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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 SECURTIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURTIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
Commission file number: 333-38177
MADE2MANAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
INDIANA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-1665080
(State or other jurisdiction (I.R.S. Employer. . . . . . . . (I.R.S. Employer
of incorporation of organization). . . . . . . . . . . . . . . Identification Number)
9002 Purdue Road, Indianapolis, IN
Indianapolis, IN . . . . . . . . . . . . . . . . . . . . . . . 46268
(Address of principal executive offices) . . . . . . . . . . . (Zip code)
(317) 875-9750
(Registrant's telephone number, including area code)
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 ________ No _____X_____
Indicate by checkmark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment of the Form 10-K. ___
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 2, 1998, as reported on The Nasdaq Stock MarketSM was $24,667,450.
Common Stock held by executive officers, directors and persons who are known
to own 5% or more of the outstanding Common Stock have been excluded from the
computation as such persons may be deemed to be affiliates of the registrant.
This determination of affiliate status is not a conclusive determination for
other purposes.
As of March 2, 1998, the registrant had 4,249,553 shares of Common Stock, no
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
22
PART 1
ITEM 1. BUSINESS.
GENERAL
Made2Manage Systems, Inc. (the "Company") develops, markets and supports fully
integrated, Microsoft(R) Windows-based business application software for
manufacturers. The Company's principal product, Made2Manage for Windows
("Made2Manage") is an Enterprise Resource Planning ("ERP") software
application designed to meet the unique needs of small and midsize discrete
manufacturers engaged in engineer-to-order, make-to-order, make-to-stock and
mixed mode operations. Made2Manage is a comprehensive application suite
designed to be the only business software these manufacturers need to
effectively manage their entire organizations, and includes customer order
management, manufacturing resource planning and scheduling, materials
management, decision support and data warehousing, and finance and accounting.
The Company's applications are in use at more than 700 manufacturers in North
America, primarily in the United States.
THE PRODUCT
Made2Manage is an enterprise-wide, open architecture, standards-based,
client/server software solution designed for use on PCs running Windows NT
Workstation or Windows 95 over LANs that utilize Windows NT or Novell Netware
servers. It is a native 32-bit application with an object-oriented structure
developed using Microsoft's Visual Studio. The object-oriented architecture
shortens development cycles, reduces costs of product enhancements and
provides a more efficient environment for customer support.
Made2Manage is designed to be the only business software required to manage
and operate a small or midsize manufacturing business. Made2Manage is designed
to enable users to do their jobs more effectively on a consistent basis. It
provides a set of modules specific to the demands of its target market in the
areas of sales, production, financial management and executive information
systems which are all integrated through system wide capabilities and Internet
applications linking a manufacturers' employees, customers and vendors.
Further, the Company's user interface and architecture are consistent with
Microsoft standards, which facilitates its implementation and use. The product
features of the current version 2.0 are organized into five basic categories
as shown in the following table:
I. Executive
Information
System
Sales Performance Reports and Graphs Production Performance System Financial
Overviews Performance
II. Sales Management. . . . . . III. Production Management IV. Financial Management
Quotations . . . . . . . . . . . Job Order Entry and Release Accounts Receivable
Sales Order Processing . . . . . Labor Entry Accounts Payable
Features and Options . . . . . . Purchasing and Inventory General Ledger
Rules-Based Product Configurator Material Requirements Planning Cash Flow Projections
Customer Service . . . . . . . . Shipping and Receiving Order Costing
Sales Reports and Graphs . . . . Lot Control Payroll and Human Resources
Sales Overview . . . . . . . . . Bar Code Data Financial Reports and Graphs
Collection Financial Overview
Job Splitting
Cycle Counting and Physical
Inventory
Bill of Materials and Routings
Production Scheduling
Quality Control
Production Reports and Graphs
Production Overview
V. System-Wide Capabilities
Notifier . . . . . . . . . . SmartLink User Permissions and Preferences
Locator. . . . . . . . . . . User-Defined Reports Internet Applications
Navigator
Executive Information System
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.
Sales Management
Sales Management provides the ability to track sales, quotes and order
activity. Sales Order Processing manages the activities from the time the
customer confirms the order, into production and through shipment, including
acknowledging the order, receiving stock materials and handling multiple
releases and partial shipments. The Rules-Based Product Configurator allows
the sales person to guide customers through specific product choices to
precisely meet their product needs while assuring that quotes meet
profitability and manufacturability guidelines.
Production Management
Production Management facilitates the planning, execution and monitoring of
the manufacturing process. Job orders are created to drive material and
production requirements and to 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. Made2Manage's manufacturing planning
functions include materials requirements planning for controlling inventory
procurement and job creation, as well as infinite and finite production
scheduling. Execution level support is provided through functions which
include cycle counting functionality, physical inventory capabilities and
on-hand availability. Lot Control enables companies to track raw materials,
sub-assemblies and final assemblies to their origin.
Financial Management
Financial Management is fully integrated with Sales Management and Production
Management. Up-to-date records of income, expenses and financial commitments
flow through the product's extensive library of financial reports. Standard
features include Accounts Receivable, Accounts Payable, Cash Flow Forecasting
and Job Order Costing. The General Ledger integrates the monetary flow from
all aspects of Made2Manage. "Drill-down" features, available throughout the
product, finely detail many areas, such as cost attributes of work in process,
inventory and product shipped.
System-Wide Capabilities
As a result of the Company's focus on the user, Made2Manage contains features
which the Company believes are unique in the industry. Notifier monitors the
manufacturer's system, detects the occurrence of specified events and
automatically sends a message via e-mail, fax or pop-up message to customers,
employees or vendors. Locator is used to find information with very little
effort and a minimum of information. By knowing only a portion of a customer
name, part number or customer purchase order number, a Made2Manage user can
use Locator to find a quote, sales order status, job order status or purchase
order. Navigator provides a visual representation of the entire Made2Manage
system and the relationship of the system components. Navigator is designed to
assist novice or infrequent users. The Company recently released its first
Internet applications designed to enhance information flow, including a report
agent, a customer service component and an application for improving
communication with vendors.
SERVICE AND SUPPORT
The Company offers a full complement of services that allow its customers to
maximize the benefits of Made2Manage, including implementation assistance
using the Company's Keystone Implementation Methodology, customer support and
education programs.
The Keystone Implementation Methodology
The Company's Keystone Implementation Methodology consists of the following
steps:
Planning: The Company assists the customer in assigning tasks to the
customer's project team members and creating a Made2Manage implementation and
education plan.
Education: The Company conducts classes either at its offices, regional
training locations or the customer's facility to instruct the project team and
key users in fundamentals of Made2Manage as well as to provide in-depth
knowledge of individual features.
Conference Room Modeling: The Company assists the customer in building a pilot
implementation allowing its customers to simulate live operation. The Company
uses this technique to reinforce and validate decisions and processes adopted
during the implementation.
