-----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, MITKYOKKoIdJ3caTUBSqGQcsGogMVBzQb1J9QqA6z0TO1vnSErgRH3yqRW2ug9kU SFJ0jVPQSW9LVG3bJiyOWg== 0000897069-96-000339.txt : 19961016 0000897069-96-000339.hdr.sgml : 19961016 ACCESSION NUMBER: 0000897069-96-000339 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFFECTIVE MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000853372 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [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: 96643645 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10QSB 1 EFFECTIVE MANAGEMENT SYSTEMS, INC. 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 August 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 August 31, 1996 Common Stock, $.01 par value 3,978,643 Transitional Small Business Disclosure Format: Yes No X EFFECTIVE MANAGEMENT SYSTEMS, INC. Form 10-QSB August 31, 1996 INDEX PART 1 - FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Consolidated Balance Sheets at August 31, 1996 and November 30, 1995 3 Consolidated Statements of Income for the Three and Nine Month Periods Ended August, 31, 1996 and August 31, 1995 5 Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 1996 and August 31, 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 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-Aug 30-Nov 1996 1995 CURRENT ASSETS Cash $ 17 $ 335 Investments in available-for-sale securities 1,010 1,263 Accounts Receivable: Trade, less allowance for doubtful accounts 9,515 9,402 Related Parties 796 652 Inventories 668 518 Refundable Income Taxes 385 462 Deferred Income Taxes 157 157 Prepaid Expenses and Other Current Assets 221 197 ------ ------ TOTAL CURRENT ASSETS 12,769 12,986 LONG TERM ASSETS Computer Software, net 5,024 4,000 Investments in and Advances to Unconsolidated Joint Ventures 193 179 Equipment and Leasehold Improvements, net 3,466 3,223 Intangible Assets, net 3,462 3,387 Other Assets 573 557 ------ ------ TOTAL LONG TERM ASSETS 12,718 11,346 ------ ------ TOTAL ASSETS $ 25,487 $ 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-Aug 30-Nov 1996 1995 CURRENT LIABILITIES Accounts Payable $ 1,558 $ 2,076 Accrued Liabilities 1,579 2,182 Income Taxes Payable (372) - Deferred Revenues 4,200 3,735 Customer Deposits 42 227 Current portion of: Long-term Obligations 26 89 ------- ------- TOTAL CURRENT LIABILITIES 7,033 8,309 LONG TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 435 532 Long-term Obligations 2,896 21 Deferred Income Taxes 1,293 1,293 ------- ------- TOTAL LONG TERM LIABILITIES 4,624 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 3,981,268 and 3,906,105 shares; outstanding 3,978,643 and 3,903,480 shares 40 39 Common Stock Warrants 3 3 Common Stock and Warrants to be issued 211 Additional Paid- in Capital 11,035 10,662 Retained Earnings 2,757 3,267 Cost of Common Stock in Treasury (2,625 shares) (5) (5) ------- ------- TOTAL STOCKHOLDERS' EQUITY 13,830 14,177 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,487 $ 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 NINE MONTHS ENDED 31-Aug 31-Aug 31-Aug 31-Aug 1996 1995 1996 1995 NET REVENUES: Software license fees $ 4,040 $ 2,047 $ 11,970 $ 6,828 Services 3,755 3,055 11,152 7,706 Hardware 1,278 2,128 5,297 4,868 --------- --------- --------- --------- Total net revenues $ 9,073 $ 7,230 $ 28,419 $ 19,402 COST OF PRODUCTS AND SERVICES Software license fees 922 664 2,587 1,658 Services 3,017 2,172 8,668 5,360 Hardware and other 844 1,573 3,932 3,779 --------- --------- --------- --------- Total cost of products and services $ 4,783 $ 4,409 $ 15,187 $ 10,797 Selling and marketing expenses 3,311 2,412 9,825 6,396 General and administrative expenses 942 663 2,736 1,892 Product development expenses 580 353 1,547 840 --------- --------- --------- --------- Total costs and operating expenses $ 9,616 $ 7,837 $ 29,295 $ 19,925 --------- --------- --------- --------- INCOME(LOSS) FROM OPERATIONS $ (543) $ (607) $ (876) $ (523) Other (Income)/ Expense Equity (earnings)/loss of unconsolidated joint ventures - 67 (3) 10 Interest (income) (22) (58) (72) (140) Interest expense 45 29 82 47 --------- --------- --------- --------- 23 38 7 (83) --------- --------- --------- --------- INCOME(LOSS) BEFORE INCOME TAXES $ (566) $ (645) $ (883) $ (440) Income Taxes Expense(Benefit) (233) (255) (372) (218) --------- --------- --------- --------- NET INCOME(LOSS) $ (333) $ (390) $ (511) $ (222) ========= ========= ========= ========= Earnings(Loss) per share ($0.08) ($0.11) ($0.13) ($0.06) Weighted average common and 3,973 3,634 3,952 3,591 equivalent shares outstanding
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) NINE MONTHS ENDED 31-August 31-August 1996 1995 OPERATING ACTIVITIES Net Income(Loss) $ (511) $ (222) Adjustments to reconcile net income(loss) to net cash provided(used) by operating activities: Depreciation and amortization 1,010 554 Amortization of capitalized computer software development costs 1,407 627 Equity in earnings of joint ventures - (41) Changes in operating assets and liabilities: Accounts Receivable 3 893 Inventories and other current assets (353 140 Accounts payable and other liabilities (1,431) (1,644) -------- ------- Total adjustments 671 529 Net cash provided(used) by operating activities 160 307 INVESTING ACTIVITIES Additions to equipment and leasehold inprovement (1,056) (1,122) Proceeds from sale (purchase) of securities 253 1,817 Purchase of Affiliate 20 (219) Software development costs capitalized (2,431) (1,299) Other (29) - -------- ------- Net cash provided(used) in investing activities (3,243) (823) FINANCING