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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 For the fiscal year ended December 31, 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: 333-38177
MADE2MANAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1665080
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification Number)
9002 Purdue Road, Indianapolis, IN 46268
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 532-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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 and 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 filing
requirement for the past 90 days.
Yes [X] No
Indicate by checkmark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment of the
Form 10-K. [X]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant, based on the closing sale price of the common stock on March 1,
2000, as reported on The Nasdaq Stock Market(R) was $47,851,388. Common stock
held by executive officers, directors and persons who are known to own 5% or
more of the outstanding common stock have been excluded from the computation as
such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not a conclusive determination for other
purposes.
As of March 1, 2000, the registrant had 4,726,563 shares of common stock, no par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
(This page has been left blank intentionally.)
Table of Contents
Made2Manage Systems, Inc.
Form 10-K
PART 1...................................................................................................1
ITEM 1. BUSINESS......................................................................................1
General.......................................................................................1
Markets and Customers.........................................................................1
Sales and Marketing...........................................................................1
The Product...................................................................................1
Product Development...........................................................................3
Service and Support...........................................................................3
Competition...................................................................................4
Intellectual Property.........................................................................4
Employees.....................................................................................5
Executive Officers of the Registrant..........................................................5
ITEM 2. PROPERTIES....................................................................................6
ITEM 3. LEGAL PROCEEDINGS.............................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................6
PART II..................................................................................................7
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................7
ITEM 6. SELECTED FINANCIAL DATA.......................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........9
Overview......................................................................................9
Results of Operations........................................................................11
Comparisons of Years Ended December 31, 1999, 1998 and 1997..................................11
Year 2000 Compliance.........................................................................14
Inflation....................................................................................14
Accounting Pronouncements....................................................................14
Liquidity and Capital Resources..............................................................14
Business Environment and Risk Factors........................................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........36
PART III................................................................................................37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................37
ITEM 11. EXECUTIVE COMPENSATION......................................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................38
(This page has been left blank intentionally.)
PART 1
ITEM 1. Business.
General
Made2Manage Systems, Inc. develops, markets and supports fully integrated,
Microsoft(R) Windows-based business application software for manufacturers. Our
principal product, Made2Manage for Windows, referred to as "Made2Manage", is an
enterprise-wide business management system, often referred to as an Enterprise
Resource Planning, or "ERP", system. During 1999 we adopted a strategy to
provide e-commerce solutions for our target market. The result was m2mEport, a
web site dedicated to the needs of small and mid size manufacturing enterprises,
which was officially launched in March 2000. Our corporate offices are in
Indianapolis, Indiana, and we have a subsidiary, Bridgeware, Inc., which we
acquired during 1998. Bridgeware provides advanced planning and scheduling
software. Bridgeware is based in San Bruno, California and has a subsidiary in
Israel. In October 1999, we incorporated Made2Manage Systems, LTD, a subsidiary
in the United Kingdom; however, Made2Manage Systems, LTD did not commence
business during 1999. Made2Manage Systems' web site address is
www.made2manage.com.
Markets and Customers
Our target market consists primarily of small and midsize discrete manufacturers
with annual revenues of up to $100 million that are engaged in
engineer-to-order, make-to-order, assemble-to-order, make-to-stock and mixed
styles of production. Discrete manufacturers fabricate and assemble parts into a
finished product as distinguished from process manufacturers, which combine raw
materials to create finished products. Engineer-to-order manufacturing is a
subset of make-to-order where the product is expressly designed and manufactured
to meet a customer's unique requirements, often as a "one-time" item.
Make-to-order manufacturing involves fabricating and assembling products that
are either standardized or that meet a customer's unique specifications.
Assemble-to-order manufacturing involves assembling products that meet a
customer's unique specifications from standard, or stock, sub-component parts.
Make-to-stock refers to manufacturing in which standard products are fabricated,
assembled and placed in finished goods inventory based on projected customer
demand. Many manufacturing processes involve a combination of some or all of
these production techniques.
Based on data published by Dun & Bradstreet Corporation, we believe that there
are over 50,000 manufacturing operations in the United States and Canada that
meet our target market parameters.
Sales and Marketing
We market our products and services primarily throughout the United States and
Canada, and we have recently added distribution for Europe. We use direct sales
representatives, supported by regional managers and manufacturing applications
consultants, and a network of Value Added Resellers ("VARs"). We have licensed
Made2Manage for use at more than 1300 manufacturing sites in North America,
primarily in the United States. Bridgeware has established customers and
reseller relationships outside of North America.
The Products
Made2Manage
Made2Manage, our core product, is designed to meet the unique needs of small and
midsize discrete manufacturers engaged in engineer-to-order, make-to-order,
assemble-to-order, make-to-stock and mixed styles of production. The product is
a comprehensive application suite designed to be the only business software
these manufacturers need to effectively manage their entire organizations. It
includes applications in sales and marketing, engineering, materials management,
production, quality management, finance and accounting, human resources and
web-based applications for customer and supplier collaboration.
Made2Manage is an enterprise-wide, client/server software solution designed for
use on PCs running Windows NT Workstation, Windows 98 or Windows 95 over LANs
that utilize Windows NT or Novell Netware servers. It is a native 32-bit
application with an object-oriented structure developed using Microsoft's Visual
Studio. The object-oriented, standards-based architecture shortens development
cycles, reduces costs of product enhancements, opens the product for use with
other applications, such as Microsoft Office, and provides a more efficient
environment for customer support.
1
Made2Manage is designed to enable users to do their jobs more effectively on a
consistent basis. Made2Manage provides a set of applications specific to the
demands of our target market. We believe these unique needs include:
o Easy-to-use screens designed for employees that are generalists, not
specialists, in the use of computers,
o An emphasis on lower-cost, standard technology, specifically Microsoft
technology, because our customers have limited Information System staff and
resources, and
o Functionality that can be readily learned and can be effectively supported
by the software provider.
Made2Manage provides software in seven functional areas of a manufacturing
operation. These functional areas with a brief description are:
1. Sales and Distribution provides the ability to track sales, quotes and
order activity, ship the order and to communicate with the customer
regarding status of the order. Sales Order Processing manages the
activities from the time the customer confirms the order, into production
and through shipment, including acknowledging the order, receiving stock
materials and handling multiple releases and partial shipments. The
Rules-Based Product Configurator allows the sales person to guide customers
through specific product choices to precisely meet their product needs
while assuring that quotes meet profitability and manufacturability
guidelines.
2. Engineering applications are designed to help engineers accomplish their
tasks more efficiently and better coordinate with manufacturing and other
parts of the organization. It includes Engineering Change Management (ECM)
which helps ensure personnel follow proper change procedures during
approval and implementation. It also provides information to help identify
the impact that changes will have on the organization. Other features
include a data interface to AutoCAD(R) 14 that prevents engineering from
entering the same information twice and a graphical Bill of Material (BOM)
creation and editing tool.
3. Materials Management functions include Materials Requirements Planning
(MRP) for controlling inventory procurement and production job creation, as
well as infinite and finite production scheduling. Our Advanced Planning
and Scheduling capabilities, acquired with Bridgeware, enable planners to
consider both materials and capacity constraints at the same time in
building their production plans. Execution level support is provided
through functions that include cycle counting functionality, physical
inventory capabilities and on-hand availability. Lot Control enables
companies to track raw materials, sub-assemblies and final assemblies to
their origin.
4. Production Management facilitates the coordination, execution and
monitoring of the manufacturing process. Job orders drive material and
production requirements and track jobs through the production process. Job
orders identify the part number, the bill of material, the routing, the
status and the job packet (i.e., the set of instructions, diagrams and
photographs required to manufacture the part). Actual material and labor
costs are tracked to jobs during the production process, typically using
bar coding technology.
5. Quality Management capabilities help manufacturers conform to the
requirements of their customers. Through our relationship with Powerway,
Inc., Made2Manage offers tools to help achieve and maintain ISO9000 and
other quality standards compliance through document authoring, document
management, and statistical process control software tools.
6. Financial Management is fully integrated with the other functions of the
Made2Manage system. Up-to-date records of income, expenses and financial
commitments flow through the product's extensive library of financial
reports. Standard features include Accounts Receivable, Accounts Payable,
Cash Flow Forecasting and Job Order Costing. The General Ledger integrates
the monetary flow from all aspects of Made2Manage. "Drill-down" features,
available throughout the product, finely detail many areas, such as cost
attributes of work in process, inventory and product shipped.
2
7. Human Resources applications include payroll and personnel tracking that
integrate Made2Manage with applications from leading providers ADP(R) and
Best Software. The interface to ADP provides users who prefer to outsource
payroll with an alternative that minimizes double data entry. For customers
who prefer to manage their own payroll internally, Made2Manage offers Best
Software's Abra(R) as well as their Human Resources applications.
Made2Manage also incorporates decision support. The Executive Information System
provides management with a tool to promote high level planning. Executives are
able to obtain an overview of their entire business, with automatic data
retrieval from sales, production and finance. Performance and exception results
are generated in report or graphical format, and can be easily customized or
exported to spreadsheets, word processors and other business tools.
Made2Manage offers several web-based applications to help its customers achieve
a competitive edge with regards to e-business and the Internet. Informing,
interacting and collaborating with customers, suppliers and employees is, and
will continue to be, a very important role of the Internet, and Made2Manage
provides much of the functionality so that small and midsize manufacturers can
compete in the new Internet economy.
m2mEport
In March 2000 we launched our web site dedicated to small and mid-sized
manufacturers. This site will provide many Internet resources for our customers
and other manufacturers. The m2mEport site features advanced distance learning
offerings, the ability to offer Made2Manage through an Application Service
Provider (ASP), along with content rich collaboration opportunities for
customers and suppliers.
Product Development
We seek to enhance our competitive position by incorporating additional
functionality in Made2Manage and our e-business products to meet the evolving
needs of manufacturers in our target market. Product enhancement ideas originate
from existing customers, prospective customers and industry trend analysis.
Input is collected through surveys, interviews, user groups and customer service
and support activities. We analyze this input and identify changes for future
product releases. Our product development personnel have experience in software
development, quality assurance and documentation and are familiar with the
specific business areas addressed by the changes.
Our development methodology incorporates comprehensive quality assurance
procedures. A substantial component of our development budget is allocated to
quality assurance. Our testing processes include component level tests, unit
tests, posting tests, validation tests, regression tests, installation tests, CD
tests and production tests. We maintain risk assessment documents throughout the
development process to identify potential roadblocks to a timely and quality
release early enough to allow corrective action. Criterion-based (as opposed to
date-based) release guidelines help insure consistent release quality.
