-----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, RV+VfVioC8j9jClOdUDLWcryFKhN+qYyhXVSLACAOJOWpJo7Ae4zoBR6BuQMwfDc HpUINSICA9qVQhyRx8dCeQ== 0000897069-97-000086.txt : 19970222 0000897069-97-000086.hdr.sgml : 19970222 ACCESSION NUMBER: 0000897069-97-000086 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970219 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: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23438 FILM NUMBER: 97538659 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURIIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 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. (Name of small business issuer in its charter) Wisconsin 39-1292200 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 12000 W. Park Place, Milwaukee, Wisconsin 53224 (Address of principal executive offices) (Zip Code) Issuer's telephone number (414) 359-9800. Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 Par Value (Title of class) Warrants to Purchase Common Stock (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(b) 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.. Check if disclosure of delinquent filers in response to Item 405 of Regulations S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [x] Issuer's revenues for its most recent fiscal year: $41,257,000 Aggregate market value of voting stock held by non-affiliates of the issuer: $16,743,434 at February 1, 1997. Number of shares of common stock, $.01 par value, outstanding on February 1, 1997: 4,010,635 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Effective Management Systems, Inc. Proxy Statement for the 1997 Annual Meeting (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the issuer's fiscal year and, upon such filing, to be incorporated by reference into Part III). Transitional Small Business Disclosure Format: Yes..; No.X. Effective Management Systems, Inc. Index to Annual Report on Form 10-KSB For the Fiscal Year Ended November 30, 1996 Part I Item 1. Description of Business . . . . . . . . . . . . . . 1 Item 2. Description of Property . . . . . . . . . . . . . 17 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 17 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 17 Part II Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 18 Item 6. Management's Discussion and Analysis or Plan Operation . . . . . . . . . . . . . . . . . . . . 19 Item 7. Financial Statements . . . . . . . . . . . . . . . 24 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . 46 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . 46 Item 10. Executive Compensation . . . . . . . . . . . . . . 46 Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 46 Item 12. Certain Relationships and Related Transactions . . 46 Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . 46 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 47 Part I Item 1. Description of Business Overview Effective Management Systems, Inc. ("EMS") develops, markets and supports integrated manufacturing and business management software. EMS' Time Critical Manufacturing/TM/ ("TCM/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. TCM/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 EMS' proprietary algorithms for scheduling and production, to optimize the customer's labor, capital and inventory utilization. Software offered by EMS functions on the Windows NT, IBM AIX, Open VMS, SCO-Unix, and HP-UX operating systems. EMS also provides services support for its software products and, on a selective basis, sells computer hardware. Software products offered by EMS include: TCM/TM/, which is a pre- integrated enterprise resource planning, accounting and manufacturing execution systems; and FACTORYnet/TM/ I/S, which is an integrated Manufacturing Execution System "MES", providing production management, shop floor scheduling, and operations support. These software products are usually integrated with a bar code data collection system or direct machine controls, and provide up-to-the-minute information to track production and business operations. This facilitates real-time decision making and enables employees throughout an organization to respond quickly to marketplace demands and unanticipated events. EMS typically focuses its sales and marketing efforts on discrete manufacturing plants. According to Advanced Manufacturing Research ("AMR") data from December 1995 there are over 24,000 discrete plant sites in the United States in the market segments EMS targets. EMS has licensed its software products to over 1,500 customer sites. EMS distributes its products in the United States through twenty branch offices and through seven joint ventures and independent distributors. EMS also has established distribution channels through independent distributors in Canada, Japan, Korea, China, Taiwan, Australia, the United Kingdom, Belgium and Poland. In addition, the Company has joint ventures in Poland and China to support these distributors. EMS was incorporated in Wisconsin in 1978. EMS became a publicly held company as a result of its initial public offering which was completed in February 1994. During 1995, EMS acquired Intercim Corporation and the remaining interest in Effective Management Systems of Illinois, Inc., a joint venture subsidiary. In 1996, EMS acquired the remaining interest in Darwin Data Systems Corporation, another joint venture subsidiary. For further details regarding these acquisitions, see Note 2 of Notes to EMS' Consolidated Financial Statements, which disclosure is included elsewhere in this Annual Report on Form 10-KSB and incorporated herein by reference. 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 MES Systems which compliments ERP systems by making available real-time information from the factory floor and enhancing production performance and decision-making associated with plant operations. EMS believes that these MES Systems represent a relatively new marketplace with substantial benefit potential for manufacturers. EMS believes that this "time emphasis" in manufacturing management, which is the focus of EMS' TCM/TM/ and FACTORYnet/TM/ I/S products, will be an essential component of the management approach for many manufacturers in the future. During 1996, the Gartner Group of Stamford, Connecticut included EMS in its evaluations for North American mid-market ERP solutions, Shop Floor Control solutions and Computerized Maintenance Management Systems. In these evaluations, EMS compared favorably relative to many of its competitors. EMS was also the only corporation within the industry to have a product offering evaluated in all three of these areas for discrete manufacturing. Management believes this reflects the fact that EMS is the only provider currently offering software for all of these dimensions of a discrete manufacturer. Strategy EMS' objective is to grow as a leading provider of integrated business software systems for discrete manufacturing plants within its target market. EMS has identified three strategic initiatives to achieve this goal. Focus on Time Critical Manufacturing. EMS believes that manufacturers are striving to become more "time competitive," and that manufacturing software which focuses solely on providing information for planning and on recording information for historical analysis will be inadequate to meet the needs and demands of manufacturers in the years to come. To be effective in the future, EMS believes that manufacturing software will be required to empower individuals at all levels of an organization to make immediate decisions regarding production processes and business activities. Since 1988, EMS has focused its resources on developing software to assist time-oriented manufacturing management. EMS' software facilitates real-time decision-making by employees enabling them to change processes proactively and react quickly to marketplace demands and unanticipated events. With few exceptions, EMS believes that the limited number of information system implementations currently in place which have this "time" focus have been developed on an individual customized basis. EMS is not aware of other major software package products available in its target market for discrete manufacturers which offer both planning and execution systems and have a strategy of focusing on time. Commitment to Manufacturing Execution Systems. EMS believes that discrete manufacturers can gain significant competitive advantage by implementing Manufacturing Execution Systems. These systems bring together the data and information from ERP Systems, Industrial Control Systems, and Engineering Systems as illustrated below. [figure omitted] [description of omitted figure: This figure illustrates the necessary integration of data and information throughout the manufacturing organization. The functional areas of engineering, manufacturing business systems, and office automation depend on information from each other to perform efficiently and with quality. Separate software solutions for each of these functional areas causes quality loss through communications errors, time loss through redundant entry of data, and incompatibilities of necessary data.] EMS offered its first MES package in 1988 and believes that it is currently a leader in this software segment. Typical business functions included in an MES are described below (see - "Time Critical Manufacturing - - EMS Software Products"). Although the people in an organization which use this software on a minute-to-minute and hour-to-hour basis are the factory operations personnel, EMS believes that the value manufacturers realize from implementing an MES extends far beyond this realm. EMS believes, based on the experience of its customers, that the major benefit of implementing an MES within an organization is improved customer service and competitiveness. These systems allow an organization to reduce non- value added elapsed time in the overall business process. EMS currently offers two MES products, one which is pre-integrated with a total software offering for the entire enterprise (TCM/TM/) and the second is FACTORYnet/TM/ I/S in which EMS personnel use MES software to "round out" and complete partial MES initiatives already undertaken by the customer. AMR reported in December 1995 that MES software packages had at that time penetrated the U.S. market by the percentages set forth below: Industry % Penetration Electronics 7% Discrete 4% Repetitive 0% Management believes MES provides a significant market opportunity for EMS and, correspondingly, has strategically committed EMS to enhancing its MES offerings and marketplace presence. Emphasis on Pre-Integrated Software for Discrete Manufacturing. EMS' experience in the marketplace resulted in the 1995 introduction of the first "pre-integrated" ERP/MES/Controls software offering for discrete manufacturers. This pre-integration initiative was facilitated by the acquisition of Intercim Corporation. The figure set forth below illustrates three risk and capital capacity curves which relate to the eras of "custom" software, "custom systems integrated" software, and "pre- integrated" software. [figure omitted] [description of omitted figure: This figure illustrates the evolution of business software and the relationship of risk/capital capacity to corporation size. "Custom" software systems and "Custom System Integrated" software systems represent the past and current eras of software development and implementation. Formerly, only large corporations could afford the cost and risk of customized software. Today, with pre- integrated software from EMS, all manufacturers can enjoy the benefits of enterprise-wide solutions without the customization risk.] The illustration depicts how, in the first era of "Custom" software, only large corporations could afford the risk and capital outlays necessary to develop such software. Results from these software investments were mixed and implementation times generally spanned from five years to infinity. During the 1980's the industry entered its second era of "Custom Systems Integrated" software. During this era, which actually spans from the mid-80's until the present time, systems integration organizations worked with manufacturing companies to procure software components (for example, ERP, Statistical Process Control, Plant Maintenance, etc.) and integrated them on a custom basis for a given facility or corporation. The advent of this era dramatically reduced risk and capital capacity and for the first time made such products affordable for mid-sized corporations. Implementation time frames were reduced to three to five years. This approach represents the state-of-the-art for many manufacturers today. EMS introduced the "pre-integrated" era in 1995 when it offered the first pre-integrated software package for discrete manufacturers. Software pre-integration means that a customer can buy a comprehensive set of software from EMS which has already been integrated and proven to function. The various software components may be built by EMS or suppliers to EMS. In the case where there are suppliers to EMS, EMS has generally established alliances so that it can have design influence over the software. The pre-integration package also contemplates that other software, for example, Computer Aided Design systems, may already be in place at