-----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, I38FcVupwxOFEmlsXzHPC8hgQyLLzmcLVs64oGcFeMKyb5oyqxiY1CDsN3tDLW+8 KD25NAlsv0rZxw2/+JXbfw== 0000897069-99-000232.txt : 19990415 0000897069-99-000232.hdr.sgml : 19990415 ACCESSION NUMBER: 0000897069-99-000232 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23438 FILM NUMBER: 99593885 BUSINESS ADDRESS: STREET 1: 12000 WEST PARK PL CITY: MILWAUKEE STATE: WI ZIP: 53224 BUSINESS PHONE: 4143599800 10-Q 1 FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO ____________ Commission file number 0-23438 Effective Management Systems, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-1292200 State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 12000 West Park Place, Milwaukee, WI 53224 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 359-9800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X___ No _______ Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding as of February 28, 1999 - ---------------------------------- ------------------------------------ Common Stock, $.01 par value 4,118,486 EFFECTIVE MANAGEMENT SYSTEMS, INC. Form 10-Q February 28, 1999 INDEX PART 1 - FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1 Financial Statements Consolidated Balance Sheets at February 28, 1999 and November 30, 1998 2 Consolidated Statements of Operations - Three Months Ended February 28, 1999 and February 28, 1998 5 Consolidated Statements of Cash Flows - Three 6 Months Ended February 28, 1999 and February 28, 1998 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 PART II - OTHER INFORMATION - --------------------------- Item 2 Changes in Securities and Use of Proceeds 19 Item 6 Exhibits and Reports on Form 8-K 20 SIGNATURES 1 Part I Financial Information Item 1 Financial Statements EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) - ------------------------------------------------------------------------------ ASSETS 28-Feb 30-Nov 1999 1998 ============================================================================== CURRENT ASSETS Cash $6 $21 Accounts Receivable: Trade, less allowance for doubtful accounts 8,626 12,871 Related Parties 437 426 Inventories 480 275 Prepaid Expenses and Other Current Assets 272 225 ------------------------- TOTAL CURRENT ASSETS 9,821 13,818 LONG TERM ASSETS Computer Software, net 4,718 4,373 Investments in and Advances to Unconsolidated Joint Ventures 291 291 Equipment and Leasehold Improvements, net 3,001 3,202 Intangible Assets, net 2,074 2,129 Other Assets 386 347 ------------------------- TOTAL LONG TERM ASSETS 10,470 10,342 ------------------------- TOTAL ASSETS $20,291 $24,160 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. 2 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) - ----------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 28-Feb 30-Nov 1999 1998 ============================================================================= CURRENT LIABILITIES Accounts Payable $4,607 $3,662 Accrued Liabilities 1,499 2,937 Deferred Revenues 6,319 6,522 Customer Deposits 133 113 Current portion of Long-term Obligations 5,244 6,194 ----------------------- TOTAL CURRENT LIABILITIES 17,802 19,428 LONG TERM LIABILITIES Deferred Revenue and Other Long-term Liabilities 771 858 Long-term Obligations 259 242 ----------------------- TOTAL LONG TERM LIABILITIES 1,030 1,100 Commitments and Contingencies 3 STOCKHOLDERS' EQUITY Preferred Stock; authorized 3,000,000 shares of which 5,000 shares are designated as Series B 8% Convertible Redeemable Preferred Stock ("Series B") 1,875.37 shares, of Series B, issued and outstanding 1,394 1,411 (liquidation preference at $1000 per share) Common Stock, $.01 par value; authorized 20,000,000 shares; issued 4,118,486 and 4,106,377 shares; Outstanding 4,105,861 and 4,093,752 shares 41 41 Common Stock Warrants 144 144 Additional Paid- in Capital 11,444 11,426 Retained Earnings (Deficit) (11,504) (9,330) Cost of Common Stock in Treasury(12,625 shares) (60) (60) ------------------------ TOTAL STOCKHOLDERS' EQUITY 1,459 3,632 ------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,291 $24,160 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. 4 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) - -------------------------------------------------------------------------------- THREE MONTHS ENDED 28-Feb 28-Feb 1999 1998 =================================================== ============= ========== NET REVENUES: Software license fees $3,156 $5,335 Services 3,994 4,239 Hardware 326 672 ----------- ---------- Total net revenues 7,476 10,246 COST OF PRODUCTS AND SERVICES Software license fees 916 1,723 Services 3,811 3,220 Hardware 281 527 ----------- ---------- Total cost of products and services 5,008 5,470 Selling and marketing expenses 2,821 3,625 General and administrative expenses 784 1,194 Product development expenses 881 837 ----------- ---------- Total costs and operating expenses 9,494 11,126 ----------- ---------- LOSS FROM OPERATIONS (2,018) (880) Other (Income)/ Expense Interest (income) (8) (10) Interest expense 174 153 ----------- ---------- 166 143 ----------- ---------- LOSS BEFORE INCOME TAXES (2,184) (1,023) Income tax (benefit) expense (9) 33 ----------- ---------- NET LOSS ($2,175) ($1,056) =========== ========== Loss per share - basic and diluted ($0.53) ($0.26) =================================================== =========== ========== The accompanying notes are an integral part of these consolidated financial statements. 