500 1,263 Accounts Receivable: Trade, less allowance for doubtful accounts 8,684 9,402 Related Parties 819 652 Inventories 336 518 Refundable Income Taxes 385 462 Deferred Income Taxes 157 157 Prepaid Expenses and Other Current Assets 195 197 -------- -------- TOTAL CURRENT ASSETS 12,217 12,986 LONG TERM ASSETS Computer Software, net 4,674 4,000 Investments in and Advances to Unconsolidated Joint Ventures 185 179 Equipment and Leasehold Improvements, net 3,323 3,223 Intangible Assets, net 3,533 3,387 Other Assets 546 557 -------- -------- TOTAL LONG TERM ASSETS 12,261 11,346 -------- -------- TOTAL ASSETS $24,478 $24,332 ======= ====== The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited except for November 30, 1995 amounts) LIABILITIES AND STOCKHOLDERS' EQUITY 31-May 30-Nov 1996 1995 CURRENT LIABILITIES Accounts Payable $1,310 $2,076 Accrued Liabilities 1,654 2,182 Income Taxes Payable (133) - Deferred Revenues 3,835 3,735 Customer Deposits 144 227 Current portion of: Long-term Obligations 31 89 ------- ------ TOTAL CURRENT LIABILITIES 6,841 8,309 LONG TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 492 532 Long-term Obligations 1,755 21 Deferred Income Taxes 1,293 1,293 ------- ------- TOTAL LONG TERM LIABILITIES 3,540 1,846 Commitments and Contingencies - - 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 3,962,210 and 3,906,105 shares; outstanding 3,959,585 and 3,903,480 shares 40 39 Common Stock Warrants 3 3 Common Stock and Warrants to be issued - 211 Additional Paid-in Capital 10,970 10,662 Retained Earnings 3,089 3,267 Cost of Common Stock in Treasury (2,625 shares) (5) (5) -------- -------- TOTAL STOCKHOLDERS' EQUITY 14,097 14,177 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,478 $24,332 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED 31-May 31-May 31-May 31-May 1996 1995 1996 1995 NET REVENUES: Software license fees $4,255 $2,612 $7,930 $4,781 Services 3,780 2,605 7,397 4,651 Hardware 1,668 1,416 4,019 2,740 ------ ------ ------ ------ Total net revenues $9,703 $6,633 $19,346 $12,172 COST OF PRODUCTS AND SERVICES Software license fees 803 401 1,665 994 Services 2,915 1,841 5,651 3,188 Hardware and other 1,275 1,101 3,088 2,206 ------ ------ ------ ------ Total cost of products and services $4,993 $3,343 $10,404 $6,388 Selling and marketing expenses 3,417 2,233 6,514 3,984 General and administrative expenses 961 728 1,794 1,229 Product development expenses 490 212 967 487 ------ ------ ------ ------ Total costs and operating expenses $9,861 $6,516 $19,679 $12,088 ------ ------ ------ ------ INCOME (LOSS) FROM OPERATIONS $(158) $117 $(333) $84 Other (Income)/Expense Equity (earnings)/loss of unconsolidated joint ventures 0 5 (3) (57) Interest (income) (28) (49) (50) (82) Interest expense 23 9 37 18 ------ ------ ------ ------ (5) (35) (16) (121) ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES $(153) $152 $(317) $205 Income Taxes Expense (Benefit) (66) 44 (139) 37 ------ ------ ------ ------ NET INCOME(LOSS) $(87) $108 $(178) $168 ====== ====== ====== ====== Earnings(loss) per share ($0.02) $0.03 ($0.05) $0.05 Weighted average common and equivalent shares outstanding 3,950 3,702 3,941 3,670
The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) SIX MONTHS ENDED 31-May 31-May 1996 1995 OPERATING ACTIVITIES Net Income(Loss) $(178) $168 Adjustments to reconcile net income(loss) to net cash provided (used) by operating activities: Depreciation and amortization 551 348 Amortization of capitalized computer software development costs 943 428 Equity in earnings of joint ventures - (113) Goodwill 133 - Changes in operating assets and liabilities: Accounts Receivable 754 867 Inventories and other current assets 97 (436) Accounts payable and other liabilities (1,531) (1,539) ------- ------- Total adjustments 947 (445) Net cash provided(used) by operating activities 769 (277) INVESTING ACTIVITIES Additions to equipment and leasehold inprovements (634) (821) Proceeds from sale (purchase) of securities (237) 1,315 Purchase of Affiliate 43 (219) Software development costs capitalized (1,617) (849) Other (78) - -------- -------- Net cash provided(used) in investing activities (2,523) (574) FINANCING ACTIVITIES Proceeds from exercise of stock options - 89 Proceeds(payments) on long-term debt and other notes payable 1,594 620 Other (34) - -------- ------- Net cash provided(used) by financing activities 1,560 709 -------- ------- Net increase (decrease) in cash ($194) ($142) Cash-beginning of period 335 280 Cash-end of period 141 138 The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1996 (Unaudited) Note 1 - Basis of Presentation The accompanying consolidated interim financial statements included herein have been prepared by Effective Management Systems, Inc. (the "Company"), without an audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the information furnished for the three and six month periods ended May 31, 1996 and May 31, 1995 include all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial results for the respective interim periods and is not necessarily indicative of the results of operations to be expected for the entire fiscal year ending November 30, 1996. It is suggested that the interim financial statements be read in conjunction with the audited consolidated financial statements for the year ended November 30, 1995 included in the Company's Form 10-KSB filed with the Securities and Exchange Commission. Note 2 - Acquisitions Effective March 31, 1995, the Company completed the purchase for $793,000 of the remaining 50% of the capital stock of Effective Management Systems, of Illinois, Inc. ("EMS-ILL") not then owned by the Company. The purchase price consisted of 50,200 shares of the Company's common stock valued at $395,000 which were exchanged for 9,200 shares of the capital stock of EMS-ILL, $380,000 in cash and $18,000 of acquisition costs. On September 6, 1995, the Company acquired all of the common stock of Intercim Corporation for approximately $3,355,000 comprised of 278,193 shares of the Company's