the customer site. "Off-the-shelf interfaces" for popular Computer Aided Design systems which once again are proven in advance are available to facilitate interaction with these software products. The figure above illustrates that pre-integrated software reduces risk and cost for the manufacturing company and also allows manufacturers of varying sizes to take advantage of the features offered by the software. Implementation time frames for pre-integrated software are between nine and eighteen months. EMS plans to continue to focus on the pre-integrated software marketplace. During 1996, Version 5.3 of TCM/TM/ became the first industry product to span the business functions from ERP through MES to Statistical Process Control (SPC) and Direct Numerical Control (DNC) as illustrated below. [figure omitted] [description of omitted figure: This figure illustrates the integration of ERP, MES, Controls, SPC, and actual physical devices on the shop floor. The figure shows the inter-relationships of these systems and the necessary feedback loops. The figure illustrates the value of integrated solutions through pre-defined communications between various software systems.] EMS believes that "pre-integration" of much of this software reduces the time and cost of system implementations and increases the business value to the manufacturer similar to the way that "suites" of desktop software have affected that marketplace as compared to custom integration of word processing, data base, and spreadsheet desktop products. Software Products EMS develops, markets and supports TCM/TM/ application software for discrete manufacturing companies. EMS currently offers licenses for two software products: (a) TCM/TM/, which is a full function business and ERP software system, including a pre-integrated MES providing production management, shop floor scheduling and operations support; and b) FACTORYnet/TM/ I/S, which is an MES that provides production personnel with correct revisions of drawings, specifications, procedures, and instructions to help them make a better product and make it right the first time. EMS' software products are intended to provide a set of "tactical tools" which will enable the customer to achieve its strategic goals by correlating the expenditure of time to the addition of value to the finished product or service. EMS' products are designed for discrete manufacturers, including both stand-alone manufacturing plants and autonomous divisions of large corporations. "Discrete" manufacturers assemble or fabricate parts into finished products as distinguished from "process" manufacturers which mix, separate and otherwise combine or control ingredients to create finished products. EMS' focus on discrete manufacturers includes the market segments of repetitive and electronics manufacturers which some people identify as additional market segments. Time Critical Manufacturing -- EMS Software Products EMS software provides assistance for a broad range of tasks identified in the six categories set forth below. The TCM/TM/ product can include software from all of these six categories. TCM/TM/ and FACTORYnet/TM/ I/S provide different capabilities within the MES and Decision Support Tools categories described below. EMS believes that over time the two MES product offerings will evolve into a single product which is more comprehensive than either of the current MES offerings. Time Critical Manufacturing Software Suites I. PLANNING Master Production Manufacturing Resource Capacity Planning Scheduling Planning II Forecasting Interface II. PRODUCT DATA MANAGEMENT Product Configurator Engineering Change Standard Bills of Control Material Standard Routings Computer Aided Document Library Manufacturing ("CAM") Item Master Computer Aided Design Standard Cost ("CAD") Interface Buildup III. SUPPLY CHAIN MANAGEMENT Customer Service Inventory Control Procurement Estimate/Quote Inventory Management Requisitions Customer Maintenance Distribution Management Vendor Maintenance Customer Order Processing Purchase Orders Shipping Vendor Performance Liability & Warranty Electronic Data Interchange (EDI" ) * Electronic Data Interchange ("EDI" ) * IV. MANUFACTURING EXECUTION SYSTEM Shop Floor Management Job Cost Bar Code Factory Data Collection Time & Attendance Plant & Equipment Maintenance Shop Floor Scheduling "As Built History" Quality Management* Electronic Traveler Machine Interface Messaging & Alarms EMS Gateway Electronic Work Instructions Distributed Numerical Control ("DNC") V. FINANCE, ACCOUNTING, AND ADMINISTRATION Accounts Receivable General Ledger Fixed Assets* Accounts Payable Human Resources* Standard Cost Payroll VI. DECISION SUPPORT TOOLS Executive Information System Document Library Report Writer E-Mail Database Internet Notification Services ODBC Access * These Products Are Provided Based On Third Party Sublicensing Alliances. I. Planning. The planning modules provide master production scheduling capability integrated with rough cut capacity planning to assist production organizations in planning materials requirements and manufacturing resource levels for the manufacturing facility. II. Product Data Management ("PDM"). PDM modules allow for product definition and control of engineering changes and relationships among component parts. These modules include software which interface with industry popular Computer Aided Design ("CAD") systems and offer Computer Aided Manufacturing ("CAM") software. III. Supply Chain Management. Customer Service. Modules provide control over the customer order cycle, including quotations, order entry, acknowledgment printing, pick ticket printing, shipping and invoicing. These modules allow for flexible pricing tables and multiple order types, including telephone orders, blanket orders and releases, over-the-counter orders and credit memos. EMS believes that its software for EDI, which facilitates electronic order entry and advance shipping notification, is particularly useful in meeting the needs of the automotive and retail supply industries. Inventory Management. The Inventory Management modules provide engineering data control and offer inventory recordkeeping, availability projections and replenishment planning. These modules provide bin, lot and serial number control, multi-location support, cycle counting and physical inventory control. Procurement. The Procurement modules provide control of the purchasing cycle, including authorized vendor price quotations, purchase order entry and printing, receipts entry and vendor performance analysis. These modules coordinate blanket orders and releases, one-time purchase orders, orders for non-productive materials and electronic mail notification upon receipt. IV. Manufacturing Execution System. The TCM/TM/ and FACTORYnet/TM/ I/S software products offer integrated MES which (i) provide production management, shop floor scheduling, distribution of "electronic drawings" as well as textual information on factory floor computer workstations, (ii) collect information from bar coding systems and (iii) facilitate the establishment of direct connections for virtually any NC/CNC machine tool and/or CAD systems. The products also include quality systems integration for statistical process control ("SPC") analysis. These MES may operate as stand-alone systems or be integrated into existing customer systems, and are pre-integrated with the remainder of the EMS software. V. Finance, Accounting and Administration. These modules provide general accounting and financial assistance in tracking and estimating planned and actual work-in-process costs. Any information from the finance and accounting database may be readily pulled into personal computer spreadsheet systems for further analysis and reporting. These modules also interface with third party human resource and fixed assets software products sold by EMS. VI. Decision Support Tools. These software modules are a combination of internally developed and third party software sold by EMS which facilitate easy data management, analysis, customization, communication, etc., of the EMS software with other software in the customer's computing environment. EMS software modules may be licensed individually or in combination to allow companies with differing business needs and schedules to have flexibility in the implementation of the software system. Customers generally license between $30,000 and $1,000,000 of software per plant, with the total license fees per plant based on the modules licensed and a per seat license fee. Software Technology EMS invests in a wide range of software technologies which are important not only for the EMS end user customer but also for EMS' internal software development and distribution. In appropriate circumstances, EMS has licensed software developed by others and integrated various features of that software into its own software products. For example, EMS' software products incorporate imaging technology, which enables the user to store and interactively display images such as photographs of steps in a particular production process, diagrams of manufacturing sub-assemblies or motion video depicting the proper operation of a machine. This imaging capability facilitates manufacturing and production set-up and also assists users in satisfying ISO 9000 certification criteria (a set of international quality standards). EMS' products also include EDI, which facilitates electronic order entry and advance shipping notification. For internal software development, EMS employs 4GL sets of development tools which EMS believes are instrumental in achieving software productivity improvements and allow end users flexibility to customize their software systems. EMS has also developed proprietary software which facilitates the conversion of EMS' software products into various foreign languages, including complex Asian languages. EMS believes that this technology is useful not only in penetrating foreign software markets, but also in assisting customers which use EMS' software products on a multi-national basis. For a further discussion of EMS' ongoing efforts to develop new software technologies, see "-- Product Development." Customer Services EMS offers comprehensive services for customers. Services provided by EMS include a telephone support program, system integration, custom software development, implementation consulting, and formal classroom and on-site training. At the customer's option, these services, which are available for both of EMS' software products, can be provided entirely by EMS or may be supplied in part by the customer or another third party such as a systems integrator or consulting firm. These services, which provide a recurring stream of revenue for EMS, are offered on an unbundled basis for either an annual or a multi-year subscription period. All of the services offered by EMS are optional, except that EMS requires first-time licensees of its software to subscribe for at least one year of telephone support. EMS believes that the availability of effective customer services is critical for customer satisfaction and to increase software license fee revenues. EMS further believes that services can provide a continuing and more predictable source of revenue as compared to software license fee revenues. For the years ended November 30, 1994, 1995, and 1996, services revenues accounted for 32.0%, 37.8%, and 37.4% of EMS' total net revenues, respectively. The following is a brief description of the various services provided by EMS: Telephone Support Program. EMS' telephone support program is a comprehensive, fee-based program designed to help customers obtain the maximum benefit from EMS' business management software. The telephone support program is handled out of EMS' Minnesota, Illinois, and Wisconsin offices and is staffed by twenty-eight trained professionals. The program includes, among other services, answering technical questions regarding standard software, and diagnosing and resolving equipment and software problems. System Integration and Custom Software Development. EMS offers system integration and custom software development services, on a fee basis, to meet specific customer requirements and to integrate its software with a customer's existing computer system. EMS has developed a Time Critical Implementation Methodology ("TCIM/TM/"), which is a proprietary implementation methodology intended to facilitate integration and efficient implementation of EMS' products at customer sites. This approach is designed to allow the customer to obtain business benefits sooner than with less structured methodologies. Ongoing technical support is also available from EMS to all customers who elect to purchase custom software development services. Implementation Consulting. EMS provides consulting services, on a fee basis, to assist customers in implementing EMS' software systems using the TCIM/TM/ approach. These services include value-added implementation planning, project management and specialized customer training. EMS employs a full-time professional services staff to provide these and other services. Training. EMS offers customers a series of both classroom and on- site training options. Training includes classroom and personal instruction at a number of EMS' locations or at the customer's plant site. Standardized training is