5 EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) - -------------------------------------------------------------------------------- THREE MONTHS ENDED 28-Feb 28-Feb 1999 1998 =============================================================================== OPERATING ACTIVITIES Net Loss ($2,175) ($1,056) Adjustments to reconcile net loss to Net cash provided by (used in) operating activities: Depreciation and amortization 343 352 Amortization of capitalized computer software development costs 475 954 Equity in earnings of joint ventures - - Goodwill Amortization 55 58 Deferred income taxes - - Restructuring and Other Charges - - Changes in operating assets and liabilities: Accounts Receivable 4,486 1,270 Inventories and other current assets (504) (1) Accounts payable and other liabilities (764) (538) ------------------------ Total adjustments 4,091 2,095 ------------------------ Net cash provided by operating activities 1,916 1,039 INVESTING ACTIVITIES Additions to equipment and leasehold improvements (143) (74) Proceeds from sale of securities - - Software development costs capitalized (819) (1,008) Other (38) 8 ------------------------ Net cash (used in) investing activities (1,000) (1,074) 6 FINANCING ACTIVITIES Proceeds on long-term debt and other notes payable (932) 272 Additional paid-in capital 18 33 Preferred stock dividend (17) - ------------------------ Net cash provided (used) by financing activities (931) 305 ------------------------ Net increase (decrease) in cash ($15) $270 Cash-beginning of period $21 $14 ======================== Cash-end of period $6 $284 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. 7 EFFECTIVE MANAGEMENT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS February 28, 1999 (Unaudited) (In Thousands) Note 1 - Basis of Presentation The accompanying consolidated interim financial statements included herein have been prepared by Effective Management Systems, Inc. (the "Company"), without an audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, the information furnished for the three-month periods ended February 28, 1999 and February 28, 1998 includes all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the interim periods. The results of operations for the three months ended February 28, 1999 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending November 30, 1999. It is suggested that the interim financial statements be read in conjunction with the audited consolidated financial statements for the year ended November 30, 1998 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2 - Additional Financial Disclosure Equipment and leasehold improvements consisted of the following: 28-February-1999 30-Nov-1998 ---------------- ----------- Gross $10,055 $9,913 Less: Accumulated Depreciation ( 7,054 ) ( 6,711 ) ---------- ---------- Net $3,001 $3,202 Allowance for doubtful accounts consisted of the following: 28-February-1999 30-Nov-1998 ---------------- ----------- Balance $ 326 $ 506 Provision for doubtful accounts consisted of the following: 28-February-1999 30-Nov-1998 ---------------- ----------- $ 48 $ 17 8 Note 3 - Net Loss Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS No. 128 requirements. The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended February 28, 1999 1998 ---- ---- Denominator Denominator for basic earnings per share - weighted average common shares 4,114 4,075 Effect of dilutive securities - stock options and warrants 0 0 Effect of dilutive securities - preferred stock 0 0 -------------------------------- Denominator for diluted earnings per share - adjusted weighted average common shares 4,114 4,075 ================================ 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company incurred a 27% decrease in net revenues and a net loss of $2,175,000 for the first quarter of fiscal 1999 compared with a net loss of $1,056,000 for the first quarter of fiscal 1998. The first quarter of fiscal 1999 and 1998 do not reflect a tax benefit relating to the loss since for book purposes the Company is in a loss carryforward position. Software revenues were down 40.8% in the first quarter of fiscal 1999 compared to the same period in the prior year. Management believes this decrease in software revenues was mainly the result of a general decline in the Enterprise Resource Planning ("ERP") industry, delays in the sales of the Baan products distributed by the Company, an insufficient level of leads for Baan prospects, a decline in the Company's proprietary TCM product revenues and reduced revenues from restructured operations (a reduction of $249,000 from the first quarter of 1998). Although the Company has taken various actions with the objective of returning the Company to profitability, no assurance can be given that these measures will actually result in the achievement of this objective. In addition, as a result of the recent losses, the Company has been required to obtain waivers from its primary lender for covenant violations. In the event that in the near term, that the Company's financial performance does not improve or if it is unable to secure additional investment capital or sell assets to bolster its financial position, the Company will continue to require covenant relief in fiscal 1999. In the event that such covenant relief cannot be obtained, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund current operations. The Company's ability to borrow additional funds under its existing credit facility remains limited. As a result of its financial situation, all of the Company's debt has been classified as short-term and its fiscal 1998 audit report contains an explanatory paragraph for going concern uncertainty, pursuant to which the auditors expressed substantial doubt as to the Company's ability to continue as a going concern. The Company's on-going operations are also dependent on its ability to attract and retain a highly qualified sales, development and service staff. The Company has recently experienced attrition at rates higher than historical levels. The Company has taken steps to curtail the attrition, but no assurance can be given that these steps will be successful or that further attrition will not materially impact the Company's financial