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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 ----- For the transition period
from ___ to ___
Commission file number: 0-23459
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 or 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 to this
Form 10-K.
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,
2002, as reported on The Nasdaq Stock Market(R) was $21,812,552. Common stock
held by executive officers, directors and persons who are known to own 10% 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, 2002, the registrant had 4,866,260 shares of common stock, no par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2002 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
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Table of Contents
Made2Manage Systems, Inc.
Form 10-K
PART I.....................................................................1
ITEM 1. BUSINESS.........................................................1
General.........................................................1
Markets and Customers...........................................1
Sales and Marketing.............................................1
The Product.....................................................1
Product Development.............................................3
Service and Support.............................................4
Competition.....................................................4
Intellectual Property...........................................5
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..........................................10
Comparisons of Years Ended December 31, 2001, 2000 and 1999....10
Liquidity and Capital Resources................................13
Key Accounting Policies........................................14
Recently Issued Accounting Pronouncements......................15
Business Environment and Risk Factors..........................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................40
PART III..................................................................41
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............41
ITEM 11. EXECUTIVE COMPENSATION.........................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................41
PART IV...................................................................42
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K....................................................42
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PART I
ITEM 1. Business.
General
Made2Manage Systems, Inc., an Indiana corporation formed in 1986, develops,
markets, licenses and supports comprehensive enterprise business systems for
mid-market manufacturers located primarily in the United States. Our principal
product, the Made2Manage(R) Enterprise Business System, provides fully
integrated solutions that manage a manufacturer's entire business environment,
from selling and design, to manufacturing and distribution, finance and human
resources, and customer service and support.
Markets and Customers
Our target market consists primarily of mid-market manufacturers, defined as
entities with annual revenues of up to $250 million, that are engaged in
discrete manufacturing such as 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 150,000 manufacturing operations in the United States, Canada and the
United Kingdom that meet our target market parameters.
Sales and Marketing
We market our products and services in the United States, Canada and the United
Kingdom. We have licensed the Made2Manage Enterprise Business System for use at
more than 1,600 manufacturing sites, primarily in the United States. Currently,
approximately 99% of our revenues are derived from customers in North America.
We use direct sales representatives, supported by regional managers and
manufacturing applications consultants, and a network of Value Added Resellers
("VARs"). We have experienced in the past, and expect to experience in the
future, a seasonal pattern in our sales, with the fourth quarter typically
having the highest total sales and the first quarter having the lowest sales.
The Product
Since our inception in 1986, we have developed, marketed, licensed and supported
comprehensive enterprise software for mid-market manufacturers engaged in
engineer-to-order, make-to-order, assemble-to-order, make-to-stock and mixed
styles of production. Our principal product, the Made2Manage Enterprise Business
System, provides fully integrated solutions automating all business processes
used by manufacturers, from selling and design, to manufacturing and
distribution, finance and human resources, and customer service and support.
This comprehensive enterprise business system features Made2Manage Enterprise
Resource Planning ("M2M(TM) ERP"), Made2Manage Supply Chain Management ("M2M
SCM"), Made2Manage Customer Relationship Management ("M2M CRM"), Made2Manage
Business Intelligence ("M2M BI"), Made2Manage Enterprise Portal ("M2M VIP"), and
Made2Manage Enterprise Integration ("M2M Link"). The system is supported by a
host of user services, including M2M Expert, the Web site which provides our
customers with Internet resources including support services 24 hours per day,
seven days a week, cyber-consulting, and virtual education courses. A brief
description of each of these applications follows:
- 1 -
M2M ERP. M2M ERP is a comprehensive back-office system that integrates
production processes into one application to provide manufacturers with
real-time visibility into their operations. Features of M2M ERP include:
o Sales and Distribution: Provides the ability to track sales, quotes
and order activity, to 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 production guidelines.
o Engineering: 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 which
helps ensure that 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) that prevents
engineering from entering the same information twice and a graphical
Bill of Material creation and editing tool.
o 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.
o Quality Management: Provides capabilities that help manufacturers
conform to the requirements of their customers. Through our
relationship with Powerway, Inc., the Made2Manage Enterprise Business
System offers tools to help manufacturers achieve and maintain ISO9000
and other quality standards compliance through document authoring,
document management, and statistical process control software tools.
o Financial Management: Designed to be fully integrated with the other
functions of the Made2Manage Enterprise Business 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 the Made2Manage Enterprise Business System.
"Drill-down" features, available throughout the product, finely detail
many areas, such as cost attributes of work in process, inventory and
product shipped.
o Human Resources: Includes payroll and personnel tracking that
integrate the Made2Manage Enterprise Business System 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, the Made2Manage Enterprise Business
System offers Best Software's Abra(R) as well as their Human Resources
applications.
M2M SCM. M2M SCM helps manufacturers improve performance and increase
profitability by optimizing their supply chains. It includes Materials
Requirements Planning for controlling inventory procurement and production job
creation, as well as infinite and finite production scheduling. Our Advanced
Planning and Scheduling capabilities, acquired with our subsidiary, Bridgeware
Inc., enable planners to consider both materials and capacity constraints at the
same time as building their production plans. Demand Planning does best fit
curve analysis to provide useful demand forecasts. 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 origins.
M2M CRM. M2M CRM provides the tools manufacturers need to attract and retain
more customers by automating sales, marketing and customer service activities.
It provides capabilities for tracking all aspects of the customer relationship,
especially the selling process. M2M CRM software tracks all contacts, proposals,
quotations, interactions, and data associated with any customer.
- 2 -
M2M BI. M2M BI converts raw data into valuable information in easy-to-understand
and easy-to-use reports to help manufacturers make better, faster decisions. 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. Data Refinery allows for the aggregation and analysis of
company operating data. Made2Manage Explorer lets executives drill quickly down
into any business document and see out of tolerance conditions within the
facility.
M2M VIP. M2M VIP is a hybrid-hosted Enterprise Portal service that extends the
reach of a manufacturer's enterprise business system to engage customers,
suppliers, partners and employees. M2M VIP enables manufacturers to reduce costs
and strengthen their supply chain.
M2M Link. M2M Link allows manufacturers to automate communications between their
enterprise business system and other business systems or trading exchanges. It
uses the latest Microsoft(R).NET technology to transfer EDI documents, XML and
flat files.
The Made2Manage Enterprise Business System is an enterprise-wide,
client/server software solution designed for use on PCs running Windows XP,
Windows 2000, Windows ME, or Windows 98 over networks that utilize Windows 2000
or Novell Netware servers. It is a native 32-bit application with an
object-oriented structure developed using Microsoft 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. Additionally, the Made2Manage Enterprise
Business System is available via the Internet through a hosted application
service provider option.
The Made2Manage Enterprise Business System is designed to enable users to do
their jobs more effectively on a consistent basis. The Made2Manage Enterprise
Business System provides a set of applications specific to the demands of our
target market. We believe these unique features include:
o Easy-to-use screens designed for employees, customers, sales channels and
suppliers 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 Systems staff
and resources; and
o Functionality that can be readily learned and can be effectively supported
by the software provider.
Product Development
We seek to enhance our competitive position by incorporating additional
functionality in the Made2Manage Enterprise Business System 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 ensure consistent release quality.
Our product development expenditures were $6.2 million in 2001, $6.4 million in
2000, and $6.5 million in 1999. Development costs were expensed as incurred.
- 3 -
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 the Made2Manage Enterprise Business
System, including implementation assistance using our Time2Value(R) tools and
services, customer support and education programs.
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 legacy 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
24 hours a day, seven days a week through our online searchable information
database and case management system, and periodic software updates. Over 85
percent of our customers maintain an annual support arrangement.
Education Programs
We provide customers with a 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. Each course includes hands-on exercises using the
software in the context of the user's typical workflow.
Additionally, traditional classroom education courses are offered for each of
the major user roles present in a mid-market manufacturing business. These
courses are offered at our corporate offices, at regional locations and on-site
at the customer's facility.
Beginning in 2001, virtual and classroom education courses have been offered via
M2M University, a subscription-based education program, which is accessible
through the M2M Expert Web site.
Competition
The enterprise software market is fragmented, intensely competitive and rapidly
changing. We face competition from a variety of software vendors, including
application software vendors, software tool vendors and relational database
management system vendors. Several large technology companies have recently
expanded into the enterprise software market by acquiring established vendors in
the market. Additionally, several software companies that have traditionally
marketed enterprise software to larger manufacturers have announced initiatives
to target mid-market 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. There can be no assurance that such competitors will not offer or
develop products that are superior to the Made2Manage Enterprise Business System
or that achieve greater market acceptance. If such competition were to result in
significant price declines or loss of market share for the Made2Manage
Enterprise Business System, our business, financial condition and results of
operation would be adversely affected.
- 4 -
The technologies we use to develop the Made2Manage Enterprise Business System
are generally available and widely known, including technology developed by
Microsoft Corporation. The Made2Manage Enterprise Business System competes with
other products principally on the basis that it is specifically designed for
mid-market 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
the Made2Manage Enterprise Business System. We believe that the Made2Manage
Enterprise Business System compares favorably with the products offered by
competitors, but there can be no assurance that we will continue to compete
successfully against such products or that we will be able to compete
successfully against future products.