Our product development expenditures were $6.5 million in 1999, $4.1 million in
1998 and $2.3 million in 1997. Development costs were expensed as incurred.
Software design and development is a complicated process, and there can be no
assurance that we will be able to complete features and products currently under
development in a timely manner or to develop features and products that find
market acceptance in the future.
Service and Support
We offer a full complement of services that allow our customers to maximize the
benefits that they receive from using Made2Manage, including implementation
assistance using our Time2Value tools and services, customer support and
education programs.
3
Time2Value Tools and Services
Time2Value tools and services are designed to help the manufacturer achieve a
quick, successful implementation that brings the manufacturer value in the
shortest amount of time. Time2Value tools and services include planning and
implementation guides, computer based training tools, procedure analyses and
data conversion automation from old business systems.
Customer Support
We provide ongoing product support services under our support arrangements.
Support services are typically purchased by customers for a one-year term at the
time of entering into the sales agreement, and may be renewed for additional
annual periods. Support services include telephone support, electronic support
through our Internet-based SmartLink(TM) knowledgebase and case management
system, and periodic software updates.
Education Programs
Classroom education courses are offered for each of the major user roles present
in a small and midsize manufacturing business. These courses are offered at our
corporate offices, at regional locations and on-site at the customer's facility.
Each course includes hands-on exercises using the software in the context of the
user's typical workflow.
Additionally, we provide customers with the cost effective and convenient method
to educate their employees by use of Virtual Classroom. Virtual Classroom offers
hands-on instruction by demonstrating software functions in an interactive
classroom environment over the Internet.
Competition
The business management applications software market is fragmented, intensely
competitive and rapidly changing. We face competition from a large number of
independent software vendors, including application software vendors, software
tool vendors and relational database management system vendors. The technologies
we use to develop Made2Manage are generally available and widely known,
including technology developed by Microsoft. In addition, several software
companies that have traditionally marketed ERP systems to larger manufacturers
have announced initiatives to market ERP systems to midsize manufacturers.
Compared to us, many of our existing competitors, as well as a number of
potential competitors, have significantly greater financial, technical and
marketing resources and a larger base of customers.
Made2Manage competes with other products principally on the basis that it is
specifically designed for small and midsize manufacturers, is relatively easy to
implement and use, and is supported by a well-developed system of service and
support. In addition, we believe that advanced features for messaging and
Internet access differentiate Made2Manage. We also believe that Made2Manage
competes favorably with the products offered by competitors, but there can be no
assurance that we will continue to compete favorably against such products or
that we will be able to compete successfully against future competitors.
Intellectual Property
We regard our software products as proprietary in that title to and ownership of
the software we develop resides exclusively with Made2Manage Systems, Inc. We
rely largely upon our license agreements with customers, dealer agreements with
suppliers, our own software protection tools, confidentiality agreements and
employee agreements to maintain the trade secret aspects of our products. We
seek to protect our programs, documentation and other written materials under
copyright law.
We have U.S. patent applications pending for software included in Made2Manage
related to the Material Requirements Planning regeneration feature and a
navigational interface for the enterprise. We have no other patents or patent
applications.
We believe that we have all necessary rights to market our products, although
there can be no assurance that third parties will not assert infringement claims
in the future.
4
Employees
As of December 31, 1999, we had 265 employees, consisting of 72 in sales and
marketing, 83 in product development, 81 in services and 29 in administration.
Each employee signs a confidentiality and nondisclosure agreement upon joining
Made2Manage Systems, Inc. We believe our employee relations to be good.
Executive Officers of the Registrant
The executive officers of Made2Manage Systems, Inc. and their ages as of
December 31, 1999, are as follows:
Name Age Position with Company
- ---- --- ---------------------
David B. Wortman........ 48 President and Chief Executive Officer
Christopher D. Clapp.... 40 Vice President, Marketing
Oliver C. Fowler........ 47 Vice President, Sales
Gary W. Rush............ 42 Vice President, Development
Joseph S. Swern......... 46 Vice President, Service and Support
David B. Wortman joined Made2Manage Systems, Inc. in September 1993 as Senior
Vice President and has served as President and Chief Executive Officer and a
director since January 1994. Prior to joining Made2Manage Systems, Inc., Mr.
Wortman held a succession of senior executive positions with and served as a
director of Pritsker Corporation, a computer software company he co-founded in
1973. Mr. Wortman is a former President of the Institute of Industrial
Engineers. He is a Director and former President of the Indiana Information
Technology Association. Mr. Wortman holds B.S. and M.S. degrees in industrial
engineering from Purdue University.
Christopher D. Clapp joined Made2Manage Systems, Inc. as Vice President,
Marketing in April 1996. From November 1993 to February 1996, Mr. Clapp was
employed by Centillion Data Systems, Inc., a company which develops and markets
software and services for the telecommunications industry, last serving as Vice
President and General Manager of that company's communications division. From
January 1989 to November 1993, Mr. Clapp was employed at Pritsker Corporation,
holding various positions, including Product Manager and Manager, Sales
Operations, where he designed and implemented the worldwide marketing strategy
for that company's manufacturing planning and scheduling software system. Mr.
Clapp holds a B.S. degree in industrial engineering from Purdue University.
Oliver C. Fowler joined Made2Manage Systems, Inc. as Vice President, Sales in
April 1995. Mr. Fowler has been involved in the sales of computer hardware and
software products since 1975. From 1989 to 1995, Mr. Fowler held a succession of
sales management positions, including Director of Strategic Accounts, with Symix
Computer Systems, Inc., a computer software company specializing in ERP systems
for discrete, midsize manufacturers. Mr. Fowler holds a B.A. from Marietta
College in Management/ Economics and has a Certification in Production and
Inventory Management from the American Production and Inventory Control Society.
Gary W. Rush joined Made2Manage Systems, Inc. as Vice President, Development in
May 1994. Mr. Rush was President of Micro Data Base Systems, Inc., a provider of
relational and network database management software, prior to joining
Made2Manage Systems, Inc. During his 14 year tenure at Micro Data Base Systems,
Mr. Rush held various other positions, including Chief Operating Officer, Vice
President of Development, and Vice President of Consulting. Mr. Rush holds a
B.S.E.E. and a M.S.M. with a focus on management information systems from Purdue
University.
Joseph S. Swern joined Made2Manage Systems, Inc. in September 1995 as Vice
President, Service and Support. Prior to joining the Made2Manage Systems, Inc.,
Mr. Swern was serving as Vice President of Professional Services at Symix
Computer Systems, Inc. During his seven year tenure at Symix, Mr. Swern also
served as Director of Consulting Services, Manager of Implementation Consulting
and Senior Implementation Consultant. Preceding his employment with Symix. Mr.
Swern spent ten years working in both discrete and process manufacturing,
holding various management positions. Mr. Swern holds a B.S. degree in
industrial management from Franklin University and a M.B.A. from Capital
University. He has a Certification in Production and Inventory Management from
the American Production and Inventory Control Society.
5
Officers are elected by the Board of Directors at each annual meeting and serve
at the pleasure of the Board of Directors.
Director and Chairman of the Board
Ira Coron, age 70
Chairman of the Board of Directors since July 1993
Member of the Audit Committee and Compensation Committee
Mr. Coron has served as Chairman of California Amplifier, Inc. since March 1994
and served also as that Company's Chief Executive Officer until August 1997.
From 1989 to 1994, he was an independent management consultant to several
companies and venture capital firms. He retired from TRW, Inc. in 1989, after
serving in numerous senior management positions since 1967, including Vice
President and General Manager of TRW's Electronic Components Group. He is a
director of the Wireless Cable Association and a director of CMC Industries. He
is a graduate of the United States Military Academy with a B.S. degree in
engineering.
ITEM 2. Properties.
Our headquarters is in Indianapolis, Indiana, where we lease space housing
administrative, sales and marketing, customer service and product development
activities. In addition, we lease office space in San Bruno, California,
Malvern, Pennsylvania and Haifa, Israel. We believe that our facilities are
adequate for the present, but anticipate expanding our facilities, as necessary,
in the future.
ITEM 3. Legal Proceedings.
We are not a party to any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
6
PART II
ITEM 5. Market for the Company's Common Equity and Related Shareholder Matters.
Our common stock began trading on The Nasdaq Stock Market(R) under the symbol
MTMS on December 19, 1997. Prior to that date, there was no public market for
the common stock. As of March 1, 2000, we had 63 shareholders of record and
approximately 1,500 beneficial holders of our common stock.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all earnings to finance future growth and we do not
anticipate paying any cash dividends in the foreseeable future.
The following table presents the high and low sales prices for our common stock
as reported by The Nasdaq Stock Market(R).
High Low
Fiscal Year 1997
- ----------------
Fourth Quarter ........................... $ 8.00 $ 7.50
Fiscal Year 1998
- ----------------
First Quarter............................. 11.50 6.75
Second Quarter............................ 16.88 9.25
Third Quarter............................. 13.75 8.25
Fourth Quarter............................ 14.88 5.81
Fiscal Year 1999
- ----------------
First Quarter............................. 14.75 7.50
Second Quarter............................ 12.25 7.88
Third Quarter............................. 8.50 6.06
Fourth Quarter............................ 10.25 5.63
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ITEM 6. Selected Financial Data.
Year Ended December 31,
--------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------ -----
(in thousands, except per share data)
Statement of Operations Data:
Total revenues.................................... $ 31,062 $ 27,242 $16,167 $ 9,379 $ 5,935
Operating income (loss) before deduction for
acquired in-process technology................ (3,157) 2,493 1,014 700 447
Operating income (loss)........................... (3,157) 603 1,014 700 447
Income tax provision (benefit).................... (1,040) 1,038 366 (1,028)(1) 6
Net income (loss)................................. (1,539) 144 613 1,606 392
Per share amounts:
Basic:
Net income (loss) per share................ (0.33) 0.03 1.17 4.29 1.32
Average number of shares................... 4,600 4,331 524 375 297
Diluted:
Net income (loss) per share................ (0.33) 0.03 0.25 0.73 0.21
Average number of shares................... 4,600 5,025 2,440 2,200 1,868
Cash dividends declared per share................. -- -- -- -- --
(1) The income tax benefit for 1996 results from the reversal of a valuation
allowance that had been established to offset the future tax benefits of net
operating loss carryforwards. The valuation allowance was reversed during
1996 based on management's analysis, which considered our profitable
operating results and future outlook because of the market acceptance of
Made2Manage. As a result of this analysis, management determined it was more
likely than not that the deferred income taxes at December 31, 1996, would
be realized. For subsequent periods we have provided for income taxes
utilizing federal and state statutory income tax rates.