performance. Results of Operations Total Revenues Net revenues decreased to $7,476,000 for the three months ended February 28, 1999, which represented a 27.0% decrease from the $10,246,000 in revenues for the same quarter in the previous year. The mix of revenues comparing software, services, and 10 hardware revenues as a percentage of net revenues was 42.2%, 53.4%, and 4.4%, respectively, in the first quarter of fiscal 1999, as compared with 52.1%, 41.4%, and 6.7%, respectively, in the first quarter of fiscal 1998. International revenues represented less than 10% of net revenues for all periods presented. The Company's operating revenues can vary substantially from quarter to quarter based on the size and timing of customer orders and market acceptance of new products. The Company has historically operated with little backlog because software orders are generally shipped as orders are received. As a result, product revenue in any quarter is substantially dependent on orders booked and shipped during that quarter. Software License Fees Software license fees are customer charges for the right to use the Company's software products. Software license fees decreased 40.8% to $3,156,000 in the first quarter of fiscal 1999 from $5,335,000 in the first quarter of fiscal 1998. Management believes this decrease in software revenues was mainly the result of a general decline in the ERP industry, delays in the sales of Baan products, an insufficient level of leads for Baan prospects, a decline in the Company's proprietary TCM product revenues (a trend that is likely to continue), reduced revenues from restructured operations (a reduction of $249,000 from the first quarter of 1998) and subsequent attrition. Service Revenues The Company offers a number of optional services to its customers, including such services as a telephone support program, systems integration, custom software development, implementation consulting, and formal classroom and on-site training. Service revenues decreased to $3,994,000 for the three months ended February 28, 1999, as compared with $4,239,000 for the same period of the prior year. The decrease in revenues was mainly the result of a reduced level of personnel due to the restructuring the Company implemented in the quarter ended May 31, 1998 and subsequent attrition. Hardware Revenues Hardware revenues decreased 51.5% to $326,000 in the first quarter of fiscal 1999 compared with $672,000 for the corresponding period of 1998. This decrease was mainly due to increased sales of software on platforms for which the Company does not supply hardware and a reduction in new TCM system sales. The Company has decided to reduce its sales of commodity-priced hardware products and those which require specific expertise beyond the scope of the Company's product focus. In turn, the Company has developed relationships with various system integrators which sell the hardware and provide these value-added hardware services. 11 Management expects the trend of declining hardware sales to continue due to both the increasing sales of software licenses operating on the Microsoft Windows NT platform and the reduced level of new TCM system sales. Hardware used with the Microsoft Windows NT platform is either generally already in place at the customer site or readily available from local suppliers who can also provide local support. Cost of Software License Fees The cost of software license fees as a percentage of related revenue was 29.0% for the first quarter of fiscal 1999, a decrease from 32.3% for the corresponding period of 1998. Cost of software license fees is composed of both amortization of past investment in software development and the third party costs associated with the software revenues. Software amortization is related to past investment in software development and does not vary consistently with variations in software revenues. The Company wrote off a substantial portion of its past investment in software development in conjunction with its restructuring efforts in the quarter ended May 31, 1998. Software amortization decreased $479,000 in the first quarter of fiscal 1999 as compared to the same period of 1998 as a result of the amounts written off of previously capitalized development costs in the restructuring. The cost of software license fees is also dependent on the level of third party costs associated with certain software revenues and includes such items as purchased licenses and other components. Cost of Services The cost of services as a percentage of related revenue increased to 95.4% for the three months ended February 28, 1999, as compared with 76.0% for the same quarter in the previous year. The increase was mainly due to additional compensation for current personnel, lower levels of productivity for new personnel, higher costs of outside-sourced labor, and additional warranty work associated with new versions of the Company's software. The Company has also initiated a group of personnel to implement the Baan software solutions which has raised the level of training costs and other initial non-billable activities. Last, the Company has been implementing a new call management system for the hot line telephone support area which has also temporarily raised costs. The Company has raised the billing rates for its services in line with industry practice, but the effects will not be fully realized until the third quarter of the 1999 fiscal year. Cost of Hardware The cost of hardware as a percentage of related revenue increased to 86.2% in the first quarter of fiscal 1999 from 78.4% in the first quarter of fiscal 1998. The cost of hardware as a percentage of related revenue varies with the size of the system, the margin mix of items comprising the system being sold, and the competitive pressure of the customer sale. The cost of hardware as a percentage of related revenue also varies with the amount of low margin hardware sales to affiliates. Hardware sales to affiliates declined in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. 