offered for a fixed fee per class. Hardware Products EMS sells computer hardware and data collection equipment in order to facilitate sales of its software products to customers requiring a complete management information system. EMS sells, among other hardware, factory data collection equipment, CAMates/TM/ (a small specialized computer allowing users to monitor and collect data from production machines), bar coding systems, networking and communication equipment, and server and client computer hardware. The factory data collection and bar coding hardware is purchased from the original manufacturers and resold on a project basis. This equipment ranges from fixed mount bar code scanners and printers to portable units and radio frequency network units. EMS also offers its customers networking and communication hardware and server and client computing hardware which EMS purchases from original manufacturers, including Digital Equipment Corporation, International Business Machines, Inc., and Intermec Corporation, plus a distributor, Hallmark Computer Products. During the past several years, EMS has focused its efforts on generating an increasing percentage of its net revenues from software license fees, which have a higher margin than hardware revenues. Markets and Customers EMS targets companies operating discrete manufacturing plants in the United States, Canada, the Pacific Rim, and Europe. These plants may be owned by privately held companies or by large, multi-national public corporations. EMS' customers include, among others, capital equipment manufacturers, job shops, high volume manufacturers, automotive suppliers, consumer product manufacturers, and aerospace equipment manufacturers. Based on December 1995 data compiled by AMR, there are approximately 24,000 discrete manufacturing plants in the United States. EMS believes that there are at least as many discrete manufacturers within this section of the market outside of the United States. During each of the past three fiscal years, no one customer has accounted for more than 10% of EMS' total net revenues. Sales and Marketing In the United States and Canada, EMS licenses its products and offers services through a direct branch office sales force, joint ventures and independent distributors as reflected in the table below: Branch Office Independent Distributor Locations Territories -Atlanta, GA -Camarillo, CA -Austin, TX -Miller Place, NY -Baltimore, MD -Menominee, MI -Boston, MA -Pittsburgh, PA -Charlotte, NC -Wausau, WI -Chicago, IL -West Des Moines, IA -Cincinnati, OH -Detroit, MI Joint Venture -Green Bay, WI Location -Houston, TX -Cleveland, OH -Indianapolis, IN -Los Angeles, CA -Milwaukee, WI -Minneapolis, MN -Norwalk, CN -Philadelphia, PA -Port St. Lucie, FL -Ringwood, NJ -Rockford, IL -San Jose, CA EMS owns 50% of the joint venture operating in Cleveland. EMS obtained its interest in this joint venture primarily in exchange for technical knowledge and management expertise. EMS has no obligation to fund any losses that may be incurred by the joint venture. EMS' direct sales personnel are compensated on a salary plus commission basis. EMS' joint venture and independent distributor agreements generally provide that sales will be made by authorized resellers from offices within a designated territory. The agreements obligate EMS to license the reseller at specified prices and to provide training to each reseller. Resellers are normally obligated to sell a specified minimum amount of EMS' software to keep the agreements in effect. EMS also maintains a staff of systems consultants who offer pre- and post-sales support to the sales and distribution network. EMS markets its products through advertising campaigns in national trade periodicals and through direct mailings. These efforts are supplemented by listings in relevant directories and trade show and conference appearances. EMS is also given leads regarding potential customers by its hardware and services vendors, existing customers and various accounting and consulting firms. Sales cycles for EMS' products vary substantially based on the degree of integration, consulting and training required and also on the status of the customer's hardware system implementation. A sales cycle is usually three to twelve months from the time an initial sales presentation is made until the time a signed license agreement is entered into with a customer. In addition to its domestic markets, EMS over the last several years has begun efforts to develop a market for its products in the Pacific Rim and Europe. EMS has established independent distributor relationships in Japan, South Korea, The Peoples Republic of China, Taiwan, the United Kingdom, Belgium and Poland. In each of these countries, EMS' software products have been or are in the process of being converted to the local language. EMS has an office in Hong Kong to support its Asian distributors. Strategic Arrangements A facet of EMS' strategy is to establish arrangements with suppliers of state of the art information systems technology. EMS over the last five years has worked to expand the number of its strategic relationships. EMS' longest ongoing equipment manufacturer relationship is with Digital Equipment Corporation. EMS has also established manufacturer relationships with International Business Machines Corporation ("IBM") and Hewlett Packard. During 1995, EMS furthered its relationship with IBM by entering into a program in which IBM personnel would sell and service selected EMS software products in the United States. EMS also has arrangements with Intermec Corporation relating to bar code data collection systems which are integrated on an "off-the-shelf" basis into EMS' software products. EMS' software has been integrated with other bar coding systems on a customized basis. EMS also has a relationship with the Datamyte Division of Rockwell Automation for its Quantum quality control software product line. In addition to its relationships with equipment providers, EMS has relationships with numerous software product suppliers. These companies provide software which EMS uses within its TCM/TM/ and FACTORYnet/TM/ I/S software. Synergex International Corporation has provided the Synergy 4GL Applications Development Environment since 1990. EMS purchases EDI software from Supply Tech and Radley Corporation. EMS' relationship with the equipment and software product suppliers described above is basically that of a reseller of such suppliers' products. As such, EMS is entitled to volume discounts on products which it purchases and is generally entitled to the benefits of cooperative marketing programs. Product Development EMS believes it must continue to enhance, broaden and modify its existing line of software products to meet the constantly evolving needs of discrete manufacturers within its target market. EMS has relied on internal development and development related to customized projects implemented at field sites to extend, enhance and support its software products, and develop and integrate new capabilities. EMS has defined and implemented a methodology to leverage EMS' software development efforts related to advanced customized projects at field sites. Under this methodology, EMS' customized software programmers must adhere to a set of proprietary development techniques which improve software quality and facilitate the integration of customized software developments into the future software releases of EMS' standard products. In general, EMS has historically made one new product release each year. These formal releases are supplemented by periodic releases for its EDI software to respond to ongoing changes in trading partner requirements. During the fiscal years ended November 30, 1994, 1995, and 1996, EMS' total software investment (consisting of product development expenses and capitalized software development costs) was $1.9 million, $3.4 million, and $5.6 million, respectively. Product development expenditures which were expensed and not capitalized during those three fiscal years totaled $.8 million, $1.1 million, and $2.2 million, respectively. Software development efforts currently in progress include the development of product enhancements such as additional object orientation features within EMS' products, enhanced client-server network operations on various operating systems, extended operation on various relational database products, and enhanced functional capability. There can be no assurance, however, that these development efforts will result in product enhancements that EMS will be able to market successfully. Certain of these enhancements are dependent upon the development efforts of third party suppliers over whom EMS has no control. In the event the development efforts of the third party suppliers are delayed or are unsuccessful, the software developments of EMS would be similarly delayed. Software development is, however, an evolutionary process and EMS management believes it could eventually find other suppliers or, if unsuccessful in its search, that it could successfully re-engineer existing products to fulfill its requirements. Competition The manufacturing software industry is intensely competitive and rapidly changing. A number of companies offer products similar to EMS' products. Some of EMS' existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than EMS. EMS believes that its employees' understanding of diverse manufacturing operations and processes and the potential business benefits of the TCM/TM/ management approach to such operations allow EMS to differentiate itself from competitors. Other competitive factors include software product features and functions, product architecture, the ability to function on a variety of operating systems, technical support and other related services, ease of product integration with third party application software, price, and performance. In December 1996, Gartner Group identified sixteen competitors of EMS in the North American mid-market Enterprise Resource Planning area for discrete manufacturers. Additionally, that firm identified seven competitors in the MES market. Although Gartner Group identified a limited number of competitors in its MES study, EMS generally does not encounter these competitors in the marketplace. EMS believes that its primary competition for its MES products are customized software products developed by internal data processing staffs or by third party customized software developers. None of the competitors identified by Gartner Group had product offerings for both ERP and MES discrete manufacturers. Intellectual Property EMS has registered or has applied for registration of its "EMS/TM/" and "TCM/TM/" trademarks for software services and products with the United States Patent and Trademark Office and with the equivalent offices of most foreign countries in which EMS currently does business. Among others, EMS has also received or applied for trademarks for products marketed under the names FACTORYnet/TM/ I/S and CAMate/TM/ . EMS regards its software products as proprietary in that title to and ownership of its software reside exclusively with EMS. EMS attempts to protect its rights with a combination of trademark, copyright and employee and third-party nondisclosure agreements. Despite these precautions, it may be possible for unauthorized parties to copy or reverse-engineer portions of EMS' software products. While EMS' competitive position could conceivably be threatened by its inability to protect its proprietary information, EMS believes that copyright and trademark protection are less important to EMS' success than other factors such as the knowledge, ability and experience of EMS' personnel, name recognition and ongoing product development and support. Employees As of November 30, 1996, EMS had 352 full-time employees, of whom 60 were engaged in sales and marketing; 78 in product development; 181 in customer service; and 33 in management, finance and administration. EMS employees are not represented by any collective bargaining organization and EMS has never experienced a work stoppage. EMS considers its employee relations to be good. SELECTED FINANCIAL DATA (In thousands, except per share data)
Year ended November 30 1992 1993 1994 1995(4) 1996 STATEMENTS OF OPERATIONS DATA: Net revenues: Software license fees $5,052 7,146 $10,163 $11,534 $19,094 Services 4,972 5,928 7,256 10,962 15,412 Hardware 6,319 6,220 5,245 6,528 6,751 ------- ------- ------- ------- ------- Total net revenues $16,343 $19,294 $22,664 $29,024 $41,257 ------- ------- ------- ------- ------- Cost of products and services Cost of software license fees $660 $747 $1,312 $2,298 $4,075 Cost of services 3,029 3,898 4,467 7,884 12,109 Cost of hardware 5,420 4,752 4,146 5,118 4,979 ------- ------- ------- ------- ------- Total Cost of product/services $9,109 $9,397 $9,925 $15,300 $21,163 ------- ------- ------- ------- ------- Gross Margin 7,234 9,897 12,739 13,724 20,094 Selling and marketing expenses $3,888 $5,546 $7,407 $9,479 $14,060 General and administrative 1,778 2,038 2,227 3,029 3,416 expenses Product development expenses (1) 546 621 752 1,086 2,235 ------- ------- ------- ------- ------- Total operating expenses $6,212 $8,205 $10,386 $13,594 $19,711 ------- ------- ------- ------- ------- Operating income $1,022 $1,692 $2,353 $130 $383 Other income (expenses) (19) (32) 342 80 118 ----- ----- ----- ---- ---- Income before income taxes $1,003 $1,660 $2,695 $210 265 Income tax expense 359 650 975 79 112 Net income 644 1,010 1,720 131 153 Net income per share $0.18 $0.39 $0.53 $0.04 $0.04 Weighed average common and common equivalent share outstanding (2) 3,527 2,574 3,268 3,669 3,965 OTHER STATISTICAL DATA: Software investment (3) $961 $1,312 $1,857 $3,407 $5,607 Software investment as a percentage of software license fees 19.0% 18.4% 18.3% 29.5% 29.4% BALANCE SHEET DATA: Working capital (deficit) $(251) $42 $4,749 $4,677 $4,510 Capitalized software development costs, net 921 1,271 1,861 4,000 5,781 Total assets 7,806 8,043 17,903 24,332 27,446 Long-term obligations 1,298 580 50 21 2,123 Stockholder's equity 531 1,541 10,354 14,177 14,597