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. We license
our software via a Certificate of License, which grants the user a perpetual
license to use the Made2Manage Enterprise Business System. 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 a United States patent for software related to Materials Requirements
Planning regeneration and patent applications pending for software included in
the Made2Manage Enterprise Business System related to a navigational interface
and an e-commerce hosting approach for the enterprise. We have no other patents
or pending 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.
Employees
As of December 31, 2001, we had 228 employees, consisting of 65 in sales and
marketing, 59 in product development, 75 in services and 29 in administration.
Each employee signs a confidentiality and nondisclosure agreement upon joining
Made2Manage Systems. We believe our employee relations are good.
Executive Officers of the Registrant
The executive officers of Made2Manage Systems and their ages as of December 31,
2001, are as follows:
Name Age Position with Company
- ---- --- ---------------------
David B. Wortman........ 50 Chairman of the Board, President and
Chief Executive Officer
D. Kirk Loncar.......... 55 Senior Vice President, Sales
Traci M. Dolan.......... 44 Vice President, Finance and Administration,
Chief Financial Officer
Gary W. Rush............ 44 Vice President, Chief Technology Officer
Joseph S. Swern......... 48 Vice President, Service and Support
DAVID B. WORTMAN joined Made2Manage Systems in September 1993 as senior vice
president. He has served as president and chief executive officer and a director
since January 1994, and as chairman of the board since April 2000. Prior to
joining Made2Manage Systems, Mr. Wortman held a succession of senior executive
positions and served as a director of Pritsker Corporation, a computer software
company he co-founded in 1973. Mr. Wortman is a director of Walker Information,
Inc. He also serves on various public service boards that foster the growth of
technology in the state of Indiana, including the 21st Century Research and
Technology Fund, Indiana Technology Partnership, and Indiana Information
Technology Association (INITA) Foundation. He is a past president of INITA and
the Institute of Industrial Engineers. Mr. Wortman holds B.S. and M.S. degrees
in industrial engineering from Purdue University.
- 5 -
D. KIRK LONCAR joined Made2Manage Systems as senior vice president, sales in May
2000. Mr. Loncar is the former president and CEO of Sonigistix Corporation, a
British Columbia, Canada firm that specializes in flat panel audio technology.
He has held a number of senior positions in the computer and software industries
including IBM with both U.S. and international assignments. He also built a
European subsidiary for a U.S.-based software company, and later was responsible
for the company's strategic development of the Asia-Pacific market. Mr. Loncar's
undergraduate work was at Michigan State with graduate work at the University of
Munich and Harvard.
TRACI M. DOLAN joined Made2Manage Systems as vice president, finance and
administration and chief financial officer in March 2000. Ms. Dolan was
previously vice president of finance and operations at Indianapolis-based
Macmillan Publishing USA, one of the world's largest reference publishers. While
at Macmillan, Ms. Dolan helped the book publisher expand its position into the
Internet space, via an online content division. Her background also includes 12
years of public accounting experience at PricewaterhouseCoopers in Indianapolis.
Ms. Dolan is a graduate of Indiana University with a B.S. degree in accounting.
GARY W. RUSH joined Made2Manage Systems as vice president, development in May
1994 and was named chief technology officer in June 2000. Mr. Rush was president
of Micro Data Base Systems, Inc., a provider of relational and network database
management software, prior to joining Made2Manage Systems. 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 an M.S.M. with a focus on
management information systems from Purdue University.
JOSEPH S. SWERN joined Made2Manage Systems in September 1995 as vice president,
service and support. Prior to joining Made2Manage Systems, Mr. Swern served as
vice president of professional services at Symix Computer Systems, Inc., now
Frontstep, 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. He has a certification in production and inventory
management from the American Production and Inventory Control Society. Mr. Swern
holds a B.S. degree in industrial management from Franklin University and an
M.B.A. from Capital University.
Officers are elected by the Board of Directors at each annual meeting and serve
at the pleasure of the Board of Directors.
ITEM 2. Properties.
Our headquarters are located 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. The San Bruno and Malvern
locations have been subleased to other tenants. 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 is traded on The Nasdaq Stock Market(R) under the symbol MTMS.
As of March 1, 2002, we had 55 shareholders of record and approximately 1,375
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 bids for our common stock as
reported by The Nasdaq Stock Market.
High Low
---- ---
Fiscal Year 2001
- ----------------
First Quarter....................................... $ 3.75 $ 1.75
Second Quarter...................................... 4.75 2.56
Third Quarter....................................... 4.20 2.45
Fourth Quarter...................................... 5.10 2.45
Fiscal Year 2000
- ----------------
First Quarter....................................... $ 10.50 $ 7.63
Second Quarter...................................... 8.88 5.38
Third Quarter....................................... 6.00 3.13
Fourth Quarter...................................... 3.50 1.66
- 7 -
ITEM 6. Selected Financial Data.
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Total revenues.................................... $ 33,682 $ 32,890 $ 31,062 $ 27,242 $ 16,167
Operating (loss) income (1)....................... (2,975) (4,607) (3,157) 603 1,014
Income tax provision (benefit).................... 2,260 (1,433) (1,040) 1,038 366
Net (loss) income(1).............................. (4,725) (2,547) (1,539) 144 613
Per share amounts:
Basic:
Net (loss) income per share (1)......... $ (0.98) $ (0.54) $ (0.33) $ 0.03 $ 1.17
Weighted-average shares outstanding...... 4,823 4,739 4,600 4,331 524
Diluted:
Net (loss) income per share (1).......... $ (0.98) $ (0.54) $ (0.33) $ 0.03 $ 0.25
Weighted-average shares outstanding...... 4,823 4,739 4,600 5,025 2,440
Cash dividends declared per share................. --- --- --- --- ---
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents......................... $ 12,688 $ 11,336 $ 12,610 $ 15,496 $ 16,805
Total assets...................................... 25,961 31,745 31,624 33,894 25,560
Total shareholders' equity........................ 12,359 16,921 18,871 19,938 18,304
- ------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Income Tax
Provision (Benefit)" for comparative pro forma results excluding the tax valuation allowance,
restructuring charge and the write-down and amortization of intangible assets related to the acquisition
of Bridgeware for the years ended December 31, 2001, 2000 and 1999.
- 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, 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.
Overview
Since our inception in 1986, we have developed, marketed, licensed and supported
comprehensive enterprise software for mid-market manufacturers engaged in
engineer-to-order, make-to-order, assemble-to-order, make-to-stock and mixed
styles of production. Our principal product, the Made2Manage(R) Enterprise
Business System, provides fully integrated solutions automating all business
processes used by manufacturers, from selling and design, to manufacturing and
distribution, finance and human resources, and customer service and support.
This comprehensive enterprise business system features Made2Manage Enterprise
Resource Planning ("M2M(TM) ERP"), Made2Manage Supply Chain Management ("M2M
SCM"), Made2Manage Customer Relationship Management ("M2M CRM"), Made2Manage
Business Intelligence ("M2M BI"), Made2Manage Enterprise Portal ("M2M VIP"), and
Made2Manage Enterprise Integration ("M2M Link"). The system is supported by a
host of user services, including M2M Expert, the Web site that provides our
customers with Internet resources including support services 24 hours per day,
seven days a week, cyber-consulting, and virtual education courses.
The Made2Manage Enterprise Business System is sold in the United States, Canada
and the United Kingdom. Currently, approximately 99% of our revenues are derived
from customers in North America.
Our revenues are derived from software licenses, services and hardware. Revenue
is generally recognized when all contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured. Software revenues
are generated from licensing software to new customers and from licensing
additional users and new applications to existing customers. Revenues from
software licenses and hardware are recognized upon shipment, delivery or
customer acceptance, based upon the substance of the arrangement or as defined
in the sales agreement. Services 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. Services
revenues from implementation, education and consulting services are generally
included in the initial agreement. We recognize revenues from these services as
they are performed. Beginning in 2001, virtual and classroom education courses
have been offered via M2M University, a subscription-based education program
which is accessible through M2M Expert and is recognized ratably over the
contract term. Subscription revenues from M2M VIP are reflected in software
revenues and are recognized ratably over the subscription period. Hardware
revenues are generated primarily from the sale of bar-coding and data collection
equipment used in connection with the Made2Manage Enterprise Business System and
constitute a relatively small component of total revenues.
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.
- 9 -
Results of Operations
The following table sets forth the percentage of total revenues and percent
increase or decrease from the prior period dollar amount represented by certain
items included in our statements of operations for the periods indicated.