12 Selling and Marketing Expenses Selling and marketing expenses decreased $804,000, or 22.2%, from $3,625,000 in the first quarter of fiscal 1998 to $2,821,000 in the first quarter of fiscal 1999. This decrease in selling and marketing expense was mainly due to reduced levels of personnel through attrition, and reduced levels of expense resulting from the Company's restructuring. The Company has also restructured compensation levels to more effectively match industry practice in the upper mid-market. As a percentage of total revenues, selling and marketing expense was 37.7% in the first quarter of fiscal 1999 compared to 35.4% in the corresponding period of 1998. This increase was mainly attributable to a reduction in revenues (see Software Revenues above). General and Administrative Expenses General and administrative expenses decreased $410,000, or 34.3%, from $1,194,000 in the first quarter of fiscal 1998 to $786,000 in the first quarter of fiscal 1999. The decrease in general and administrative expenses was mainly due to reduced expense levels as a result of the Company's restructuring. As a percentage of net revenues, general and administrative expenses were 10.5% and 11.7% in the first quarter of fiscal 1999 and 1998, respectively. Product Development Expense Product development expense increased 5.3% from $837,000 in the first quarter of fiscal 1998 to $881,000 in the first quarter of fiscal 1999. This increase primarily related to a $189,000 decrease in the amount of software capitalized. The Company capitalizes costs in accordance with Statement of Financial Accounting Standard (SFAS) No. 86. The Company capitalized $819,000 of product development costs in the first quarter of fiscal 1999 compared to $1,008,000 in the first quarter of fiscal 1998. As a percentage of software license fees, the total amount invested in software development was 53.6% and 34.7% in the first quarter of fiscal 1999 and fiscal 1998, respectively. Management expects to reduce the level of software development expense in the next two fiscal quarters. Restructuring Charges In the second quarter of fiscal 1998, the Company recorded a restructuring charge of $6,836,000 related to entering into a new distributor arrangement for the Baan manufacturing software, and a reduction of costs focused on improving the Company's financial performance. The full amount of the restructuring charge has been paid or expensed as of February 28, 1999. 13 Other Income\Expense-Net Other income\expense-net was $143,000 of expense for the first quarter of fiscal 1998 compared to $166,000 of expense for the first quarter of fiscal 1999. The increase in the level of expense was mainly the result of an increase in interest expense as a result of increased borrowings under the Company's borrowing facilities. Income Tax A tax expense of $33,000 (for state and local taxes) and no income tax benefit was recorded for the first quarter of fiscal 1998 compared to a tax expense of $9,000 for the first quarter of fiscal 1999. For some time, the Company, for book purposes, has been in a tax loss carryforward position. Generally accepted accounting principles prohibit the Company from recording a tax benefit under the circumstances. Liquidity and Capital Resources At February 28, 1999, the Company had cash and marketable securities aggregating $6,000. During the first quarter of fiscal 1999, the Company's operating activities provided $1,916,000 of cash compared to providing $1,039,000 of cash for the same period of the prior year. This increase in the cash provided was mainly attributable to the Company's improved collection of accounts receivable. Investing activities used cash of $1,000,000 in the first quarter of fiscal 1999 compared to $1,074,000 of cash in the first quarter of fiscal 1998. The principal use of the cash in the first quarter of fiscal 1999 was $819,000 for capitalized product development. The principal uses of cash in the first quarter of fiscal 1998 included $1,008,000 for capitalized product development. Financing activities used $931,000 of cash in the first quarter of fiscal 1999 compared with providing $305,000 in the first quarter of fiscal 1998. The cash used in fiscal 1999 mainly reflected payments under the Company's borrowing facilities. As of February 28, 1999, the Company had $ 891,000 of availability under its $5,000,000 line of credit, which is based on the level of eligible accounts receivable. The Company's credit agreement with Foothill Capital Corporation contains certain restrictive covenants relating to income (EBITDA), tangible net worth, and level of capital expenditures. On April 13, 1999 the Company obtained a waiver from the lender as a result of its failure to meet the tangible net worth and EBITDA covenants. In order to meet financial covenants in the future and to meet short term operational needs, the Company will need positive operational results in the short term. In the event that the Company's performance does not improve in the short term, the Company will need to secure additional waivers and/or alternative sources of financing which could include the sale of assets. The Company is continuing its review of alternative sources of financing to deal with its current financial status. Although management believes that waivers and/or additional financing can be obtained, if needed, no assurance can be given that waivers or such additional financing will be available to the Company on acceptable 14 terms. In the event that the Company is unable to secure necessary waivers or additional financing, it would likely have a material adverse effect on the Company's liquidity, including its ability to fund