Operational Development: The Company assists the customer in developing
policies and procedures for a smooth conversion to Made2Manage, including the
development of a final conversion plan.
User Training and Live Operation: The Company employs a "train-the-trainer"
approach with the customer and provides direction for detailed training so
users become more proficient with Made2Manage. The Company and the customer
use feedback from these training sessions to make final adjustments to the
implementation prior to live operation.
Follow-Up: After implementation, the Company reviews the status of the
customer's system and recommends any adjustments and additional training.
Customer Support
The Company provides ongoing product support services under its support
agreements. Support agreements are typically sold to customers for a one year
term at the time of the initial product license and may be renewed for
additional annual periods. Telephone and electronic support and periodic
software updates are included as part of the support agreement.
Education Programs
The Company offers classroom education courses for each of the major user
roles present in a small and midsize manufacturing business. These courses are
offered at the Company's headquarters, in regional locations and on-site at
the customer's facility. Each course includes hands-on exercises using the
software in the context of the user's typical workflow.
PRODUCT DEVELOPMENT
The Company seeks to enhance its competitive position by incorporating
additional functionality in Made2Manage to meet the evolving needs of
manufacturers in its 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. The Company analyzes this input and identifies changes for
future product releases. The Company's product development personnel have
experience in software development, quality assurance and documentation and
are familiar with the specific manufacturing or financial area to be addressed
by the change.
The Company's development methodology incorporates comprehensive quality
assurance procedures. A substantial component of its development budget is
allocated to quality assurance. Its testing processes include component level
tests, unit tests, posting tests, validation tests, regression tests,
installation tests, CD tests and production tests. Risk assessment documents
are prepared and maintained 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 insure consistent release quality.
The Company's product development expenditures were $2.3 million, $1.7 million
and 1.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company has expensed all the development costs associated
with the development of the Windows version of Made2Manage.
As a result of the complexities inherent in software design and development,
there can be no assurance that the Company 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.
SALES AND MARKETING
The Company markets its products and services in markets throughout the United
States and Canada. The Company has direct sales representatives, supported by
regional managers and manufacturing applications consultants, and a network of
Value Added Resellers ("VARS"). The Company has implemented procedures to
reduce conflict between its direct and indirect sales channels and between
individual VARs.
MARKETS AND CUSTOMERS
The Company's target market consists primarily of small and midsize discrete
manufacturers with annual revenues of between $5 million and $50 million that
are engaged in engineer-to-order, make-to-order, make-to-stock or mixed mode
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.
Make-to-stock refers to manufacturing in which standard products are
fabricated, assembled and placed in finished goods inventory based on
projected customer demand. Mixed mode manufacturing involves a combination of
some or all of these production techniques.
Based on data provided by Dun & Bradstreet Corporation, the Company believes
there are approximately 26,000 manufacturing operations in the United States
that meet the Company's target market parameters.
COMPETITION
The business management applications software market is fragmented, intensely
competitive and rapidly changing. The Company faces competition from a variety
of software vendors, including application software vendors, software tool
vendors and relational database management systems vendors. The Company's
competitors include a large number of independent software and systems
vendors. In addition, several software companies that have traditionally
marketed ERP systems to larger manufacturers have announced initiatives to
market ERP systems to midsize manufacturers. Many of the Company's existing
competitors, as well as a number of potential competitors, have significantly
greater financial, technical and marketing resources and a larger base of
customers than the Company.
The technologies utilized by the Company to develop Made2Manage are generally
available and widely known, including technology developed by Microsoft. As a
result, competition is likely to increase substantially. Made2Manage competes
with other products, principally on the basis that it is specifically designed
for small and midsize manufacturers, is relatively easy to implement and use
and is supported by a well-developed system of service and support. In
addition, the Company believes that advanced features for messaging and
Internet access largely differentiate Made2Manage from its peers. The Company
believes that Made2Manage competes favorably with the products offered by its
competitors, but there can be no assurance that it will continue to compete
favorably against such products or that it will be able to compete
successfully against potential competitors.
INTELLECTUAL PROPERTY
The Company regards its software products as proprietary in that title to and
ownership of the software it develops resides exclusively with the Company.
The Company relies largely upon its license agreements with customers, dealer
agreements with suppliers, its own software protection schemes,
confidentiality procedures and employee agreements to maintain the trade
secret aspects of its products. The Company seeks to protect its programs,
documentation and other written materials under copyright law.
The Company has a U.S. patent application pending for software related to the
Material Requirements Planning feature included in Made2Manage. The Company
has no other patents or patent applications.
The Company believes that it has all necessary rights to market its products,
although there can be no assurance that third parties will not assert
infringement claims in the future.
EMPLOYEES
As of December 31, 1997, the Company employed 149 people, consisting of 46 in
sales and marketing, 39 in product development, 45 in services and 19 in
administration. Each employee signs a confidentiality and nondisclosure
agreement upon joining the Company. The Company believes that its relations
with its employees are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company and their ages as of
December 31, 1997, are as follows:
Name . . . . . . . . Age Position with Company
David B. Wortman . . 46 President, Chief Executive Officer and Director
Christopher D. Clapp 38 Vice President, Marketing
Oliver C. Fowler . . 45 Vice President, Sales
Stephen R. Head. . . 44 Vice President, Finance and Administration, Chief Financial
Officer, Secretary and Treasurer
Gary W. Rush . . . . 40 Vice President, Development
Joseph S. Swern. . . 44 Vice President, Service and Support
DAVID B. WORTMAN joined the Company in September 1993 as Senior Vice President
and has served as President and Chief Executive Officer and a director since
January 1994. Prior to joining the Company, Mr.Wortman held a succession of
senior executive positions with and served as a director of Pritsker
Corporation, a computer software company he co-founded in 1973. Mr. Wortman is
a past President of the Institute of Industrial Engineers and a recipient of
its Outstanding Young Industrial Engineer award. He is Immediate Past
President and a Director of the Indiana Software Association. Mr. Wortman
holds B.S. and M.S. degrees in industrial engineering from Purdue University.
CHRISTOPHER D. CLAPP joined the Company as Vice President, Marketing in April
1996. From November 1993 to February 1996, Mr. Clapp was employed by
Centillion Data Systems, Inc., a company which develops and markets software
and services for the telecommunications industry, last serving as Vice
President and General Manager of that company's communications division. From
January 1989 to November 1993, Mr. Clapp was employed at Pritsker Corporation,
holding various positions, including Product Manager and Manager, Sales
Operations. As Product Manager at Pritsker Corporation, Mr. Clapp designed and
implemented the worldwide marketing strategy for that company's manufacturing
planning and scheduling software system. Mr. Clapp holds a B.S. degree in
industrial engineering from Purdue University.
OLIVER C. FOWLER joined the Company as Vice President, Sales in April 1995.