(1) Does not include capitalized software cost of $415, $691, $1,105, $2,321, and $3,372 recorded for the years ended November 1992, 1993, 1994, 1995, and 1996, respectively. (2) Weighted average common and common equivalent shares outstanding for the periods shown include the effect of common stock equivalents, if dilutive. The decrease in common and common equivalent shares from 1992 to 1993 was due to the redemption of convertible preferred stock and the cancellation of outstanding warrants in November 1992. (3) Software investment consists of product development expense and capitalized software development costs. (4) Includes results of Effective Management Systems of Illinois, Inc. and Intercim Corporation since being acquired effective March 31, 1995 and September 6, 1995, respectively. CONDENSED QUARTERLY RESULTS (UNAUDITED) (In thousand, except per share) The following table sets forth certain unaudited condensed operating results for each of the eight quarters in the two-year period ended November 30, 1996. This information has been prepared by EMS on the same basis as the Consolidated Financial Statements appearing elsewhere in this report and includes, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein. EMS' operating results for any one quarter are not necessarily indicative of results for any future period. Three Months Ended
Feb 28, May 31, Aug 31, Nov 30 Feb 28 May 31 Aug 31 Nov 30 1995 1995 1995 1995 1996 1996 1996 1996 Statements of Operations Data: Net revenues: Software license fees $2,169 $2,612 $2,047 $4,706 $3,675 $4,255 $4,040 $7,124 Services 2,046 2,605 3,055 3,256 3,617 3,780 3,755 4,260 Hardware 1,324 1,416 2,128 1,660 2,351 1,668 1,278 1,454 ------- ------- ------- ------- ------- ------- ------- ------- Total net revenues $5,539 $6,633 $7,230 $9,622 $9,643 $9,703 $9,073 $12,838 Total operating expenses $5,572 $6,516 $7,837 $8,969 $9,818 $9,861 $9,616 $11,579 ------- ------- ------- ------- ------- ------- ------- ------- Operating income <33> 117 <607> 653 <175> <158> <543> 1,259 Income before income taxes 53 152 <645> 650 <164> <153> <566> 1,148 ------- ------- ------- ------- ------- ------- ------- ------- Net Income 60 108 <390> 353 <91> <87> <333> 664 ======= ======= ======= ======= ======= ======= ======= ======= Net income per share $0.02 $0.03 <$0.11> $0.09 <$.02> <$.02> <$.08> $.17 ======= ======= ======= ======= ======= ======= ======= ======= Weighed averaged common and equivalent share outstanding 3,611 3,702 3,634 3,903 3,932 3,950 3,973 4,006 ======= ======= ======= ======= ======= ======= ======= =======
Item 2. Properties EMS' corporate headquarters are located in Milwaukee, Wisconsin, in a leased office consisting of approximately 42,000 square feet under a lease expiring November 30, 2003. EMS leases additional facilities domestically in Austin, Texas; Boston, Massachusetts; Chicago, Illinois; Cincinnati, Ohio; Detroit, Michigan; Hartford Connecticut; Houston, Texas; Indianapolis, Indiana; Minneapolis, Minnesota; Philadelphia, Pennsylvania; Port St. Lucie, Florida; Rockford, Illinois and San Jose, California. For its international operations, EMS leases office space in Hong Kong. Additional space may be required within the next twelve months, but EMS believes that suitable additional space will be available as required. See Note 8 of the Notes to Consolidated Financial Statements for information regarding EMS total lease obligations. Item 3. Legal proceedings As of the date of this filing, neither MES nor any of its subsidiaries is a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material effect on EMS' results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended November 30, 1996. PART II Item 5, Market for Registrant's Common Equity and Related Stockholder Matters The common stock and common stock warrants of EMS are traded on The Nasdaq Stock market under the symbols EMSI and EMSIW, respectively. The table below represents the high and low sales prices for the EMS common stock and warrants as reported on The Nasdaq Stock Market for fiscal 1995 and 1996: Common Stock Warrant/1 1995 High Low High Low First Quarter 7 7/8 5 7/8 -- -- Second Quarter 8 3/4 6 1/4 -- -- Third Quarter 7 3/4 6 1/8 -- -- Fourth Quarter 8 1/2 4 3/4 3 1/2 2 1996 High Low High Low First Quarter 5 3/4 4 1/4 2 1/8 1 1/4 Second Quarter 7 3/4 4 1/4 3 1 1/4 Third Quarter 8 5 1/4 3 1/8 2 1/2 Fourth Quarter 8 1/4 5 1/4 3 1/4 2 1/2 1/Trading commenced on October 31, 1995 As of February 1, 1997, there were 408 shareholders of record of EMS' common stock and 307 holders of record of the warrants. EMS has not declared or paid cash dividends on its common stock in the past, and currently intends to retain any earnings for use in its business. Therefore, EMS does not anticipate paying any cash dividends in the foreseeable future. EMS' credit facility also contains provisions limiting its ability to pay cash dividends. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations (for the fiscal years ended November 30, 1996, 1995, and 1994) Overview Effective Management Systems, Inc.("EMS" or "the Company") recorded a strong increase in revenues and a slight increase in net income for fiscal 1996 compared with fiscal 1995. The increase in revenues 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 for manufacturing software that fully integrates customer service, engineering, production control, dispatching, quality and machine tool communication. The Company also secured the first orders from its marketing relationship with the International Business Corporation (IBM). Lastly, the Company recorded significant revenues from the introduction of its products on the Windows NT operating system of the Microsoft Corporation. The Company had recorded a decline in net income for fiscal 1995 compared with fiscal 1994. The decline was primarily the result of three factors, including extended efforts to incorporate advancing technologies into the Company's software products, rising expenses to build the infrastructure necessary for newly established selling relationships, including IBM, and time and costs associated with effecting two acquisitions. Effective March 31,1995, the Company acquired the remaining 50% interest (in addition to the 50% interest previously owned) in Effective Management System of Illinois, Inc. ("EMS-ILL") for a cost of approximately $793,000 in Company common stock, cash, and related direct acquisition costs. The acquisition was accounted for as a purchase and resulted in the Company recording goodwill, which is being amortized over a twenty-year period. On September 6, 1995, the Company acquired all of the common stock of Intercim Corporation ("Intercim") for a cost of approximately $3,355,000 in Company common stock , warrants and related direct acquisition costs. The warrants have a ten-year term and an exercise price of $6.75. The acquisition was accounted for as a purchase and the goodwill resulting from the transaction is being amortized over a twelve-year period. The consolidated financial statements reflect the operating results of EMS-ILL and Intercim since their respective dates of acquisition. EMS-ILL was the exclusive distributor of the Company's products in Illinois and northern Indiana. Intercim designed, built, integrated, and supported 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 acquisitions are herein referred to as the "1995 Acquisitions". Results of Operations Total Revenue Total revenue for fiscal 1996 increased 42.2% to $41,257,000 from $29,024,000 in 1995 and grew 28.1% from $22,664,000 in 1994 to 1995. The 1995 Acquisitions accounted for $7,338,000 of the increase in revenues in 1996 and $5,498,000 in 1995. The increase in revenues in all periods presented was primarily related to the increase in the amount of software sold with each unit and the corresponding services revenues. The mix of software, services, and hardware, as a percentage of total revenue, was 46.2%, 37.4%, and 16.4%, respectively, in fiscal 1996; 39.7%, 37.8%, and 22.5%, respectively, in fiscal 1995; and 44.8%, 32.0%, and 23.2%, respectively, in fiscal 1994. The change in mix of revenues from fiscal 1995 to fiscal 1996 was mainly the result of declining hardware revenues due to the introduction of the Company's products on the Microsoft Windows NT operating system. Customers are able to use the Company's software on hardware that they have already purchased, or purchase the necessary hardware through local retail channels. The change in mix of revenues from fiscal 1994 to fiscal 1995 was mainly the result of a lower volume of revenues from new software installations in fiscal 1995 as compared to growing service revenues from established customers. Software License Fee Revenues Software license fee revenues are customer charges for the right to use the Company's software products. These revenues increased 65.6% to $19,094,000 in fiscal 1996 from $11,534,000 in fiscal 1995. The 1995 Acquisitions accounted for $4,623,000 of the 1996 increase in revenues and $1,846,000 of the 1995 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 the IBM marketing relationship, the hiring of additional sales personnel, and increased productivity of existing sales personnel. Software license fee revenues increased by $1,371,000 (13.5%) to $11,534,000 in fiscal 1995 from $10,163,000 in fiscal 1994. The 1995 Acquisitions accounted for $1,846,000 of the 1995 revenues. The impact of the 1995 Acquistions on software license fee revenues was offset in part by a decline in software revenues relating to the Company's historical product offerings. The main contributors to this decrease(net of 1995 Acquisitions) was the on-going efforts to incorporate advancing technologies into the Company's software products. The Company was also focused on integrating the products obtained as a result of the acquisition of Intercim. Service Revenues The Company offers 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 40.6% to $15,412,000 in fiscal 1996 from $10,962,000 in fiscal 1995 and increased 51.1% to $10,962,000 in fiscal 1995 from $7,256,000 in fiscal 1994. Of these increases, $4,496,000 and $2,320,000 were attributable to the 1995 Acquisitions in fiscal 1996 and 1995, respectively. The balance of the increases in all periods presented were primarily due to growth in the customer base and normal price increases. 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 increased 3.4% to $6,751,000 in fiscal 1996 from $6,528,000 in fiscal 1995 and increased 24.5% from $5,245,000 in fiscal 1994. These increases reflect the additional revenues of the 1995 Acquisitions ($1,740,000 in fiscal 1996 and $1,291,000 in fiscal 1995). Net of the 1995 Acquisitions, hardware revenues decreased to $5,011,000, $5,237,000, and $5,245,000 in fiscal 1996, fiscal 1995, and fiscal 1994, respectively. 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. The recent introduction of the Company's products on the Windows NT platform has resulted in an increased number of "software only" sales. Second, as the volume of business grows, hardware revenues have tended to increase. 