At December 31,
----------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(in thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents......................... $ 12,610 $ 15,496 $ 16,805(2) $ 1,139 $ 1,033
Total assets...................................... 31,624 33,894 25,560 6,666 3,756
Long-term obligations, less current portion....... -- -- -- 436 452
Total shareholders' equity........................ 18,871 19,938 18,304 2,116 509
(2) On December 19, 1997, we completed our initial public offering of common
stock. We received net proceeds of $15.5 million, of which $1.0 million was
used to repay outstanding indebtedness.
8
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. These statements reflect our expectations regarding our
strategic plans, future growth, results of operations, performance, business
prospects and opportunities. Words such as, "estimates," "believes,"
"anticipates," "plans" and similar expressions may be used to identify these
forward-looking statements, but are not the exclusive means of identifying these
statements. These statements reflect our current beliefs and are based on
information currently available to us. Accordingly, these statements are subject
to known and unknown risks, uncertainties and other factors that could cause our
actual growth, results, performance and business prospects and opportunities to
differ from those expressed in, or implied by, these statements. In light of the
uncertainties inherent in any forward-looking statement the inclusion of a
forward-looking statement herein should not be regarded as a representation by
us that our plans and objectives will be achieved. Actual results or events
could differ materially from those anticipated in any forward-looking statements
for the reasons discussed in this section, in the "Business Environment and Risk
Factors" section below, and elsewhere in this report, or for other reasons. We
are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances or otherwise. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained in the Company's SEC
reports, including the report on Form 10-K for the year ended December 31, 1998.
Overview
We develop, market, license and support Made2Manage, an open architecture,
standards-based, client/server enterprise business system software solution for
small and midsize manufacturers engaged in engineer-to-order, make-to-order,
assemble-to-order, make-to-stock and mixed styles of production. We have
developed manufacturing software applications for this market since our
inception in 1986. Our first generation of Made2Manage, designed for PC networks
running the DOS operating system on Novell networks, was introduced in 1988, and
we introduced a UNIX version of Made2Manage in 1990. We ceased offering the DOS
and UNIX versions to new customers in 1995 and 1994, respectively and we
discontinued supporting these versions in 1999.
In March 2000 we launched m2mEport, our web site dedicated to the needs of small
and midsize manufacturers. This site will provide many Internet resources for
our customers and other manufacturers. The m2mEport site features advanced
distance learning offerings, the ability to offer Made2Manage through an
Application Service Provider (ASP), along with content rich collaboration
opportunities for customers and suppliers.
During 1998 we acquired Bridgeware, Inc., a company that offers advance planning
and scheduling software, for a combination of cash and common stock. The total
cost of the acquisition was $4.5 million. In connection with this acquisition,
we recorded a $1.9 million in-process technology charge. The remaining costs of
the acquisition are recorded as assets and are expected to be amortized over
lives of five and seven years.
Our revenues are derived from software licenses, services and hardware. Software
revenues are generated from licensing software to new customers, and from
current customers increasing the number of licensed users and from licensing new
applications. We recognize revenue from software license fees and hardware upon
shipment to the customer following execution of a sales agreement. Service
revenues are generated from annual fees paid by customers to receive support
services and software upgrades and also from implementation, education and
consulting services. Support is typically purchased as part of the initial sales
agreement and is renewable annually. Support fees are recognized ratably over
the term of the agreement. Service revenues from implementation, education and
consulting services are generally included in the initial agreement. We
recognize revenue from these services as they are performed. Hardware revenues
are generated primarily from the sale of bar-coding and data collection
equipment used in connection with Made2Manage and constitute a relatively small
component of total revenues.
9
Software revenues for a particular quarter depend substantially on orders
received and products shipped in that quarter. Furthermore, large orders may be
significant to operating income in the quarter in which the corresponding
revenue is recognized.
10
Results of Operations
The following table sets forth the percentage of total revenues represented by
certain items included in our statements of operations for the periods
indicated.
Percent
Year Ended December 31, Increase (Decrease)
----------------------------------- 1999 over 1998 over
1999 1998 1997 1998 1997
--------- --------- --------- ---------- ----------
Revenues:
Software ........................................ 44.2% 59.2% 63.4% (14.8)% 57.4%
Services ........................................ 52.3 37.8 32.8 57.9 94.1
Hardware ........................................ 3.5 3.0 3.8 30.5 34.0
--------- --------- ---------
Total revenue ................................ 100.0 100.0 100.0 14.0 68.5
--------- --------- ---------
Cost of revenues:
Software ........................................ 5.1 3.7 3.5 56.3 78.0
Amortization of purchased
technology ................................... 1.3 .6 -- 139.6 NM
Services ........................................ 28.2 20.7 20.7 55.2 68.5
Hardware ........................................ 2.3 2.1 2.6 31.7 33.2
--------- --------- ---------
Total costs of revenues ...................... 36.9 27.1 26.8 55.5 70.1
--------- --------- ---------
Gross profit ................................. 63.1 72.9 73.2 (1.4) 67.9
--------- --------- ---------
Operating expenses:
Sales and marketing ............................. 37.5 36.2 40.5 18.2 50.7
Product development ............................. 21.0 15.1 14.4 59.2 76.2
General and administrative ...................... 13.7 12.1 12.0 29.8 68.8
Amortization of acquired
intangibles .................................. 1.0 .4 -- 140.0 NM
Acquired in-process technology .................. -- 6.9 -- (100.0) NM
--------- --------- ---------
Total operating expenses ..................... 73.2 70.7 66.9 18.1 78.1
--------- --------- ---------
Operating income (loss) ............................. (10.1) 2.2 6.3 (623.5) (40.5)
Other income (expense), net ......................... 1.8 2.1 (0.2) (0.2) NM
--------- --------- ---------
Income (loss) before income taxes ................... (8.3) 4.3 6.1 (318.2) 20.7
Income tax (provision) benefit ...................... 3.3 (3.8 (2.3) (200.2) 183.6
--------- --------- ---------
Net income (loss) ................................... (5.0)% 0.5% 3.8% NM (76.5)
========== ========= =========
NM - Not Meaningful
Comparisons of Years Ended December 31, 1999, 1998 and 1997
Revenues
Revenues are derived from software license fees, service and support fees and
hardware sales. Total revenues increased by $3.8 million, or 14.0%, to $31.1
million in 1999 from $27.2 million in 1998. Total revenues increased by $11.1
million, or 68.5%, in 1998 from $16.2 million in 1997. The increase in 1999 was
primarily due to an increase in service and support revenues. The increase in
1998 was primarily due to a greater volume of license transactions, an increase
in average order size and sales of new software modules, all of which was driven
by an increase in market awareness and acceptance of Made2Manage and the
expansion of our sales and marketing organizations. We have not historically
recognized significant annual revenues from any single customer.
Although revenues have increased in 1999 over 1998 and 1997, we believe during
the last six months, of 1999, we were adversely impacted by the industry-wide
trend of delays in new business system purchases due to the Year 2000 market
dynamics, as manufacturers delayed major business system purchases. See
"Business Environment and Risk Factors - Year 2000 Market Dynamics" for a
description of Year 2000 market dynamics and potential revenue impact.
11
Software Revenues. Software revenues decreased by $2.4 million, or 14.8%, to
$13.7 million in 1999 from $16.1 million in 1998 and increased by $5.9 million,
or 57.4%, in 1998 from $10.2 million in 1997. Software license revenues
constituted 44.2%, 59.2% and 63.4% of total revenues in 1999, 1998 and 1997,
respectively. The decrease in software license revenues in 1999 was mainly due
to a lower volume of license transactions and, to a lesser extent, a decrease in
the average contract size. The increases in software license revenues in 1998
and 1997 were primarily due to a greater volume of license transactions and, to
a lesser extent, increases in average contract size. The decreases in the
percentage of total revenues represented by software revenue resulted from the
greater rate of growth in services revenues, and, in 1999, was due in part to
the reduced demand for enterprise business systems due to industry-wide Year
2000 market dynamics.
Services Revenues. Services revenues increased by $6.0 million, or 57.9%, to
$16.2 million in 1999 from $10.3 million in 1998 and by $5.0 million, or 94.1%,
in 1998 from $5.3 million in 1997. These revenues constituted 52.3%, 37.8% and
32.8% of total revenues in 1999, 1998 and 1997, respectively. The increases in
the revenues recognized were due to (i) increased support fees from a larger
user base, (ii) greater utilization by customers of implementation, consulting
and customization services offerings and (iii) delivery of expanded educational
offerings.
Hardware Revenues. Hardware revenues increased by $252,000, or 30.5%, to $1.1
million in 1999 from $827,000 in 1998 and by $210,000, or 34.0%, in 1998 from
$617,000 in 1997. These revenues constituted 3.5%, 3.0% and 3.8% of total
revenues in 1999, 1998 and 1997, respectively. The hardware equipment sold is
bar-coding and data collection equipment necessary to utilize certain features
of Made2Manage. The increases were due to increased demand for this equipment as
a result of continued expansion of the number of customers using our software.
Costs of Revenues
Costs of Software Revenues. Costs of software revenues totaled $1.6 million,
$1.0 million and $569,000 in 1999, 1998 and 1997, respectively, resulting in
gross profits of 88.5%, 93.7% and 94.4% of software revenues, respectively. The
decrease in the gross profit in 1999 and 1998 was due to a greater proportion of
revenue generated from third-party products.
Amortization of Purchased Technology. This expense of $393,000 and $164,000 in
1999 and 1998, respectively, results from amortizing the value assigned to
Bridgeware technology and is being amortized on a straight-line basis over five
years.
Costs of Services Revenues. Costs of services revenues totaled $8.8 million,
$5.6 million and $3.3 million in 1999, 1998 and 1997, respectively, resulting in
gross profits of 46.1%, 45.2% and 36.8% of service revenues, respectively. The
cost increases were due primarily to the growth in our installed customer base
and related support services revenue, which resulted in an increase in the
staffing levels for technical support, implementation, customization and
education services. The increase in gross profits in 1998 compared to 1997 was
due to one-time costs incurred in 1997 to develop customer requirements.
Costs of Hardware. Costs of hardware totaled $735,000, $558,000 and $419,000 in
1999, 1998 and 1997, respectively. The gross profit from hardware was 31.9%,
32.5% and 32.1% of hardware revenues in 1999, 1998 and 1997, respectively.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $11.7 million,
$9.9 million and $6.5 million in 1999, 1998 and 1997, respectively, representing
37.5%, 36.2% and 40.5% of total revenues, respectively. The increase in sales
and marketing expenses in 1999 was primarily due to increased (i) staffing for
sales and marketing, (ii) marketing activities, including promotional
activities,(iii) travel expenses related to sales and marketing efforts, and, (
iv) the costs of beginning international sales efforts. The increases in sales
and marketing expenses in 1998 and 1997 were principally due to increased (i)
staffing for sales and marketing, (ii) marketing activities, including
promotional activities,(iii) travel expenses related to sales and marketing
efforts, and, ( iv) commissions as a result of increased license revenues. The
decrease in sales and marketing expenses as a percent of revenue in 1998
compared to 1997 was a result of greater productivity.