Mr. Fowler has been involved in the sales of computer hardware and software
products since 1975. From 1989 to 1995, Mr. Fowler held a succession of sales
management positions, including Director of Strategic Accounts, with Symix
Computer Systems, Inc., a computer software company specializing in the ERP
systems market for discrete, midsize manufacturers. Mr. Fowler holds a B.A.
from Marietta College in Management/ Economics and has a Certification in
Production and Inventory Management from the American Production and Inventory
Control Society.
STEPHEN R. HEAD joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in December 1996 and has served as
Secretary and Treasurer since January 1997. From January 1994 through November
1996, Mr. Head served as Vice President, Finance and Chief Financial Officer
of Software Artistry, Inc., a software company that became a public company in
March 1995. From 1991 through December 1993, he served as a part-time Chief
Financial Officer and Controller for Software Artistry, Inc. and rendered
similar services to other small and growing companies, including four other
software companies. He is a founding member and former Treasurer of the
Indiana Software Association. Mr. Head is a Certified Public Accountant and
holds B.S. and M.B.A. degrees from Indiana University.
GARY W. RUSH joined the Company as Vice President, Development in May 1994.
Prior to joining the Company, Mr. Rush was President of Micro Data Base
Systems, Inc., a provider of relational and network database management
software. During his 14 year tenure at Micro Data Base Systems, Mr. Rush held
various other positions, including Chief Operating Officer, Vice President of
Development, and Vice President of Consulting. Mr. Rush holds a B.S.E.E. and a
M.S.M. with a focus on management information systems from Purdue University.
JOSEPH S. SWERN joined the Company in September 1995 as Vice President,
Service and Support. Prior to joining the Company, Mr. Swern was Vice
President of Professional Services at Symix Computer Systems, Inc. During his
seven year tenure at Symix, Mr. Swern also served as Director of Consulting
Services, Manager of Implementation Consulting and Senior Implementation
Consultant. Preceding his employment with Symix Computer Systems, Inc., Mr.
Swern spent ten years working in both discrete and process manufacturing,
holding various management positions. Mr. Swern holds a B.S. degree in
industrial management from Franklin University and a M.B.A. from Capital
University. He has a Certification in Production and Inventory Management from
the American Production and Inventory Control Society.
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.
The Company is headquartered in Indianapolis, Indiana, where it leases space
housing administrative, sales and marketing, customer service and product
development activities. In addition, the Company leases office space in two
other locations in the United States. The Company believes that its facilities
are adequate for the present, but anticipates expanding its facilities, as
necessary, in the future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of stockholders of the Company was held on November 21, 1997
at the Company's corporate offices at which the stockholders approved the
following four proposals.
Proposal 1 The stockholders approved the minutes from the Annual Meeting of
Stockholders of the Company held on May 8, 1997.
Votes For . . 1,851,072
Votes Against --
Abstentions . --
Proposal 2 The stockholders approved the Company's Amended and Restated
Articles of Incorporation, in the form approved by the Company's Board of
Directors and filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 333-38177, which deleted certain provisions relating to the
outstanding shares of Preferred Stock, which converted into shares of Common
Stock prior to the consummation of the Company's initial public offering in
December 1997.
Common Stock, voting as a separate voting group:
Votes For 371,271
Votes Against --
Abstentions --
Convertible Preferred Stock, voting as a separate voting group:
Votes For 1,479,801
Votes Against --
Abstentions --
Common and Convertible Preferred Stock, voting as a one voting
group:
Votes For 1,851,072
Votes Against --
Abstentions --
Proposal 3 The stockholders approved the Made2Manage Systems, Inc. Employee
Stock Purchase Plan, in the form approved by the Company's Board and filed as
an exhibit to the Company's Registration Statement on Form S-1, File No.
333-38177 (the "Stock Purchase Plan"), and the reservation of 100,000 shares
for issuance under the Stock Purchase Plan.
Votes For . . 1,851,072
Votes Against
Abstentions
Proposal 4 The stockholders approved amendments to the Made2Manage Systems,
Inc. Stock Option Plan (the "Option Plan") to increase the number of shares
reserved for issuance pursuant to the Option Plan by 200,000 shares to 1.8
million shares and to provide formula grants of options to directors of the
Company.
Votes For . . 1,851,072
Votes Against --
Abstentions . --
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock began trading on The Nasdaq Stock Market under the
symbol MTMS on December 19, 1997. Prior to that date, there was no public
market for the Common Stock. As of March 2, 1998, the Company had 57
stockholders of record and approximately 1,100 beneficial holders of its
Common Stock.
The Company has never declared or paid any cash dividends on its Common Stock.
The Company currently intends to retain all earnings to finance future growth
and therefore does not anticipate paying any cash dividends in the foreseeable
future.
The high and low sales prices for the Common Stock as reported on The Nasdaq
Stock Market from the date of the public offering on December 19, 1997 through
December 31, 1997 were $8.00 and $7.50, respectively.
The Company anticipates that factors such as quarterly fluctuation in the
results of operations and announcements of new products by the Company or by
its competitors may cause the market price of the Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in
general has, and the share prices of technology companies in particular have,
experienced extreme price fluctuations. These broad market and industry
fluctuations may adversely affect the market price of the Company's Common
Stock.
During the year ending December 31, 1997, the Company issued an aggregate of
33,437 shares of Common Stock to seven key employees, former employees and
members of the Company's Board of Directors at various times upon the exercise
of options granted pursuant to the Option Plan for $49,792. In addition, in
connection with its initial public offering, on December 22, 1997 the Company
issued 1,479,822 shares of Common Stock upon the conversion of all outstanding
shares of convertible preferred stock and issued 14,063 shares of Class C
preferred Stock in exchange for $56,252 in cash upon the exercise of
outstanding warrants. During the year ended December 31, 1997, the Company
issued options to purchase 293,000 shares of Common Stock at the fair market
value of the Common Stock on the date of grant with 25% of such options
exercisable on the first anniversary of the date of grant and the remaining
75% of such options exercisable at the rate of 1/48 of the amount granted in
each of the next 36 consecutive months. The issuances of these securities were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), but reason of Section 4(2) thereof and Rule 701 of the
Securities and Exchange Commission.
The Company's Registration Statement on Form S-1, File No. 333-38177
registering 2,587,500 shares of the Company's authorized but unissued Common
Stock under the Securities Act was declared effective by the Securities and
Exchange Commission on December 19, 1997 and a public offering of those shares
commenced thereafter. The managing underwriters for the offering were First
Albany Corporation, Van Kasper & Company and RvR Securities Corp. The Company
sold 2,310,937 shares of Common Stock in the offering with an aggregate
offering price of $17,332,028 and certain stockholders of the Company (the
"Selling Stockholders") sold 103,953 shares of Common Stock with an aggregate
offering price of $779,647, including 89,890 shares of Common Stock sold upon
the exercise of the underwriters' overallotment option. The aggregate offering
price of all shares sold was $18,111,675. If all of the shares which were
registered were sold, the aggregate offering price of all shares of Common
Stock sold would have been $19,406,250.