ACTIVITIES Proceeds from exercise of stock options - 116 Proceeds(payments) on long-term debt and other notes payable 2,734 177 Additional paid in capital 31 - -------- ------- Net cash provided(used) by financing activities 2,765 293 -------- ------- Net increase (decrease) in cash $ (318) $ (223) Cash-beginning of period 335 280 Cash-end of period 17 57 The accompanying notes are an integral part of these consolidated financial statements. EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 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 nine month periods ended August 31, 1996 and 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, Inc of Illinois ("EMS-ILL") not then owned by the Company. The purchase price consisted of (a) 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, (b) $380,000 in cash and (c) $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 warrant; and direct acquisition costs of $225,000. On May 18, 1996, the Company issued additional warrants pursuant to the Agreement and Plan of Merger, dated as of February 17, 1995, by and among the Company, 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 acquisition of the remaining interest in EMS-ILL and the acquisition of 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: 8-31-1996 11-30-1995 Gross $7,490,000 $6,416,000 Less: Accumulated Depreciation <4,024,000> <3,193,000> ----------- ----------- Net $3,466,000 $3,223,000 Allowance for doubtful accounts consisted of the following: 8-31-1996 11-30-1995 Balance $ 239,000 $ 312,000 Provision for doubtful accounts consisted of the following: 8-31-1996 11-30-1995 Balance $ 60,000 $ 26,000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company continued its growth in revenues (25.5%) along with a corresponding growth in costs and expenses to produce a smaller net loss for the third quarter of 1996 compared to the third quarter of 1995. The Company experienced a strong expansion in software revenues (97.4%) which was offset in part by a reduction in low margin hardware revenues (-40.0%) in the third quarter of 1996 as compared with the same period in 1995. The increase in software revenues was mainly due to expansion of the existing distribution channels and from the acquisition of two entities mentioned below. The reduction in hardware revenues was primarily the result of "software only" sales whereby the customer elects not to purchase hardware from the Company because of hardware already in place, or because the customer decides to purchase hardware through a third party vendor. On a year to date basis, total revenues grew 46.5% with a corresponding growth in costs and revenues which resulted in a larger net loss for the first three quarters of 1996 compared to the same period of 1995. The corresponding rise in costs and expenses resulted, for the most part, from a continued high level of strategic investments in product development, field service infrastructure, and expanded distribution channels. 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 third quarter of 1996 and for the first three quarters of 1996. The Company acquired the remaining interest in EMS-ILL effective March 31, 1995. EMS-ILL 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 third 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 $9,073,000 for the three months ended August 31, 1996, which was an increase of 25.5% from the $7,230,000 for the same quarter in the previous year. The 1995 Acquisitions accounted for $1,284,000 of the third quarter increase in revenues. Net revenues grew to $28,419,000 for the nine months ended August 31, 1996, which was an increase of 46.5% from the $19,402,000 for the same quarter in the previous year. The 1995 Acquisitions accounted for $6,154,000 of the increase in revenues for the first three quarters of 1996. The mix of revenues comprising software, services, and low margin hardware revenues as a percentage of total revenues improved to 44.5%, 41.4%, and 14.1%, respectively, in the third quarter of 1996 as compared with 28.3%, 42.3%, and 29.4%, respectively, in the third quarter of 1995. This improvement in the mix of revenues was mainly due to strong growth of software sales made on a "software only" basis. The Company offers its products on a "software only" basis for those customers who already have hardware or who may wish to purchase it from other vendors. The mix of revenues comprising software, services, and hardware revenues as a percentage of total revenues improved to 42.2%, 39.2%, and 18.6%, respectively, in the first three quarters of 1996 as compared with 35.2%, 39.7%, and 25.1% , respectively, in the first three quarters of 1995. International revenues represented less than 10% of total revenues for all periods presented. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer orders and market acceptance of new products. The Company has historically operated with little backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees increased 97.4% to $4,040,000 in the third quarter of 1996 from $2,047,000 in the third quarter of 1995. Of this increase, $932,000 was attributable to the 1995 Acquisitions. Software license fees increased 75.3% to $11,970,000 in the first three quarters of 1996 from $6,828,000 in the first three quarters of 1995. Of this increase, $3,301,000 was attributable to the 1995 Acquisitions. The remaining increase in software license fees was attributable to both the impact of increased levels of sales personnel and increased productivity of existing sales personnel. Between August 31, 1995 and August 31,1996, the Company added 7 sales