Percent
Increase (Decrease)
Year Ended December 31, 2001 over 2000 over
------------------------------- ---------------------
2001 2000 1999 2000 1999
------- ------- ------- ------ -------
Revenues:
Software......................... 42.1% 45.5% 44.2% (5.3)% 8.8%
Services......................... 55.3 51.2 52.3 10.4 3.8
Hardware......................... 2.6 3.3 3.5 (16.6) (0.5)
------- ------- -------
Total revenues............... 100.0 100.0 100.0 2.4 5.9
------- ------- -------
Costs of revenues:
Software......................... 7.9 5.7 5.1 42.6 18.2
Write-down and amortization of
purchased technology......... --- 4.3 1.3 NM 258.5
Services......................... 25.0 25.7 28.2 (0.4) (3.3)
Hardware......................... 1.9 2.3 2.3 (16.0) 3.5
Restructuring charge............. 1.9 --- --- NM NM
------- ------- -------
Total costs of revenues...... 36.7 38.0 36.9 (1.0) 9.1
------- ------- -------
Gross profit................. 63.3 62.0 63.1 4.5 4.0
------- ------- -------
Operating expenses:
Sales and marketing.............. 37.0 40.4 37.5 (6.3) 14.0
Product development.............. 18.4 19.4 21.0 (2.5) (2.5)
General and administrative....... 13.9 13.5 13.9 5.0 3.0
Write-down and amortization of
goodwill..................... --- 2.7 0.8 NM 257.7
Restructuring charge............. 2.8 --- --- NM NM
------- ------- -------
Total operating expenses..... 72.1 76.0 73.2 (2.8) 9.8
------- ------- -------
Operating loss........................ (8.8) (14.0) (10.1) (35.4) (45.9)
Other income, net..................... 1.5 1.9 1.8 (18.7) 8.5
------- ------- -------
Loss before income taxes.............. (7.3) (12.1) (8.3) (38.1) (54.3)
Income tax provision (benefit) 6.7 (4.4) (3.3) (257.7) (37.8)
------- ------- -------
Net loss ............................. (14.0)% (7.7)% (5.0)% (85.5) (65.5)
======= ======= =======
NM - Not Meaningful
Comparisons of Years Ended December 31, 2001, 2000 and 1999
Revenues
Revenues are derived from software licenses, service and support fees and
hardware sales. Total revenues increased by $792,000, or 2.4%, to $33.7 million
in 2001 from $32.9 million in 2000. This increase in 2001 revenue was driven by
increases in services revenues, partially offset by a decrease in software and
hardware revenues. Total revenues increased by $1.8 million, or 5.9%, in 2000
from $31.1 million in 1999. This 2000 increase was in both software and services
revenues. We have not historically recognized significant annual revenues from
any single customer.
- 10 -
Software Revenues. Software license revenues decreased by $791,000, or 5.3%, to
$14.2 million in 2001 from $15.0 million in 2000, which was up from $13.7
million in 1999. Software license revenues constituted 42.1%, 45.5%, and 44.2%
of total revenues in 2001, 2000 and 1999, respectively. The decrease in software
revenues in 2001 from 2000 is due to a decrease in sales of additional users and
optional modules to our installed base of customers, partially offset by an
increase in revenues from licenses to new users. We believe the weak economy
negatively impacted manufacturers' discretionary spending for upgrades, while
new systems capital expenditures and services were less affected. The increase
in software revenues in 2000 over 1999 was attributed to an increase in the
average order size, which offset the decrease in the number of license
transactions.
Services Revenues. Services revenues increased by $1.8 million, or 10.4%, to
$18.6 million in 2001 from $16.9 million in 2000, which was up from $16.2
million in 1999. Services revenues constituted 55.3%, 51.2% and 52.3% of total
revenues in 2001, 2000 and 1999, respectively. The increases in services
revenues were largely due to support fees from an expanding user base.
Hardware Revenues. Hardware revenues were $896,000 in 2001 and $1.1 million in
both 2000 and 1999. Hardware revenues constituted 2.6%, 3.3% and 3.5% of total
revenues in 2001, 2000 and 1999, respectively. The hardware equipment sold was
bar-coding and data collection equipment necessary to utilize certain features
of the Made2Manage Enterprise Business System. Hardware revenues decreased in
2001 compared to 2000 due to a decrease in sales to the installed base of
customers. Although the number of new system orders decreased, hardware revenues
remained flat in 2000 due to increased demand for this equipment as a result of
continued expansion of the number of customers using our software.
International Revenues. International revenues from our operations in the United
Kingdom totaled $141,000 in 2001 and $278,000 in 2000 for software, hardware and
support and represented 0.4% and 0.8% of total revenues in 2001 and 2000,
respectively. There were no international revenues in 1999, as we started our
international sales effort in 2000.
Costs of Revenues
Costs of Software Revenues. Costs of software revenues totaled $2.7 million,
$1.9 million and $1.6 million in 2001, 2000 and 1999, respectively, resulting in
gross profits of 81.2%, 87.5% and 88.5% of software revenues, respectively. The
decreases in gross profit percentages were due in part to a greater proportion
of software revenues generated from third-party products and an increase in
sales discounts. Additionally, royalties associated with the upgrade of the
Made2Manage Enterprise Business System to the Microsoft(R) SQL Server database
were introduced in the third quarter of 2000 and are reflected in costs of
software revenues.
Write-down and Amortization of Purchased Technology. In August 1998, we acquired
Bridgeware, Inc., which gave rise to a purchased technology asset. During the
third quarter of 2000, we decided to accelerate development of an integrated
multi-level planning suite that is largely replacing the acquired technology.
That decision resulted in an impairment of the purchased technology asset, which
was written down to its net realizable value. The non-cash write-down and
amortization of purchased technology in 2000 was $1.4 million as compared to
amortization of $393,000 in 1999. See "Operating Expenses - Income Tax Provision
(Benefit)" for comparative pro forma results of operations excluding the
write-down and amortization of intangible assets related to the acquisition of
Bridgeware.
Costs of Services Revenues. Costs of services revenues totaled $8.4 million,
$8.5 million and $8.8 million in 2001, 2000 and 1999, respectively, resulting in
gross profits of 54.7%, 49.8% and 46.1% of services revenues, respectively. The
gross profit percentages continue to increase as services and support revenues
increase with our expanding customer base. At the same time, staffing levels
decreased in 2001 resulting in increased operating efficiencies.
Costs of Hardware Revenues. Costs of hardware revenues totaled $639,000,
$761,000 and $735,000 in 2001, 2000 and 1999, respectively. Gross profits from
hardware were 28.7%, 29.1% and 31.9% of hardware revenues in 2001, 2000 and
1999, respectively.
- 11 -
Restructuring Charge. During the first quarter of 2001, management approved a
restructuring plan designed to align our operations with the current technology
and economic environment. Elements of the restructuring plan included (1)
facilities rationalization as a result of increased market acceptance of our
online education offerings, (2) cost reductions associated with M2M VIP after
the significant initial investment made in 2000 and (3) 16 employee separations
across most functional areas of the company. In connection with the
restructuring, we recorded a $1.6 million pre-tax charge comprised of
restructuring liabilities of $811,000, of which $457,000 was paid as of December
31, 2001, and related asset impairments of $781,000. The remaining restructuring
liability of $354,000 is recorded as a current liability in the consolidated
balance sheet and represents our best estimate of non-recoverable costs and
expenses associated with sublet facilities and guaranteed future royalty
payments related to an impaired asset. The total $1.6 million pre-tax charge in
the first quarter was recorded as $640,000 in costs of revenues and $952,000 in
operating expenses.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $12.4 million,
$13.3 million and $11.7 million in 2001, 2000 and 1999, respectively,
representing 37.0%, 40.4% and 37.5% of total revenues, respectively. The
decrease in sales and marketing expenses in 2001 compared to 2000 was due
primarily to a decrease in headcount and a reduction of travel as more of the
selling effort was driven to the Web. The increases in sales and marketing
expenses in 2000 compared to 1999 were primarily due to increased (1) staffing
for sales and marketing, (2) marketing activities, including promotional
activities, (3) travel expenses related to sales and marketing efforts, (4)
costs associated with starting up the international sales effort and (5) costs
associated with marketing M2M Express and M2M VIP with substantially no
offsetting revenues.
Product Development Expenses. Product development expenses were $6.2 million,
$6.4 million and $6.5 million in 2001, 2000 and 1999, respectively, representing
18.4%, 19.4% and 21.0% of total revenues, respectively. We did not capitalize
any software development costs during these years, since the capitalizable
portion was not significant. We continue to invest heavily in ongoing product
development to expand functionality and create next generation products.
General and Administrative Expenses. General and administrative expenses were
$4.7 million, $4.5 million and $4.3 million in 2001, 2000 and 1999,
respectively, representing 13.9%, 13.5% and 13.9% of total revenues,
respectively. The increase in 2001 compared to 2000 was due mainly to increased
spending for investor relations activities. The increase in 2000 compared to
1999 was due primarily to increased headcount.
Write-down and Amortization of Goodwill. In August 1998, we recorded purchased
technology and related goodwill associated with the acquisition of our
Bridgeware subsidiary. During the third quarter of 2000, we decided to
accelerate development of an integrated multi-level planning suite that is
largely replacing the acquired technology. That decision resulted in an
impairment of the purchased technology asset and related goodwill, which were
written down to their net realizable value. The non-cash write-down and
amortization of goodwill in 2000 was $887,000 as compared to amortization of
$248,000 in 1999. See "Operating Expenses - Income Tax Provision (Benefit)" for
comparative pro forma results of operations excluding the write-down and
amortization of intangible assets related to the acquisition of Bridgeware.
Other Income, Net
Other income, net was $510,000, $627,000 and $578,000 in 2001, 2000 and 1999,
respectively, representing 1.5%, 1.9% and 1.8% of total revenues, respectively.
Other income, net principally reflects interest earned on marketable securities.
Interest income was $503,000, $619,000 and $572,000 in 2001, 2000 and 1999,
respectively. Interest income decreased in 2001 from 2000 due to lower interest
rates.
- 12 -
Income Tax Provision (Benefit)
From 1999 and through 2001, we sustained cumulative tax operating losses
totaling $9 million, inclusive of two significant charges totaling $4.5 million
related to the write-down and amortization of purchased technology assets,
described under "Operating Expenses - Write-down and Amortization of Goodwill,"
and a restructuring charge, described under "Costs of Revenues - Restructuring
Charge." Those losses have given rise to deferred tax assets of $3.4 million.