continuing operations at current levels. The Company currently has past due amounts with certain vendors. The Company has secured extended payment arrangements with some of these vendors and is in the process of securing similar arrangements with other vendors. There can be no assurance that the Company will be successful in extending these amounts owed to other vendors or that funds will be available to pay obligations as they arise. The Company is dependent on success in its selling efforts to build collateral to meet these obligations, whereby a lack of success could substantially impact the Company's ability to continue as a going concern. As a result of its current financial situation, the Company, in accordance with generally accepted accounting principles, has reclassified all of its outstanding debt under the credit facility as short-term debt. All debt pertaining to the credit facility having cross-default provisions has been so reclassified regardless of whether or not covenant violations have occurred or are anticipated. The Company's report from its independent accountants for the year ended November 30, 1998, contains a going concern explanatory paragraph, pursuant to which the auditors expressed substantial doubt as to the Company's ability to continue as a going concern. Market Risk Due to the variable rate paid on the revolver portion of its credit facility, the Company is exposed to market risk from changes in interest rates. Generally, if the base rate on the revolver averaged 2% more in fiscal 1999 than in fiscal 1998, the Company's interest expense would increase by $80,000. This amount is determined by considering the impact of the hypothetical interest rate on the Company's borrowing cost, but does not consider the effects of the reduced level of economic activity that could exist in such an environment. The Company has not historically used financial instruments to hedge interest rate exposure and does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Year 2000 Compliance The Company faces "Year 2000" compliance issues similar to other companies in the manufacturing software industry. The problem relates to software systems and programs that use only two digits , rather than four digits, to represent a year. This does not allow processing of dates beyond the year 1999 and may result in incorrect calculations, reports or other information. Additionally, this may cause system failures from processors that are embedded in a multitude of devices. To address the Year 2000 problem, the Company established a corporate readiness program which began in fiscal 1994 with the a detailed analysis of the Company's software products sold to its customers. The Company had originally started addressing the changes to the program code of its software products for Year 2000 issues in 1985. 15 The Company later, in 1998, added the analysis of internal systems and third party suppliers of both software and any other goods that may have Year 2000 problems. The Company plans to complete its detailed assessment plan on or around May of fiscal 1999. A formal review and approval by the Board of Directors is expected to occur immediately thereafter. State of Readiness Company's Products The Company's current products have been designed and tested for Year 2000 compliance. However,due to the complexity of the software product, there can be no absolute assurance that the Company's software products contain all the necessary date code changes. The Company's versions of the software prior to version 5.1.2 in 1994 are known to contain code that is not Year 2000 compliant. In 1996, the Company notified customers of prior versions, and subsequently, of this non-compliance and customers were offered upgrades and implementation assistance to migrate to a Year 2000 compliant version. The Company's agreements with the customers since 1992 do not expressly obligate the Company to furnish an updated version of the software that is Year 2000 compliant. The Company's analysis of contracts prior to 1992 indicate an immaterial level of Company obligation to furnish updated software.. Internal Systems The Company is in the process of assessing the Year 2000 readiness of its internal computer information system and non-computer systems , such as telecommunications equipment, network equipment, etc., to determine whether such systems are Year 2000 compliant. Even though substantial work has already been completed, a complete detailed plan to address any assessed Year 2000 problems should be available on or around May, 1999. The Company expects to complete deployment of Year 2000 corrections on or around September of 1999. Third Party Reseller and Key Suppliers The Company plans to assess the Year 2000 readiness of its resellers and key suppliers over the second quarter of fiscal 1999. With respect to certain of its most significant resellers and suppliers, the Company has already made inquiries to assess their readiness and has obtained published information indicating that they are in compliance. Costs The Company estimates the historical costs to remediate the Year 2000 issues have totaled $968,000 and future costs to remediate will be approximately $500,000. The Company expects to fund the future costs of remedation from operations. 16 Risk Failure to correct critical Year 2000 issues could cause a serious interruption in business operations of the Company's customers and/or internal systems. Such interruptions could have a material impact on the Company's results of operations, liquidity, and financial condition. The Company is taking actions to minimize these issues, but no assurance can be given that all potential issues can be eliminated. Additionally, the effects of potential litigation can not be estimated and could also have a material effect on the results of operations. Finally, factors outside the Company's control could also cause disruption of business activities which could materially affect the results of operations. Contingency Plans The Company is in the process of evaluating contingency plans to handle the controllable risks regarding Year 2000 compliance. Certain of the risks such as lengthy power outages or communication failures may not be circumvented. A detailed plan of controllable risks is expected to be available on or around September, 1999. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS", INCLUDING INFORMATION REGARDING FUTURE ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT OF A HISTORICAL NATURE ARE FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS DESCRIBED IN THE SECTION CAPTIONED "BUSINESS RISK FACTORS" IN ITEM 1 OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998, WHICH INCLUDE, BUT ARE NOT LIMITED TO, THE BUSINESS CONTINUING TO BE UNPROFITABLE DESPITE STEPS TO IMPROVE PERFORMANCE, THE INABILITY TO OBTAIN COVENANT RELIEF LEADING TO LIQUIDITY PROBLEMS AND AN INABILITY TO FUND CONTINUING OPERATIONS, THE RESTRUCTURING FAILING TO IMPROVE OUR FINANCIAL PERFORMANCE AND PERHAPS EVEN HAVING A NEGATIVE IMPACT ON OUR PERFORMANCE, OUR POOR FINANCIAL PERFORMANCE MAKING IT DIFFICULT TO CONTINUE AS A GOING CONCERN, THE INABILITY TO OBTAIN PRINCIPAL PRODUCTS NEGATIVELY IMPACTING OUR OPERATIONS, THE BAAN RELATIONSHIP FAILING AND THE LOSS OF KEY EMPLOYEES NEGATIVELY IMPACTING OUR OPERATIONS. 17 Item 3. Quantitative and Qualitative Disclosure About Market Risk Reference is made to the information in Item 2 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation-Market Risk," which information is incorporated herein by reference. 18 Part II - Other Information Item 2. Changes in Securities and Use of Proceeds Pursuant to the terms of the Company's Series B 8% Convertible Redeemable Preferred Stock (the "Series B"), the Company was obligated to provide cumulative preferential dividends to the holders of the Series B on January 2, 1999 and April 1, 1999. With respect to each of the above-referenced dividend payment dates, the Board of Directors of the Company, in accordance with the terms of the Series B, having reviewed the cash situation of the Company, determined that the Company would pay the dividends in shares of Series B. Thus, on (i) January 2, 1999, in accordance with and pursuant to the terms of the Series B, 34.74 shares of the Series B were issued in payment of the dividends due the holders of the Series B and (ii) on April 1, 1999, in accordance with and pursuant to the terms of the Series B, 55.63 shares of the Series B were issued in payment of the dividends due the holders of the Series B. 19 Exhibit Index Item 6. Exhibits and Reports on Form 8-K Exhibit Number (a) Exhibits 4.1 Waiver and Second Amendment to Loan Agreement between Foothill Capital Corporation and Effective Management Systems, Inc., EMS-East, Inc., and Effective Management Systems of Illinois, Inc., dated April 13, 1999. 10.1 Form of Nonstatutory Stock Option Agreement, dated February 1, 1999. 27 Financial Data Schedule [EDGAR version only] (b) Reports on Form 8-K None 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EFFECTIVE MANAGEMENT SYSTEMS, INC. April 14, 1999 By: /s/ MICHAEL D. DUNHAM Michael D. Dunham President (principal executive officer) By: /s/JEFFREY J. FOSSUM Jeffrey J. Fossum Chief Financial Officer and Assistant Treasurer (principal financial and accounting officer) 21 EX-4.1 2 WAIVER Exhibit 4.1 WAIVER THIS WAIVER (this "Waiver") is entered into as of April 13, 1999, among Effective Management Systems, Inc. ("EMS"), a Wisconsin corporation, EMS-East, Inc. ("EMS-East"), a Massachusetts corporation, Effective Management Systems of Illinois, Inc. ("EMS-Illinois"), an Illinois corporation (EMS, EMS-East and EMS-Illinois are each individually a "Borrower", and collectively "Borrowers"), and Foothill Capital Corporation ("Lender"). WHEREAS, Borrowers and Lender are parties to a Loan and Security Agreement dated as of December 30, 1997, as amended (the "Loan Agreement"); WHEREAS, Borrower has informed Lender that Borrowers' Tangible Net Worth (as defined in the Loan Agreement) for the fiscal quarter ended February 28, 1999 is approximately negative Six Million Seven Hundred Nineteen Thousand Dollars (-$6,719,000); WHEREAS, Borrower has informed Lender that Borrowers' EBITDA (as defined in the Loan Agreement) for the three month period ending February 28, 1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand Dollars (-$2,175,000); WHEREAS, as a result of the foregoing, Borrowers have breached Sections 7.20(a) and 7.20(b) of the Loan Agreement and Events of Default exist under Section 8.2 of the Loan Agreement; WHEREAS, Borrowers have requested that Lender waive the foregoing Events of Default and Lender has agreed to do so subject to the terms hereof; NOW THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Waiver. Subject to the reaffirmation by each Borrower of its representations and warranties under the Loan Agreement and its representations and warranties set forth herein and receipt by Lender of the waiver fee referred to below, Lender hereby waives the Events of Default arising solely as a result of the (i) Tangible Net Worth of Borrowers not being at least Four Million Dollars ($4,000,000) for the fiscal quarter ended February 28, 1999 and (ii) EBITDA of Borrowers not being at least negative Five Hundred Thousand Dollars (-$500,000) for the three month period ending February 28, 1999. The foregoing waiver shall not constitute a waiver of any other Event of Default that may exist, or a wavier of any future Event of Default that may occur (including, without limitation, any Event of Default occurring as a result of a breach of Section 7.20(a) or Section 7.20(b) as of any date or for any period ending after February 28, 1999). 