common stock valued at $7.50 per share; 278,193 of the Company's warrants valued at $3.75 per share; and direct acquisition costs of $225,000. On May 18, 1996, the Compay issued additional warrants pursuant to the Agreement and Plan of Merger, dated as of February 17, 1995, by and among the Company and EMS Acquisition Corporation and Intercim Corporation. As of the record date of April 18, 1996, each holder of a warrant was entitled to receive .4459 additional warrants. A total of 123,719 additional warrants were issued. The Acquisitions of the remaining interest in EMS-ILL and Intercim Corporation have been accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of EMS-ILL and Intercim Corporation have been adjusted to their estimated fair values. The excess of cost over the net assets acquired has been allocated to goodwill ($395,000 for EMS-ILL and $1,437,000 for Intercim Corporation). Note 3 - Additional Financial Disclosure Equipment and leasehold improvements consisted of the following: 5-31-1996 11-30-1995 Gross $ 7,086,000 $ 6,416,000 Less: Account Depreciation <3,745,000> <3,193,000> --------- --------- Net $ 3,323,000 $ 3,223,000 Allowance for doubtful accounts and notes consisted of the following: 5-31-1996 11-30-1995 Balance $ 372,000 $ 312,000 Provision for doubtful accounts and notes consisted of the following: 5-31-1996 11-30-1995 Balance $ 91,000 $ 26,000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company recorded an increase in revenues (46.3%) and a decline in net income for the second quarter of 1996 compared with the second quarter of 1995. The Company also recorded an increase in revenues (58.9%) and a decline in net income for the first half of 1996 compared with the first half of 1995. The growth in sales reflected both the acquisition of two entities mentioned below and increased sales of the Company's products and services. The decline in net income resulted, for the most part, from a continued high level of strategic investments in product development, field service infrastructure, and expanded distribution channels. These investments , in turn, have elevated the growth rate in both operating costs and expenses which currently exceed the growth rate in operating revenues. Management believes these strategic investments have the potential to positively enhance future revenues and profitability. The 1996 year-to-date consolidated financial statements reflect the operating results of Effective Management Systems of Illinois, Inc.("EMS-ILL") and Intercim Corporation ("Intercim") for both the second quarter of 1996 and for the first half of 1996. The Company acquired the remaining interest in EMS-ILL effective March 31, 1995, who was the exclusive distributor of the Company's products in Illinois and Indiana. Intercim, acquired on September 6, 1995, designs, builds, integrates, and supports factory floor information systems to assist companies with the control and management of their manufacturing process for the purpose of improving quality, productivity, and efficiency. The results of EMS-ILL and Intercim have been included since the respective dates of acquisition and accordingly are not reflected in the operating results of the second quarter of 1995 (except for EMS-ILL after March 31, 1995). The two acquisitions are hereafter referred to as the "1995 Acquisitions". Results of Operations Total Revenues Net revenues increased to $9,703,000 for the three months ended May 31, 1996, which was an increase of 46.3% from the $6,633,000 for the same quarter in the previous year. The 1995 Acquisitions accounted for $1,881,000 of the second quarter increase in revenues. Net revenues grew to $19,346,000 for the six months ended May 31, 1996, which was an increase of 58.9% from the $12,172,000 for the same quarter in the previous year. The 1995 Acquisitions accounted for $4,869,000 of the increase in the first half revenues. The mix of revenues comparing software, services, and hardware revenues as a percentage of total revenues improved to 43.9%, 39.0%, and 17.1%, respectively, in the second quarter of 1996 as compared with 39.4%, 39.3%, and 21.3% , respectively, in the second quarter of 1995. The mix of revenues comparing software, services, and hardware revenues as a percentage of total revenues remained generally consistent at 41.0%, 38.2%, and 20.8%, respectively, in the first half of 1996 as compared with 39.3%, 38.2%, and 22.5%, respectively, in the first half of 1995. The Company introduced version 5.3 of its products on May 3,1996. This version of the Company's software enhances interfaces with a variety of engineering functions and provided extensive factory-automation capabilities. The version also continues the evolution of the Company's software products with a Microsoft Windows user interface. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer orders and market acceptance of new products. The Company has historically operated with little backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees increased 62.9% to $4,255,000 in the second quarter of 1996 from $2,612,000 in the second quarter of 1995. Of this increase , $1,018,000 was attributable to the 1995 Acquisitions. Software license fees increased 65.9% to $7,930,000 in the first half of 1996 from $4,781,000 in the first half of 1995. Of this increase , $2,368,000 was attributable to the 1995 Acquisitions. The remaining increase in software license fees was attributable to increased levels of sales personnel. Between May 31, 1995 and May 31,1996 the Company added 32 sales personnel through the 1995 Acquisitions and 14 through new hiring. The Company also continued its strategic plan to undertake efforts to incorporate new technologies into its products and to integrate certain products into its product lines from its recent acquisition of Intercim. These activities are intended to be completed at various times in the future, and management believes that the successful completion of these steps will ultimately provide the Company with significant competitive