Although the loss carryforwards substantially do not begin to expire until 2018,
current economic conditions make it difficult to predict full recoverability of
those tax assets in a period comparable to the period over which they
originated. A valuation allowance was recorded against the $3.4 million of
deferred tax assets to reflect that uncertainty in the fourth quarter of 2001,
resulting in a full year income tax provision of $2.3 million. Furthermore, we
do not anticipate recording either tax charges or benefits in the next several
quarters due to this charge. This non-cash charge has no effect on our cash and
investments, which totaled $15.1 million at December 31, 2001.
On a pro forma basis, exclusive of the tax valuation allowance, restructuring
charge and the write-down and amortization of intangible assets, results of
operations would be comparatively reported as follows:
Year Ended December 31,
------------------------------------
2001(1) 2000(2) 1999(2)
--------- --------- ---------
(in thousands, except per share data)
(unaudited)
Total revenues............................................. $ 33,682 $ 32,890 $ 31,062
Operating loss............................................. (1,383) (2,259) (2,464)
Net loss ................................................. (319) (740) (1,011)
Per share amounts - basic and diluted:
Net loss per share.................................. $ (0.07) $ (0.16) $ (0.22)
========= ========= =========
Weighted-average shares outstanding................. 4,823 4,739 4,600
========= ========= =========
(1) Excludes the restructuring charge and valuation allowance against deferred tax assets. The
tax provision assumes a 46% full-year effective rate.
(2) Excludes the write-down and amortization of purchased technology and goodwill recorded in
connection with the Bridgeware acquisition.
Liquidity and Capital Resources
We have funded our operations primarily through equity capital, including the
initial public offering of common stock in December 1997, and cash generated
from operations. As of December 31, 2001, we had $15.1 million of cash, cash
equivalents and marketable securities.
The net change in cash, cash equivalents and marketable securities was an
increase of $3.1 million in 2001 and a reduction of $2.5 million and $2.2
million in 2000 and 1999, respectively.
At December 31, 2001, we had working capital of $10.5 million. Accounts
receivable, net of allowance for doubtful accounts, were $6.8 million and $11.5
million at December 31, 2001 and 2000, respectively. The average accounts
receivable days outstanding (DSO) was 71 days at December 31, 2001, and 108 days
as of December 31, 2000. Accounts receivable and DSO were reduced in 2001 due to
improved collection efforts through increased automation. Deferred revenue
decreased to $10.5 million at December 31, 2001, from $10.9 million at December
31, 2000. 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
decreased at the end of 2001 compared to 2000 due to lower fourth quarter new
system sales, a portion of which is deferred for support and other contracted
services.
- 13 -
We believe that cash and cash equivalents, marketable securities and cash flow
from operations will be sufficient to meet our currently anticipated working
capital and capital expenditure requirements at least through 2002.
In the normal course of business, we enter into various contractual commitments
that impact the liquidity of our operations. At December 31, 2001, our
commitments consisted of long-term operating leases, principally for office
space. Furthermore, we have entered into certain sublease agreements as a result
of facilities rationalization associated with the increased market acceptance of
our online education offerings. Future minimum lease payments required under
these non-cancelable operating leases, net of receipts from sublease agreements,
are as follows (in thousands):
Payable in:
2002................................................. $ 972
2003................................................. 495
2004................................................. 290
2005 and thereafter.................................. ---
-------
1,757
Less receipts from sublease agreements............... 941
-------
$ 816
-------
Key Accounting Policies
Revenue Recognition
We provide our customers with software, hardware, customer support services and
consulting services. Consistent with other companies that provide similar
offerings, revenue recognition is subject to multiple accounting pronouncements
including Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), Statement of Position No. 97-2, "Software Revenue
Recognition" ("SoP 97-2") and related interpretations. Our revenue recognition
policy is consistent with the requirements of SAB 101, SoP 97-2 and other
applicable revenue recognition guidance and interpretations. In general, we
record revenue when it is realized, or realizable, and earned.
Revenues from software licenses and hardware are recognized upon shipment,
delivery or customer acceptance, based upon the substance of the arrangement or
as defined in the sales agreement provided there are no significant remaining
vendor obligations to be fulfilled and collectibility is reasonably assured.
Software revenues are generated from licensing software to new customers and
from licensing additional users and new applications to existing customers.
Hardware revenues are generated primarily from the sale of bar-coding and data
collection equipment used in connection with the Made2Manage Enterprise Business
System and constitute a relatively small component of total revenues.
Our sales arrangements typically include services in addition to software and
hardware. Services revenues are generated from annual fees paid by customers to
receive support services and software upgrades and also from implementation,
education and consulting services. For sales arrangements that include bundled
software, hardware and services, we account for any undelivered service offering
as a separate element of a multiple-element arrangement. These services are
usually not essential to the functionality of the software and hardware. Amounts
deferred for services are determined based upon vendor-specific objective
evidence of the fair value of the elements as prescribed in SoP 97-2. 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. If the services are essential to the functionality of the
software and hardware, revenue from the software and hardware components is
deferred until the essential services are complete.
Subscription revenues include M2M Express, M2M VIP and M2M University. The M2M
Express thin client option is designed to provide mid-market manufacturing
companies access to the Made2Manage Enterprise Business System via the Internet
through a hosted application service provider. The M2M VIP enterprise portal
offers manufacturing companies a range of collaborative opportunities with their
customers, sales channels and suppliers. M2M University provides flexible,
comprehensive educational opportunities to customers via the Web and also
through traditional classroom training. Subscription revenues are recognized
ratably over the subscription period.
- 14 -
Use of Estimates
In the normal course of business, we are required to make significant estimates
in preparing our financial statements. As described in the Notes to Consolidated
Financial Statements, actual results could differ from the amounts estimated and
recorded in such statements. A description of our more significant estimates
follows:
Allowance for Doubtful Accounts. We establish allowances for doubtful accounts
using a combination of specific identification and applying percentages of our
accounts receivable balance as an overall proxy to reflect historical average
credit losses. Given our experience, we believe that the reserves for potential
losses are adequate, but if one or more of our larger customers were to default
in its obligations under applicable contractual arrangements, we could be
exposed to potential significant losses in excess of the provisions established.
Income Taxes and Valuation Allowances. We estimate our tax liabilities based on
current tax laws in the statutory jurisdictions in which we operate. Our
estimates include judgments about deferred tax assets and liabilities resulting
from temporary differences recognized for financial reporting purposes and such
amounts recognized for tax purposes, as well as about the realization of
deferred tax assets and the need for a valuation allowance. If our provisions
for current or deferred taxes are not adequate, if we are unable to realize
certain deferred tax assets or if the tax laws change unfavorably, we could
experience potential significant losses in excess of the reserves established.
Likewise, if our provisions for current and deferred taxes are in excess of
those eventually needed, if we are able to realize additional deferred tax
assets or if tax laws change favorably, we could experience potential
significant gains. (See Note 6 of Notes to Consolidated Financial Statements.)
Basis of Consolidation
The consolidated financial statements include the accounts of Made2Manage
Systems, Inc., and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. We do not have any special
purpose entities whose financial results are not included in the consolidated
financial statements.
We have not participated in any material transactions with a related party,
including members of the Board of Directors, executive officers, key employees
or former employees.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141, which supersedes Accounting Principles Board Opinion No. 16, "Business
Combinations" and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises," requires
that all business combinations entered into after the effective date of July 1,
2001, be accounted for by the purchase method, defines criteria for recognition
of intangible assets apart from goodwill and further defines disclosure
requirements for business combinations. We do not expect this standard to have
any material impact on our consolidated financial position, results of
operations or cash flows.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides
guidance on the financial accounting and reporting for acquired goodwill and
other intangible assets upon their initial acquisition and also subsequent to
their acquisition. SFAS 142 states that an intangible asset with a finite useful
life should be amortized over that life. Goodwill and an intangible asset with
an indefinite useful life should not be amortized; however, they should be
tested for impairment at least annually. Consistent with the requirements to
implement SFAS 142 at the beginning of fiscal years beginning after December 15,
2001, we will adopt the provisions of SFAS 142 in the first quarter of 2002. At
this time, we do not expect this standard to have any material impact on our
consolidated financial position, results of operations or cash flows.
- 15 -
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143, which
amends Statement of Financial Accounting Standards No. 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies," establishes accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. The objective of SFAS 143 is to
provide guidance for legal obligations associated with the retirement of
tangible long-lived assets. The retirement obligations included within the scope
of this project are those that an entity cannot avoid as a result of either
acquisition, construction or normal operation of a long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. At this time, we do not expect this standard to
have any material impact on our consolidated financial position, results of
operations or cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and amends Accounting Principles Board Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business" ("APB 30"). This statement develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are disposed of by
sale, as well as addresses the principal implementation issues. It eliminates
the APB 30 requirement that discontinued operations be measured at net
realizable value or that entities include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. This statement is effective for fiscal
years beginning after December 15, 2001. At this time, we do not expect this
standard to have any material impact on our consolidated financial position,
results of operations or cash flows.
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 revenues in each quarter is from software licenses signed and product
shipped in that quarter, and such revenues historically have been recorded
largely in the third month of the quarter, with a concentration 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 the Made2Manage Enterprise Business System 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.