3. Representations. In order to induce Lender to enter into this Waiver, Borrower hereby represents and warrants to Lender that: (a) The representations and warranties of each Borrower contained in the Loan Agreement, are true and correct as of the date hereof as if made on the date hereof; (b) No Event of Default or event which, with giving of notice or the passage of time, or both would become an Event of Default, exists as of the date hereof (other than as described in Section 2 above); (c) The Tangible Net Worth of Borrowers as of February 28, 1999 is approximately negative Six Million Seven Hundred Nineteen Thousand Dollars (-$6,719,000); and (d) The EBITDA of Borrowers for the three month ending February 28, 1999 is approximately negative Two Million One Hundred and Seventy-Five Thousand Dollars (-$2,175,000). 4. Waiver Fee. In consideration of the waiver described above, Borrowers agree to pay Lender a waiver fee of Five Thousand Dollars ($5,000) on the date hereof. The remainder of the page is intentionally left blank IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC., a Wisconsin corporation By Its EMS-EAST, INC., a Massachusetts corporation By Its EFFECTIVE MANAGEMENT SYSTEMS OF ILLINOIS, an Illinois corporation By Its FOOTHILL CAPITAL CORPORATION By Its EX-10.1 3 FORM OF STOCK OPTION AGREEMENT EFFECTIVE MANAGEMENT SYSTEMS, INC. NONSTATUTORY STOCK OPTION AGREEMENT THIS NONSTATUTORY STOCK OPTION AGREEMENT (this "Stock Option Agreement"), dated as of this 1st day of February, 1999, by and between Effective Management Systems, Inc., a Wisconsin corporation (the "Company"), and ______________________ (the "Optionee"). W I T N E S S E T H: WHEREAS, in recognition of the Optionee's service as a non-employee director of the Company, the Board of Directors has deemed it appropriate to grant the Optionee an option to purchase shares of the Company's common stock, par value $0.01 per share (the "Common Stock"); and WHEREAS, the parties deem it appropriate to memorialize the grant of such option. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements herein set forth, the parties hereby mutually covenant and agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Stock Option Agreement, the Company hereby grants to the Optionee an option (the "Option") to purchase from the Company all or any part of the aggregate amount of ______________ shares of Common Stock (the "Optioned Shares"). The Option is intended to constitute a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 2. Option Price. The price to be paid for the Optioned Shares shall be $1-7/16 per share. 3. Exercisability and Termination of Option. a. The Option shall vest and become exercisable, but only during the time that the Optionee is serving as a director of the Company, as to 30% of the Optioned Shares immediately, as to an additional 30% after one calendar year has elapsed from the date of this Stock Option Agreement, and as to the final 40% after the second calendar year has elapsed from the date of this Stock Option Agreement; provided, however, that if the Optionee ceases to be a director of the Company by reason of death, disability, or retirement within two calendar years after the date of this Stock Option Agreement or in the event of a Change in Control (as defined in Section 3.b below), the Option shall become immediately exercisable in full. The Option shall terminate on the earlier of: (i) February 1, 2009; (ii) six months after the Optionee ceases to be a director of the Company by reason of death; or (iii) three months after the Optionee ceases to be a director of the Company for any reason other than death. b. A "Change in Control" shall be deemed to have occurred if the events set forth in any one of the following paragraphs shall have occurred: i. any "Person" (as such term is defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended, as modified and used in sections 13(d) and 14(d) thereof), other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportion as their ownership of Common Stock in the Company ("Excluded Persons"), is or becomes the "Beneficial Owner" (as defined in rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing 25% or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's the outstanding voting securities; or ii. the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities; or iii. the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the Common Stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity that owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 4. Manner of Exercise and Payment. Subject to the provisions of Paragraph 3 hereof, the Option may be exercised in full at any time or in part from time to time by -2- delivery to the Assistant Secretary of the Company at the Company's principal office in Milwaukee, Wisconsin, of a written notice of exercise specifying the number of shares with respect to which the Option is being exercised. The notice of exercise must be accompanied by full payment of the option price of the shares being purchased: (i) in cash or its equivalent; (ii) by tendering previously acquired shares of Common Stock (valued at their fair market value as of the date of exercise as determined in the manner as provided by the Board of Directors); or (iii) by any combination of the means of payment set forth in subparagraphs (i) and (ii). For purposes of subparagraphs (ii) and (iii) above, the term "previously acquired shares of Common Stock" shall only include Common Stock owned by the Optionee prior to the exercise of the Option and shall not include shares of Common Stock which are being acquired pursuant to the exercise of the Option. No Optioned Shares shall be issued until full payment therefor has been made. 5. Nontransferability of the Option. The Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. The Option may be exercised during the life of the Optionee only by the Optionee or the Optionee's guardian or legal representative. 