The proceeds received by the Company from the offering were $15,469,000 after
deducting expenses paid by the Company of $1,863,028, consisting of $1,213,242
for the underwriting discounts and commission and $649,786 for legal,
accounting, printing and other filing related fees and costs. As of December
31, 1997, the Company had used approximately $1.0 million of the net proceeds
from the offering to repay outstanding indebtedness and had invested the
balance in short-term money market funds, U.S. Treasuries and variable rate
revenue bonds backed by letters of credit from the Company's commercial bank.
ITEM 6. SELECTED FINANCIAL DATA.
Year Year Year Year Year
Ended Ended Ended Ended Ended
December December December December December
31, 31, 31, 31, 31,
1997 1996 1995 1994 1993
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues . . . . . . . . . . . . $ 16,167 $ 9,379 $ 5,935 $ 4,452 $ 3,938
Operating income . . . . . . . . . . . 1,014 700 447 546 24
Income tax provision (benefit) (1) . . 366 (1,028) 6 5 --
Net income (loss). . . . . . . . . . . 613 1,606 392 443 (90)
Per share:
Basic:
Net income (loss) per share. . . . 1.17 4.29 1.32 1.98 (.45)
Share used . . . . . . . . . . . . 524 375 297 224 199
Diluted:
Net income (loss) per share . . . .25 .73 .21 .26 (.06)
Shares used. . . . . . . . . . . . 2,440 2,220 1,868 1,704 1,622
Cash dividends declared per share. . . -- -- -- -- --
At At At At At
December December December December December
31, 31, 31, 31, 31,
1997 1996 1995 1994 1993
(In thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents (2) . . . . $ 16,805 $ 1,139 $ 1,033 $ 893 $ 158
Total assets. . . . . . . . . . . . . 25,560 6,666 3,576 2,270 1,496
Long-term obligations, less current
portion . . . . . . . . . . . . . . -- 436 452 349 651
Total stockholders' equity (deficit). 18,304 2,116 509 80 (877)
(1) The income tax benefit for 1996 results from the reversal of a
valuation allowance that had been established to offset future tax benefits of
net operating loss carryforwards. The valuation allowance was reversed during
1996 based on management's analysis which considered the Company's profitable
operating results and future outlook because of the market acceptance of its
Windows product. As a result of this analysis, management determined it was
more likely than not that the deferred income taxes at December 31, 1996 would
be realized. For subsequent periods the Company has provided for income taxes
utilizing federal and state statutory income tax rates.
(2) On December 19, 1997, the Company completed its initial public
offering of Common Stock. The Company received net proceeds of $15.5 million,
of which $1.0 million was used to repay outstanding indebtedness.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report contains 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. Such forward-looking statements may be deemed to include
statements regarding the intent, belief or current expectations of the Company
and its management with respect to (i) the Company's strategic plans, (ii) the
Company's future profitability, (iii) the Company's policies regarding capital
expenditures, financing or other matters, (iv) industry trends affecting the
Company's financial condition and results of operations, (v) the Company's
sales or marketing plans and (vi) the Company's growth strategy. 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. 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 the Company or the Company's
management that the Company's plans and objectives will be achieved.
OVERVIEW
The Company develops, markets, licenses and supports Made2Manage, an open
architecture, standards-based, client/server ERP software solution for small
and midsize manufacturers engaged in engineer-to-order, make-to-order,
make-to-stock and mixed mode operations. The Company has developed
manufacturing software applications for this market since its inception in
1986. The Company's first generation of Made2Manage, designed for PC networks
running the DOS operating system on Novell networks, was introduced in 1988,
and the Company introduced a UNIX version of Made2Manage in 1990. The Company
continues to support its existing DOS and UNIX customers, but ceased offering
the DOS and UNIX versions to new customers in 1995 and 1994, respectively.
Beginning in mid-1994, the Company made a significant investment in the
development of the Windows version of Made2Manage. The Company further
increased its expenditures for developing its Windows product in 1995 and
introduced this product late in that year. Development expenses continued to
increase during 1996 and 1997 but have represented a smaller percentage of
total revenues. As of December 31, 1995, the Company had fully amortized the
capitalized development costs incurred in connection with the DOS and UNIX
versions of Made2Manage, and the Company currently expenses software
development costs as they are incurred. In 1995, 1996 and 1997, sales and
marketing expenses increased in conjunction with the introduction of the
Company's new Windows product. Substantially all license revenues after 1995
were derived from Made2Manage for Windows, including licenses sold to a
significant number of licensees of prior versions of Made2Manage.
The Company's revenues are derived from software licenses, services and
hardware. Software revenues are generated from licensing software to new
customers, from the conversion of existing DOS or UNIX customers to the
Windows version, from current customers increasing the number of licensed
users and from licensing new modules. The Company recognizes revenue from
software license fees and hardware upon shipment to the customer following
execution of a sales agreement. Service revenues are generated from (i) annual
fees paid by customers to receive the Company's customer support services and
Made2Manage software upgrades and (ii) from implementation, education and
consulting services. Support is typically purchased with the initial software
license and is renewable annually. Support fees are recognized ratably over
the term of the agreement. Service revenues from implementation, education and
consulting services are generally included in the initial agreement. The
Company recognizes revenue from these services as they are performed. Hardware
revenues are generated primarily from the sale of bar-coding and data
collection equipment used in connection with Made2Manage and constitute a
relatively small component of total revenues.
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.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented by
certain items included in the Company's statements of operations for the
periods indicated.
Percent Percent
Increase/ Increase/
(Decrease) (Decrease)
Year Year Year
Ended Ended Ended
December December December
31, 31, 31, 1997 over 1996 over
1997 1996 1995 1996 1995
Revenues:
Software. . . . . . . . . . 63.4% 65.4% 60.2% 66.9% 71.9%
Services. . . . . . . . . . 32.8 32.0 36.4 76.8 38.8
Hardware. . . . . . . . . . 3.8 2.6 3.4 156.0 18.7
Total revenue. . . . . . . 100.0 100.0 100.0 72.4 58.0
Cost of revenues:
Software. . . . . . . . . . 3.5 6.4 7.0 (5.0) 43.6
Services. . . . . . . . . . 20.7 18.8 19.8 90.0 50.0
Hardware. . . . . . . . . . 2.6 1.7 2.8 155.5 .6
Total costs of revenues . . 26.8 26.9 29.6 71.7 43.9
Gross profit. . . . . . . . 73.2 73.1 70.4 72.6 64.0
Operating expenses:
Sales and marketing . . . . 40.5 35.0 28.9 99.3 91.1
Product development . . . . 14.4 18.3 20.0 35.6 44.5
General and administrative. 12.0 12.3 14.0 68.8 39.5
Total operating expenses. . 66.9 65.6 62.9 75.8 64.9
Operating income. . . . . . . 6.3 7.5 7.5 44.9 56.6
Other expense, net. . . . . . .2 1.3 .8 (71.3) 149.0
Income before taxes . . . . . 6.1 6.2 6.7 69.4 45.2
Income tax provision. . . . . 2.3 (10.9) .1 NM NM
(benefit)
Net income. . . . . . . . . . 3.8% 17.1% 6.6% 61.8% 309.7%
NM - Not Meaningful
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues
Revenues are derived from software license fees, service and support fees and
hardware sales. Total revenues increased by $6.8 million, or 72.4%, to $16.2
million in 1997 from $9.4 million in 1996. Total revenues increased by $3.4
million, or 58.0%, in 1996 from $5.9 million in 1995. The increase was
primarily due to a greater volume of license transactions, an increase in
average contract size, sales of new software modules, an increase in market
awareness and acceptance of the Company's Windows product and an expansion of
the Company's sales and marketing organizations. The Company does not expect
revenues to continue to increase at this rate. The Company has not
historically recognized significant annual revenues from any single customer.