personnel through the 1995 Acquisitions and 11 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 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 22.9% to $3,755,000 for the three months ended August 31, 1996 from $3,055,000 for the same period of the prior year. The 1995 Acquisitions provided an increase of $431,000 in service revenues in the third quarter of 1996. Service revenues increased 44.7% to $11,152,000 for the nine months ended August 31, 1996 from $7,706,000 for the same period of the prior year. The 1995 Acquisitions provided $2,174,000 of increases in service revenues in the first three quarters of 1996. In addition to the impact of the 1995 Acquisitions, the increase in service revenues was mainly the result of the needs of new customers as well as the needs of the established customer base. Hardware Revenues Hardware revenues declined 39.9% to $1,278,000 in the third quarter of 1996 compared with $2,128,000 for the corresponding period of 1995. The decrease in hardware revenues for the third quarter was mainly attributable to a larger number of "software only" sales. Hardware revenues rose 8.8% to $5,297,000 in the first three quarters of 1996 compared with $4,868,000 for the corresponding period of 1995. The 1995 Acquisitions contributed $686,000 of the increase in hardware revenues for the first three quarters 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, over a three year period, have 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 22.8% for the third quarter of 1996, a decrease from 32.4% for the corresponding period of 1995. Cost of software license fees as a percentage of related revenue was 21.6% for the first three quarters of 1996, a decrease from 24.3% for the corresponding period of 1995. This decrease was mainly due to the revenue growth exceeding the relatively fixed 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 relationship with changes in revenue levels. In the third quarter of 1996, the third party revenues and associated costs were up in comparison to the associated revenues for the third quarter of 1995. In the first three quarters of 1996, the third party revenues and associated costs were down in comparison to the associated revenues for the first three quarters of 1995. Third party revenues can vary by both the number of users sold and the number of systems sold. 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 80.4% for the three months ended August 31, 1996 as compared with 71.1% for the same quarter in the previous year. Cost of services as a percentage of related revenue increased to 77.7% for the nine months ended August 31, 1996 as compared with 69.6% 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 ($332,000 year to date, 3.0% 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. The cost of services as a percentage of related revenues was also negatively impacted by the issuance of the new 5.3 version of the Company's software. Typically, both new versions of the software and the amount of changes made to that software ( the Company has raised investment in new software significantly), raise service costs in the short run. Extra service costs include the training of service personnel and the non-bill activities associated with the learning and enhancing of the software as additional on-site experience is accumulated. Additional costs relating to the 1995 Acquisitions had no material impact on all periods presented. Cost of Hardware The cost of hardware as a percentage of related revenue decreased from 73.9% in the third quarter of 1995 to 66.0% in the third quarter of 1996. The cost of hardware as a percentage of related revenue decreased from 77.6% in the first three quarters of 1995 to 74.2% in the first three quarters 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 affiliated joint ventures, which were $227,000 and $295,000 in the third quarter of 1996 and 1995, respectively, and $1,040,000 and $833,000 in the first three quarters 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 $9,000 in the third quarter of 1996, and $43,000 in the first three quarters of 1996. Selling and Marketing Expenses Selling and marketing expenses increased $899,000 (37.3%) from $2,412,000 in the third quarter of 1995 to $3,311,000 in the third quarter of 1996. The 1995 Acquisitions accounted for $412,000 of the third quarter increase. The remainder of the third quarter increase was attributable to additional increases in sales and marketing expenses corresponding to growth in total sales margin (total net revenues minus total cost of products and services). Selling and marketing expenses increased $3,429,000 (53.6%) from $6,396,000 in the first three quarters of 1995 to $9,825,000 in the first three quarters of 1996. The 1995 Acquisitions accounted for $1,224,000 of the first three quarters increase. The additional increases in sales and marketing expenses corresponded to growth in total sales margin (total net revenues minus total cost of products and services). General and Administrative Expenses General and administrative expenses increased $279,000 (42.1%) from $663,000 in the third quarter of 1995 to $942,000 in the third quarter of 1996. The 1995 Acquisitions accounted for $136,000 of the third quarter increase. General and administrative expenses increased $844,000 (44.6%) from $1,892,000 in the first three quarters of 1995 to $2,736,000 in the first three quarters of 1996. The 1995 Acquisitions accounted for $467,000 of the increase in the first three quarters of 1996. The remainder of the increase related to expenses that corresponded with revenue growth, including personnel costs, and telephone and insurance expenses. As a percent of total revenues, general and administrative expenses were 10.4% and 9.2% in the third quarter of 1996 and 1995, respectively; and were 9.6% and 9.8% in the first three quarters of 1996 and 1995, respectively. 