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 counterbalancing, but, to date, have generally resulted in a long-term decline in hardware sales as a percentage of revenue. Cost of Software License Fees Most of the 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. Additionally, the costs of software license fees also include the amortization of past investments in product development. Cost of software license fees increased from $1,312,000 in fiscal 1994, to $2,298,000 in fiscal 1995 and to $4,075,000 in fiscal 1996. The 1995 Acquisitions accounted for $526,000 of the fiscal 1995 increase and $834,000 of the fiscal 1996 increase. Aside from the effect of the 1995 Acquisitions, these increases were mainly attributable to increases in both the costs of additional third party software sales and the software amortization resulting from increased capitalized investment in software products during fiscal 1994, fiscal 1995, and fiscal 1996. Amortization of capitalized software costs is dependent on past investments in product development and may not necessarily correspond to revenue growth. Cost of Services Cost of services as a percentage of related revenues increased to 78.6% in 1996, from 71.9% in 1995 and from 61.6% in 1994. The increase was attributable to both a rising cost of labor, additional management expense in regard to building an organization for the future, additional expenses to further develop a world wide learning initiative in regard to new selling relationships (3.5% of related revenues in 1996), and the training expense related to newly hired employees. The 1995 Acquisitions did not have a material impact on the Company's cost of services as a percentage of related revenues. Cost of Hardware Cost of hardware as a percentage of related revenues decreased to 73.8% in fiscal 1996 form 78.4% in fiscal 1995 and 79.1% in fiscal 1994. As more customers purchase the low margin hardware at local retail channels, the remaining hardware sales are made at higher margins due to the technical expertise that the Company brings to the process. This higher margin hardware includes such items as servers, network equipment, and data collection devices. Management expects the overall level of hardware per unit sale to decline, but the resultant value added margins to be higher. Additionally, the cost of hardware as a percentage of hardware revenues can vary due to amount of lower margin sales (cost plus 11%) to the Company's joint ventures and affiliates, which were $1,264,000, $1,091,000, and $685,000 in fiscal 1996, fiscal 1995, and fiscal 1994, respectively. Commencing January 1, 1996, the Company began charging 11% over cost (previously sold at cost) on hardware sales to EMS Solutions, Inc., an affiliated entity owned by certain executive officers of the Company, to match similar terms offered to the Company's joint ventures. Sales of hardware to EMS Solutions, Inc. were $851,000 in fiscal 1996, $926,000 in fiscal 1995, and $408,000 in fiscal 1994. Net Product Development Expenses Product development expenses, net of amounts capitalized, increased from $752,000 in fiscal 1994 to $1,086,000 (44.4% growth) in fiscal 1995 and to $2,235,000 (105.8% growth) in fiscal 1996. These increases were mainly the result of the Company's strategic initiatives to increase investment in the development of future products, including the incorporation of various new technologies into the Company's software products. In fiscal 1995 and fiscal 1996, the 1995 Acquisitions added $545,000 and $659,000, respectively, to product development expense, excluding $313,000 and $1,329,000 which were capitalized in accordance with Statement of Financial Standards (SFAS) No. 86. Management expects product development expense to continue to rise in fiscal 1997 as efforts continue on the development of new products and the incorporation of new technologies. Total development expense (defined as net development expense plus amounts capitalized) increased in fiscal 1996 to $5,607,000 from $3,407,000 in fiscal 1995 and from $1,857,000 in fiscal 1994. These expenses expressed as a percent of related software sales were 29.4%, 29.5% and 18.3% in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. Selling and Marketing Expenses Selling and marketing expenses increased to $14,060,000 in 1996 from $9,479,000 in fiscal 1995 and from $7,407,000 in fiscal 1994. As a percent of gross margin (total net revenues minus total costs of products and services), selling and marketing expenses increased to 70.0% in fiscal 1996 from 69.1% in fiscal 1995 ,and from 58.1% in fiscal 1994. The 1995 Acquisitions accounted for $1,756,000 of the increase in the selling and marketing expenses in fiscal 1996 and accounted for $843,000 of the increase in the selling and marketing expense in fiscal 1995. Other primary reasons for the increases in fiscal 1996 compared to fiscal 1995 include: enhanced marketing efforts ($293,000); growth in international sales efforts ($159,000); and general growth in selling efforts. Other primary reasons for the increase in fiscal 1995 compared to fiscal 1994 include: expanded national distribution channels ($337,000); enhanced marketing efforts ($381,000); growth in international sales efforts ($239,000); and general growth in selling efforts.. The Company expects selling and marketing expense to continue to rise as additional sales people are hired and existing markets are developed. General and Administrative Expenses For fiscal 1996, general and administrative expense increased to $3,416,000 from $3,029,000 in fiscal 1995 and from $2,227,000 in fiscal 1994. As a percent of gross margin (total net revenues minus total costs of products and services), these expenses were 17.0%, 22.1% and 17.5% in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The 1995 Acquisitions increased general and administrative expense by $1,009,000 in fiscal 1996 and by $706,000 in fiscal 1995. Other primary reasons for the increase in fiscal 1996 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 primary reasons for the increase in fiscal 1995 include: additional depreciation from rising levels of capital purchases ($138,000); added support personnel for system and facilities needs ($121,000); and additional administrative costs attributable to the growth in hardware and service revenues. EMS also provides office space, accounting and administrative services, computer processing time, and other miscellaneous services to EMS Solutions, Inc. (an affiliated company). The amounts received by the Company for these services were $269,000 in fiscal 1996, $321,000 in fiscal 1995, and $349,000 in fiscal 1994. The amounts received from EMS Solutions, Inc. are recorded as a reduction against general and administrative expense. Other Income/Expense Other income/expense was $118,000 of expense in fiscal 1996, $80,000 of income in fiscal 1995 and $342,000 of income in fiscal 1994. Equity earnings from affiliates were $25,000 of income in fiscal 1996, $31,000 of loss in fiscal 1995 and $245,000 of income in fiscal 1994. The equity earnings for fiscal 1996 and fiscal 1995 declined , in part, due to the merger with EMS-Ill, which resulted in reduced equity earnings from this former joint venture. Interest income and interest expense were $89,000 and $145,000, respectively, in fiscal 1996; $176,000 and $52,000, respectively, in fiscal 1995; and $149,000 and $52,000, respectively, in fiscal 1994. The decrease in interest income and simultaneous rise in interest expense were mainly due to the Company's reduction in cash and short-term assets in order to fund investments in products, distribution channels, and service infrastructure. The Company anticipates that interest income will continue to decline and interest expense will continue to increase with continued application of cash for operating and capital expenditure purposes. Income Tax Expense The effective income tax rate was 42.3% for fiscal 1996 versus 37.6% for fiscal 1995 and 36.2% for fiscal 1994. The effective income tax rate fluctuates mainly in relation to the equity earnings of unconsolidated joint ventures, interest earned on tax-free municipal obligations, the amount of allowable tax credit for research and development expenditures, goodwill amortization, meals and entertainment expense, and officer's life insurance expense. In 1996, the effective income tax rate was higher than fiscal 1995 due to reduced tax-exempt interest income and non-deductible meals and entertainment expenses. In fiscal 1996, Intercim, formally a wholly owned subsidiary of the Company, was merged into the Company. As a result, the net operating loss carryforwards of Intercim may be used to offset the Company's taxable income, subject to an annual limitation of $182,000. These net operating loss carryforwards expire in the year 2010. Liquidity and Capital Resources Cash provided by operations was $2,906,000 in fiscal 1996, $1,915,000 in fiscal 1995, and $61,000 in fiscal 1994. Non-cash expenditures , including depreciation relating to capital expenditures, amortization associated with software product development, and amortization of goodwill, contributed to the cash provided in fiscal 1996 and fiscal 1995. In addition, improvements in accounts receivable collection practices, contributed to the cash provided in fiscal 1996 and fiscal 1995. Investment activities used cash of $4,163,000 in fiscal 1996, $1,850,000 in fiscal 1995 and $6,451,000 in fiscal 1994. In fiscal 1996, the Company used the cash mainly to fund $1,424,000 of capital expenditures and $3,372,000 of investment in capitalized software product development. The Company sold $1,584,000 of available-for-sale securities and $743,000 hold-to-maturity securities in fiscal 1995, which funded, in part, $1,430,000 of capital expenditures and $2,321,000 of capitalized product development. The 1995 Acquisitions were funded primarily though issuance of the Company's common stock and warrants. In fiscal 1994, the Company purchased $3,590,000 of securities and funded $1,219,000 of capital expenditures and $1,105,000 of capitalized software product development. Financing activities provided $1,788,000 of cash in fiscal 1996 compared with $10,000 of cash used in fiscal 1995 and $6,498,000 of cash provided in fiscal 1994. The cash provided from financing activities in 1996 was mainly through the Company's line of credit. The cash provided in fiscal 1994 was mainly from the Company's initial public offering. As of November 30, 1996, the Company had $3,136,000 of availability under its revolving line of credit. The Company believes its cash flows from operations, funds available under its line of credit, and funds available from investment securities will be adequate to finance capital expenditures and working capital requirements for at least the next twelve months. Item 7. Financial Statements Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . 25 Consolidated Balance Sheets as of November 30, 1996 and 1995 . . . . . 26 Consolidated Statements of Income for the Years Ended November 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 28 Consolidated Statements of Stockholders' Equity for the Years Ended November 30, 1996, 1995 and 1994 . . . . . . . . . . . . 29 Consolidated Statements of Cash Flows for the Years Ended November 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 30 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 32 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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at November 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin January 17, 1997 Effective Management Systems, Inc. Consolidated Balance Sheets (Dollars in Thousands) November 30 1996 1995 Assets Current assets: Cash and cash equivalents $866 $335 Investment in available-for-sale securities 505 1,263 Accounts receivable: Trade, less allowance for doubtful accounts of $346-1996; $312-1995 11,146 9,402 Related parties 693 652 ------- ------- 11,839 10,054 Refundable income taxes 159 462 Inventories 391 518 Deferred income taxes 175 157 Prepaid expenses and other current assets 288 197 ------- ------- Total current assets 14,223 12,986 Computer software, net 5,781 4,000 Investments in and advances to unconsolidated joint ventures 199 179 Equipment and leasehold improvements, net 3,961 3,223 Intangible assets, net 2,690 3,387 Other assets 592 557 ------- ------- Total assets $27,446 $24,332 ======= ======= Liabilities and stockholders' equity Current liabilities: Accounts payable $2,026 $2,076 Accrued liabilities 2,846 2,182 Deferred revenue 4,605 3,735 Customer deposits 109 227 Current portion of long-term obligations 127 89 ------- ------- Total current liabilities 9,713 8,309 Deferred revenue and other long-term liabilities 453 532 Long-term obligations 2,123 21 Deferred income taxes 560 1,293 Commitments and contingencies (Note 8) 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 4,011,018 and 3,906,105 shares; outstanding 4,008,393 and 3,903,480 shares 41 39 Common stock warrants 4 3 Common stock and warrants to be issued - 211 Additional paid-in capital 11,137 10,662 Retained earnings 3,420 3,267 Cost of common stock in treasury (2,625 shares) (5) (5) ------- ------- 14,597 14,177 ------- ------- Total liabilities and stockholders' equity $27,446 $24,332 ======= ======= See accompanying notes. Effective Management Systems, Inc. Consolidated Statements of Income (In Thousands, except per share amounts) Year ended November 30 1996 1995 1994 Net revenues: Software license fees $19,094 $11,534 $10,163 Services 15,412 10,962 7,256 Hardware 6,751 6,528 5,245 ------- ------- ------- 41,257 29,024 22,664 Costs of products and services: Cost of software license fees 4,075 2,298 1,312 Cost of services 12,109 7,884 4,467 Cost of hardware 4,979 5,118 4,146 ------- ------- ------- 21,163 15,300 9,925 Selling and marketing expenses 14,060 9,479 7,407 General and administrative expenses 3,416 3,029 2,227 Product development expenses 2,235 1,086 752 ------- ------- ------- 40,874 28,894 20,311 ------- ------- ------- Income from operations 383 130 2,353 Other income (expense): Equity in earnings (losses) of unconsolidated joint ventures 25 (31) 245 Interest income 89 176 149 Interest expense (145) (52) (52) Other (87) (13) - ------- ------- ------- (118) 80 342 ------- ------- ------- Income before income taxes 265 210 2,695 Income tax expense 112 79 975 -------- ------- ------- Net income $153 $131 $1,720 ======== ======= ======= Net income per common share - Primary and fully diluted $.04 $.04 $.53 ======== ======= ======= Weighted average common and common equivalent shares - Primary and fully diluted 3,965 3,669 3,268 ======== ======= ======= See accompanying notes.