- 16 -
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 may
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.
Product and Market Concentration
Our revenues are currently derived from licenses of the Made2Manage Enterprise
Business System and related services and third party software and hardware
products. In the near term, the Made2Manage Enterprise Business System and
related services are expected to continue to account for the majority of our
revenues. Accordingly, any event that adversely affects the sale of the
Made2Manage Enterprise Business System, such as competition from other products,
significant quality problems, negative publicity or evaluation, reduced market
acceptance of, or obsolescence of the hardware platforms on, or software
environments in which the Made2Manage Enterprise Business System operates, could
have a material adverse effect on our business, financial condition and results
of operations. Additionally, as our sales of third party software and hardware
products have increased, incompatibility with those products could also have a
material adverse effect.
Our business depends substantially upon the software expenditures of mid-market
manufacturers, which in part depend upon the demand for such manufacturers'
products. An economic slow-down or other adverse event affecting manufacturing
industries in the United States could impact such demand, causing 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
The Made2Manage Enterprise Business System uses a variety of third-party
technologies, including operating systems, tools and other applications
developed and supported by Microsoft Corporation. The Made2Manage Enterprise
Business System relies heavily on Microsoft Visual Studio and Microsoft SQL
Server. Other Microsoft programming tools and applications used by the
Made2Manage Enterprise Business System include ActiveX, OLE, ODBC, OLEDB, MSMQ,
and Internet Information Server. There can be no assurance that Microsoft
Corporation will continue to support the operating systems, tools and other
applications utilized by the Made2Manage Enterprise Business System or that they
will continue to be widely accepted in our target market. Additionally, we use
Visual Objects from Computer Associates and certain optimization software from
ILOG Inc.
We resell various third-party products, including Microsoft Visual FoxPro,
Microsoft SQL Server, Microsoft Project, products from Powerway, Best Software,
ADS Inc., Interact Commerce 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.
- 17 -
Product Development and Rapid Technological Change
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 the Made2Manage Enterprise
Business System 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 developments 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.
Internet and Potential for Subscription Revenue Business Model
We believe the Internet is changing the way businesses operate and therefore the
software needs of our customers. We believe our customers will increasingly
require e-business applications and software solutions that will enable them to
engage in commerce or service over the Internet. If we are unable to respond to
emerging industry standards and technological changes, we may not be able to
deliver products and services that meet our customers' changing needs. If we are
not successful in addressing these changing needs, our products may become
obsolete and our financial results may be materially and adversely impacted.
Furthermore, advances in Internet and e-commerce applications may lead the
enterprise business system market to rapid acceptance of Application Service
Provider ("ASP"), a hosted method of delivering business system solutions. The
ASP method of delivery uses a subscription revenue model, and although
subscriptions could improve predictability of future revenue, it delays revenue
recognition and cash collections as compared to the current method. Therefore,
if there is a rapid change to the ASP business model, our near term financial
results and financial position may be materially and adversely impacted.
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 growth in our domestic 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.
- 18 -
We have begun to distribute the Made2Manage Enterprise Business System in
international markets, primarily the United Kingdom. We have no significant
experience in international markets, and there can be no assurance that such
expansion can be successfully accomplished or that the Made2Manage Enterprise
Business System will be successfully adapted or accepted in the international
markets. Additionally, we rely on our distributor in the United Kingdom, NCR
Corporation, to sell and service the United Kingdom market place. At present,
our international plans include only Canada and the United Kingdom.
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,
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 to do so could have a
material adverse effect on our business, financial condition or results of
operations.
Insufficient Customer Commitment
To obtain the benefits of the Made2Manage Enterprise Business System, 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 the Made2Manage Enterprise Business
System. 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 enterprise software market is fragmented, intensely competitive and rapidly
changing. We face competition from a variety of software vendors, including
application software vendors, software tool vendors and relational database
management system vendors. Several large technology companies have recently
expanded into the enterprise software market by acquiring established vendors in
the market. Additionally, several software companies that have traditionally
marketed enterprise software to larger manufacturers have announced initiatives
to target mid-market 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. There can be no assurance that such competitors will not offer or
develop products that are superior to the Made2Manage Enterprise Business System
or that achieve greater market acceptance. If such competition were to result in
significant price declines or loss of market share for the Made2Manage
Enterprise Business System, our business, financial condition and results of
operation would be adversely affected.
The technologies we use to develop the Made2Manage Enterprise Business System
are generally available and widely known, including technology developed by
Microsoft Corporation. The Made2Manage Enterprise Business System competes with
other products principally on the basis that it is specifically designed for
mid-market 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
the Made2Manage Enterprise Business System. We believe that the Made2Manage
Enterprise Business System compares favorably with the products offered by
competitors, but there can be no assurance that we will continue to compete
successfully against such products or that we will be able to compete
successfully against future products.
- 19 -
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 the
Made2Manage Enterprise Business System sold to new customers is sold by VARs.
Additionally, we rely on our distributor in the United Kingdom, NCR Corporation,
to sell and service the United Kingdom market place. If some or all of the VARs
reduce their efforts to sell the Made2Manage Enterprise Business System, 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 Insufficient 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 the Made2Manage
Enterprise Business System or third-party technologies utilized by the
Made2Manage Enterprise Business System.
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. Additionally, we are subject to other legal
proceedings and claims in the normal course of business. 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. We have a United States patent for software related to
Materials Requirements Planning regeneration and patent applications pending for
software included in the Made2Manage Enterprise Business System related to a
navigational interface and an e-commerce hosting approach for the enterprise.
However, we have no other 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.
Substantial Control by Single Shareholder
As of March 1, 2002, Hambrecht & Quist California and Hambrecht & Quist London
Ventures (the "Entities Affiliated with J.P. Morgan Chase & Co., Inc.")
beneficially owned approximately 16.6% of our outstanding common stock. As a
result, the Entities Affiliated with J.P. Morgan Chase & Co., Inc., 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.
- 20 -
Effect of Antitakeover Provisions
The Amended and Restated Articles of Incorporation of Made2Manage Systems, Inc.
(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., Employee Stock Option Plan (the "Stock Option Plan")
provides that, unless the Board of Directors or a committee of the 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.
Our Board of Directors believes that it is imperative to diminish the inevitable
distraction of key executive employees by the personal uncertainties and risks
created by a pending or threatened change in control. In order to encourage such
executives' full undivided time, attention, loyalty, and dedication, the Board
of Directors has approved the Made2Manage Systems, Inc., Executive Salary
Continuation Plan (the "Salary Continuation Plan"). Pursuant to the terms of the
Salary Continuation Plan, we have entered into agreements with the President and
each of the Vice Presidents of the company pursuant to which each of them will
receive certain severance payments in the event their employment with the
company is terminated within twelve months of a change in control or ownership
of the company.
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 our
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, 2002, we had 4,866,260 shares of common stock outstanding, of which 807,606
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, 2002, there were 2,304,749 options outstanding to purchase
shares of common stock at a weighted average price of $5.95 per share under the
Company's stock option plans, of which options to purchase 1,175,884 shares of
common stock were then vested and exercisable. At March 1, 2002, we had reserved
576,174 shares of common stock for future grant under the Stock 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, 2002, 75,481 shares have been issued under the Stock Purchase Plan. We
have filed registration statements registering shares of common stock issued
pursuant to the Stock Option Plan and the 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.
- 21 -
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.
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.
- 22 -
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We transact limited business in various foreign currencies, primarily in the
British pound sterling and Canadian dollar. We do not have any significant
receivables or obligations denominated in foreign currencies. We do not have any
foreign currency swaps or derivatives, and we are not currently subject to
material foreign currency exchange risk.
- 23 -
ITEM 8. Financial Statements and Supplementary Data.