Software Revenues. Software revenues increased by $4.1 million, or 66.9%, to
$10.2 million in 1997 from $6.1 million in 1996 and by $2.6 million, or 72.0%,
in 1996 from $3.6 million in 1995. Software license revenues constituted
63.4%, 65.4% and 60.2% of total revenues in 1997, 1996 and 1995, respectively.
The increase in software license revenues in 1997 and 1996 was primarily due
to a greater volume of license transactions and an increase in average
contract size.
Services Revenues. Services revenues increased by $2.3 million, or 76.8%, to
$5.3 million in 1997 from $3.0 million in 1996 and by $838,000, or 38.8%, in
1996 from $2.2 million in 1995. These revenues constituted 32.8%, 32.0% and
36.4% of total revenues in 1997, 1996 and 1995, respectively. The increases in
the dollar amount recognized were due to (i) increased support fees from an
expanded user base, (ii) sales of expanded implementation and consulting
services offerings and (iii) sales of expanded educational offerings.
Hardware Revenues. Hardware revenues increased by $376,000, or 156.0%, to
$617,000 in 1997 from $241,000 in 1996 and by $38,000, or 18.7%, in 1996 from
$203,000 in 1995. These revenues constituted 3.8%, 2.6% and 3.4% of total
revenues in 1997, 1996 and 1995, respectively. During this period, the Company
limited the type of hardware equipment it sold to certain bar-coding and data
collection equipment necessary to utilize certain features of Made2Manage. The
increase in 1997 was due to increased demand for this equipment.
Costs of Revenues
Costs of Software Revenues. Costs of software revenues totaled $569,000,
$599,000 and $417,000 in 1997, 1996 and 1995, respectively, resulting in gross
profits of 94.4%, 90.2% and 88.3% of software revenues, respectively. The
increase in the gross profit in 1997 was due to pricing changes for certain
software the Company resells. Costs of software in 1995 included the
amortization of the remaining software development costs capitalized in
connection with the DOS and UNIX versions of Made2Manage and certain royalty
payments related to the DOS version of Made2Manage. No development costs have
been capitalized for the Windows version of Made2Manage.
Costs of Services Revenues. Costs of services revenues totaled $3.3 million,
$1.8 million and $1.2 in 1997, 1996 and 1995, respectively, resulting in gross
profits of 36.8%, 41.2% and 45.6% of service revenues, respectively. The
dollar increases were due primarily to the growth in the Company's installed
customer base and related support services revenue, which resulted in an
increase in the staffing levels for technical support, implementation,
consulting and education services. The decline in the gross profits was a
result of an increasing proportion of implementation and education services
revenue relative to support revenue.
Costs of Hardware. Costs of hardware totaled $419,000, $164,000 and $163,000
in 1997, 1996 and 1995, respectively. The gross profit from hardware was
32.1%, 32.0% and 19.7% of hardware revenues in 1997, 1996 and 1995,
respectively.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $6.5 million,
$3.3 million and $1.7 million in 1997, 1996 and 1995, respectively,
representing 40.5%, 35.0% and 28.9% of total revenues, respectively. The
increase in sales and marketing expenses was primarily due to increased (i)
staffing as the Company expanded its field sales force and marketing staff,
(ii) commissions as a result of increased software license revenues, (iii)
marketing activities, including promotional activities and (iv) travel
expenses related to sales and marketing efforts.
Product Development Expenses. Product development expenses were $2.3 million,
$1.7 million and $1.2 million in 1997, 1996 and 1995, respectively,
representing 14.4%, 18.3% and 20.0% of total revenues, respectively. The
Company did not capitalize any software development costs during these years.
The Company began developing its Windows version of Made2Manage in 1994 with
the highest level of product development expense in relation to revenues
occurring in 1995. The Windows version was initially released in late 1995.
Product development expenses increased during each of the years, but decreased
as a percentage of revenue over the same period as the Company spread
development expenses across a broader revenue base.
General and Administrative Expenses. General and administrative expenses were
$1.9 million, $1.2 million and $827,000 in 1997, 1996 and 1995, respectively,
representing 12.0%, 12.3% and 14.0% of total revenues, respectively. The
dollar increases resulted primarily from additional costs incurred to support
the growth of the Company's operations and, to a lesser extent, as a result of
the addition of personnel.
Other Expense, Net
Other expense, net was $35,000, $122,000 and $49,000 in 1997, 1996 and 1995,
respectively, representing .2%, 1.3% and 0.8% of total revenues, respectively.
The decrease in other expense in 1997 compared to 1996 was due primarily to
repayment of indebtedness with a high interest rate in March 1997 and
increased income from investments. The increase in 1996 compared to 1995 was
due primarily to increased borrowings.
Income Tax Provision (Benefit)
In 1995, the Company's income tax provision was significantly reduced as a
result of the utilization of net operating loss carryforwards. Net income for
the year ended December 31, 1996 includes an income tax benefit of $1.2
million resulting from the reversal of valuation allowance which had been
established to offset future tax benefits of net operating loss carryforwards.
The valuation allowance was reversed during 1996 based on management's
analysis, which considered the Company's profitable operating results and
future outlook because of the market acceptance of its Windows product. As a
result of this analysis, management determined it was more likely than not
that the deferred income taxes at December 31, 1996 would be realized. For
1997 the Company provided for income taxes utilizing federal and state
statutory income tax rates. See Note 7 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through equity
capital, including the Company's initial public offering of Common Stock in
December 1997, debt and cash generated from operations. As of December 31,
1997, the Company had $16.8 million of cash and cash equivalents resulting
principally from the proceeds of the Company's initial public offering.
Cash flows from operations were $2.3 million, $560,000, and $506,000 in 1997,
1996 and 1995, respectively. Cash used in investing activities was primarily
related to the purchase of computer equipment and office furniture and
aggregated $1.4 million, $584,000 and $513,000 in 1997, 1996 and 1995,
respectively. Net borrowings decreased $793,000 in 1997 principally as a
result of the repayment of outstanding indebtedness using the proceeds of the
initial public offering. Net borrowings increased by $129,000 and by $111,000
in 1996 and 1995, respectively, to fund purchases of property and equipment.