Common Stock and Common Warrants Common Stock to be Paid-in Retained Treasury Shares Stock Warrants Issued Capital Earnings Stock Total Balance, November 30, 1993 2,493,715 $25 $ - $ - $ 105 $1,416 $(5) $ 1,541 Shares sold to public, net of offering costs 1,000,000 10 - - 6,999 - - 7,009 Stock options exercised 51,500 1 - - 83 - - 84 Net income - - - - - 1,720 - 1,720 --------- ----- ---- ------ ------- ------- ------- ------- 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 Intercim shareholder - - - (39) - - - (39) Net income - - - - - 153 - 153 --------- ----- ---- ------ ------ ----- ---- ------ Balance, November 30, 1996 4,011,018 $41 $4 $ - $11,137 $3,420 $(5) $14,597 ========= ===== ==== ====== ====== ===== ==== ======
See accompanying notes. Effective Management Systems, Inc. Consolidated Statements of Cash Flows (Dollars in Thousands) Year ended November 30 1996 1995 1994 Operating activities Net income $153 $131 $ 1,720 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,037 730 445 Amortization, other 189 82 54 Amortization of capitalized computer software development costs 1,591 879 515 Equity in losses (earnings) of joint ventures (25) 31 (245) (Gain) loss on disposal of equipment and leasehold improvements (24) 4 20 Deferred income taxes 202 554 203 Changes in operating assets and liabilities: Accounts receivable (1,770) (297) (3,690) Inventories and other current assets 341 265 (352) Accounts payable and other liabilities 1,212 (464) 1,391 ------- ------- ------- Total adjustments 2,753 1,784 (1,659) ------- ------- ------- Net cash provided by operating activities 2,906 1,915 61 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 (1,424) (1,430) (1,219) Purchases of available-for-sale securities (495) - (1,584) Purchases of held-to-maturity securities - - (2,006) Proceeds from sales of available-for- sale securities 1,247 1,584 - Proceeds from sales of held-to- maturity securities - 743 - Proceeds from sale of equipment and leasehold improvements 68 39 9 Increase in cash surrender value of life insurance (25) (31) (112) Software development costs capitalized (3,372) (2,321) (1,105) Other (111) 29 (434) ------- -------- -------- Net cash used in investing activities (4,163) (1,850) (6,451) Financing activities Net proceeds from initial public stock offering $ - $ - $ 7,009 Proceeds from issuance of stock to employees 174 167 84 Proceeds from increase in debt 1,864 - - Payments on long-term debt and capital lease obligations (250) (177) (595) ------- -------- ------- Net cash provided by (used in) financing activities 1,788 (10) 6,498 ------- ------- ------- Net increase in cash 531 55 108 Cash: Beginning of year 335 280 172 ------- ------- ------- End of year $866 $335 $280 ======= ======= ======= Supplemental cash flow information: Interest paid (net of amount capitalized) $133 $52 $8 Income taxes paid (refunded), net (464) 357 518 Noncash transactions: Equipment recorded under capital lease obligations 371 - 7 Issuance of common stock and warrants for acquisitions 132 3,314 - Common stock and warrants to be issued for an acquisition - 211 - See accompanying notes. Effective Management Systems, Inc. Notes to Consolidated Financial Statements Years ended November 30, 1996, 1995 and 1994 (Dollars in thousands) 1. Basis of Presentation and Significant Accounting Policies Consolidation The accompanying consolidated financial statements include the accounts of Effective Management Systems, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Business and Concentration of Credit Risk The Company develops, sells, and services computer software and related hardware throughout the United States and certain foreign countries that meet the Company's credit policies. The Company performs periodic credit evaluations of its customers' financial condition and generally follows a policy to obtain deposits for sales to new customers. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue is recognized in accordance with the provisions of AICPA Statement of Position (SOP) 91-1, "Software Revenue Recognition," as follows: Software and Hardware Sales Revenue is recognized when the product is delivered. Professional Fees and Services Revenue is recognized as time and material costs are incurred. Software Support Fees Revenue is recognized ratably over the terms of the nonrefundable support contract. Annual Upgrade Fees Revenue is recognized ratably over the nonrefundable annual upgrade contract period. 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 were $5,781 and $4,000 at November 30, 1996 and 1995, respectively, which is net of accumulated amortization of $5,342 and $3,751, respectively. Investment in Unconsolidated Joint Ventures Investments in unconsolidated joint ventures are accounted for on the equity method wherein the Company's share of the joint ventures' net earnings or losses is recorded as an adjustment to the investment. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost and are depreciated using the straight-line method for financial reporting purposes. The estimated useful lives used to calculate depreciation are as follows: Years Leasehold improvements 5 Furniture and fixtures 10 Equipment 5 Assets under capital leases are amortized on a straight-line basis over their useful lives, unless the length of the lease is less and there is not a bargain purchase option. 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 Per Common Share Net income per common share is computed based on the weighted average number of common shares outstanding for the periods presented. The dilutive effect of stock options and warrants was not material for all years presented. 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, 1996, 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 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. SFAS No. 123, "Accounting for Stock-Based Compensation," is effective December 1, 1996. The Company will adopt SFAS No. 123 in fiscal 1997. As is permitted under SFAS No. 123, the Company has tentatively decided to continue accounting for employee stock compensation using APB 25, but will disclose pro forma results using the new standard's alternative accounting treatment, which calculates the total compensation expense to be recognized as the fair value of the award at the date of grant for effectively all awards granted after December 31, 1994. 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, comprised 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 fifteen 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 of the remaining interests in Darwin and EMS-Illinois as well as the purchase of Intercim have been accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of Darwin, EMS-Illinois and Intercim 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 each period presented. In addition to combining the historical results of all the entities, the pro forma calculations include adjustments for amortization of various intangibles acquired in conjunction with the acquisition and elimination of intercompany transactions with EMS-Illinois. However, no adjustments have been reflected for nonrecurring expenses as a result of the combination of the entities. Year ended November 30 1995 1994 (Unaudited) Total net revenue $34,174 $32,435 Net income (loss) (505) 1,616 Earnings per share (.13) .45 Pro forma results have not been included for 1996 for the Darwin acquisition because the impact was not significant. 3. Investments The following is a summary of investment securities at November 30: 1996 Available-for-Sale Securities Gross Unrealized Gains Estimated Cost (Losses) Fair Value Obligations of states and political subdivisions $505 $ - $505 1995 Available-for-Sale Securities Gross Unrealized Gains Estimated Cost (Losses) Fair Value Obligations of states and political subdivisions $1,263 $ - $1,263 All of the above securities were due in one year or less. During the years ended November 30, 1995 and 1996, debt available-for-sale and certain debt held-to-maturity securities with fair market value of $1,247 and $2,330, 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 and 1995. 4. Equipment and Leasehold Improvements Equipment and leasehold improvements consisted of the following at November 30: 1996 1995 Equipment $6,090 $4,738 Furniture and fixtures 1,199 1,058 Leasehold improvements 426 253 Equipment under capital leases 454 367 ------- ------- 8,169 6,416 Less accumulated depreciation and amortization (4,208) (3,193) ------- ------- Equipment and leasehold improvements, net $3,961 $3,223 ======= ======= 5. Intangible Assets Intangible assets consisted of the following at November 30: 1996 1995 Goodwill $1,435 $1,915 Customer list 1,400 1,400 Other 200 200 ------ ------ 3,035 3,515 Less accumulated amortization (355) (128) ------ ------ Intangible assets, net $2,680 $3,387 ====== ====== 6. Unconsolidated Joint Ventures and Contingent Liabilities The Company owns a 50% equity investment in two joint ventures that market and sell the Company's software. In April 1996 and March 1995, the Company purchased the remaining joint venture interest in which it previously only owned 25% and 50%, respectively. The Company recognized earnings (losses) from these joint ventures of $25, ($31) and $245 in 1996, 1995 and 1994, respectively. The Company has no obligation to fund any losses that may be incurred by these joint ventures. Included in accounts receivable related parties are amounts due from the joint ventures totaling $174 and $137 at November 30, 1996 and 1995, respectively. Included in the Company's net revenues are $486, $531 and $1,464 from joint ventures in 1996, 1995 and 1994, respectively. Summarized financial information from the unaudited annual financial statements of the unconsolidated joint ventures is presented below using their fiscal year ends completed prior to the Company's November 30 fiscal year below: 1994 Net revenues $7,892 Costs and expenses 7,255 Net income 276 Information for 1996 and 1995 was not included as the Company's investment in joint ventures is not material at November 30, 1996 and 1995, respectively. 7. Affiliated Company Certain of the Company's stockholders also own all of the common stock of an affiliated company, EMS Solutions, Inc. (Solutions), which develops and sells computer software and related hardware to the food vending and food distribution industry. The Company provides office space and other services to Solutions for which the Company received fees of $269, $321 and $349 in 1996, 1995 and 1994, respectively, that are recorded as an offset to general and administrative expense. The Company also sells computer hardware to Solutions that totaled $851, $926 and $408 in 1996, 1995 and 1994, respectively. Amounts due from Solutions were $445 and $429 at November_30, 1996 and 1995, respectively. Material transactions with Solutions must be approved by a majority of the Company's nonemployee directors. 8. Long-Term Debt and Lease Commitments Long-term obligations consist of the following at November 30: 1996 1995 Line of credit $1,864 $ - Notes payable 27 - Capital lease obligations 359 110 ------- ------ 2,250 110 Less amounts due within one year (127) (89) ------- ------ $2,123 $ 21 ======= ====== The Company has entered into a loan and security agreement (Agreement) with a bank, as amended, which includes a revolving line of credit facility (Revolver) providing for maximum borrowings of $5,000 at November 30, 1996. 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 1997. Interest is payable monthly based on the bank's base rate, or quarterly based on a Eurodollar borrowing rate plus a margin, depending upon how advances are drawn. The Revolver had a weighted average interest rate of 8.38% at November 30, 1996, and matures in February 1998. Total borrowings under the Revolver are limited to the lesser of a) the commitment amount or b) 80% of qualified accounts receivable, as defined in the Agreement. 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 net income, tangible net worth, capital expenditures and expenditures for capitalized software. The Company is also required to pay a monthly commitment fee of .25% 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, 1996, future payments under capital and noncancellable operating leases were as follows: November 30, 1996 Fiscal Year Ending Capital Operating November 30 Leases Leases 1997 $164 $1,142 1998 153 1,059 1999 99 990 2000 4 958 2001 - 878 Thereafter - 1,451 ------ ------ Total minimum lease obligations 420 $6,478 ====== Amounts representing interest (61) ----- Capital lease obligations $359 ===== 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 $1,404, $1,042 and $642 in 1996, 1995 and 1994, respectively. 9. 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. In 1994, the Company issued 1,000,000 new shares of common stock to the public in an initial public offering (IPO) and received net proceeds of approximately $7.0 million. 10. Stock Options and Employee Stock Purchase Plans The Company maintains the 1986 Employees' Stock Option Plan (the 1986 Plan) pursuant to which executive officers and other key employees of the Company have received options to purchase shares of the Company's common stock. Options under the 1986 Plan were granted at exercise prices equal to the fair market value of the common stock on the date of grant. Options to purchase an aggregate of 57,000 shares have previously been granted and remain outstanding at November 30, 1996, and no additional options will be granted. 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 non-employee directors of the Company covering up to a maximum of 550,025 shares. Under the 1993 Plan, the exercise price of options granted cannot be less than 100% of the fair market value of a share of the Company's stock at the date of grant. On September 6, 1995, in conjunction with the merger of Intercim (see Note 2), the Company adopted a new stock option plan, pursuant to which the Company granted stock options to those holders who agreed to the cancellation of their Intercim stock options. The Company has also issued nonqualified stock options to certain of its executives and other nonemployee directors. These options have various vesting schedules. Information with respect to stock options granted under all plans is as follows: Number Exercise Price of Shares Per Share Outstanding at November 30, 1993 169,750 $1.57 - 2.29 Granted 272,049 1.57 - 8.00 Exercised (51,500) 1.57 - 6.25 Canceled or expired (875) 1.57 - 2.29 ------- ----------- 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 ======= =========== At November 30, 1996, options to purchase 338,970 shares were exercisable under all plans. 