differentiation. Service Revenues The Company offers a number of optional services to its customers. Such services include a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues increased 45.1% to $3,780,000 for the three months ended May 31, 1996 from $2,605,000 for the same period of the prior year. The 1995 Acquisitions provided an increase of $662,000 in service revenues in the second quarter of 1996. Service revenues increased 59.0% to $7,397,000 for the six months ended May 31, 1996 from $4,651,000 for the same period of the prior year. The 1995 Acquisitions provided $1,700,000 of increases in service revenues in the first half quarter of 1996. In addition to the impact of the 1995 Acquisitions, the increase in service revenues was mainly the result of new customers, as well as requirements of the established customer base. Hardware Revenues Hardware revenues rose 17.8% to $1,668,000 in the second quarter of 1996 compared with $1,416,000 for the corresponding period of 1995. The 1995 Acquisitions contributed $151,000 of hardware revenues to the second quarter of 1996. Hardware revenues rose 46.7% to $4,019,000 in the first half of 1996 compared with $2,740,000 for the corresponding period of 1995. The 1995 Acquisitions contributed $755,000 of hardware revenues to the first half of 1996. In addition to the 1995 Acquisitions, the remaining increase was due to increased sales of software on platforms for which the Company frequently supplies hardware. The amount of hardware revenues is generally impacted by three major influences. First, and most significantly, management has decided to focus its efforts on sales of higher margin software and services. The Company offers its software on a "software only basis" (no hardware) for those customers who already have hardware or who may wish to purchase it from other vendors. Many customers, however, utilize the Company as their hardware supplier in order to secure a fully integrated system environment. The Company provides a full range of integration services to satisfy most customer needs. Second, as the volume of business grows, hardware revenues generally increase correspondingly. Finally, hardware revenues are related to the number of hardware manufacturers represented at any one time by the Company. The fluctuation of the above factors in regard to hardware sales can be offsetting, but, to date, has generally resulted in a long-term decline in hardware sales as a percentage of revenue. Cost of Software License Fees Cost of software license fees as a percentage of related revenue was 18.9% for the second quarter of 1996, an increase from 15.4% for the corresponding period of 1995. Cost of software license fees as a percentage of related revenue was 21.0% for the first half of 1996, an increase from 20.8% for the corresponding period of 1995. This increase was mainly due to growth in software amortization. Software amortization is related to past investment in software development and is not consistent with variations in software revenues on a quarter by quarter basis. The cost of software license fees is also dependent on the level of third party software revenues and their associated costs, which has a direct relation- ship with changes in revenue levels. In the second quarter of 1996, the third party revenues and associated costs were flat in comparison to the associated revenues for the second quarter of 1995. Third party revenues can vary by both the number of users sold and the number of systems sold. In the first half of 1996, the third party revenues and associated costs were down in comparison to the associated revenues for the first half of 1995. Additional costs relating to the 1995 Acquisitions did not materially affect the cost of software license fees as a percentage of related revenue in all periods presented. Cost of Services Cost of services as a percentage of related revenue increased to 77.1% for the three months ended May 31, 1996 as compared with 70.7% for the same quarter in the previous year. Cost of services as a percentage of related revenue increased to 76.4% for the six months ended May 31, 1996 as compared with 68.5% for the same period in the previous year. The increases were mainly due to both the startup and training costs associated with newly hired personnel, and additional costs related to the building of a service infrastructure ($205,000 year to date, 2.8% of service revenues) for both ongoing business growth and the establishment of new third party selling relationships. The service infrastructure costs include investments to strengthen the support of national and international third party suppliers of service in conjunction with the continued expansion of distribution channels. Additional costs relating to the 1995 Acquisitions had a nominal effect (1%) on the cost of services as a percentage of related revenue in the second quarter of 1996 and no material impact on the first half of 1996. Cost of Hardware The cost of hardware as a percentage of related revenue decreased from 77.8% in the second quarter of 1995 to 76.4% in the second quarter of 1996. The cost of hardware as a percentage of related revenue decreased from 80.5% in the first half of 1995 to 76.8% in the first half of 1996. The cost of hardware as a percentage of related revenue varies with the size of the system, the manufacturer of the equipment, and the competitive pressure of the customer sale. Additionally, the cost of hardware as a percentage of hardware revenues can vary due to amount of lower margin sales (cost plus 11%) to joint ventures, which were $443,000 and $302,000 in the second quarter of 1996 and 1995, respectively, and $812,000 and $517,000 in the first half of 1996 and 1995, respectively. As of January 1, 1996, the Company charges 11% over cost on hardware sales to EMS Solutions, Inc., an affiliated entity, to match similar terms of the Company's joint ventures. These charges were $22,000 in the second quarter of 1996, and $11,000 in the first half of 1996. Selling and Marketing Expenses Selling