At December 31, 1997, the Company had working capital of $16.7 million.
Accounts receivable, net of allowance for doubtful accounts, was $5.8 million
and $3.5 million at December 31, 1997 and 1996, respectively. The average
accounts receivable days' outstanding was 102 days as of December 31, 1997 and
was 94 days at December 31, 1996. Deferred revenue increased to $4.9 million
at December 31, 1997 from $2.3 million at December 31, 1996 due to (i) an
increased number of contracts that included service fees, which are deferred
until provided, and (ii) a greater number of support agreements for multiple
years of support, which are recognized on a straight-line basis over the
support period. Deferred revenue is related 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.
The Company has a revolving credit agreement with a commercial bank which
expires on July 1, 1998, borrowings under which bear interest at the rate of
prime plus .75% per annum (9.25% at December 31, 1997). Loans under the
revolving credit agreement are limited, in the aggregate, to the lesser of $1
million and a "borrowing base" amount. As of December 31, 1997, the Company
satisfied the borrowing base requirements and was eligible to borrow up to the
maximum of $1.0 million under the revolving credit agreement. The Company has
not borrowed under the revolving line of credit.
Management believes that cash and cash equivalents, cash flow from operations
and credit commitments will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements at least
through 1998.
YEAR 2000 COMPLIANCE
The Company utilizes a combination of its own software and other commercially
available software for running its operations. Based on its evaluation, the
Company believes that there will be no significant costs associated with
ensuring year 2000 compliance of its internal systems.
The Company continuously tests Company developed software for year 2000
compliance and has not identified any problems related to year 2000
compliance. The Company's legacy DOS and UNIX products are not year 2000
compliant. Users of these prior versions were notified in 1996 of this
non-compliance, and given aggressive upgrade pricing and assistance to migrate
to the Windows version.
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
ACCOUNTING PRONOUNCEMENTS
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2), was issued in October 1997. SOP
97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Therefore, SOP 97-2 will affect transactions entered
into by the Company beginning January 1, 1998. SOP 97-2 addresses various
aspects of the recognition of revenue on software transactions and supersedes
SOP 91-1. SOP 97-2 provides guidance on software arrangements consisting of
multiple elements. The revenue for an individual element is allocated based on
the relative fair market value of that element as compared to the total price.
Revenue and is recognized on each element as that element is performed or
completed. The Company is does not expect that SOP 97-2 will have a material
effect upon the Company's financial statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
Fluctuations of Quarterly Operating Results; Seasonality
The Company has experienced in the past, and expects to experience in the
future, significant fluctuations in quarterly operating results. A substantial
portion of the Company's software license revenue in each quarter is from
licenses signed and product shipped in that quarter, and such revenues
historically have been recorded largely in the third month of a quarter, with
a concentration of revenues mostly in the last week of that third month.
Accordingly, the Company's quarterly results of operations are difficult to
predict, and delays in product delivery or in closings of sales near the end
of a quarter could cause quarterly revenues and, to a greater degree, net
income to fall substantially short of anticipated levels. In addition, the
Company has experienced a seasonal pattern in its 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 the Company's control, that may contribute
to fluctuations in quarterly operating results include the size of individual
orders, the timing of product introductions or enhancements by the Company and
its 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 the Company or its competitors, product quality problems,
personnel changes, conditions or events in the manufacturing industry, and
general economic conditions. The sales cycle for Made2Manage typically ranges
from three to nine months. However, license signing may be delayed for a
number of reasons outside the control of the Company. Since software is
generally shipped as orders are received, the Company historically has
operated without significant backlog. Because the Company's operating expenses
are based on anticipated revenue levels and a high percentage of the Company's
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, the Company currently intends to
increase its 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, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
Product and Market Concentration
All of the Company's revenues are currently derived from licenses of
Made2Manage and related sales of support, services and hardware. In the near
term, Made2Manage and related services are expected to continue to account for
substantially all of the Company's revenues. Accordingly, any event that
adversely affects the sale of Made2Manage, such as competition from other
products, significant quality problems, incompatibility with third party
hardware or software products, negative publicity or evaluation, reduced
market acceptance of, or obsolescence of the hardware platforms on, or
software environments in, which Made2Manage operates, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's business depends substantially upon the software expenditures of
small and midsize manufacturers, which in part depend upon the demand for such
manufacturers' products. A recession or other adverse event affecting
manufacturing industries in the United States could impact such demand,
forcing manufacturers in the Company's target market to curtail or postpone
capital expenditures on business information systems. While in the long term
the Company plans to distribute Made2Manage in international markets, the
Company has no significant experience in international markets and there can
be no assurance that such expansion can be successfully accomplished. Any
adverse change in the amount or timing of software expenditures by the
Company's target customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Third Party Technologies
Made2Manage utilizes a variety of third party technologies, including
operating systems and other applications developed and supported by Microsoft
Corporation ("Microsoft"). There can be no assurance that Microsoft will
continue to support the operating systems utilized by Made2Manage or that such
operating systems will continue to be widely accepted in the Company's target
market. Made2Manage relies heavily on Microsoft's Visual Studio, and there can
be no assurance that Microsoft will not discontinue or otherwise fail to
support Visual Studio or any of its components. In addition, the Company
utilizes a number of other programming tools and applications, including
ActiveX, OLE, ODBC, OLEDB and Internet Information Server. The Company also
sub-licenses and resells various third party products, including
InstallShield, Microsoft Project 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 the Company's target market. The occurrence of any of
these events could have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Development
The Company's growth and future financial performance depend in part upon its
ability to enhance existing applications and to develop and introduce new
applications to incorporate technological advances and satisfy customer
requirements or expectations. As a result of the complexities inherent in
product development, there can be no assurance that either improvements to
Made2Manage or applications the Company develops in the future will be
delivered on a timely basis or ultimately accepted in the market. Any failure
by the Company to anticipate or respond adequately to technological
development or end-user requirements, or any significant delays in product
development or introduction, could damage the Company's competitive position
and have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Key Personnel
The Company's success depends to a significant extent upon a number of key
employees, including members of senior management. None of the Company's
employees is subject to an employment contract. The Company's ability to
implement its business strategy is substantially dependent on its ability to
attract, on a timely basis, and retain skilled personnel, especially sales,
service and support personnel. Competition for such personnel is intense, and
the Company competes for such personnel with numerous companies, including
larger, more established companies with significantly greater financial
resources than the Company. There can be no assurance that the Company 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 the
Company's business, financial condition and results of operations.
Management of Growth
The Company has experienced rapid growth in its business and operations. While
the Company has managed this growth to date, there can be no assurance that it
will be able to effectively do so in the future. The ability of the Company to
manage its growth successfully is contingent on a number of factors including
its ability to implement and improve its own operational, financial and
management information systems and to motivate and effectively manage its
employees. If the Company were unable to manage future growth effectively, its
business, financial condition and results of operations would be materially
and adversely affected.