12
Product Development Expenses. Product development expenses were $6.5 million,
$4.1 million and $2.3 million in 1999, 1998 and 1997, respectively, representing
21.0%, 15.1% and 14.4% of total revenues, respectively. We did not capitalize
any software development costs during these years, since the capitalizable
portion was not significant. Product development expenses increased in 1999 as a
percent of revenue over 1998 as we continued to invest in our product to meet
competitive pressures. We expect product development costs will continue to
increase in proportion to the increase in revenues, but not as a percent of
revenue.
General and Administrative Expenses. General and administrative expenses were
$4.3 million, $3.3 million and $1.9 million in 1999, 1998 and 1997,
respectively, representing 13.7%, 12.1% and 12.0% of total revenues,
respectively. The expense increases resulted primarily from additional costs
incurred to support the growth of operations and, to a lesser extent, as a
result of the addition of personnel.
Amortization of Acquired Intangibles. This expense of $300,000 and $125,000 in
1999 and 1998, respectively, results from amortizing excess cost over net assets
acquired and assembled workforce related to the acquisition of Bridgeware.
Acquired In-Process Technology. This charge of $1.9 million in 1998 is a result
of the amounts assigned to in-process technology in connection with the
acquisition of Bridgeware.
On a pro forma basis, exclusive of the Bridgeware acquisition charge for
in-process technology and amortization of purchase related assets, results of
operations would be comparatively reported as follows.
Results excluding acquired in-process technology charge and related intangible
assets amortization (1):
Year Ended December 31,
-----------------------
1999 1998 1997
--------- --------- ---------
Total revenues.......................... $ 31,062 $ 27,242 $ 16,167
Operating income (loss) (1)............. (2,464) 2,782 1,014
Net income (loss) (1)................... (1,011) 2,255 613
Per share amounts:
Basic:
Net income (loss) per share...... $ (0.22) $ 0.52 $ 1.17
========= ========= =========
Average number of shares......... 4,600 4,331 524
========= ========= =========
Diluted:
Net income (loss) per share...... $ (0.22) $ .45 $ .25
========= ========== =========
Average number of shares......... 4,600 5,025 2,440
========= ========== =========
(1) Intangible assets amortization for purchased technology, assembled workforce
and excess cost over net assets acquired recorded in connection with the
Bridgeware acquisition, net of related tax.
Other Income (Expense), Net
Other income (expense), net was $578,000 and $579,000 of income in 1999 and
1998, respectively and $35,000 of expense in 1997, representing 1.8%, 2.1% and
(0.2)% of total revenues, respectively. Other income in 1999 and 1998
principally reflects interest earned on the proceeds of our initial public
offering, which was completed in December 1997. The other expense in 1997 was
principally interest on borrowings, which were subsequently repaid from proceeds
of the initial public offering.
Income Tax Provision (Benefit)
The income tax provision (benefit) effective rate was (40.3)% in 1999 and 33.8%,
excluding the in-process research technology charge, in 1998 and 37.4% in 1997.
The effective rate was higher for 199 compared to 1998 primarily due to the
impact of non deductible amortization. The effective rate was lower for 1998
compared to 1997 due to the impact of tax free interest included in other income
(expense), net, offset, in part, by non-deductible intangible assets
amortization in 1998. The acquired in-process technology charge is not
deductible for income tax purposes. See Note 7 of Notes to Consolidated
Financial Statements.
13
Year 2000
Compliance
The Year 2000 issue relates to whether computer systems are able to properly
recognize and process information relating to dates in and after the year 2000.
Prior to January 1, 2000, significant uncertainty existed in the software
industry concerning the potential consequences that might have occurred from the
failure of software to adequately address the Year 2000 issue.
We have not encountered any Year 2000 compliance issues relating to our
currently developed and actively marketed software products or with our internal
computer information system and non-computer systems. Our current product and
service offerings have been designed to be Year 2000 compliant (though earlier
versions of our products that are not the most currently released or are not
currently being developed may not be Year 2000 compliant). Year 2000 compliance
issues have many elements and consequences, some of which cannot be readily
detected or foreseen. We will continue to monitor our operations for Year 2000
problems. Any failure of our software product and service offerings or our
internal computer information system or non-computer systems to properly process
dates could have a material adverse effect on our business, operating results
and financial condition.
We expensed all costs related to preparation for Year 2000 issues. The total
costs of evaluation and compliance were not material.
Market Dynamics.
We believe that during 1999 we were adversely affected by Year 2000 market
dynamics, and we are uncertain of the impact Year 2000 market dynamics will have
on us during 2000. See "Business Environmental and Risk Factors Year 2000 Market
Dynamics" for a description of Year 2000 market dynamics and potential revenue
impact.
Inflation
We believe that inflation has not had a material impact on our operations.
Accounting Pronouncements
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitation of SOP 97-2 on what constitutes vendor specific objective
evidence of fair value. SOP 98-9 was effective for transaction entered into in
fiscal years beginning after March 15, 1999. We believe that our current revenue
recognition policies and practices are consistent with the provisions of the new
guidance.
Liquidity and Capital Resources
We have funded operations to date primarily through equity capital, including
the initial public offering of common stock in December 1997, debt and cash
generated from operations. As of December 31, 1999, we had $14.4 million of
cash, cash equivalents and investments resulting principally from the proceeds
of our initial public offering.
Cash flows from operations were $134,000, $5.4 million and $2.3 million in 1999,
1998 and 1997, respectively. During 1998 we used $3.5 million of cash in
connection with the acquisition of Bridgeware. Other cash usage included the
purchase of computer equipment and office furniture and aggregated $2.8 million,
$2.5 million and $1.4 million in 1999, 1998 and 1997, respectively. During 1999
we received $351,000 from the exercise of stock options and purchase of common
stock under the Stock Purchase Plan and realized tax benefits of $121,000 from
stock option exercises. Subsequent to the acquisition of Bridgeware in 1998, we
repaid $111,000 of outstanding Bridgeware indebtedness. Net borrowings decreased
$793,000 in 1997 principally as a result of the repayment of outstanding
indebtedness using the proceeds of the initial public offering.
14
At December 31, 1999, we had working capital of $11.8 million. Accounts
receivable, net of allowance for doubtful accounts, was $7.4 million and $9.1
million at December 31, 1999 and 1998, respectively. The average accounts
receivable days' outstanding was 93 days at December 31, 1999, and 87 days as of
December 31, 1998. Deferred revenue increased to $9.4 million at December 31,
1999, from $8.8 million at December 31, 1998. Deferred revenue principally
relates to support agreements or contracted services, and the current portion of
deferred revenue is expected to be recognized in revenue during the next twelve
months. Deferred revenue increased primarily as a result of high support renewal
rates from the installed base of customers and from sales of new systems that
contain support and service components which are recognized on a straight-line
basis over the support period or when the service is delivered.
We have a revolving credit agreement with a commercial bank which expires on
March 31, 2000, borrowings under which bear interest at the prime rate (8.50% at
December 31, 1999). Loans under the revolving credit agreement are limited, in
the aggregate, to the lesser of $2 million and a "borrowing base" amount. As of
December 31, 1999, we satisfied the borrowing base requirements and were
eligible to borrow up to the maximum of $2.0 million. We have not borrowed under
the revolving line of credit. We expect to renew our line of credit April 1,
2000.
We believe that cash and cash equivalents, cash flow from operations and credit
commitments will be sufficient to meet our currently anticipated working capital
and capital expenditure requirements at least through 2000.
Business Environment and Risk Factors
In addition to other information contained in this report, the following factors
could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward looking
statements.
Fluctuations of Quarterly Operating Results; Seasonality
We have experienced in the past, and expect to experience in the future,
significant fluctuations in quarterly operating results. A substantial portion
of our software license revenue in each quarter is from licenses signed and
product shipped in that quarter, and such revenues historically have been
recorded largely in the third month of a quarter, with a concentration of
revenues mostly in the last week of that third month. Accordingly, our quarterly
results of operations are difficult to predict, and delays in closings of sales
near the end of a quarter or product delivery could cause quarterly revenues
and, to a greater degree, net income to fall substantially short of anticipated
levels. In addition, we have experienced a seasonal pattern in our operating
results, with the fourth quarter typically having the highest total revenues and
operating income and the first quarter having historically reported lower
revenues and operating income compared to the fourth quarter of the preceding
year.
Other factors, many of which are beyond our control, that may contribute to
fluctuations in quarterly operating results include the size of individual
orders, the timing of product introductions or enhancements by us and our
competitors, competition and pricing in the manufacturing software industry,
market acceptance of new products, reduction in demand for existing products,
the shortening of product life cycles as a result of new product introductions
by us or our competitors, product quality problems, personnel changes,
conditions or events in the manufacturing industry, and general economic
conditions.
The sales cycle for Made2Manage typically ranges from three to nine months.
However, license signing may be delayed for a number of reasons outside of our
control. Since software is generally shipped as orders are received, we have
historically operated without significant backlog.
Because our operating expenses are based on anticipated revenue levels and a
high percentage of our expenses are relatively fixed in the short term, small
variations in the timing of revenue recognition can cause a significant
fluctuation in operating results from quarter to quarter and may result in
unanticipated quarterly earnings shortfalls or losses. In addition, we currently
intend to increase operating expenses in anticipation of continued growth and to
fund expanded product development efforts. To the extent such expenses precede,
or are not subsequently followed by, increased revenues, our business, financial
condition and results of operations could be materially and adversely affected.
15
Year 2000 Market Dynamics
We believe the Year 2000 planning cycle reduced demand for enterprise business
systems in 1999. In addition, each customer's evaluation of its need to achieve
Year 2000 compliance with other internal systems potentially lengthened the
sales cycle. We believe that in 1999 certain customers and potential customers
were engaged in testing and correcting system Year 2000 problems, and such
customers may have chosen to defer system investments during 1999, negatively
impacting our revenues. Additionally, prior year sales may have been increased
due to customers' need to address Year 2000 issues. Such Year 2000 demand most
likely was reduced in 1999 due to the lead time required to implement new
systems, possibly negatively impacting our revenues. Our sales cycles may
lengthen in 2000 and future years due to lessened urgency of customers' system
investment decisions. Because Year 2000 related impacts on customer purchasing
decisions were unprecedented, we have a limited ability to determine the impact
of the Year 2000 market dynamics on our quarter-to-quarter revenues in 2000.