Page
----
Report of Independent Accountants........................................ 25
Consolidated Balance Sheets as of December 31, 2001 and 2000............. 26
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999....................................... 27
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999................... 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999....................................... 29
Notes to Consolidated Financial Statements............................... 30
- 24 -
Report of Independent Accountants
To the Board of Directors and Shareholders
of 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, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14 (a) (2) on page 38 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 of America, 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 our opinion.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 21, 2002
- 25 -
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 12,688 $ 11,336
Marketable securities................................................ 2,377 615
Trade accounts receivable, net of allowance for doubtful accounts
of $416 and $450 at December 31, 2001 and 2000, respectively...... 6,796 11,532
Prepaid expenses and other........................................... 1,543 1,314
Deferred income taxes................................................ --- 215
--------- ---------
Total current assets.............................................. 23,404 25,012
Property and equipment, net.............................................. 2,557 4,679
Deferred income taxes.................................................... --- 2,054
--------- ---------
Total assets...................................................... $ 25,961 $ 31,745
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 468 $ 1,197
Accrued liabilities.................................................. 1,694 1,249
Accrued compensation and related expenses............................ 977 1,492
Deferred revenue..................................................... 9,784 10,342
--------- ---------
Total current liabilities......................................... 12,923 14,280
Deferred revenue......................................................... 679 544
--------- ---------
Total liabilities................................................. 13,602 14,824
--------- ---------
Commitments (Note 9)
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized,
no shares issued and outstanding in 2001 and 2000................. --- ---
Common stock, no par value; 10,000,000 shares authorized,
4,839,646 and 4,758,112 shares issued and outstanding
at December 31, 2001 and 2000, respectively....................... 22,615 22,486
Accumulated other comprehensive income............................... 34 ---
Accumulated deficit.................................................. (10,290) (5,565)
--------- ---------
Total shareholders' equity........................................ 12,359 16,921
--------- ---------
Total liabilities and shareholders' equity........................ $ 25,961 $ 31,745
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
- 26 -
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Software............................................................. $ 14,171 $ 14,962 $ 13,746
Services............................................................. 18,615 16,854 16,237
Hardware............................................................. 896 1,074 1,079
--------- --------- ---------
Total revenues.................................................... 33,682 32,890 31,062
--------- --------- ---------
Costs of revenues:
Software............................................................. 2,668 1,871 1,583
Write-down and amortization of purchased technology.................. --- 1,409 393
Services............................................................. 8,429 8,465 8,756
Hardware............................................................. 639 761 735
Restructuring charge................................................. 640 --- ---
--------- --------- ---------
Total costs of revenues........................................... 12,376 12,506 11,467
--------- --------- ---------
Gross profit...................................................... 21,306 20,384 19,595
--------- --------- ---------
Operating expenses:
Sales and marketing.................................................. 12,445 13,282 11,651
Product development.................................................. 6,211 6,372 6,533
General and administrative........................................... 4,673 4,450 4,320
Write-down and amortization of goodwill.............................. --- 887 248
Restructuring charge................................................. 952 --- ---
--------- --------- ---------
Total operating expenses.......................................... 24,281 24,991 22,752
--------- --------- ---------
Operating loss........................................................... (2,975) (4,607) (3,157)
Other income, net........................................................ 510 627 578
--------- --------- ---------
Loss before income taxes................................................. (2,465) (3,980) (2,579)
Income tax provision (benefit)........................................... 2,260 (1,433) (1,040)
--------- --------- ----------
Net loss ............................................................... $ (4,725) $ (2,547) $ (1,539)
========== ========= =========
Per share amounts - basic and diluted:
Net loss per share................................................... $ (0.98) $ (0.54) $ (0.33)
========= ========= =========
Weighted-average shares outstanding.................................. 4,823 4,739 4,600
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
- 27 -
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Accumulated
------------------------ Other Total
Number Accumulated Comprehensive Shareholders'
of Shares Amount Deficit Income Equity
-----------------------------------------------------------------------
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 loss.................................. --- --- (1,539) --- (1,539)
--------- -------- --------- -------- ---------
Balances, December 31, 1999.................... 4,652,168 21,889 (3,018) --- 18,871
Exercise of stock options................. 85,846 464 --- --- 464
Tax benefits of stock option exercises.... --- 28 --- --- 28
Issuance of common stock under
Stock Purchase Plan................... 20,098 105 --- --- 105
Net loss.................................. --- --- (2,547) --- (2,547)
--------- -------- --------- -------- ---------
Balances, December 31, 2000.................... 4,758,112 22,486 (5,565) --- 16,921
Exercise of stock options................. 55,083 14 --- --- 14
Tax benefits of stock option exercises.... --- 34 --- --- 34
Issuance of common stock under
Stock Purchase Plan................... 26,451 81 --- --- 81
--------- -------- --------- -------- ---------
Subtotal.................................. 4,839,646 22,615 (5,565) --- 17,050
--------- -------- --------- -------- ---------
Net loss.................................. --- --- (4,725) --- (4,725)
Other comprehensive income, net-of-tax:
Unrealized gain on available-for-sale
securities............................ --- --- --- 34 34
--------- -------- --------- -------- ---------
Total comprehensive loss.................. --- --- (4,725) 34 (4,691)
--------- -------- --------- -------- ---------
Balances, December 31, 2001.................... 4,839,646 $ 22,615 $ (10,290) $ 34 $ 12,359
========= ======== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements.
- 28 -
MADE2MANAGE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Operating activities:
Net loss ........................................................... $ (4,725) $ (2,547) $ (1,539)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization................................... 1,967 1,880 1,564
Restructuring charge related to write-down of impaired property
and equipment.......................................... 781 --- ---
Write-down and amortization of purchased technology & goodwill.. --- 2,296 641
Provision for doubtful accounts................................. 711 836 649
Tax benefits of stock option exercises.......................... 34 28 121
Changes in assets and liabilities:
Trade accounts receivable.................................. 4,025 (4,992) 1,088
Prepaid expenses and other................................. (229) 609 (793)
Deferred income taxes...................................... 2,269 (1,445) (790)
Accounts payable and accrued liabilities................... (284) 220 (175)
Accrued compensation and related expenses.................. (515) 370 (1,134)
Deferred revenue........................................... (423) 1,481 623
--------- --------- ---------
Net cash provided by (used in) operating activities............. 3,611 (1,264) 255
--------- --------- ---------
Investing activities:
Purchases of property and equipment................................. (626) (1,764) (2,842)
Purchases of marketable securities.................................. (13,040) (12,216) (9,900)
Sales of marketable securities...................................... 11,312 13,401 9,250
--------- --------- ---------
Net cash used in investing activities........................... (2,354) (579) (3,492)
--------- --------- ---------
Financing activities:
Proceeds from issuance of common stock.............................. 81 105 174
Proceeds from exercise of stock options............................. 14 464 177
--------- --------- ---------
Net cash provided by financing activities....................... 95 569 351
--------- --------- ---------
Change in cash and cash equivalents...................................... 1,352 (1,274) (2,886)
Cash and cash equivalents, beginning of period........................... 11,336 12,610 15,496
--------- --------- ---------
Cash and cash equivalents, end of period................................. $ 12,688 $ 11,336 $ 12,610
========= ========= =========
Supplemental disclosures:
Cash paid (received) for:
Income taxes.................................................... $ 29 $ (818) $ 1,038
========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
- 29 -
1. Summary of Significant Accounting Policies
Description of Business
Made2Manage Systems, Inc. (the "Company"), an Indiana corporation formed in
1986, develops, markets, licenses and supports comprehensive enterprise business
systems for mid-market manufacturers located primarily in the United States. The
Company is dependent upon its principal product, the Made2Manage(R) Enterprise
Business System, which provides fully integrated solutions that manage a
manufacturer's entire business environment, from selling and design, to
manufacturing and distribution, finance and human resources, and customer
service and support. This comprehensive enterprise business system features
Made2Manage Enterprise Resource Planning ("M2M(TM) ERP"), Made2Manage Supply
Chain Management ("M2M SCM"), Made2Manage Customer Relationship Management ("M2M
CRM"), Made2Manage Business Intelligence ("M2M BI"), Made2Manage Enterprise
Portal ("M2M VIP") and Made2Manage Enterprise Integration ("M2M Link"). The
system is supported by a host of user services, including M2M Expert, the Web
site which provides the Company's customers with Internet resources including
support services 24 hours per day, seven days a week, cyber-consulting, and
virtual education courses.
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.
Certain amounts in prior years have been reclassified to conform to the 2001
presentation.
Cash Equivalents and Marketable Securities
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair value.
Marketable securities consist of debt instruments with maturities between three
and twelve months and are classified as available-for-sale. In 2001, marketable
securities were recorded at fair value, with unrealized gains reported in
shareholders' equity. In 2000, marketable securities were recorded at cost,
which approximated fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
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. Repairs and maintenance costs are expensed as incurred.
Capitalized Software
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 and those incurred after general release to customers
are expensed. 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 2001, 2000 or 1999.
- 30 -
The Company accounts for costs associated with internal-use software in
accordance with Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Certain costs
associated with internal-use software are capitalized and are generally
amortized on a straight-line basis over the estimated useful life, generally
three to five years, beginning when the asset is substantially ready for use.
Valuation of Long-Lived Assets
Long-lived assets such as property and equipment and capitalized software are
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition are less than its
carrying amount.
Income Taxes
Income tax expense is provided based on income before income taxes. Deferred
income taxes reflect the impact of temporary differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. These deferred taxes are measured by applying
currently enacted tax laws. The Company records valuation allowances related to
its deferred income tax assets when, in the opinion of management, it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized within the same period of time in which the loss arose.
Revenue Recognition and Deferred Revenue
The Company's revenue recognition policy is consistent with the requirements of
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), Statement of Position No. 97-2, "Software Revenue Recognition"
("SoP 97-2") and other applicable revenue recognition guidance and
interpretations. In general, the Company records revenue when it is realized, or
realizable, and earned. Revenues from software licenses and hardware are
recognized upon shipment, delivery or customer acceptance, based upon the
substance of the arrangement or as defined in the sales agreement provided there
are no significant remaining vendor obligations to be fulfilled and
collectibility is reasonably assured. Software revenues are generated from
licensing software to new customers and from licensing additional users and new
applications to existing customers. Hardware revenues are generated primarily
from the sale of bar-coding and data collection equipment used in connection
with the Made2Manage Enterprise Business System, and constitute a relatively
small component of total revenues.
The Company's sales arrangements typically include services in addition to
software and hardware. Services revenues are generated from annual fees paid by
customers to receive support services and software upgrades and also from
implementation, education and consulting services. For sales arrangements that
include bundled software, hardware and services, the Company accounts for any
undelivered service offering as a separate element of a multiple-element
arrangement. These services are usually not essential to the functionality of
the software and hardware. Amounts deferred for services are determined based
upon vendor-specific objective evidence of the fair value of the elements as
prescribed in SoP 97-2. 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. If the services are essential
to the functionality of the software and hardware, revenue from the software and
hardware components is deferred until the essential services are complete.