and marketing expenses increased $1,184,000 (53.0%) from $2,233,000 in the second quarter of 1995 to $3,417,000 in the second quarter of 1996. The 1995 Acquisitions accounted for $487,000 of the second quarter increase. Selling and marketing expenses increased $2,530,000 (63.5%) from $3,984,000 in the first half of 1995 to $6,514,000 in the first half of 1996. The 1995 Acquisitions accounted for $1,106,000 of the second half increase. The increases in sales and marketing expenses corresponded to growth in software license fees. General and Administrative Expenses General and administrative expenses increased $233,000 (32.0%) from $728,000 in the second quarter of 1995 to $961,000 in second quarter of 1996. The 1995 Acquisitions accounted for $115,000 of the second quarter increase. General and administrative expenses increased $565,000 (46.0%) from $1,229,000 in the first half of 1995 to $1,794,000 in first half of 1996. The 1995 Acquisitions accounted for $324,000 of the first half increase. The remainder of the increase related to expenses that corresponded with the total revenue growth, including personnel costs, and telephone and insurance expenses. As a percent of total revenues, general and administrative expenses were 9.9% and 11.0% in the second quarter of 1996 and 1995, respectively; and were 9.3% and 10.1% in the first half of 1996 and 1995, respectively. These improvements in general and administrative expenses as a percent of total revenues were mainly due to better utilization of personnel and facilities, along with improved processes. The Company also provides office space, accounting and administrative services, computer processing time, and other miscellaneous services to EMS Solutions, Inc., an affiliated entity. The amounts received by the Company for these items were $54,000 in the second quarter of 1996, as compared with $80,000 in the second quarter of 1995 and were $138,000 in the first half of 1996, as compared with $161,000 in the first half of 1995. Amounts received from EMS Solutions, Inc. are recorded as a reduction of general and administrative expenses. Product Development Expense Product development expense increased from $212,000 in the second quarter of 1995 to $490,000, in the second quarter of 1996. Product development expense increased from $487,000 in the first half of 1995 to $967,000 in the first half of 1996. The 1995 Acquisitions accounted for $142,000 of the increase in the second quarter and $312,000 of the increase in the first half. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $846,000 in the second quarter of 1996 compared to $696,000 in the second quarter of 1995. In the first half of 1996, the Company capitalized $1,617,000 compared to $849,000 in the corresponding period of 1995. As a percent of software license fees, the total amount invested in software development was 31.4% and 34.8% in the second quarter of 1996 and 1995, respectively, and was 32.6% and 27.9% in the first half of 1996 and 1995, respectively. These increases were focused mainly on the development of a pre-integrated factory workstation system, including the integration of engineering, customer service, production control, quality, and machine controls. Additional expenditures were made to increase the Company's investment in the development of future products, including the incorporation of various new technologies into the Company's software products. Other Income\Expense-Net Other income\expense-net was $35,000 of income for the second quarter of 1995 compared to $5,000 of income for the second quarter of 1996. Other income\expense-net was $121,000 of income for the first half of 1995 compared to $16,000 of income for the first half of 1996. This decrease was mainly the result of a reduction in the amount of interest income and an increase in the amount of interest expense as the Company has borrowed under its bank line of credit to continue its investment strategy in product development, field service infrastructure, and expanded distribution channels. Additionally, the income-expense-net was negatively impacted by a reduction in the amount of equity earnings of $54,000 in the first half of 1996, mainly due to the acquisition of the remaining 50% interest in EMS-ILL and a decrease in equity income for other affiliates. Income Tax The effective income tax rate provided a benefit of 43.1% for the second quarter of 1996 compared to an expense of 28.9% for the second quarter of 1995. The effective income tax rate provided a benefit of 43.8% for the first half of 1996 compared to an expense of 18.0% for the first half of 1995. The effective rate was impacted mainly by the result of operating losses and the effect of investments in tax-exempt securities. Liquidity and Capital Resources At May 31, 1996, the Company had cash and marketable securities aggregating $1,641,000, including $1,500,000 of available-for-sale securities. During the first half of 1996, the Company's operating activities provided $769,000 of cash. This positive operating cash flow was primarily due to non-cash charges to the income statement of $1,627,000 less a working capital increase of $680,000. During the first half of 1995, the Company's operating activities used $277,000 of cash. This negative operating cash flow was primarily due to cash utilized in the purchase of EMS-ILL of $380,000. Investing activities used cash of $2,523,000 in the first half of 1996 compared to using $574,000 of cash in the first half of 1995. The principal uses of the cash for the first half of 1996 were $1,617,000 for capitalized product development and $634,000 for purchases of equipment and furniture. Financing activities provided $1,560,000 of cash in the first half of 1996 compared with $709,000 in the first half of 1995. The cash provided in 1996 reflected borrowings under the Company's bank line of credit. As of May 31, 1996, the Company had $1,346,000 of availability under its $3,000,000 line of credit based on the level of the eligible accounts receivable. The Company believes its cash