Product and Market Concentration
Our revenues are currently derived from licenses of Made2Manage, including
optional modules, licensing of Bridgeware's Advanced Planning and Scheduling
products and third-party software, and related support, services and hardware.
In the near term, Made2Manage and related services are expected to continue to
account for substantially all of the our revenues. Accordingly, any event that
adversely affects the sale of Made2Manage, such as competition from other
products, significant quality problems, incompatibility with third party
hardware or software products, negative publicity or evaluation, reduced market
acceptance of, or obsolescence of the hardware platforms on, or software
environments in, which Made2Manage operates, could have a material adverse
effect on our business, financial condition and results of operations.
Our business depends substantially upon the software expenditures of small and
midsize manufacturers, which in part depend upon the demand for such
manufacturers' products. A recession or other adverse event affecting
manufacturing industries in the United States could impact such demand, forcing
manufacturers in our target market to curtail or postpone capital expenditures
for business information systems. Any adverse change in the amount or timing of
software expenditures by our target customers could have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Third Party Technologies
Made2Manage uses a variety of third party technologies, including operating
systems, tools and other applications developed and supported by Microsoft
Corporation ("Microsoft"). There can be no assurance that Microsoft will
continue to support the operating systems, tools and other applications utilized
by Made2Manage or that they will continue to be widely accepted in our target
market. Made2Manage relies heavily on Microsoft's Visual Studio, and there can
be no assurance that Microsoft will not discontinue or otherwise fail to support
Visual Studio or any of its components. In addition, we use a number of other
programming tools and applications, including ActiveX, OLE, ODBC, OLEDB and
Internet Information Server.
We sublicense various third party products, including Microsoft Visual FoxPro,
Microsoft Project, products from Powerway, Best Software, and FRx, and bar code
hardware and software. There can be no assurance that these third party vendors
will continue to support these technologies or that these technologies will
retain their level of acceptance among manufacturers in our target market. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and results of operations.
Product Development
Our growth and future financial performance depend in part upon our ability to
enhance existing applications and to develop and introduce new applications to
incorporate technological advances that satisfy customer requirements or
expectations. As a result of the complexities inherent in product development,
there can be no assurance that either improvements to Made2Manage or
applications that we develop in the future will be delivered on a timely basis
or ultimately accepted in the market. Any failure by us to anticipate or respond
adequately to technological development or end-user requirements, or any
significant delays in product development or introduction, could damage our
competitive position and have a material adverse effect on our business,
financial condition and results of operations.
16
Dependence on Key Personnel
Our success depends to a significant extent upon a number of key employees,
including members of senior management. No employee is subject to an employment
contract. Our ability to implement business strategy is substantially dependent
on our ability to attract, on a timely basis, and retain skilled personnel,
especially sales, service, support and development personnel. Competition for
such personnel is intense, and we compete for such personnel with numerous
companies, including larger, more established companies with significantly
greater financial resources. There can be no assurance that we will be
successful in attracting and retaining skilled personnel. The loss of the
services of one or more of the key employees or the failure to attract and
retain qualified employees could have a material adverse effect on our business,
financial condition and results of operations.
Management of Growth; International Expansion
We have experienced rapid growth in our business and operations. While we have
managed this growth to date, there can be no assurance that we will be able to
effectively do so in the future. Our ability to manage growth successfully is
contingent on a number of factors including our ability to implement and improve
operational, financial and management information systems and to motivate and
effectively manage employees. While we plan to distribute Made2Manage in
international markets, we have no significant experience in international
markets and there can be no assurance that such expansion can be successfully
accomplished. If we are unable to manage future growth effectively, our
business, financial condition and results of operations would be materially and
adversely affected.
Risks Associated with Acquisitions
As part of our business strategy, we expect to review acquisition prospects that
would complement our existing product offerings, augment market coverage or
enhance technological capabilities or that may otherwise offer growth
opportunities. Acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect operating results and/or the price of
our common stock. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations, technologies and products, diversion of
management's attention from other business concerns, risks of entering markets
in which we have no or limited prior experience and potential loss of key
employees of acquired organizations. No assurance can be given as to our ability
to successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure of to do so could have a
material adverse effect on our business and financial condition or results of
operations.
Insufficient Customer Commitment
To obtain the benefits of Made2Manage, customers must commit resources to
implement and manage the product and to train their employees in the use of the
product. The failure of customers to commit sufficient resources to those tasks
or to carry them out effectively could result in customer dissatisfaction with
Made2Manage. If a significant number of customers became dissatisfied, our
reputation could be tarnished and our business, financial condition and results
of operations could be materially and adversely affected.
Competition
The business management applications software market is intensely competitive,
rapidly changing and significantly affected by new product offerings and other
market activities. We face competition from a variety of software vendors,
including application software vendors, software tool vendors and relational
database management systems vendors. A number of companies offer Windows
compatible products that are directed at the market for ERP systems. The
technologies we use to develop Made2Manage are generally available and widely
known and include technologies developed by Microsoft. There can be no assurance
that competitors will not develop products based on the same technology upon
which Made2Manage is based.
17
Our competitors include a large number of software and system vendors, many of
which are public companies. In addition, there are numerous international,
national and regional vendors that offer alternative systems. Several software
companies that have traditionally marketed ERP systems to larger manufacturers
have announced initiatives to market ERP systems to midsize manufacturers.
Compared to us, many of the existing competitors, as well as a number of
potential competitors, have significantly greater financial, technical and
marketing resources and a larger installed base of customers. There can be no
assurance that such competitors will not offer or develop products that are
superior to Made2Manage or that achieve greater market acceptance. If such
competition were to result in significant price declines or loss of market share
for Made2Manage, our business, financial condition and results of operation
would be adversely affected.
Relationships with Value Added Resellers
We distribute our software products through a direct sales force and a network
of value added resellers ("VARs"). A significant portion of licenses of
Made2Manage sold to new customers is sold by VARs. If some or all of the VARs
reduce their efforts to sell Made2Manage, promote competing products or
terminate their relationships with us, our business, financial condition and
results of operation would be materially and adversely affected. Furthermore,
VARs frequently develop strong relationships with their customers, so if VARs
criticize us or our products to their customers, our reputation could be
damaged, which could have a material adverse effect on our business, financial
condition or results of operations.
Product Liability and Lack of Insurance
We market, sell and support software products used by manufacturers to manage
their business operations and to store substantially all of their operational
data. Software programs as complex as those we offer may contain undetected
errors, despite testing, which are discovered only after the product has been
installed and used by customers. There can be no assurance that errors will not
be found in existing or future releases of our software or that any such errors
will not impair the market acceptance of these products. A customer could be
required to cease operations temporarily and some or all of its key operational
data could be lost or damaged if its information systems fail as the result of
human error, mechanical difficulties or quality problems in Made2Manage or third
party technologies utilized by Made2Manage. We have insurance covering product
liability or damages arising from negligent acts, errors, mistakes or omissions;
however there can be no assurance that this insurance will be adequate. A claim
against us, if successful and of a sufficient magnitude, could have a material
adverse effect on our business, financial condition and results of operations.
Dependence on Proprietary Rights; Risk of Infringement
We rely primarily on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect our proprietary rights. There can be no assurance that these
protections will be adequate or that competitors will not independently develop
products incorporating technology that is substantially equivalent or superior
to our technology. Furthermore, other than pending United States patent
applications for software included in Made2Manage related to the Material
Requirements Planning regeneration feature and a navigational interface for the
enterprise, the we have no patents or patent applications pending, and existing
copyright laws afford only limited protection. In the event that we are unable
to protect our proprietary rights, our business, financial condition and results
of operations could be materially and adversely affected.
There can be no assurance that we will not be subject to claims that our
technology infringes on the intellectual property of third parties, that we
would prevail against any such claims or that a licensing agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim. Any such claim, with or without merit, would likely be time consuming and
expensive to defend and could have a material adverse effect on our business,
financial condition and results of operations.
18
Substantial Control by Single Shareholder
As of March 1, 2000, Hambrecht & Quist ("H&Q") and its affiliates, as a group,
beneficially owned approximately 20.7% of our outstanding common stock. As a
result, H&Q and its affiliates will be able to exercise significant influence
over all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Concentration of
stock ownership could also have the effect of delaying or preventing a change in
control.
Effect of Antitakeover Provisions
Our Amended and Restated Articles of Incorporation (the "Articles") authorize
the Board of Directors to issue, without shareholder approval, up to two million
shares of preferred stock with such rights and preferences as the Board of
Directors may determine in its sole discretion. The Made2Manage Systems, Inc.
Stock Option Plan (the "Option Plan") provides that, unless the Board of
Directors or a committee of the our Board of Directors decides to the contrary,
all outstanding options vest and become immediately exercisable upon a merger or
similar transaction. In addition, certain provisions of Indiana law could have
the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control. Further, certain
provisions of Indiana law impose various procedural and other requirements that
could make it more difficult for shareholders to effect certain corporate
actions. The foregoing provisions could discourage an attempt by a third party
to acquire a controlling interest without the approval of management even if
such third party were willing to purchase shares of common stock at a premium
over its then market price.
Possible Volatility of Stock Price
The trading price of our common stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new applications by us or our competitors, the
failure of earnings to meet the expectations of securities analysts and
investors, as well as other events or factors. In addition, the stock market has
from time to time experienced extreme price and volume fluctuations which have
particularly affected the market price of many high technology companies and
which often have been unrelated to the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of the
common stock.
Shares Eligible for Future Sale
The sale of a substantial number of shares of our common stock in the public
market could adversely affect the market price of the common stock. As of March
1, 2000, we had 4,726,563 shares of common stock outstanding, of which 976,793
shares of common stock are "Restricted Shares," which are subject to volume and
other limitations of Rule 144 and Rule 701 restrictions under the Securities
Act. As of March 1, 2000, there were options outstanding to purchase 1,752,475
shares of common stock at a weighted average price of $7.16 share under
Made2Manage Systems, Inc. Stock Option Plan (the "Option Plan"), of which
options to purchase 878,571 shares of common stock were then vested and
exercisable. We have reserved 195,437 shares of common stock for future grant
under the Option Plan. We have reserved 100,000 shares of common stock for
issuance under the Made2Manage Systems, Inc. Employee Stock Purchase Plan (the
"Stock Purchase Plan"). As of March 1, 2000, 28,932 shares have been issued
under the Stock Purchase Plan. We filed registration statements registering
shares of common stock issued pursuant to the Option Plan and Stock Purchase
Plan on January 30, 1998. Accordingly, shares issued pursuant to these plans
will be saleable in the public market upon issuance, subject to certain
restrictions.