Subscription revenues include M2M Express, M2M VIP and M2M University. The M2M
Express thin client option is designed to provide mid-market manufacturing
companies access to the Made2Manage Enterprise Business System via the Internet
through a hosted application service provider. The M2M VIP enterprise portal
offers manufacturing companies a range of collaborative opportunities with their
customers, sales channels and suppliers. M2M University provides flexible,
comprehensive educational opportunities to customers via the Web and also
through traditional classroom training. Subscription revenues are recognized
ratably over the subscription period.
- 31 -
Net Income (Loss) Per Share
Basic earnings per share ("EPS") is determined in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), and
is calculated by dividing net income by the weighted-average number of common
shares outstanding for the period. The calculation of diluted EPS is similar to
basic, except that the weighted-average number of shares outstanding includes
the impact of common equivalent shares. Diluted common equivalent shares consist
of stock options (using the treasury stock method) as prescribed by SFAS 128.
Common equivalent shares are included in the diluted EPS calculation when
dilutive. Under the treasury stock method, the assumed proceeds from the
exercise of stock options are applied solely to the repurchase of common stock.
Stock-Based Compensation
The Company accounts for its stock-based compensation using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, which require compensation expense for options to be recognized
when the market price of the underlying stock exceeds the exercise price on the
date of grant. Additionally, the Company follows disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"). The Company has elected to apply the provisions of
APB 25 and provide the pro forma disclosures of SFAS 123.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
SFAS 141, which supersedes Accounting Principles Board Opinion No. 16, "Business
Combinations" and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises," requires
that all business combinations entered into after the effective date of July 1,
2001, be accounted for by the purchase method, defines criteria for recognition
of intangible assets apart from goodwill, and further defines disclosure
requirements for business combinations. The Company does not expect this
standard to have any material impact on its consolidated financial position,
results of operations or cash flows.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides
guidance on the financial accounting and reporting for acquired goodwill and
other intangible assets upon their initial acquisition and also subsequent to
their acquisition. SFAS 142 states that an intangible asset with a finite useful
life should be amortized over that life. Goodwill and an intangible asset with
an indefinite useful life should not be amortized; however, they should be
tested for impairment at least annually. Consistent with the requirements to
implement SFAS 142 at the beginning of fiscal years beginning after December 15,
2001, we will adopt the provisions of SFAS 142 in the first quarter of 2002. The
Company does not expect this standard to have any material impact on its
consolidated financial position, results of operations or cash flows.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143, which
amends Statement of Financial Accounting Standards No. 19, "Financial Accounting
and Reporting by Oil and Gas Producing Companies," establishes accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. The objective of SFAS 143 is to
provide guidance for legal obligations associated with the retirement of
tangible long-lived assets. The retirement obligations included within the scope
of this project are those that an entity cannot avoid as a result of either
acquisition, construction or normal operation of a long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect this standard to have
any material impact on its consolidated financial position, results of
operations or cash flows.
- 32 -
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and amends Accounting Principles Board Opinion No.
30, "Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business" ("APB 30"). This statement develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are disposed of by
sale, as well as addresses the principal implementation issues. It eliminates
the APB 30 requirement that discontinued operations be measured at net
realizable value or that entities include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect this
standard to have any material impact on its consolidated financial position,
results of operations or cash flows.
2. Restructuring
During the first quarter of 2001, management approved a restructuring plan
designed to align the Company's operations with the current technology and
economic environment. Elements of the restructuring plan include (1) facilities
rationalization as a result of increased market acceptance of the Company's
online education offerings, (2) cost reductions associated with M2M VIP after
the significant initial investment made in 2000 and (3) 16 employee separations
across most functional areas of the Company. In connection with the
restructuring, the Company recorded a $1.6 million pre-tax charge comprised of
restructuring liabilities of $811,000,of which $457,000 was paid as of December
31, 2001, and related asset impairments of $781,000. The remaining restructuring
liability of $354,000 is recorded as a current liability in the consolidated
balance sheet and represents the Company's best estimate of non-recoverable
costs and expenses associated with sublet facilities and guaranteed future
royalty payments related to an impaired asset. The total $1.6 million pre-tax
charge in the first quarter was recorded as $640,000 in costs of revenues and
$952,000 in operating expenses.
3. Acquisition
In August 1998, the Company recorded purchased technology and related goodwill
associated with the acquisition of the Bridgeware, Inc., subsidiary. During the
third quarter of 2000, the Company decided to accelerate development of an
integrated multi-level planning suite that is largely replacing certain acquired
technology. That decision resulted in an impairment of the purchased technology
asset and related goodwill. The impaired assets were written down to their net
realizable value, which resulted in a non-cash, pre-tax charge of $2.0 million.
The after-tax effect of the charge was $1.5 million.
At December 31, 2001 and 2000, intangible assets related to assembled workforce
were $186,000 and $238,000, respectively.
- 33 -
4. Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents and marketable securities are summarized as follows
(in thousands):
December 31,
-------------------
2001 2000
-------- --------
Cash and cash equivalents:
Cash........................................................ $ 4,157 $ 2,798
U.S. Treasury Securities and obligations of U.S.
government agencies....................................... 1,313 65
Municipal debt securities................................... --- 2,000
Corporate debt securities................................... 7,218 6,467
Other....................................................... --- 6
-------- --------
$ 12,688 $ 11,336
======== ========
Marketable securities:
Corporate debt securities................................. $ 2,377 $ 615
======== ========
5. Property and Equipment
Property and equipment are summarized as follows (in thousands):
December 31,
-------------------
2001 2000
-------- --------
Software and computer equipment............................. $ 5,581 $ 6,853
Furniture and equipment..................................... 1,724 1,916
Leasehold improvements...................................... 764 837
-------- --------
8,069 9,606
Less accumulated depreciation and amortization.............. 5,512 4,927
-------- --------
$ 2,557 $ 4,679
======== ========
The estimated lives for property and equipment are 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. Depreciation expense was $1,967,000
in 2001, $1,880,000 in 2000 and $1,564,000 in 1999.
- 34 -
6. 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.
The components of the income tax provision (benefit) are as follows (in
thousands):
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
Current:
Federal................................................. $ (77) $ (52) $ (296)
State................................................... 35 35 (75)
-------- -------- ---------
(42) (17) (371)
-------- -------- ---------
Deferred:
Federal................................................. 2,105 (1,292) (600)
State................................................... 197 (124) (69)
-------- -------- ---------
2,302 (1,416) (669)
-------- -------- ---------
$ 2,260 $ (1,433) $ (1,040)
======== ======== =========
The provision (benefit) for income taxes differs from the federal statutory tax
rate as follows (in thousands):
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
Federal tax at statutory rate............................... $ (838) $ (1,353) $ (877)
State income tax, net of federal tax benefit................ (181) (101) (119)
Non-deductible amortization and other expenses.............. --- 301 141
Non-taxable interest income................................. (1) (103) (138)
Research and experimentation credit......................... (146) (182) (168)
Business meals and entertainment............................ 48 54 51
Deferred tax asset valuation allowance...................... 3,403 --- ---
Other....................................................... (25) (49) 70
-------- -------- ---------
$ 2,260 $ (1,433) $ (1,040)
======== ======== =========
- 35 -
Deferred tax assets and liabilities are comprised of the following (in
thousands):
Year Ended December 31,
2001 2000
--------- ---------
Deferred tax assets:
Net operating loss carryforward......................... $ 1,927 $ 1,266
Research and experimentation tax credits carryforward... 136 667
Minimum tax credits carryforward........................ 831 188
Accounts receivable allowance........................... 98 121
Accrued vacation pay.................................... 36 73
Restructuring costs..................................... 248 ---
Deferred revenue........................................ 291 202
Other................................................... 22 21
-------- --------
3,589 2,538
-------- --------
Deferred tax liabilities:
Depreciation............................................ (115) (181)
Workforce............................................... (71) (88)
-------- --------
(186) (269)
-------- --------
Net deferred tax assets, before valuation allowance......... $ 3,403 $ 2,269
======== ========
Recorded as:
Current deferred income tax asset....................... $ 285 $ 215
Long-term deferred income tax asset..................... 3,118 2,054
Valuation allowance..................................... (3,403) ---
-------- --------
Net deferred tax assets..................................... $ --- $ 2,269
======== ========
As of December 31, 2001, the Company had net operating loss carryforwards of
$4,803,000 for federal and $6,573,000 for state income tax reporting purposes
that expire in the years 2010 through 2021, research and experimentation tax
credits of $831,000 that expire commencing in 2009, and minimum tax credit
carryforwards of $136,000. Although the loss carryforwards substantially do not
begin to expire until 2018, current economic conditions make it difficult to
predict full recoverability of those tax assets in a period comparable to the
period over which they originated. A valuation allowance was recorded against
the $3.4 million of deferred tax assets to reflect that uncertainty in the
fourth quarter of 2001, resulting in a full year income tax provision of $2.3
million.
- 36 -
7. Shareholders' Equity
Preferred Stock
Authorized preferred stock is issuable in series under such terms and conditions
as the Board of Directors may determine. None have been issued to date.