flows from operations, funds available under its line of credit, funds available from investment securities and, if needed, other capital financing will be adequate to finance capital expenditures and working capital requirements for at least the next twelve months. Part II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders held on April 30, 1996, Scott J. Mermel and Robert E. Weisenberg were elected as directors of the Company for terms expiring in 1999. The following table sets forth certain information with respect to the election of directors at the annual meeting. Shares Withholding Name of Nominee Shares Voted For Authority Scott J. Mermel 3,769,042 10,063 Robert E. Weisenberg 3,769,050 10,055 The following table sets forth the other directors of the Company whose terms of office continued after the 1996 annual meeting: Name of Director Term Expires Thomas M. Dykstra 1997 Helmut M. Adam 1998 Michael D. Dunham 1998 In addition, at the annual meeting, shareholders approved to the Effective Management Systems, Inc. 1993 Stock Option Plan, as amended. With respect to such approval, the number of shares voted for and against were 3,572,255 and 171,082, respectively. The number of shares abstaining and the number of shares subject to broker non-votes were 15,584 and 20,184, respectively. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10.1) Effective Management Systems, Inc. 1993 Stock Option Plan, as amended (27.0) Financial Data Schedule [EDGAR version only] (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the second quarter of 1996. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EFFECTIVE MANAGEMENT SYSTEMS, INC. /s/ Michael D. Dunham July 12, 1996 Michael D. Dunham President (principal executive officer) /s/ Jeffrey J. Fossum Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer (principal financial and accounting officer) INDEX TO EXHIBITS Exhibit No. Exhibit Description 10.1 Effective Management Systems, Inc. 1993 Stock Option Plan, as amended 27.0 Financial Data Schedule [EDGAR version only] EX-10.1 2 EXHIBIT 10.1 STOCK OPTION PLAN EFFECTIVE MANAGEMENT SYSTEMS, INC. 1993 STOCK OPTION PLAN AS AMENDED 1. Purpose. The purpose of the Effective Management Systems, Inc. 1993 Stock Option Plan (the "Plan") is to promote the best interests of Effective Management Systems, Inc. (the "Company") and its shareholders by providing employees of the Company and its subsidiaries and members of the Company's Board of Directors who are not employees of the Company or its subsidiaries with an opportunity to acquire a proprietary interest in the Company. It is intended that the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company by employees of the Company and its subsidiaries. In addition, by encouraging stock ownership by non-employee directors, the Company seeks both to attract and retain on its Board of Directors (the "Board") persons of exceptional competence and to provide a further incentive to serve as a director of the Company. It is intended that certain of the options issued pursuant to the Plan will constitute incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and successor provisions thereto (the "Code"), and the remainder of the options issued under the Plan will constitute nonstatutory stock options. 2. Administration. The Plan shall be administered by a committee designated by the Board (the "Committee"). The Committee shall consist of not less than two members of the Board who are "disinterested persons" as defined in Section 13 hereof. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by at least a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully as effective as if it had been made by a unanimous vote at a meeting duly called and held. In accordance with the provisions of the Plan, the Committee shall: select the employees to whom options are granted; determine the number of shares to be covered by each option, the time at which the option is to be granted, the type of option, the option period, the option exercise price and the manner and time in which options become exercisable; and establish such other provisions of the option agreements as the Committee may deem necessary or desirable. Grants of options to non-employee directors, all of which options shall be nonstatutory stock options, shall be automatic and the amount and the terms of such awards shall be determined in accordance with Section 5 hereof. The Committee may adopt such rules and regulations for carrying out the Plan as it may deem proper and in the best interests of the Company. The interpretation of any provision of the Plan by the Committee and any determination made by the Committee on the matters referred to in this Section 2 shall be final. 3. Shares Subject to the Plan. The shares to be subject to options under the Plan shall be shares of the Company's Common Stock ("Stock"). The total number of shares of Stock which may be purchased pursuant to options granted under the Plan shall not exceed an aggregate of 550,025 shares, subject to adjustment as provided in Section 8 hereof. Shares of Stock delivered upon exercise of an option under the Plan may consist, in whole or in part, of authorized but unissued shares or of treasury shares. In the event that an option granted under the Plan expires, is cancelled or terminates unexercised as to any shares of Stock covered thereby, such shares shall thereafter be available for the granting of additional options under the Plan. 4. Grants to Employees. (a) Eligibility. Any employee ("Employee") of the Company or its present and future subsidiaries, as defined in Section 424(f) of the Code ("Subsidiaries"), including any such Employee who is also an officer or director of the Company, whose judgment, initiative and efforts contribute to the successful performance of the Company shall be eligible to receive options under the Plan. Notwithstanding any provision to the contrary herein, no Employee shall be granted options that could result in such Employee receiving more than 150,000 shares of Stock under