Absence of Dividends
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain earnings, if any, for the
development of our business.
19
Investment Risk
Despite the high credit ratings on our cash equivalents and investments, there
is no assurance such agencies will not default on their obligations which could
result in losses of principal and accrued interest.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
20
ITEM 8. Financial Statements and Supplementary Data.
Page
Report of Independent Accountants........................................ 22
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 23
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997...................................................... 24
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997................................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997...................................................... 26
Notes to Consolidated Financial Statements............................... 27
21
Report of Independent Accountants
The Board of Directors and Shareholders
Made2Manage Systems, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Made2Manage Systems, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 27, 2000
22
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
--------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 12,610 $ 15,496
Marketable securities........................................................... 1,800 1,150
Trade accounts receivable, net of allowance for doubtful accounts of
$564 and $602 in 1999 and 1998, respectively................................. 7,376 9,113
Prepaid expenses and other...................................................... 784 796
Income taxes, receivable........................................................ 849 --
Deferred income taxes........................................................... 737 551
--------- ---------
Total current assets......................................................... 24,156 27,106
Property and equipment, net......................................................... 4,795 3,509
Purchased technology, net........................................................... 1,410 1,803
Excess of cost over net assets acquired and other intangibles, net.................. 1,176 1,476
Deferred income taxes............................................................... 87 --
--------- ---------
Total assets................................................................. $ 31,624 $ 33,894
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 1,331 $ 990
Accrued liabilities............................................................. 895 1,411
Accrued compensation and related expenses....................................... 1,122 2,256
Deferred revenue................................................................ 8,986 7,961
--------- ---------
Total current liabilities.................................................... 12,334 12,618
Deferred revenue.................................................................... 419 821
Deferred income taxes............................................................... -- 517
--------- ---------
Total liabilities............................................................ 12,753 13,956
--------- ---------
Commitments (Note 8)
Shareholders' Equity:
Preferred stock, no par value; 2,000,000 shares authorized, no shares issued and
outstanding in 1999 and 1998................................................. -- --
Common stock, no par value; 10,000,000 shares authorized, 4,652,168 and
4,523,278 shares issued and outstanding in 1999 and 1998, respectively....... 21,889 21,417
Accumulated deficit............................................................. (3,018) (1,479)
--------- ---------
Total shareholders' equity................................................... 18,871 19,938
--------- ---------
Total liabilities and shareholders' equity................................... $ 31,624 $ 33,894
========= =========
See accompanying notes.
23
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Revenues:
Software....................................... $ 13,746 $ 16,130 $ 10,250
Services....................................... 16,237 10,285 5,300
Hardware....................................... 1,079 827 617
--------- --------- ---------
Total revenues.............................. 31,062 27,242 16,167
--------- --------- ---------
Costs of revenues:
Software....................................... 1,583 1,013 569
Amortization of purchased technology........... 393 164 --
Services....................................... 8,756 5,641 3,347
Hardware....................................... 735 558 419
--------- --------- ---------
Total costs of revenues..................... 11,467 7,376 4,335
--------- --------- ---------
Gross profit................................ 19,595 19,866 11,832
--------- --------- ---------
Operating expenses:
Sales and marketing............................ 11,651 9,855 6,541
Product development............................ 6,533 4,104 2,329
General and administrative..................... 4,268 3,289 1,948
Amortization of acquired intangibles........... 300 125 --
Acquired in-process technology................. -- 1,890 --
--------- --------- -------
Total operating expenses.................... 22,752 19,263 10,818
--------- --------- ---------
Operating income (loss)............................ (3,157) 603 1,014
Other income (expense), net........................ 578 579 (35)
--------- --------- ---------
Income (loss) before income taxes.................. (2,579) 1,182 979
Income tax provision (benefit)..................... (1,040) 1,038 366
--------- --------- ---------
Net income (loss).................................. $ (1,539) $ 144 $ 613
========= ========= =========
Per share amounts:
Basic:
Net income (loss) per share................. $ (0.33) $ 0.03 $ 1.17
========= ========= =========
Average number of shares.................... 4,600 4,331 524
========= ========= =========
Diluted:
Net income (loss) per share................. $ (0.33) $ 0.03 $ 0.25
========= ========== =========
Average number of shares.................... 4,600 5,025 2,440
========= ========== =========
See accompanying notes.
24
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
Convertible Preferred Stock
--------------------------------------------------------------------------------------------
Series A Series B Series C Series D
--------------------------------------------------------------------------------------------
Number Number Number Number
of of of of
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
Balances, December 31, 1996 79,137 $ 178 255,331 $ 471 563,580 $ 2,234 581,776 $ 1,159
Issuance of common stock -- -- -- -- -- -- -- --
Exercise of warrants -- -- -- -- 14,063 56 -- --
Conversion of preferred stock (79,137) (178) (255,331) (471) (577,643) (2,290) (581,776) (1,159)
Exercise of stock options -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balances, December 31, 1997 -- -- -- -- -- -- -- --
Issuance of common stock for
Bridgeware, Inc. acquisition -- -- -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- -- -- --
Tax benefits of stock option exercises -- -- -- -- -- -- -- --
Issuance of common stock under
Stock Purchase Plan -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balances, December 31, 1998 -- -- -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- -- -- --
Tax benefits of stock option exercises -- -- -- -- -- -- -- --
Issuance of common stock under
Stock Purchase Plan -- -- -- -- -- -- -- --
Net Income (loss) -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balances, December 31, 1999 -- $ -- -- $ -- -- $ -- -- $ --
============================================================================================
Common Stock
------------------------
Number Total
of Accumulated Shareholders'
Shares Amount Deficit Equity
-------------------------------------------------------
Balances, December 31, 1996 376,544 $ 310 $ (2,236) $ 2,116
Issuance of common stock 2,310,937 15,469 -- 15,469
Exercise of warrants -- -- -- 56
Conversion of preferred stock 1,493,885 4,098 -- --
Exercise of stock options 33,437 50 -- 50
Net income -- -- 613 613
--------------------------------------------------------
Balances, December 31, 1997 4,214,803 19,927 (1,623) 18,304
Issuance of common stock for
Bridgeware, Inc. acquisition 91,135 997 -- 997
Exercise of stock options 210,587 219 -- 219
Tax benefits of stock option exercises -- 211 -- 211
Issuance of common stock under
Stock Purchase Plan 6,753 63 -- 63
Net income -- -- 144 144
--------------------------------------------------------
Balances, December 31, 1998 4,523,278 21,417 (1,479) 19,938
Exercise of stock options 106,711 177 -- 177
Tax benefits of stock option exercises -- 121 -- 121
Issuance of common stock under
Stock Purchase Plan 22,179 174 -- 174
Net Income (loss) -- -- (1,539) (1,539)
--------------------------------------------------------
Balances, December 31, 1999 4,652,168 $21,889 $ (3,018) $18,871
========================================================
See accompanying notes.
25
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
1999 1998 1997
--------- --------- ---------
Operating activities:
Net income (loss) ................................................... $ (1,539) $ 144 $ 613
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Acquired in-process technology.................................... -- 1,890 --
Depreciation of property and equipment........................... 1,564 1,012 419
Amortization of purchased technology.............................. 393 164 --
Amortization of cost over net assets acquired and other
intangibles.................................................... 300 125 --
Provision for doubtful accounts................................... 649 650 413
Loss on disposition of property and equipment..................... (8) 34 --
Deferred income taxes............................................. (790) 7 344
Changes in assets and liabilities:
Trade accounts receivable...................................... 1,088 (3,731) (2,762)
Income taxes receivable........................................ (849) -- --
Prepaid expenses and other..................................... 12 (348) (268)
Accounts payable............................................... 341 240 130
Accrued liabilities............................................ (516) 691 115
Accrued compensation and related expenses...................... (1,134) 1,066 637
Deferred revenue............................................... 623 3,453 2,617
--------- --------- --------
Net cash provided by operating activities......................... 134 5,397 2,258
--------- --------- --------
Investing activities:
Acquisition of Bridgeware, Inc., net of cash acquired................ -- (3,451) --
Purchases of property and equipment.................................. (2,842) (2,487) (1,374)
Purchases of marketable securities................................... (9,900) (5,580) --
Sales of marketable securities....................................... 9,250 4,430 --
--------- --------- --------
Net cash used in investing activities............................. (3,492) (7,088) (1,374)
---------- --------- --------
Financing activities:
Proceeds from issuance of common stock, net of issuance costs........ 174 63 15,469
Proceeds from long-term obligations.................................. -- -- 684
Proceeds from exercise of warrants................................... -- -- 56
Proceeds from exercise of stock options.............................. 177 219 50
Tax benefits of stock option exercises............................... 121 211 --
Payments on long-term obligations.................................... -- (111) (1,477)
--------- --------- --------
Net cash provided by financing activities......................... 472 382 14,782
--------- --------- --------
Change in cash and cash equivalents...................................... (2,886) (1,309) 15,666
Cash and cash equivalents, beginning of period........................... 15,496 16,805 1,139
--------- --------- --------
Cash and cash equivalents, end of period................................. $ 12,610 $ 15,496 $ 16,805
========= ========= ========
Supplemental disclosures:
Cash paid for:
Interest expense.................................................. $ -- $ 4 $ 100
Income taxes...................................................... 1,038 403 34
Noncash investing and financing:
Conversion of convertible preferred stock to common stock......... -- -- 4,098
Issuance of 91,135 shares of common stock for Bridgeware, Inc.
acquisition ................................................... -- 997 --
See accompanying notes.
26
MADE2MANAGE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Made2Manage Systems, Inc. (the "Company") develops, markets and supports
business management systems for small and midsize manufacturing companies
located primarily in the United States. The Company is dependent upon its
primary product, Made2Manage for Windows, which is a fully integrated, Microsoft
Windows based business software system for manufacturing companies.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash Equivalents and Marketable Securities
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Marketable securities consist of
debt instruments with maturities between three and twelve months and are
classified as available-for-sale. Cash equivalents and marketable securities are
valued at cost which approximates market value.
Property and Equipment
Property and equipment are stated at cost. Leasehold improvements are amortized
over the lesser of the term of the related lease or estimated useful life. All
other assets are depreciated using the straight-line method over their estimated
useful lives which range from two to ten years.
Computer Software Development Costs
The Company accounts for computer software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Costs incurred
prior to establishing the technological feasibility of computer software
products and enhancements to such products are expensed as incurred. Software
development costs incurred by the Company following technological feasibility,
defined by the Company as the existence of a working model of the product, and
prior to the time the product is available for general release to customers,
have not been material and, therefore, have not been capitalized in 1999, 1998
or 1997.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue from the sale of its software and hardware upon
receipt of an executed sales agreement and shipment to the customer provided
there are no significant remaining vendor obligations to be fulfilled and
collectibility is probable in accordance with American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue Recognition".