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 1996 and 1995, 29,718 and 18,671 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 (see Note 9) and issuance under the stock option and purchase plans described above. 11. Income Taxes Income tax expense (credit) in the consolidated statement of operations consists of the following: Year ended November 30 1996 1995 1994 Current: Federal $(170) $(485) $635 State 80 10 137 ----- ----- ---- (90) (475) 772 Deferred 202 576 203 Change in valuation reserve - (22) - ---- ---- ---- $ 112 $ 79 $975 ==== ==== ==== The reconciliation of income tax expense computed at the U.S. federal statutory rate to income tax expense is: Year ended November 30 1996 1995 1994 Tax at U.S. statutory rate of 34% $ 90 $ 71 $916 State income taxes, net of federal benefit 14 7 137 Intangible amortization 28 28 - Other nondeductible items 84 54 - Tax-exempt investment income (13) (32) (27) General business credits (98) (69) (61) Change in valuation allowance - 22 - Other 7 (2) 10 ---- ---- ---- $112 $ 79 $975 ==== ==== ==== The significant components of the deferred tax accounts recognized for financial reporting purposes at November 30 were as follows: 1996 1995 Deferred tax liabilities: Capitalized computer software costs $2,341 $1,579 Depreciation 328 241 Other, net 15 60 ------- ------- Total deferred tax liabilities 2,684 1,880 Deferred tax assets: Net operating loss carryforwards 1,578 1,108 Allowance for doubtful accounts 108 114 Deferred revenue 72 146 Inventory 40 100 General business credit carryforwards 448 69 Other, net 53 63 ------ ------ Total deferred tax assets 2,299 1,600 Valuation allowance - (856) ------ ------ Net deferred tax liabilities $ 385 $1,136 ====== ====== At November 30, 1996, the Company had net operating loss carryforwards (NOLs) of approximately $3,345,000 available to offset future federal 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. In addition, the Company has general business credits totaling $281,000 which can be used to reduce federal taxable income through 2011. In conjunction with the acquisition of Intercim (see Note 2), a valuation allowance was recorded as an offset to the net deferred tax assets acquired (which primarily consisted of acquired net operating loss carryforwards) based on uncertainty regarding realization of such deferred tax assets because Intercim's NOLs were only available to offset future taxable income of Intercim. On November 29, 1996, Intercim was merged into the Company and, as a result, the NOLs can be offset against the Company's taxable income, subject to the annual limitation described above. As a result, the valuation allowance referred to above has been eliminated with an offsetting reduction of the goodwill recorded in the Intercim acquisition. 12. Savings Plan The Company has three defined contribution 401(k) savings plans that cover 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 $345, $246 and $184 for 1996, 1995 and 1994, respectively. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable Part III Item 9. Directors, Executive Officers, Promoters, and Control Persons of the Registrant; Compliance with Section 16 (a) of the Exchange Act Pursuant to Instruction E, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1997 annual meeting of shareholders under the captions "Election of Directors", "Executive Officers" and "Miscellaneous-Section 16(a) Beneficial Ownership Reporting Compliance.". The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 10. Executive Compensation Pursuant to Instruction E, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1997 annual meeting of shareholders under the caption "Board of Directors-Director Compensation" and "Executive Compensation". The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 11. Security Ownership of Certain Beneficial Owners and Management Pursuant to Instruction E, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1997 annual meeting of shareholders under the caption "Principal Shareholders". The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. Item 12. Certain Relationships and Related Transactions Pursuant to Instruction E, information required by this item is hereby incorporated by reference from the Company's definitive proxy statement for its 1997 annual meeting of shareholders under the caption "Related Party Transactions". The definitive proxy statement will be filed with the Securities and Exchange Commission with 120 days after the end of the Company's fiscal year. Item 13. Exhibits and Reports on Form 8-K Exhibits Reference is made to the separate exhibit index contained on pages E-1 through E-5 hereof. b) Reports on Form 8-K No current reports on Form 8-K were filed during the fourth quarter of the Company's fiscal year ended November 30, 1996. SIGNATURES In accordance with Section 13 or 15(d) of Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 14, 1997. EFFECTIVE MANAGEMENT SYSTEMS, INC. BY: /s/ Michael D. Dunham Michael D. Dunham President In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 14, 1997. Signature Title /s/ Michael D. Dunham President and Director Michael D. Dunham (Principal Executive Officer) /s/ Jeffrey J. Fossum Chief Financial Officer and Jeffrey J. Fossum Assistant Treasurer (Principal Financial and Accounting Officer) /s/ Helmut M. Adam Director Helmut M. Adam /s/ Thomas M. Dykstra Director Thomas M. Dykstra /s/ Scott J. Mermel Director Scott J. Mermel /s/ Robert E. Weisenberg Director Robert E. Weisenberg INDEX TO EXHIBITS Exhibit No. Exhibit Description 2.1 Agreement and Plan of Merger, dated as of February 17, 1995, among Effective Management Systems, Inc., EMS Acquisition Corp. and Intercim Corporation [Incorporated by reference to Exhibit 2.1 to Effective Management Systems, Inc.'s Registration Statement on Form S-4 (Registration No. 33-95338)] 2.2 Amendment No. 1 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of June 30, 1995 [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc. Registration Statement on Form S-4 (Registration No. 33-95338)] 2.3 Amendment No. 2 to Agreement and Plan of Merger described in Exhibit 2.1, dated as of July 31, 1995 [Incorporated by reference to Exhibit 2.3 to Effective Management Systems, Inc.'s Registration Statement on Form S-4 (Registration No. 33-95338)] 2.4 Agreement of Merger, dated as of March 22, 1995, among Effective Management Systems, Inc., EMS Illinois Acquisition Corp., Effective Management Systems of Illinois, Inc., Richard W. Grelck and Daniel E. Long [Incorporated by reference to Exhibit 2.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 28, 1995] 3.1 Restated Articles of Incorporation of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.1 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 3.2 By-laws of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.1 Article 4 of the Restated Articles of Incorporation of Effective Management Systems, Inc. [Incorporated by reference to Exhibit 3.1 of Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.2 Loan and Security Agreement, dated November 9, 1992, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.3 First Amendment to Loan and Security Agreement, dated April 23, 1993, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.3 to Effective Management Systems, Inc.'s Registration Statement on Forms SB-2 (Registration No. 33-73354)] 4.4 Second Amendment to Loan and Security Agreement, dated February 8, 1994, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.4 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 4.5 Third Amendment to Loan and Security Agreement, dated May 11, 1995, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 29, 1996] 4.6 Fourth Amendment to Loan and Security Agreement, dated August 31, 1995, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates [Incorporated by reference to Exhibit 4.2 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 29, 1996] 4.7 Fifth Amendment to Loan and Security Agreement, dated May 31, 1996, by and between Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates. 4.8 Sixth Amendment to Loan and Security Agreement, dated October 31, 1996, by and betwen Bank One, Milwaukee, National Association, and Effective Management Systems, Inc. and certain affiliates. 4.9 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] 10.1 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)] 10.7 Software Supplier Agreement, dated August 6, 1994, by and between Effective Management Systems, Inc. and Hewlett Packard Company [Incorporated by reference to Exhibit 10.7 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.8 Joint Venture Agreement, dated September 15, 1985, by and between Effective Management Systems, Inc. and Joseph H. Schlanser, Aurinee M. Schansler and Barton R. Benjamin [Incorporated by reference to Exhibit 10.9 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.9 International Marketing Agreement, dated July 5, 1994 by and between Effective Management Systems, Inc., Systems, Inc. and Systems Technology Management Corporation [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.10 Lease by and between Effective Management Systems, Inc. and Milwaukee Park Place Limited Partnership, as amended [Incorporated by reference to Exhibit 10.10 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.11* Effective Management Systems, Inc. 1986 Employee's Stock Option Plan [Incorporated by reference to Exhibit 10.11 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.12* Effective Management Systems, Inc. 1993 Stock Option Plan, as amended [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended May 31, 1996] 10.13* Stock Option Agreement by and between Helmut M. Adam and Effective Management Systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.13 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.14* Stock Option Agreement by and between Scott J. Mermel and Effective Management Systems, Inc., dated as of December 17, 1993 [Incorporated by reference to Exhibit 10.14 to Effective Management Systems, Inc.'s Registration Statement on Form SB-2 (Registration No. 33-73354)] 10.15* Bonus Arrangement by and between Thomas G. Allen and Effective Management Systems, Inc. [Incorporated by reference to Exhibit 10.16 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1994] 10.16 IBM Business Partner Agreement between International Business Machines Corporation and Effective Management Systems, Inc., dated as of March 3, 1995 [Incorporated by reference to Exhibit 10.1 to Effective Management Systems, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended February 28, 1995] 10.17 Software Reseller Agreement between International Business Machines Corporation and Effective Management Systems, Inc., dated as of September 6, 1995 [Incorporated by reference to Exhibit 10.18 to Effective Management Systems, Inc.'s Annual Report on Form 10-KSB for the year ended November 30, 1995] 21 List of subsidiaries of Effective Management Systems, Inc. 23 Consent of Ernst & Young, LLP 27 Financial Data Schedule [EDGAR Version Only] 99 Proxy Statement for 1997 Annual Meeting Shareholders [The Proxy Statement for the 1997 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Company's fiscal year; except to the extent incorporated by reference, the Proxy Statement for the 1997 Annual Meeting of Shareholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on form 10-KSB] * Indicates a management contract or compensatory plan or arrangement. EX-4.7 2 FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Fifth Amendment to Loan and Security Agreement is dated as of May 31, 1996 by and between Bank One, Milwaukee, NA (the "Secured Party") and Effective Management Systems, Inc. ("EMS"), Effective Management Systems of Michigan, Inc., EMS-East, Inc., Intercim Corp. f/k/a EMS Acquisition Corp. and Effective Management Systems of Illinois, Inc. (collectively, the "Debtors"). WHEREAS, the Secured Party and certain of the Debtors entered into a loan and security agreement dated as of April 23, 1993, which agreement has subsequently been amended (as amended, the "Loan Agreement"); and WHEREAS, the Secured Party and the Debtors desire to further amend the Loan Agreement as hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows (all capitalized terms used but not defined herein shall have the meaning assigned in the Loan Agreement): 1. The definition of "Note A" is amended and restated such that it shall mean Debtors' amended and restated Note A of even date herewith, a copy of which is attached as Exhibit A. 2. Section 7 (aa) of the Loan Agreement is amended and restated as follows: (aa) Financial average. EMS shall maintain at all times a ratio of (i) its Consolidated liabilities (other than capital stock and surplus) as shown on its consolidated balance sheet in accordance with GAAP, and including as liabilities all reserves for contingencies and other potential liabilities and all liabilities of all foreign subsidiaries, to (ii) its Consolidated Adjusted Tangible Net Worth (including net capitalized software costs) of less than 1.50 to 1.00. 3. Section 8(c) of the Loan Agreement is amended and restated as follows: (c) Capital Expenditures. Expend or contract to expend more than $5,750,000 in fiscal year 1996 and more than $6,000,000 in any fiscal year thereafter in the aggregate for all Debtors for the lease (other than operating leases), purchase or other acquisition of any capital asset, or for the lease (other than operating leases) of any other asset, whether payable currently or in the future. 4. Section 8(i) of the Loan Agreement is amended and restated as follows: (i) Purchase stock or securities of, extend credit to (other than that expressly permitted in Section 8(l)) or make investments in, become liable as surety for, or guarantee or endorse any obligation in excess of $25,000 of, any person, firm or corporation, except investments in direct obligations of the United States and commercial bank deposits with Secured Party, extensions of credit reflected by trade accounts receivables arising for goods sold by a Debtor in the ordinary course of its business, investments in EMS Asia Pacific Limited, a Hong Kong corporation, up to $25,000 in the aggregate and except acquisitions with a cash price and/or Subordinated Debt in the aggregate of less than $1,000,000, provided Debtors provide Secured Party, within 30 days of such acquisition, a certificate demonstrating that Debtors are not in breach of Section 7 (aa) of this Agreement after giving effect to such acquisition and using the most recent fiscal quarter-End financial statements. 