the Plan (such number of Shares shall be subject to adjustment as provided in Section 8 hereof). (b) Option Price. The option exercise price per share of Stock shall be fixed by the Committee, but shall not be less than 100% of the fair market value of a share of Stock on the date the option is granted; provided, however, that no Incentive Stock Option shall be granted to any Employee who, at the time such Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent corporation or Subsidiaries unless the option exercise price of such Incentive Stock Option is at least 110% of the fair market value of a share of Stock on the date of grant. Unless otherwise determined by the Committee, the "fair market value" of a share of Stock on the date of grant shall be the last sale price for shares of Stock in the NASDAQ National Market System on the trading date next preceding the date on which the option is granted, as reported in The Wall Street Journal (Midwest Edition); provided, however, that if the principal market for the Stock is then a national securities exchange, the "fair market value" shall be the closing price for shares of Stock on the principal securities exchange on which the Stock is traded on the trading date next preceding the date of grant, or, in either case above, if no trading occurred on the trading date next preceding the date of grant, then the option price per share shall be determined with reference to the next preceding date on which the Stock is traded. (c) Grant of Options. Subject to the terms and conditions of the Plan, the Committee may, from time to time, grant to Employees options to purchase such number of shares of Stock and on such terms and conditions as the Committee may determine; provided, however, that any option granted to an Employee who is subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, on the date of the grant shall not become exercisable (except as otherwise specifically set forth in the option agreement) until at least six months elapse from the date of grant. More than one option may be granted to the same Employee. The date on which an option is granted shall be the date the Committee approves the granting of the option or if the Committee so specifies, such later date as the Committee may determine. Options granted to Employees may be either Incentive Stock Options or nonstatutory stock options as determined by the Committee. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision thereto, and any regulations promulgated thereunder. (d) Option Period. The Committee shall determine the expiration date of each option, but such expiration date shall be not later than ten years after the date such option is granted; provided, however, that no Incentive Stock Option shall be granted to any Employee who, at the time such Incentive Stock Option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent corporation or Subsidiaries unless such Incentive Stock Option by its terms is not exercisable after the expiration of five years from the date of grant. (e) Maximum Per Participant. The aggregate fair market value (determined as of the date the option is granted) of the Stock with respect to which any Incentive Stock Options are exercisable for the first time by an Employee during any calendar year under the Plan or any other plan of the Company or any parent corporation or Subsidiary shall not exceed $100,000. (f) Exercise of Options. An option may be exercised, subject to its terms and conditions and the terms and conditions of the Plan, in full at any time or in part from time to time by delivery to the Assistant Secretary of the Company at the Company's principal office in Milwaukee, Wisconsin, of a written notice of exercise specifying the number of shares with respect to which the option is being exercised. Any notice of exercise shall be accompanied by full payment of the option price of the shares being purchased (i) in cash or its equivalent; (ii) with the consent of the Committee (as set forth in the option agreement or otherwise), by tendering previously acquired shares of Stock (valued at their fair market value as of the date of exercise, as determined by the Committee consistent with the method of valuation set forth in Section 4(b) above); or (iii) with the consent of the Committee (as set forth in the option agreement or otherwise), by any combination of the means of payment set forth in subparagraphs (i) and (ii). For purposes of this Section 4, the term "previously acquired shares of Stock" shall only include Stock owned by the Employee prior to the exercise of the option for which payment is being made and shall not include shares of Stock which are being acquired pursuant to the exercise of said option. No shares shall be issued until full payment therefor has been made. 5. Grants to Non-Employee Directors. (a) Eligibility. Each member of the Board who is not an employee of the Company or any of its Subsidiaries or any parent corporation of the Company (a "Non-Employee Director") shall be eligible to be granted nonstatutory stock options under the Plan. A Non-Employee Director may hold more than one option, but only on the terms and subject to any restrictions set forth in this Section 5. (b) Option Price. The option exercise price per share of Stock shall be equal to 100% of the fair market value of a share of Stock on the date the option is granted. For purposes of this Section 5, the "fair market value" of a share of Stock shall be determined in the manner set forth in Section 4(b) hereof; provided, however, that, to the extent applicable, the fair market value of a share of Stock shall be determined with reference to the reported market price of the Stock determined in the manner provided in Section 4(b). (c) Grant of Options. Any person who is first elected as a Non-Employee Director after the date of approval of the Plan by the Board shall automatically on the date of such election be granted an option to purchase 2,030 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8). Thereafter, in consideration