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 $65,000 in the third quarter of 1996, as compared with $80,000 in the third quarter of 1995 and were $203,000 in the first three quarters of 1996, as compared with $242,000 in the first three quarters of 1995. Amounts received from EMS Solutions, Inc. are recorded as reductions in general and administrative expenses. Product Development Expense Product development expense increased from $353,000 in the third quarter of 1995 to $580,000 in the third quarter of 1996. Product development expense increased from $840,000 in the first three quarters of 1995 to $1,547,000 in the first three quarters of 1996. The 1995 Acquisitions accounted for $67,000 of the increase in the third quarter and $367,000 of the increase in the first three quarters of 1996. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $814,000 in the third quarter of 1996 compared to $449,000 in the third quarter of 1995. In the first three quarters of 1996, the Company capitalized $2,431,000 compared to $1,299,000 in the corresponding period of 1995. As a percent of software license fees, the total amount invested in software development was 34.5% and 39.2% in the third quarter of 1996 and 1995, respectively, and was 33.2% and 31.3% in the first three quarters 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 $38,000 of expense for the third quarter of 1995 compared to $23,000 of expense for the third quarter of 1996. Other income\expense-net was $83,000 of income for the first three quarters of 1995 compared to $7,000 of income for the first three quarters 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. Income Tax The effective income tax rate provided a benefit of 41.2% for the third quarter of 1996 compared to a benefit of 39.5% for the third quarter of 1995. The effective income tax rate provided a benefit of 42.1% for the first three quarters of 1996 compared to a benefit of 49.5% for the first three quarters of 1995. The change in the effective rate was mainly the result of operating losses and the effect of investments in tax-exempt securities. Liquidity and Capital Resources At August 31, 1996, the Company had cash and marketable securities aggregating $1,027,000, including $1,010,000 of available-for-sale securities. During the first three quarters of 1996, the Company's operating activities provided $160,000 of cash. This positive operating cash flow was primarily due to non-cash charges to the income statement of $2,417,000 less a working capital increase of $1,746,000. During the first three quarters of 1995, the Company's operating activities provided $307,000 of cash. This positive operating cash flow was primarily due to non-cash charges to the income statement of $1,140,000 less a working capital increase of $611,000. Investing activities used cash of $3,243,000 in the first three quarters of 1996 compared to using $823,000 of cash in the first three quarters of 1995. The principal uses of the cash for the first three quarters of 1996 were $2,431,000 for capitalized product development and $1,056,000 for purchases of equipment and furniture. The principal uses of the cash for the first three quarters of 1995 were $1,299,000 for capitalized product development and $1,122,000 for purchases of equipment and furniture. Financing activities provided $2,734,000 of cash in the first three quarters of 1996 compared with $293,000 in the first three quarters of 1995. The cash provided in 1996 reflected borrowings under the Company's bank line of credit. The cash provided in 1995 reflected sales of investment securities. As of August 31, 1996, the Company had $395,000 of availability under its $3,000,000 line of credit based on the level of the eligible accounts receivable. The Company also arranged for a short term master draw note, dated August 5, 1996, in the amount of $500,000 which expires on November 4, 1996. The Company believes its cash flows from operations, funds available under its line of credit, funds available from investment securities and, to the extent necessary, funds available from other capital financing that the Company is in the process of obtaining, will be adequate to finance capital expenditures and working capital requirements for the next twelve months. Part II - Other Information Item 6. Exhibits and Report on Form 8-K (a) Exhibits (27) Financial Data Schedule [EDGAR version only] (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the third quarter of 1996. SIGNATURES In accordance with the requirements of 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. October 11, 1996 By: /s/ MICHAEL D. DUNHAM Michael D. Dunham President (principal executive officer) By: /s/JEFFREY J. FOSSUM Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer (principal financial and accounting officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EFFECTIVE MANAGEMENT SYSTEMS, INC. AS OF AND FOR THE NINE MONTHS ENDED AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS NOV-30-1996 DEC-01-1995 AUG-31-1996 17 1,010 10,550 239 668 12,769 7,490 4,024 25,487 7,033 0 0 0 40 13,790 25,487 5,297 28,419 3,932 29,295 7 60 (10) (883) (372) (511) 0 0 0 (511) (.13) 0 Not required to be calculated in accordance with generally accepted accounting principles.
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