5. Section 10 of the Loan Agreement is amended by deleting "February 27, 1997" appearing therein and inserting "February 28, 1998" in its place. 6. This Fifth Amendment shall be effective upon the execution of this Fifth Amendment, as well as the Amended and Restated Note A of even date herewith in the amount of $3,000,000, a copy of which is attached hereto as Exhibit A Thereafter, such note shall become Exhibit A to the Loan Agreement 7. The Debtors represent that all of the representations and warranties contained in the Loan Agreement are true and correct as of the date hereof, there is no event of default which has occurred and is continuing under the Loan Agreement and there has not, since January 26, 1996, been any material adverse change in the financial condition or business prospects of the Debtors. 8. Except as specifically amended hereby, the Loan Agreement continues in full force and effect and all references therein or otherwise to the Loan Agreement shall mean the Loan Agreement as amended hereby. EFFECTIVE MANAGEMENT BANK ONE, MILWAUKEE, NA SYSTEMS, INC. By: ___________________________ By: _____________________________ William E. Shaw, Vice President EFFECTIVE MANAGEMENT SYSTEMS OF MICHIGAN, INC. By: _____________________________ EMS-EAST, INC. By: _____________________________ INTERCIM CORP. f/k/a EMS ACQUISITION CORP. By: _____________________________ EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, INC. By: _____________________________ EXHIBIT A AMENDED AND RESTATED NOTE A Dated: May 31, 1996 Executed at Stated Principal: $3,000,000 Milwaukee, Wisconsin FOR VALUE RECEIVED, Effective Management Systems, Inc., a Wisconsin corporation, Effective Management Systems of Michigan, Inc., a Michigan corporation, EMS-East, Inc., a Massachusetts corporation, Intercim Corp. f/k/a EMS Acquisition Corp., a Minnesota corporation and Effective Management Systems of Illinois, Inc., an Illinois corporation (collectively, "Borrowers"), hereby promise to pay, jointly and severally, to the order of Bank One, Milwaukee, National Association, its successors and assigns (the "Secured Party") at its Milwaukee office at 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, the principal sum of Three Million Dollars ($3,000,000) or the aggregate unpaid principal amount of all advances made by the Secured Party hereunder pursuant to the Loan Agreement hereinafter referred to and to pay interest from the date hereof on the unpaid balances hereof at the rate set forth in Section 2 of the Loan Agreement and to pay interest at a rate equal to 2.5% per annum above the Reference Rate (as defined in the Loan Agreement) after default or maturity. Any change in interest hereon shall be effective on the date of each such change in the Reference Rate. In the absence of a default, interest (computed on the basis of actual days elapsed and a year of 360 days) for each calendar month shall be due and payable as of the first day of the next succeeding month, commencing on the first such date after the date hereof, and at Secured Party's sole discretion may be debited to Borrowers' loan account ledger for Credit Facility A (as defined in the Loan Agreement) or debited to any Borrowers commercial demand account maintained with Secured Party, and all principal and accrued but unpaid interest shall be due and payable upon termination of the Loan Agreement. AD payments received hereunder shall be applied first to interest accrued and unpaid to date of receipt and then to repay principal. No deferral of time of payment shall be valid unless the holder consents in writing and if such deferral is granted,the deferred balance including interest thereof at 2.5% in excess of the Reference Rate shall be an additional obligation under this Note. The undersigned and each endorser hereby waive presentment, protest, and notice of dishonor and give consent to the holder to extend time and to compound, release or delay enforcement of rights against the undersigned or the security. This Note is cross-defaulted and cross-collateralized with Borrowers' Amended and Restated Note B payable to Secured Party dated February 8, 1994. This Note is the Note A referred to in the Loan and Security Agreement dated as of November 9, 1992 as amended by the First Amendment to Loan and Security Agreement dated as of April 23, 1993, by the Second Amendment to Loan and Security Agreement dated February 8, 1994, by Third Amendment to Loan and Security Agreement dated May 11, 1995, by Fourth Amendment to Loan and Security Agreement dated January 26, 1996, and Fifth Amendment to Loan and Security Agreement of even date, between the undersigned, or some of the undersigned, and the Secured Party (as the same may be amended, modified, supplemented or restated from time to time, the "Loan Agreement"). This Note is secured by certain collateral referred to in the Loan Agreement: This Note is, in part, in substitution and replacement of the Amended and Restated Note A executed by the undersigned, or some of the undersigned, and delivered to Secured Party dated May 11, 1995 in the original principal amount of $3,000,000, and does not constitute repayment of such Note. EFFECTIVE MANAGEMENT INTERCIM CORP. f/k/a SYSTEMS, INC. EMS ACQUISITION CORP. By: __________________________ By: ____________________________ Attest:_______________________ Attest:_________________________ EFFECTIVE MANAGEMENT EFFECTIVE MANAGEMENT SYSTEMS OF MICHIGAN, INC. SYSTEMS OF ILLINOIS, INC. By: __________________________ By: ____________________________ Attest:_______________________ Attest:_________________________ EMS-EAST INC. By: ___________________________ Attest: _______________________ EX-4.8 3 SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Sixth Amendment to Loan and Security Agreement is dated as of October 31, 1996 by and between Bank One, Milwaukee, NA (the "Secured Party") and Effective Management Systems, Inc. ("EMS"), Effective Management Systems of Michigan, Inc., EMS-East, Inc., Intercim Corp. f/k/a EMS Acquisition Corp. and Effective Management Systems of Illinois, Inc. (collectively, the "Debtors"). WHEREAS, the Secured Party and certain of the Debtors entered into a loan and security agreement dated as of April 23, 1993, which agreement has subsequently been amended (as amended, the "Loan Agreement"); and WHEREAS, the Secured Party and the Debtors desire to further amend the Loan Agreement as hereinafter set forth. NOW, THEREFORE, the parties hereto agree as follows (all capitalized terms used but not defined herein shall have the meaning assigned in the Loan Agreement): 1. The definition of "Note A" is amended and restated such that it shall mean Debtors' amended and restated Note A of even date herewith, a copy of which is attached as Exhibit A. 2. The definitions for the defined terms "Default," "Minimum" and "Target" levels of Consolidated adjusted Net Earnings From Operations are amended and restated as follows: "Default," "Minimum" and "Target" levels of Consolidated Adjusted Net Earnings From Operations shall be determined in accordance with the following table, for the periods set forth therein, as follows: Consolidated Adjusted Period Net Earnings From Operations Four fiscal quarters ending: Default Minimum Target August 31, 1996 ($175,000) $ 500,000 $ 700,000 November 30, 1996 ($100,000) $ 550,000 $ 750,000 February 28, 1997 $100,000 $ 600,000 $ 800,000 May 31, 1997 $400,000 $ 600,000 $ 800,000 each quarter end thereafter $800,000 $1,000,000 $1,250,000 As used herein, amounts within parentheses are negative numbers. 3. Section 2(a) of the Loan Agreement is amended by deleting "$3,000,000" appearing therein and inserting "$5,000,000" in its place. 4. This Sixth Amendment shall be effective upon the execution of this Sixth Amendment, as well as the Amended and Restated Note A of even date herewith in the amount of $5,000,000, a copy of which is attached hereto as Exhibit A Thereafter, such note shall become Exhibit A to the Loan Agreement. 5. The Debtors represent that all of the representations and warranties contained in the Loan Agreement are true and correct as of the date hereof, there is no event of default which has occurred and is continuing under the Loan Agreement and there has not, since May 31, 1996, been any material adverse change in the financial condition or business prospects of the Debtors. 6. Except as specifically amended hereby, the Loan Agreement continues in full force and effect and all references therein or otherwise to the Loan Agreement shall mean the Loan Agreement as amended hereby. EFFECTIVE MANAGEMENT BANK ONE, MILWAUKEE, NA SYSTEMS, INC. By: By: William E. Shaw, Vice President EFFECTIVE MANAGEMENT SYSTEMS OF MICHIGAN, INC. By: EMS-EAST, INC. By: INTERCIM CORP. f/k/a EMS ACQUISITION CORP. By: EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, INC. By: EXHIBIT A AMENDED AND RESTATED NOTE A Dated: October 31, 1996 Executed at Stated Principal: $5,000,000 Milwaukee, Wisconsin FOR VALUE RECEIVED, Effective Management Systems, Inc., a Wisconsin corporation, Effective Management Systems of Michigan, Inc., a Michigan corporation, EMS-East, Inc., a Massachusetts corporation, Intercim Corp. f/k/a EMS Acquisition Corp., a Minnesota corporation and Effective Management Systems of Illinois, Inc., an Illinois corporation (collectively, "Borrowers"), hereby promise to pay, jointly and severally, to the order of Bank One, Milwaukee, National Association, its successors ad assigns (the "Secured Party") at its Milwaukee office at 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, the principal sum of Five Million Dollars ($5,000,000) or the aggregate unpaid principal amount of all advances made by the Secured Party hereunder pursuant to the Loan Agreement hereinafter referred to ad to pay interest from the date hereof on the unpaid balances hereof at the rate set forth in Section 2 of the Loan Agreement and to pay interest at a rate equal to 2.5% per annum above the Reference Rate (as defined in the Loan Agreement) after default or maturity. Any change in interest hereon shall be effective on the date of each such change in the Reference Rate. In the absence of a default, interest (computed on the basis of actual days elapsed and a year of 360 days) for each calendar month shall be due and payable as of the first day of the next succeeding month, commencing on the first such date after the date hereof, and at Secured Party's sole discretion may be debited to Borrowers' loan account ledger for Credit Facility A (as defined in the Loan Agreement) or debited to any Borrowers commercial demand account maintained with Secured Party, and all principal and accrued but unpaid interest shall be due and payable upon termination of the Loan Agreement. All payments received hereunder shall be applied first to interest accrued and unpaid to date of receipt and then to repay principal. No deferral of time of payment shall be valid unless the holder consents in writing and if such deferral is granted, the deferred balance including interest thereof at 2.5% in excess of the Reference Rate shall be an additional obligation under this Note. The undersigned and each endorser hereby waive presentment, protest, and notice of dishonor and give consent to the holder to extend time and to compound, release or delay enforcement of rights against the undersigned or the security. This Note is cross-defaulted and cross-collateralized with Borrowers' Amended and Restated Note B payable to Secured Party dated February 8, 1994. This Note is the Note A referred to in the Loan and Security Agreement dated as of November 9, 1992 as amended by the First Amendment to ban and Security Agreement dated as of April 23,993, by the Second Amendment to ban and Security Agreement dated February 8, 1994, by Third Amendment to Loan and Security Agreement dated May 11, 1995, by Fourth Amendment to Loan and Security Agreement dated January 26, 1996, by Fifth Amendment to Loan and Security Agreement dated May 31, 1996 and by Sixth Amendment to Loan and Security Agreement of even date, between the undersigned, or some of the undersigned, and the Secured Party (as the same may be amended, modified, supplemented or restated from time to time, the "Loan Agreement"). This Note is secured by certain collateral referred to in the loan Agreement. This Note is, in part, in substitution and replacement of the Amended and Restated Note A executed by the undersigned, or some of the undersigned, and delivered to Secured Party dated May 31, 1996 in the original principal amount of $3,000,000, and does not constitute repayment of such Note. EFFECTIVE MANAGEMENT SYSTEMS, INC. INTERCIM CORP. f/k/a EMS ACQUISITION CORP. By: By: Attest: Attest: EFFECTIVE MANAGEMENT SYSTEMS OF MICHIGAN, INC. EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, INC. By: By: Attest: Attest: EMS-EAST, INC. By: Attest: EX-21 4 Exhibit 21 List of Subsidiaries of Effective Management Systems, Inc. Name of Subsidiary Jurisdiction of Incorporation Intercim Corporation Minnesota EMS-East, Inc. Massachusetts Effective Management Systems of Michigan, Inc. Michigan Effective Management Systems of Illinois, Inc. Illinois Total Management Systems, Inc. Ohio EMS-Asia Pacific, Ltd. Hong Kong EMS China, Ltd. Hong Kong EX-23 5 Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-79838) pertaining to the Effective Management Systems, Inc. 1994 Employee Stock Purchase Plan, the Registration Statement on Form S-8 (No. 33-78658) pertaining to the Effective Management Systems, Inc. 1993 Stock Option Plan and the Registration Statement on Form S-3 (No. 33- 95816) pertaining to the registration of 550,000 shares of its common stock of our report dated January 17, 1997, with respect to the consolidated financial statements of Effective Management Systems, Inc. included in the Annual Report on Form 10-KSB for the year ended November 30, 1996. ERNST & YOUNG LLP Milwaukee, Wisconsin February 14, 1997 EX-27 6
5 1,000 YEAR NOV-30-1996 DEC-01-1995 NOV-30-1996 866 505 12,185 346 391 11,839 8,169 4,208 27,448 9,715 0 0 0 41 14,556 27,448 14,556 41,257 4,979 40,874 118 0 56 265 112 153 0 0 0 153 .04 0
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