for serving on the Board, each Non-Employee Director (if he or she continues to serve in such capacity) shall automatically be granted an option on the day following the annual meeting of shareholders in each year commencing with the 1995 annual meeting and continuing for so long as the Plan remains in effect and a sufficient number of shares are available thereunder for the granting of such option. Such option shall entitle the Non-Employee Director to purchase 1,500 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8). In addition, in consideration for serving on committees of the Board, each Non-Employee Director (if he or she continues to serve in such capacity) shall automatically be granted an additional option on the day following the annual meeting of shareholders in each year commencing with the 1995 annual meeting and continuing for so long as the Plan remains in effect and a sufficient number of shares are available thereunder for the granting of such option. Such option shall entitle the Non-Employee Director to purchase a number of shares of Stock equal to the product of (i) 1,000 shares of Stock (which number of shares shall be subject to adjustment in the manner as provided in Section 8) multiplied by (ii) the number of committees of the Board on which the Non-Employee Director is then serving. (d) Exercisability and Termination of Options. Options granted to Non-Employee Directors shall vest and become exercisable, but only during the time that the Non-Employee Director serves in such capacity, as to 10% of the shares of Stock subject thereto after one year has elapsed from the date of grant, as to an additional 20% after the second year has elapsed from the date of grant, as to an additional 30% after the third year has elapsed from the date of grant, and as to the final 40% after the fourth calendar year has elapsed from the date of grant; provided, however, that if a Non-Employee Director ceases to be a director of the Company by reason of death, disability or retirement within four years after the date of grant, the option shall become immediately exercisable in full. Options granted to Non-Employee Directors shall terminate on the earlier of: (i) ten years after the date of grant; (ii) six months after the Non-Employee Director ceases to be a director of the Company by reason of death; or (iii) three months after the Non-Employee Director ceases to be a director of the Company for any reason other than death. (e) Exercise of Options. An option may be exercised, subject to its terms and conditions and the terms and conditions of the Plan, in full at any time or in part from time to time by delivery to the Assistant Secretary of the Company at the Company's principal office in Milwaukee, Wisconsin, of a written notice of exercise specifying the number of shares with respect to which the option is being exercised. Any notice of exercise shall be accompanied by full payment of the option price of the shares being purchased (i) in cash or its equivalent; (ii) by tendering previously acquired shares of Stock (valued at their fair market value as of the date of exercise as determined in the manner set forth in Section 4(b) above; provided, however, that, to the extent applicable, the fair market value of a share of Stock shall be determined with reference to the reported market price of the Stock determined in the manner provided in Section 4(b)); or (iii) by any combination of the means of payment set forth in subparagraphs (i) and (ii). For purposes of subparagraphs (ii) and (iii) above, the term "previously acquired shares of Stock" shall only include Stock owned by the Non-Employee Director prior to the exercise of the option for which payment is being made and shall not include shares of Stock which are being acquired pursuant to the exercise of said option. No shares shall be issued until full payment therefor has been made. 6. Nontransferability of Options. No option shall be transferable by an optionee other than by will or the laws of descent and distribution. Options under the Plan may be exercised during the life of the optionee only by the optionee or his guardian or legal representative. 7. Powers of the Company Not Affected. The existence of the Plan or any options granted under the Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issuance of bonds, debentures, or preferred or prior preference stock ahead of or affecting the Stock or the rights thereof, or any dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company's assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. 8. Capital Adjustments Affecting Stock. In the event of a capital adjustment resulting from a stock dividend (other than a stock dividend in lieu of an ordinary cash dividend), stock split, reorganization, spin-off, split up or distribution of assets to shareholders, recapitalization, merger, consolidation, combination or exchange of shares or the like following Board approval of the Plan, the number of shares of Stock subject to the Plan, the number of shares referenced in the limitation in Section 4(a) hereof, the number of shares subject to options to be granted to Non-Employee Directors pursuant to Section 5(c) hereof, and the number of shares under option in outstanding option agreements shall be adjusted in a manner consistent with such capital adjustment; provided, however, that no such adjustment shall require the Company to sell any fractional shares and the adjustment shall be limited accordingly. The price of any shares under option shall be adjusted so that there will be no change in the aggregate purchase price payable upon exercise of any such option. The determination of the Committee as to any adjustment shall be final. 9. Corporate Mergers and Other Consolidations. The Committee may also grant options having terms and provisions which vary from those specified in the Plan provided that any options granted pursuant to this Section 9 are granted in substitution for, or in connection with the assumption of, existing options granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition or other combination or reorganization to which the Company is a party. 