Insufficient Customer Commitment
To obtain the maximum rewards of Made2Manage, customers must commit resources
to implement and manage the product and to train their employees in the use of
the product. The failure of customers to commit sufficient resources to those
tasks or to carry them out effectively could result in customer
dissatisfaction with Made2Manage. If a significant number of customers became
dissatisfied, the Company's reputation could be tarnished and the Company's
business, financial condition and results of operations could be materially
and adversely affected.
Competition
The business management applications software market is intensely competitive,
rapidly changing and significantly affected by new product offerings and other
market activities. The Company faces competition from a variety of software
vendors, including application software vendors, software tool vendors and
relational database management systems vendors. A number of companies offer
Windows compatible products that are directed at the market for ERP systems.
The technologies the Company used to develop Made2Manage are generally
available and widely known and include technologies developed by Microsoft.
There can be no assurance that the Company's competitors will not develop
products based on the same technology upon which Made2Manage is based. The
Company's competitors include a large number of software and system vendors,
many of which are public companies and also private companies. In addition,
there are numerous national and regional vendors that offer alternative
systems. Several software companies that have traditionally marketed ERP
systems to larger manufacturers. have announced initiatives to market ERP
systems to midsize manufacturers. Many of the Company's existing competitors,
as well as a number of potential competitors, have significantly greater
financial, technical and marketing resources and a larger installed base of
customers than the Company. There can be no assurance that such competitors
will not offer or develop products that are superior to Made2Manage or that
achieve greater market acceptance. If such competition were to result in
significant price declines or loss of market share by Made2Manage, the
Company's business, financial condition and results of operation would be
adversely affected.
Relationships with Value Added Resellers
Historically, the Company has distributed its software products through a
direct sales force and a network of VARs. A significant portion of licenses of
Made2Manage sold to new customers is sold by VARs. If some or all of the VARs
in the Company's network reduce their efforts to sell Made2Manage, promote
competing products or terminate their relationships with the Company, the
Company's 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 in the Company's network
criticize the Company or its products to their customers, the Company's
reputation could be damaged, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
Product Liability and Lack of Insurance
The Company markets, sells and supports a software product used by
manufacturers to manage their business operations and to store substantially
all of their operational data. Software programs as complex as those offered
by the Company may contain undetected errors or "bugs," despite testing by the
Company, 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 the Company's software or that any such errors
will not impair the market acceptance of these products. A customer could be
required to cease operations temporarily and some or all of its key
operational data could be lost or damaged if its information systems fail as
the result of human error, mechanical difficulties or quality problems in
Made2Manage or third party technologies utilized by Made2Manage. The Company
has insurance covering product liability or damages arising from negligent
acts, errors, mistakes or omissions; however there can be no assurance that
this insurance will be adequate. A claim against the Company, if successful
and of a sufficient magnitude, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Proprietary Rights; Risk of Infringement
The Company relies primarily on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its proprietary rights. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop products incorporating technology
that is substantially equivalent or superior to the Company's technology.
Furthermore, other than a pending United States patent application for
software related to the Material Requirements Planning regeneration feature
included in Made2Manage, the Company has no patents or patent applications
pending, and existing copyright laws afford only limited protection. In the
event that the Company is unable to protect its proprietary rights, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
There can be no assurance that the Company will not be subject to claims that
its technology infringes on the intellectual property of third parties, that
the Company 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 the Company's business, financial condition and results of
operations.
Substantial Control by Single Stockholder
Hambrecht & Quist ("H&Q") and its affiliates, as a group, beneficially own
approximately 28.5% of the Company's outstanding Common Stock. As a result,
H&Q and its affiliates will be able to exercise significant influence over all
matters requiring stockholder 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 of the Company.
Effect of Antitakeover Provisions
The Company's Amended and Restated Articles of Incorporation (the "Articles")
authorize the Board of Directors to issue, without stockholder 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 Option Plan
provides that, unless a committee of the Company's 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 of the Company. Further, certain provisions of Indiana law
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. The foregoing
provisions could discourage an attempt by a third party to acquire a
controlling interest in the Company without the approval of the Company's
management even if such third party were willing to purchase shares of Common
Stock at a premium over its then market price.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new applications by the Company
or its competitors, the failure of the Company's earnings to meet the
expectations of securities analysis and investors, as well as other events or
factors. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market price of many high technology companies and which often have been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
Shares Eligible for Future Sale; Registration Rights
The sale of a substantial number of shares of Common Stock in the public
market could adversely affect the market price of Common Stock. As of March 2,
1998, the Company had 4,249,553 shares of Common Stock outstanding, of which
1,819,913 shares of Common Stock are "Restricted Shares," which are subject to
restrictions under the Securities Act. Substantially all of the Restricted
Shares are subject to lock-up agreements under which the holders have agreed
not to sell or otherwise dispose of any of their shares for a period of six
months after December 19 ,1997 without the prior written consent of First
Albany Corporation. In its sole discretion and at any time without notice,
First Albany Corporation may release all or any portion of the shares of
Common Stock subject to the lock-up agreements. Of the Restricted Shares,
275,209 will become available for sale in the public market immediately
following expiration of the six month lock-up period pursuant to Rule 144(k),
and 1,520,198 will become eligible for sale in the public market following the
expiration of the six month lock-up period, subject to the volume and other
limitations of Rule 144 and Rule 701. As of March 2, 1998, there were options
outstanding to purchase 1,397,781 shares of Common Stock at a weighted average
price of $4.65 per share under the Company's Option Plan, of which options to
purchase 508,488 shares of Common Stock were then vested and exercisable. All
holders of options exercisable as of March 2, 1998 have signed six month
lock-up agreements. The Company has reserved 150,563 shares for future grant
under the Option Plan. The Company has reserved 100,000 shares of Common Stock
for issuance under the Stock Purchase Plan. To date, no shares have been
issued under the Stock Purchase Plan. The Company filed registration
statements registering shares of Common Stock issued pursuant to the Option
Plan and Stock Purchase Plan on January 30, 1998. Accordingly, shares issued
pursuant to these plans will be saleable in the public market upon issuance,
subject to certain restrictions.
Holders of approximately 1,457,698 shares of Common Stock, have certain rights
with respect to the registration of their shares under the Securities Act. If
the holders of registration rights cause a large number of shares of Common
Stock to be registered and sold in the public market, such sales could have a
material adverse effect on the market price for the Common Stock. If the
Company were required to include these shares in a Company-related
registration under the Securities Act pursuant to the exercise of piggyback
registration rights, such sales could have a material adverse effect on the
Company's ability to raise capital.
Absence of Dividends
The Company does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain its
earnings, if any, for the development of its business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. INDEX TO FINANCIAL STATEMENTS.
PAGE
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . 22
Statements of Operations for the years ended December 31, 1997, 1996 and 1995. . . . 23
Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 24
1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. . . . 25
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Made2Manage Systems, Inc.:
We have audited the financial statements and financial statement schedule of
Made2Manage Systems, Inc. listed in Item 14(a) of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Made2Manage Systems, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken s a whole, presents
fairly, in all material respects, the information required to in included
therein.