Services revenue includes support, education and consulting services. The
Company provides software support and product upgrades to its customers through
separately priced agreements. These support revenues are recognized on a
straight-line basis over the term of the agreement. Revenues from technical
training and consulting services are recognized as provided to customers.
27
Purchased Technology
Purchased technology is being amortized on a straight-line basis over a five
year period.
Intangible Assets
Excess of cost over net assets acquired is amortized on a straight-line basis
over the five year period expected to be benefited. Adjustments to the carrying
value of excess of cost over net assets acquired are made if the sum of expected
future net cash flows from the business acquired is less than carrying value.
Other intangible assets, including the value assigned to the workforce at
Bridgeware, are amortized on a straight-line basis over seven years.
Net Income (loss) Per Share
Earnings per share ("EPS") is determined in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share", and
is based upon the weighted average number of common and common equivalent shares
outstanding for the period. Diluted common equivalent shares consist of
convertible preferred stock (using the "if converted" method), stock options and
warrants (using the treasury stock method) as prescribed by SFAS No. 128. Common
equivalent shares are included in the diluted earnings per share calculation
when dilutive. Under the treasury stock method the assumed proceeds from the
exercise of stock options and warrants are applied solely to the repurchase of
common stock.
Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock
Issued to Employees," and related interpretations, and follows disclosure
provisions of Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-based Compensation." The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures
of SFAS No. 123.
Recent Accounting Pronouncements
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitation of SOP 97-2 on what constitutes vendor specific objective
evidence of fair value. As the Company's revenue recognition policies and
practices were consistent with SOP 98-9, the new guidance did not have an impact
on the Company.
28
2. Acquisition
On August 3, 1998, the Company acquired all of the outstanding capital stock of
Bridgeware, a privately held software company that develops, markets and
supports Advanced Planning and Scheduling software and related services
throughout North America, South America and Europe. The transaction was
consummated for approximately $3.5 million in cash and 91,135 shares of the
Company's common stock with a market value of $997,000 at the date of
acquisition.
The acquisition was accounted for using the purchase method. The purchase price
was allocated to identifiable tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values. Amounts allocated to
acquired in-process technology have been expensed at the time of acquisition.
The consolidated statements of operations reflect the results of operations of
the purchased company since the effective date of the acquisition. Pro forma
statements are not shown as they would not differ materially from reported
results.
To determine the fair value of the acquired in-process technology, the Company
considered three traditional approaches of value: the cost approach, the market
approach and the income approach. The Company relied primarily on the income
approach, whereby fair market value is a function of the future revenues
expected to be generated by an asset, net of all allocable expenses and charges
for the use of the contributory assets. The future net revenue stream is
discounted to present value based upon the specified level of risk associated
with achieving the forecasted asset earnings. The resulting value is further
reduced to reflect the percentage of completion of development as of the date an
acquisition. The income approach focuses on the income production capability of
the acquired assets and best represents the present value of the future economic
benefits expected to be derived from these assets.
The Company determined that the acquired in-process technologies had not reached
technological feasibility based on the status of design and development
activities that required future refinement and testing. The development
activities required to complete the acquired in-process technologies included
additional coding, quality assurance procedures and customer beta testing. Based
on appraisal amounts, the Company recorded a charge for acquired in-process
technology of $1.9 million.
The Company also acquired $785,000 in net tangible assets and assumed
liabilities of $844,000. The allocation of the remaining purchase price resulted
in an excess of the purchase price over the fair values of the net assets
acquired of approximately $3.6 million and a related deferred tax liability of
$862,000. These intangible assets relate to purchased technology and assembled
workforce and the balance of the purchase price has been assigned to excess of
cost over net assets acquired, all of which will be amortized on a straight-line
basis over useful lives of five or seven years.
The balances of the intangible assets are as follows (in thousands):
December 31,
---------------------
1999 1998
--------- ---------
Purchased technology......................... $ 1,967 $ 1,967
Less accumulated amortization................ 557 164
--------- ---------
$ 1,410 $ 1,803
========= =========
Excess cost over net assets acquired......... $ 1,237 1,237
Less accumulated amortization................ 351 103
--------- ---------
$ 886 $ 1,134
========= =========
Assembled workforce.......................... $ 364 $ 364
Less accumulated amortization................ 74 22
--------- ---------
$ 290 $ 342
========= =========
29
3. Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents and marketable securities are summarized as follows
(in thousands):
December 31,
--------------------
1999 1998
--------- ---------
Cash and cash equivalents:
Cash..................................... $ 1,484 $ 2,452
U.S Treasury Securities and obligations
of U.S. government agencies.......... 494 1,450
Municipal debt securities................ 6,800 7,575
Corporate debt securities................ 3,800 3,900
Other.................................... 32 119
--------- ---------
$ 12,610 $ 15,496
Marketable securities:
Municipal debt securities................ -- 400
Corporate debt securities................ 1,800 750
--------- ---------
$ 1,800 $ 1,150
========= =========
4. Property and Equipment
Property and equipment are summarized as follows (in thousands):
December 31,
--------------------
1999 1998
--------- ---------
Software and computer equipment...................$ 5,283 $ 3,550
Furniture and equipment........................... 1,853 1,149
Leasehold improvements............................ 739 390
--------- ---------
7,875 5,089
Less accumulated depreciation and amortization.... 3,080 1,580
--------- ---------
$ 4,795 $ 3,509
========= =========
The estimated lives for property and equipment area as follows: software and
computer equipment - two to five years; furniture and equipment - seven to ten
years; and leasehold improvements - the life of the lease, none of which have a
remaining life of greater than five years.
5. Line of Credit Agreement
The Company has a $2,000,000 working capital facility with a bank which had no
amounts outstanding at December 31, 1999 and 1998. This line of credit expires
March 31, 2000. Interest is at the prime rate (8.50% at December 31, 1999). We
expect to renew our line of credit April 1, 2000.
6. Shareholders' Equity
In December 1997, the Company completed an initial public offering of 2,310,937
shares of common stock at $7.50 per share, resulting in net proceeds of
$15,469,000 after deducting underwriting discounts and other costs. All issued
and outstanding Series A, B, C and D convertible preferred stock were
automatically converted into an aggregate of 1,493,885 shares of common stock
upon the completion of the offering.
Preferred Stock
Authorized preferred stock is issuable in series under such terms and conditions
as the Board of Directors may determine.
30
Stock Warrants
The Company issued warrants that entitled the holders to purchase 14,063 shares
of series C preferred stock at an exercise price of $4.00 per share. In
conjunction with the initial public offering of the Company's common stock these
warrants were exercised and the series C preferred stock was converted to common
stock.
Common Stock Options
The Company's 1999 Option Plan, was adopted in April 1999, and authorizes the
granting of incentive and nonqualified stock options. No additional options will
be granted under the Company's previous Option Plan which was originally adopted
in 1990. Initially 200,000 shares were reserved for issuance under the 1999 Plan
with automatic increases on January 1 of each year equal to 7% of the Base
Shares. The Base Shares are equal to the sum of ( i) the number of shares of the
Company's Common Stock outstanding on the last day of the preceding fiscal year
and ( ii) the number of shares of Common Stock reserved for issuance upon the
exercise of options outstanding on the last day of the preceding fiscal year.
The exercise price of the options must not be less than the fair market value of
the common stock for options. Options granted under the Option Plan generally
vest over four years, with 25% exercisable one year from date of grant and the
remaining 75% at the rate of 1/48th of the amount granted in each of the next 36
consecutive months. Options granted prior to 1996 generally expire five years
from the date of grant and options granted subsequently expire ten years from
date of grant. The 1999 Plan terminates in 2009.
At December 31, 1999, options for 22,400 shares of common stock were available
for future grants under the plan. In accordance with the provisions of the plan,
the number of shares available for grant automatically increased by 436,387
shares to 458,787 shares on January 1, 2000.
Activity in the option plan is summarized as follows:
Years Ended December 31,
--------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ---------- -------- --------- --------
Outstanding at begining of year.... 1,366,617 $ 5.88 1,104,931 $ 3.50 856,368 $ 2.45
Granted........................ 417,250 9.35 516,450 9.01 304,000 6.17
Exercised...................... (106,711) 1.66 (214,700) 1.21 (33,437) 1.49
Forfeited...................... (95,218) 8.48 (40,064) 5.49 (22,000) 2.94
----------- ---------- ---------
Outstanding at end of year.......... 1,581,938 6.92 1,366,617 5.88 1,104,931 3.50
=========== ========== =========
Options exercisable at end of year.. 842,123 5.26 534,900 3.45 455,797 1.85
31
Options outstanding at December 31, 1999, are summarized as follows:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------- ------------- ----------- -------------- ------------------ ------
$0.20 - 0.40 62,500 3.09 years $ 0.21 62,500 $0.21
3.50 - 4.40 350,669 6.11 3.54 335,580 3.53
5.30 - 5.75 244,524 7.05 5.65 189,440 5.62
5.81 - 8.88 581,345 8.54 7.61 207,111 7.74
9.13 - 13.31 342,900 8.88 11.36 47,492 11.66
The Company applies APB Opinion 25 and related Interpretations in accounting for
its option plan, and no compensation expense has been recognized. The following
table presents pro forma net income had compensation cost been determined based
on the fair value at the grant date for awards under the plan in accordance with
SFAS No. 123.
1999 1998 1997
--------- --------- -------
Pro forma net income (loss) (in thousands)............. $ (2,814) $ (655) $ 234
Pro forma diluted net income (loss) per share.......... (0.61) (0.13) 0.10
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: risk-free
interest rate of 5.5% for 1999 and 1998 and 6.0% for 1997; expected life of one
year beyond vesting date; and volatility of 65% for 1999, 75% for 1998 and 60%
for 1997. In accordance with SFAS No. 123, only options granted in 1995 and
subsequently are included in these calculations and, accordingly, the
disclosures are not likely to be representative of the effect on pro forma net
income for future years because awards vest over several years and the
disclosures do not take into consideration pro forma expense related to grants
made prior to 1995 and additional awards that generally are made each year.
Based on the Black-Scholes option-pricing model, the fair value at grant date of
options granted for the years ended December 31 were $6.50 in 1999, $5.03 in
1998, and $2.91 for 1997.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("Stock Purchase Plan") was
established in October 1997 and 100,000 shares of the Company's common stock
were reserved for issuance. Under the Stock Purchase Plan, employees are granted
the right to purchase shares of common stock at a price per share that is equal
to the greater of (i) 85% of the beginning of the quarter market price or (ii)
90% of the average market price during the quarter. Purchases are made at the
end of each fiscal quarter. Shares issued under this plan for the year ended
December 31, 1999 and 1998, totaled 28,932 and 6,753, respectively.
7. Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
use of the asset and liability approach of accounting for deferred income taxes.
Deferred tax assets and liabilities are recognized on differences between the
book and tax bases of assets and liabilities using presently enacted tax rates.
The provision (benefit) for income taxes is the tax payable or recoverable for
the period and the change during the period in deferred tax assets and
liabilities.
32
The components of the income tax provision (benefit) are as follows (in
thousands):
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Current:
Federal.............. $ (296) $ 711 $ --
State................ (75) 320 22
---------- --------- ---------
(371) 1,031 22
---------- --------- ---------
Deferred:
Federal.............. (600) (10) 293
State................ (69) 17 51
---------- --------- ---------
(669) 7 344
---------- --------- ---------
$ (1,040) $ 1,038 $ 366
========== ========= =========
The provision for income taxes differs from the federal statutory tax rate as
follows:
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Federal tax at statutory rate.......................... $ (877) $ 401 $ 333
State income tax, net of federal tax benefit........... (119) 223 48
Non-deductible acquired in-process technology.......... -- 643 22
Non-deductible amortization and other expenses......... 141 35 --
Non-taxable interest income............................ (138) (125) --
Research and experimentation credit.................... (168) (211) (50)
Business meals and entertainment....................... 51 35 20
Other.................................................. 70 37 (7)
--------- --------- ---------
$ (1,040) $ 1,038 $ 366
========== ========= =========
33
Deferred tax assets and liabilities are comprised of the following (in
thousands):
December 31,
--------------------
1999 1998
--------- ---------
Deferred tax assets:
Net operating loss carryforward............................... $ 441 $ 132
Research and experimentation tax credits carryforward......... 457 75
Minimum tax credits carryforward.............................. 224 --
Accounts receivable allowance................................. 207 223
Accrued vacation pay.......................................... 127 131
Deferred revenue.............................................. 155 304
Other......................................................... 21 --
--------- ---------
1,632 865
Deferred tax liabilities:
Depreciation.................................................. (179) (27)
Purchased technology.......................................... (521) (667)
Workforce..................................................... (108) (127)
Deferred state tax............................................ -- (10)
--------- ---------
(808) (831)
---------- ---------
$ 824 $ 34
========= =========
Recorded as:
Current deferred income tax asset............................. $ 737 $ 551
Long-term deferred income tax asset (liability)............... 87 (517)
--------- ---------
$ 824 $ 34
========= =========
As of December 31, 1999, the Company had net operating loss carryforwards of
$1,032,000 for federal and $3,047,000 for state income tax reporting purposes
which expire in 2010, research and experimentation tax credits of $457,000 that
expire commencing in 2009, and minimum tax credit carryforwards of $224,000.
8. Operating Leases
The Company has certain commitments, principally for office space, under
long-term operating leases. Future minimum lease payments required under these
noncancellable operating leases are as follows (in thousands):
Payable in:
2000........................................... $ 1,117
2001........................................... 941
2002........................................... 950
2003........................................... 490
2004........................................... 290
---------
$ 3,788
Rent expense was $1,067,000 in 1999, $588,000 in 1998 and $290,000 in 1997.
9. Employee Savings Plan
The Company has an employee savings plan that is qualified under Section 401(k)
of the Internal Revenue Code. This plan covers substantially all employees who
meet minimum age requirements and allows participants to defer a portion of
their annual compensation on a pre-tax basis. Company contributions to the plan
may be made at the discretion of the Board of Directors. The Board of Directors
approved a matching contribution of 25% of the first 6% of employee
contributions beginning January 1996. The Company's matching contribution to the
savings plan was $167,000 in 1999, $115,000 in 1998, and $68,000 in 1997.
34
10. Earnings Per Share
The reconciliation of basic EPS to diluted EPS follows (in thousands, except per
share amounts):
Per Share
Income Shares Amount
-------- --------- ----------
1999:
Basic EPS............................... $ (1,539) 4,600 $ (0.33)
Diluted EPS............................. $ (1,539) 4,600 $ (0.33)
======== =========
1998:
Basic EPS............................... $ 144 4,331 $ 0.03
Adjustments for diluted EPS - effect
of stock options..................... -- 694
-------- ---------
Diluted EPS............................. $ 144 5,025 $ 0.03
======== =========
1997:
Basic EPS............................... $ 613 524 $ 1.17
Adjustments for diluted EPS:
Effect of preferred stock............ -- 1,427
Effect of stock options.............. -- 484
Effect of warrants................... -- 5
-------- ---------
Diluted EPS............................. $ 613 2,440 $ 0.25
======== =========
11. Condensed Quarterly Financial Results (unaudited)
The following table sets forth certain unaudited condensed operating results for
each of the eight quarters in the two-year period ended December 31, 1999. This
information has been prepared by the Company 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. The Company's operating results for
any one quarter are not necessarily indicative of results for any future period.
Earnings per share for each quarter are computed independently of earnings per
share for the year. The sum of the quarterly earnings per share may not equal
the earnings per share for the year because of (i) transactions affecting the
weighted average number of shares outstanding in each quarter and (ii) the
uneven distribution of earnings during the year.
35
Quarter Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
----------- ----------- ------------ ------------ -----------
(in thousands, except per share data)
1999:
Total revenues...................... $ 8,871 $ 8,615 $ 6,413 $ 7,163 $ 31,062
Operating income (loss)............. 413 22 (2,140) (1,452) (3,157)
Income tax provision (benefit)...... 205 62 (740) (567) (1,040)
Net income (loss)................... 348 108 (1,260) (735) (1,539)
Net income (loss) per share:
Basic............................. 0.08 0.02 (0.27) (0.16) (0.33)
Diluted........................... 0.07 0.02 (0.27) (0.16) (0.33)
1998:
Total revenues...................... $ 4,754 $ 5,825 $ 7,288 $ 9,375 $ 27,242
Operating income (loss)............. 249 352 (1,293) 1,295 603
Income tax provision................ 143 138 255 502 1,038
Net income (loss)................... 283 363 (1,426) 924 144
Net income (loss) per share:
Basic............................. 0.07 0.09 (0.33) 0.21 0.03
Diluted........................... 0.06 0.07 (0.28) 0.18 0.03
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
36
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this Item is contained in the section captioned
"Election of Directors" and "Section 16(A) Beneficial Ownership Reporting
Compliance" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2000 (the "Proxy Statement"), and is
incorporated herein by reference. Information with respect to Executive Officers
of the Company is set forth under the caption "Executive Officers of the
Registrant" in Part I, Item 1 of this Report.
ITEM 11. Executive Compensation.
The information required by this Item is contained in the section captioned
"Executive Compensation" of the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is contained in the section captioned
"Stock Ownership" of the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions.
Not applicable.
37
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Consolidated Financial Statements
The following information appears in Item 8 of Part II of this Report:
o Report of Independent Accountants
o Consolidated Balance Sheets as of December 31, 1999 and 1998
o Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
o Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
o Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
o Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following financial statement schedule is included in this Report:
o Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not
applicable, or the required information is otherwise shown in the
consolidated financial statements or the notes thereto.
Index to Exhibits
Number Assigned in
Regulation S-K
Item 601 Exhibit Number Description of Exhibit
-------- -------------- ----------------------
(2) 2.0 Stock Purchase Agreement, dated August 3, 1998, among Made2Manage
Systems, Inc. and the stockholders of Bridgeware, Inc.
(Incorporated by reference to June 30, 1998 Form 10-Q).
(3) 3.1 Amended and Restated Articles of Incorporation of Made2Manage
Systems, Inc. (Incorporated by reference to Registration Statement
on Form S-1, Registration No. 333-38177).
3.2 Amended and Restated Code of By-Laws of Made2Manage Systems, Inc.
(Incorporated by reference to Registration Statement on Form S-1,
Registration No. 333-38177).
(4) 4.1 Specimen Stock Certificate for Common Stock (Incorporated by
reference to Registration Statement on Form S-1, Registration No.
333-38177).
4.2 Other rights of securities holders - see Exhibits 3.1 and 3.2.
(10) 10.12 Form of Made2Manage Systems, Inc. Stock Option Agreement
(Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.18 Made2Manage Systems, Inc. Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.27 Best Software, Inc. Linked Software Dealer Agreement by and
between Best Software, Inc. and Made2Manage Systems, Inc. dated
May 14, 1998 (Incorporated by reference to June 30, 1998 Form
10-Q).
10.28 Business Loan Agreement by and between Bank One, Indiana, NA and
Made2Manage Systems, Inc. dated March 19, 1999. (Incorporated by
reference to March 31, 1999 Form 10-Q).
10.29 Promissory Note by and between Bank One, Indiana, NA and
Made2Manage Systems Inc. dated March 19, 1999. (Incorporated by
reference to March 31, 1999 Form 10-Q).
10.30 Made2Manage Systems, Inc. 1999 Stock Option Plan. (Incorporated
by reference to March 31, 1999 Form 10-Q).
(21) 21.1 List of Subsidiaries
(27) 27.1 Financial Data Schedule.
38
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
MADE2MANAGE SYSTEMS, INC.
Date: March 1, 2000 By: /s/David B. Wortman
-------------------
David B. Wortman
President and Chief Executive Officer
Pursuant to the requirements of 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 and on the date indicated.
Signature Title (Capacity) Date
--------- ---------------- ----
/s/David B. Wortman President, Chief Executive Officer March 1, 2000
- --------------------------- and Director(Principal Executive
David B. Wortman Officer)
/s/Katherine L. Kinder Controller March 1, 2000
- --------------------------- (Principal Financial Officer and
Katherine L. Kinder Principal Accounting Officer)
/s/Ira Coron Chairman of the Board of Directors March 1, 2000
- ---------------------------
Ira Coron
/s/Michael P. Cullinane Director March 1, 2000
- ---------------------------
Michael P. Cullinane
/s/John M. Dillon Director March 1, 2000
- ---------------------------
John M. Dillon
/s/Richard G. Halperin Director March 1, 2000
- ---------------------------
Richard G. Halperin
40
Made2Manage Systems, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ------------- --------------------------- -------------- -------------
Additions
---------------------------
Charged Charged
Balance at to Costs to Balance
Beginning and Support at the End of
Description of Period Expenses Revenue Deductions Period
- --------------------------------- ------------- ------------- ------------- -------------- -------------
Year Ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 188 $ 244 $ 169 $(311) $ 290
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 290 $ 408 $ 242 $(338) $ 602
Year Ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 602 $ 498 $ 151 $(687) $ 564
41