6. Tax Withholding. The Company may deduct and withhold from any cash otherwise payable to the Optionee (whether payable as director's fees, bonus or other compensation) such amount as may be required for the purpose of satisfying any obligation the Company may have to withhold federal, state or local taxes. Further, in the event the amount so withheld is insufficient for such purpose, the Company may require that the Optionee pay to the Company upon its demand or otherwise make arrangements satisfactory to the Company for payment of such amount as may be requested by the Company in order to satisfy its obligation to withhold any such taxes. 7. Capital Adjustments Affecting the Common Stock. In the event of a capital adjustment resulting from a stock dividend (other than a stock dividend in lieu of an ordinary cash dividend), stock split, reorganization, spin-off, split-up or distribution of assets to shareholders, recapitalization, merger, consolidation, combination or exchange of shares or the like, the number of shares of Common Stock subject to the Option shall be adjusted in a manner consistent with such capital adjustment; provided, however, that no such adjustment shall require the Company to sell any fractional shares and the adjustment shall be limited accordingly. The price of any shares under the Option shall be adjusted so that there will be no change in the aggregate purchase price payable upon exercise of the Option. The determination of the Board of Directors of the Company as to any adjustment shall be final. 8. Representation by the Optionee. By execution of this Stock Option Agreement, the Optionee represents to the Company that his acquisition of Optioned Shares upon exercise of the Option will be for investment purposes only for his own account and not with a view to resell or otherwise distribute such shares. The Optionee acknowledges that the issuance of Optioned Shares upon exercise of the Option will not be registered under the Securities Act of 1933, as amended, or under any state securities laws, and that such shares cannot be resold or otherwise transferred unless registered under said Act and laws or unless an exemption from registration is available. The Optionee further acknowledges that the certificate or certificate representing the Optioned Shares acquired upon exercise of the Option shall bear the following legend: -3- "The shares of common stock of Effective Management Systems, Inc. represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and such shares may not be resold or otherwise transferred unless registered under said Act and laws or unless an exemption from registration is available." 9. Status of Optionee. The Optionee shall have no rights as a shareholder with respect to Optioned Shares covered by the Option until the date of issuance of stock certificates to the Optionee and only after such shares are fully paid. The Option shall not confer upon the Optionee the right to continue as a director of the Company. 10. Powers of the Company Not Affected. The existence of the Option shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or any dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. 11. Interpretation by the Board of Directors. As a condition of the granting of the Option, the Optionee agrees, for himself and his legal representatives or guardians, that this Stock Option Agreement shall be interpreted by the Board of Directors and that any interpretation by the Board of the terms of this Stock Option Agreement and any determination made by the Board pursuant to this Stock Option Agreement shall be final, binding and conclusive. 12. Requirements of Law. The grant of the Option and the issuance of Optioned Shares pursuant to this Stock Option Agreement are subject to all applicable laws, statutes, rules and regulations. 13. Governing Law. This Stock Option Agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin. 14. Amendment. This Stock Option Agreement may not be amended, modified, terminated or otherwise altered except by the written consent of the parties hereto. 15. Severability. The parties agree that if any provision of this Stock Option Agreement shall under any circumstances be deemed invalid or inoperative, this Stock Option Agreement shall be construed with the invalid or inoperative provision or provisions deleted and the rights and obligations of the parties shall be construed and enforced accordingly. 16. Entire Agreement. This Stock Option Agreement evidences the entire agreement between the parties hereto with respect to the matters provided for herein and there are no agreements, representations or warranties with respect to the matters provided herein other than those set forth herein. -4- 17. Headings. The headings for the paragraphs of this Stock Option Agreement are inserted for convenience only and shall not constitute a part of this Stock Option Agreement. IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement to be executed by its duly authorized officers and its corporate seal to be hereunto affixed, and the Optionee has hereunto affixed his hand and seal as of the day and year first above written. EFFECTIVE MANAGEMENT SYSTEMS, INC. By: _________________________________ [SEAL] Attest: _____________________________ _____________________________________ [SEAL] _________________, Optionee -5- EX-27 4 FINANCIAL DATA SCHEDULE
5 1000 3-MOS NOV-30-1999 NOV-30-1998 FEB-28-1999 6 0 8,952 (326) 480 9,821 10,055 (7,054) 20,291 17,802 0 0 1,394 41 24 20,291 326 7,476 281 14,502 166 48 174 (2,184) (9) (2,175) 0 0 0 (2,175) (.53) 0 Not required to be calculated in accordance with generally accepted accounting principles.
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