10. Option Agreements. All options granted under the Plan shall be evidenced by written agreements (which need not be identical) in such form as the Committee shall determine. Each option agreement shall specify whether the option granted thereunder is intended to constitute an Incentive Stock Option or a nonstatutory stock option. 11. Rights as a Shareholder; Rights as an Employee or a Director. An optionee shall have no rights as a shareholder with respect to shares covered by an option until the date of issuance of stock certificates to him or her and only after such shares are fully paid. Neither the Plan nor any option granted hereunder shall confer upon any optionee the right to continue as an employee or as a director of the Company. 12. Transfer Restrictions. Shares of Stock purchased under the Plan and held by any person who is an officer or director of the Company, or who directly or indirectly controls the Company, may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or except in a transaction which, in the opinion of counsel for the Company, is exempt from registration under said Act. The Committee may waive the foregoing restrictions in whole or in part in any particular case or cases or may terminate such restrictions whenever the Committee determines that such restrictions afford no substantial benefit to the Company. 13. Disinterested Person. A "disinterested person" for purposes of the Plan shall mean (except as otherwise provided in Rule 16b-3 under the Securities Exchange Act of 1934, as amended) a director who is not, during the one year period prior to service as an administrator of the Plan, granted or awarded equity securities pursuant to the Plan (except for any automatic grants to Non-Employee Directors pursuant to Section 5 hereof) or any other plan of the Company or any of its affiliates. 14. Amendment of Plan. The Board shall have the right to amend the Plan at any time and for any reason; provided, however, that the provisions of Section 5 of the Plan shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules promulgated thereunder; and provided further that shareholder approval of any amendment to the Plan shall also be obtained: (a) if otherwise required by (i) the rules and/or regulations promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (in order for the Plan to remain qualified under Rule 16b-3 or any successor provision under such Act), (ii) the Code, or any rules promulgated thereunder (in order to allow for Incentive Stock Options to be granted under the Plan) or (iii) the quotation or listing requirements of NASDAQ or any principal securities exchange or market on which the Stock is then traded (in order to maintain the Stock's quotation or listing thereon); (b) if such amendment materially modifies the eligibility requirements as provided in Sections 4(a) and 5(a) hereof; (c) if such amendment increases the total number of shares of Stock, except as provided in Section 8 hereof, which may be purchased pursuant to the exercise of options granted under the Plan; or (d) if such amendment reduces the minimum option price per share at which options may be granted as provided in Sections 4(b) and 5(b) hereof. Any amendment of the Plan shall not, without the consent of the optionee, alter or impair any of the rights or obligations under any option previously granted to the optionee. 15. Termination of Plan. The Board shall have the right to suspend or terminate the Plan at any time; provided, however, that no Incentive Stock Options may be granted after the tenth anniversary of the effective date of the Plan. Termination of the Plan shall not affect the rights of optionees under options previously granted to them, and all unexpired options shall continue in force and operation after termination of the Plan except as they may lapse or be terminated by their own terms and conditions. 16. Effective Date. The Plan shall become effective on the date of adoption by the Board, subject to approval and ratification by the shareholders of the Company within twelve months of the date of adoption by the Board. All options granted prior to shareholder approval and ratification of the Plan shall be subject to such approval and ratification and shall not be exercisable until after such approval and ratification. 17. Tax Withholding. The Company may deduct and withhold from any cash otherwise payable to the optionee (whether payable as salary, bonus or other compensation) such amount as may be required for the purpose of satisfying the Company's obligation to withhold Federal, state or local taxes. Further, in the event the amount so withheld is insufficient for such purpose, the Company may require that the optionee pay to the Company upon its demand or otherwise make arrangements satisfactory to the Company for payment of such amount as may be requested by the Company in order to satisfy its obligation to withhold any such taxes. With the consent of the Committee, an Employee may be permitted to satisfy the Company's withholding tax requirements by electing to have the Company withhold shares of Stock otherwise issuable to the Employee or to deliver to the Company shares of Stock having a fair market value on the date income is recognized pursuant to the exercise of an option equal to the amount required to be withheld. The election shall be made in writing and shall be made according to such rules and in such form as the Committee may determine. EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF AND FOR THE QUARTER ENDED MAY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-MOS NOV-30-1996 DEC-01-1995 MAY-31-1996 141 1,500 9,056 372 336 12,217 7,068 3,745 24,478 6,841 0 0 0 40 14,057 24,478 4,019 19,346 3,088 19,679 (16) 91 13 (317) (139) (178) 0 0 0 (178) (.05) 0 Not required to be calculated in accordance with generally accepted accounting principles.
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