Common Stock Options
The Company's 1999 Employee Stock Option Plan (the "1999 Stock Option Plan") was
adopted in April 1999, amended in April 2000, and authorizes the granting of
incentive and non-qualified stock options. No additional options will be granted
under the Company's previous Employee Stock Option Plan, which was originally
adopted in 1990 (the "1990 Stock Option Plan"). Initially 200,000 shares were
reserved for issuance under the 1999 Stock Option 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 (1) the number of shares of the Company's common stock
outstanding on the last day of the preceding fiscal year and (2) 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 1999 Stock 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 April 2000 amendment to the 1999 Stock Option Plan authorizes
the grant of options under the 1999 Stock Option Plan covering an additional
number of shares equal to the number of shares covered by unexercised options
that were forfeited under the 1990 Stock Option Plan. The 1999 Stock Option Plan
terminates in 2009.
At December 31, 2001, options for 540,911 shares of common stock were available
for future grants under the plan, which include the additional shares authorized
per the April 2000 amendment to the 1999 Stock Option Plan. In accordance with
the provisions of the plan, the number of shares available for grant
automatically increased by 472,039 shares to 1,012,950 shares on January 1,
2002, representing the aggregate of the calculated 7% of base shares and the
available shares at December 31, 2001.
- 37 -
Activity in the option plan is summarized as follows:
2001 2000 1999
------------------- ------------------- -------------------
Weighted- Weighted- Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------- ------------------- -------------------
Outstanding at beginning of year.... 1,908,359 $ 6.70 1,581,938 $ 6.92 1,366,617 $ 5.88
Granted.......................... 552,700 3.31 587,550 6.39 417,250 9.35
Exercised........................ (55,083) 0.25 (85,846) 5.41 (106,711) 1.66
Forfeited........................ (502,213) 6.71 (175,283) 8.33 (95,218) 8.48
Outstanding at end of year.......... 1,903,763 $ 5.90 1,908,359 $ 6.70 1,581,938 $ 6.92
========= ======= ========= ======== ========= =======
Options exercisable at end of year.. 1,055,470 $ 6.77 1,061,383 $ 6.20 842,123 $ 5.26
========= ======= ========= ======== ========= =======
Options outstanding at December 31, 2001, are summarized as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- ------------- --------- ----------- ---------- --------- --------
$0.40 - 3.18 155,617 8.68 years $ 2.78 51,030 $ 2.66
3.22 - 3.22 454,000 9.08 years 3.22 0 0.00
3.30 - 5.75 431,424 5.14 years 4.22 395,424 4.18
5.81 - 8.06 422,181 6.79 years 7.44 335,760 7.59
8.19 - 13.31 440,541 7.51 years 9.93 273,256 10.28
--------- -------- --------- --------
1,903,763 $ 5.90 1,055,470 $ 6.77
========= ======== ========= ========
The Company applies APB 25 and related interpretations in accounting for its
option plan, and no compensation expense has been recognized. The following
table presents pro forma net loss had compensation cost been determined based on
the fair value at the grant date for awards under the plan in accordance with
SFAS 123.
2001 2000 1999
--------- --------- ---------
Pro forma net loss (in thousands)............. $ (5,611) $ (3,786) $ (2,814)
Pro forma diluted net loss per share.......... (1.16) (0.80) (0.61)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.9% for 2001, 6.25% for 2000 and 5.5%
for 1999; expected life of one year beyond vesting date; and volatility of 70%
for 2001, 67% for 2000 and 65% for 1999. In accordance with SFAS 123, only
options granted in 1995 and subsequently are included in these calculations.
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.
Based on the Black-Scholes option-pricing model, the weighted-average fair value
at grant date of options granted for the years ended December 31 were $2.30 in
2001, $4.57 in 2000 and $6.50 in 1999.
- 38 -
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "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 (1) 85% of the beginning of the quarter market price or (2)
90% of the average market price during the quarter. Purchases are made at the
end of each fiscal quarter. Cumulative shares issued under this plan totaled
75,481, 49,030 and 28,932 at December 31, 2001, 2000 and 1999, respectively.
8. 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 37.5% of the first 6% of the employees'
contributions beginning January 2001. Prior to this, the Board of Directors had
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 $259,000 in 2001, $173,000 in 2000 and $167,000 in 1999.
9. Commitments
The Company has certain commitments, principally for office space, under
long-term operating leases. Furthermore, the Company has entered into certain
sublease agreements as a result of facilities rationalization associated with
the increased market acceptance of the Company's online education offerings.
Future minimum lease payments required under these non-cancelable operating
leases, net of receipts from sublease agreements, are as follows (in thousands):
Payable in:
2002............................................ $ 972
2003............................................ 495
2004............................................ 290
2005 and thereafter............................. ---
-------
1,757
Less receipts from sublease agreements.......... 941
-------
$ 816
=======
Rent expense was $881,000 in 2001, $1,162,000 in 2000 and $1,067,000 in 1999.
10. 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, 2001. 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 (EPS) for each quarter are computed independently of EPS for
the year. The sum of the quarterly EPS may not equal the EPS for the year
because of (1) transactions affecting the weighted-average number of shares
outstanding in each quarter and (2) the uneven distribution of earnings during
the year.
- 39 -
Quarter Ended (Unaudited)
--------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- -----
(in thousands, except per share data)
2001:
Total revenues..................... $ 8,392 $ 8,571 $ 8,129 $ 8,590 $ 33,682
Gross profit....................... 4,628 5,416 5,373 5,889 21,306
Operating (loss) income............ (2,783) (398) (59) 265 (2,975)
Income tax (benefit) provision..... (524) (770) 20 3,534 2,260
Net (loss) income.................. (2,096) 514 25 (3,168) (4,725)
Net (loss) income per share:
Basic.......................... (0.44) 0.11 0.01 (0.66) (0.98)
Diluted........................ (0.44) 0.11 0.01 (0.66) (0.98)
2000:
Total revenues..................... $ 7,296 $ 7,701 $ 8,315 $ 9,578 $ 32,890
Gross profit....................... 4,708 4,864 4,444 6,368 20,384
Operating (loss) income............ (1,030) (1,303) (2,295) 21 (4,607)
Income tax (benefit) provision..... (294) (562) (646) 69 (1,433)
Net (loss) income.................. (584) (596) (1,490) 123 (2,547)
Net (loss) income per share:
Basic.......................... (0.12) (0.13) (0.31) 0.03 (0.54)
Diluted........................ (0.12) (0.13) (0.31) 0.03 (0.54)
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure. None.
- 40 -
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 23, 2002 (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 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 Proxy Statement and is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions.
Not applicable.
- 41 -
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, 2001
and 2000
o Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999
o Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
o Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
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 for the Years Ended
December 31, 2001, 2000 and 1999
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.
- 42 -
3. Exhibits
Number Assigned in
Regulation S-K Exhibit
Item 601 Number Description of Exhibit
-------- ------- ----------------------
(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) 10.1 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.)
10.2 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.)
10.3 1999 Made2Manage Systems, Inc., Employee
Stock Option Plan (Incorporated by
reference to March 31, 1999 Form 10-Q.)
10.4 Amendment to the 1999 Made2Manage
Systems, Inc., Employee Stock Option
Plan (Incorporated by reference to March
31, 2000 schedule 14-a, appendix 1.)
10.5 Made2Manage Systems, Inc., Executive
Salary Continuation Plan (Incorporated
by reference to September 30, 2001 Form
10-Q.)
(21) 21.1 List of Subsidiaries (Incorporated by
reference to December 31, 2000 Form
10-K.)
(23) 23.1 Consent of Independent Accountants
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 25, 2001, to
report under Item 5 the designation of Rudolf J. Herrmann to the Company's
board of directors.
- 43 -
SIGNATURES
Pursuant to the requirements of Section 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 20, 2002 By: /s/David B. Wortman
-------------------------------------
David B. Wortman
Chairman of the Board, 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 dates indicated.
Signature Title (Capacity) Date
/s/David B. Wortman Chairman of the Board, President March 20, 2002
- --------------------------- and Chief Executive Officer
David B. Wortman (Principal Executive Officer)
/s/Traci M. Dolan Vice President, Finance and March 20, 2002
- --------------------------- Administration, Chief Financial
Traci M. Dolan Officer, Secretary and Treasurer
(Principal Financial Officer)
/s/Katherine L. Kinder Controller March 20, 2002
- --------------------------- (Principal Accounting Officer)
Katherine L. Kinder
/s/Michael P. Cullinane Director March 20, 2002
- ---------------------------
Michael P. Cullinane
/s/Timothy A. Davenport Director March 20, 2002
- ---------------------------
Timothy A. Davenport
/s/Richard G. Halperin Director March 20, 2002
- ---------------------------
Richard G. Halperin
/s/Rudolf J. Herrmann Director March 20, 2002
- ---------------------------
Rudolf J. Herrmann
- 44 -
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 Other at the End
Description of Period Expenses Accounts Deductions of Period
- -------------------------------- ----------- -------- --------- ---------- ----------
Allowance for Doubtful Accounts:
2001 $ 450 $ 478 $ 233 $ (745) $ 416
2000 $ 564 $ 514 $ 322 $ (950) $ 450
1999 $ 602 $ 498 $ 151 $ (687) $ 564
Income Tax Valuation Allowance:
2001 $ --- $ --- $ 3,403 $ --- $ 3,403
2000 $ --- $ --- $ --- $ --- $ ---
1999 $ --- $ --- $ --- $ --- $ ---
- 41 -