/s/Coopers & Lybrand L.L.P.
Indianapolis, Indiana
February 3, 1998
MADE2MANAGE SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31, December 31
1997 1996
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 16,805 $ 1,139
Trade accounts receivable, net of allowance for doubtful 5,799 3,450
accounts of $290 and $188 in 1997 and 1996, respectively
Prepaid expenses and other . . . . . . . . . . . . . . . 367 99
Deferred income taxes. . . . . . . . . . . . . . . . . . 648 554
Total current assets . . . . . . . . . . . . . . . . . 23,619 5,242
Property and equipment, net. . . . . . . . . . . . . . . . 1,876 921
Deferred income taxes. . . . . . . . . . . . . . . . . . . 65 503
Total assets . . . . . . . . . . . . . . . . . . . . $ 25,560 $ 6,666
December 31, December 31
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt . . . . . $ -- $ 357
Accounts payable. . . . . . . . . . . . . . 556 426
Accrued liabilities . . . . . . . . . . . . 595 480
Accrued compensation and related expenses . 1,176 539
Deferred revenue. . . . . . . . . . . . . . 4,575 2,267
Total current liabilities . . . . . . . 6,902 4,069
Long-term obligations, net of current portion -- 436
Deferred revenue. . . . . . . . . . . . . . . 354 45
Total liabilities . . . . . . . . . . . . . . 7,256 4,550
December December
31, 31,
1997 1996
Commitments (Note 6)
Stockholders' Equity:
Convertible preferred stock, no par value:
Series A; no shares in 1997 and 79,137 shares authorized, issued and
outstanding in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 178
Series B; no shares in 1997 and 255,331 shares authorized, issued and
outstanding in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 471
Series C; no shares in 1997 and 577,643 shares authorized and 563,580 issued
and outstanding in 1996. . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,234
Series D; no shares in 1997 and 750,000 shares authorized and 581,776 issued
and outstanding in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,159
Preferred stock, no par value; 2,000,000 shares authorized, no shares issued and
outstanding in 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, no par value; 10,000,000 shares authorized, 4,214,803 and
376,544 shares issued and outstanding in 1997 and 1996, respectively. . . . . . 19,927 310
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,623) (2,236)
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 18,304 2,116
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $ 25,560 $ 6,666
See accompanying notes.
MADE2MANAGE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1997 1996 1995
Revenues:
Software. . . . . . . . . . . . $ 10,250 $ 6,140 $ 3,572
Services. . . . . . . . . . . . 5,300 2,998 2,160
Hardware. . . . . . . . . . . . 617 241 203
Total revenues. . . . . . . . 16,167 9,379 5,935
Costs of revenues:
Software. . . . . . . . . . . . 569 599 417
Services. . . . . . . . . . . . 3,347 1,762 1,175
Hardware. . . . . . . . . . . . 419 164 163
Total costs of revenues . . . 4,335 2,525 1,755
Gross profit. . . . . . . 11,832 6,854 4,180
Operating expenses:
Sales and marketing . . . . . . 6,541 3,282 1,717
Product development . . . . . . 2,239 1,718 1,189
General and administrative. . . 1,948 1,154 827
Total operating expenses. 10,818 6,154 3,733
Operating income. . . . . . . . . 1,014 700 447
Other expense, net. . . . . . . . 35 122 49
Income before income taxes. . . . 979 578 398
Income tax provision (benefit). . 366 (1,028) 6
Net income. . . . . . . . . . . . $ 613 $ 1,606 $ 392
Per share amounts:
Basic:
Net income per share. . . . . $ 1.17 $ 4.29 $ 1.32
Average number of shares. . . 524 375 297
Diluted:
Net income per share. . . . . $ .25 $ .73 $ .21
Average number of shares. . . 2,440 2,200 1,868
See accompanying notes.
30
MADE2ANAGE SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Convertible Convertible Convertible Convertible Convertible Convertible
Preferred Preferred Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Stock Stock
Series A Series A Series B Series B Series C Series C
Number Number Number Number Number Number
of of of of of of
Shares Amount Shares Amount Shares Amount
Balances, December 31, 1994 . . 79,137 $ 178 255,331 $ 471 563,580 $ 2,234
Exercise of stock options . . -- -- -- -- -- --
Net Income. . . . . . . . . . -- -- -- -- -- --
Balances, December 31, 1995 . . 79,137 178 255,331 471 563,580 2,234
Exercise of stock options . . -- -- -- -- -- --
Net Income. . . . . . . . . . -- -- -- -- -- --
Balances, December 31, 1996 . . 79,137 178 255,331 471 563,580 2,234
Exercise of stock options . . -- -- -- -- -- --
Issuance of Common Stock. . . -- -- -- -- -- --
Exercise of warrants. . . . . -- -- -- -- 14,063 56
Conversion of preferred stock (79,137) (178) (255,331) (471) (577,643) (2,290)
Net Income. . . . . . . . . . -- -- -- -- -- --
Balances, December 31, 1997 . . -- $ -- -- $ -- -- $ --
Convertible Convertible
Preferred Preferred
Stock Stock Common Common
Series D Series D Stock Stock
Number Number Number Total
of of of of Accum. Stockholders'
Shares Amount Shares Amount Deficit Equity
Balances, December 31, 1994 . . 581,776 $ 1,159 232,075 $ 273 (4,234) $ 81
Exercise of stock options . . -- -- 141,031 36 -- 36
Net Income. . . . . . . . . . -- -- -- -- 392 392
Balances, December 31, 1995 . . 581,776 1,159 373,106 309 (3,842) 509
Exercise of stock options . . -- -- 3,438 1 -- 1
Net Income. . . . . . . . . . -- -- -- -- 1,606 1,606
Balances, December 31, 1996 . . 581,776 1,159 376,544 310 (2,236) 2,116
Exercise of stock options . . -- -- 33,437 50 -- 50
Issuance of Common Stock. . . -- -- 2,310,937 15,469 -- 15,469
Exercise of warrants. . . . . -- -- -- -- -- 56
Conversion of preferred stock (581,776) (1,159) 1,493,885 4,098 -- --
Net Income. . . . . . . . . . -- -- -- -- 613 613
Balances, December 31, 1997 . . -- $ -- 4,214,803 $19,927 (1,623) $ 18,304
See accompanying notes.
49
MADE2MANAGE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Year Year
Ended Ended Ended
December 31 December 31 December 31
1997 1996 1995
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . $ 613 $ 1,606 $ 392
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment . . . . . . . . . . . . . . . . . 419 204 91
Amortization of software development costs. . -- -- 196
Provision for doubtful accounts . . . . . . . 413 140 90
Loss on disposition of property and equipment -- 44 17
Deferred income taxes . . . . . . . . . . . . 344 (1,057) --
Changes in assets and liabilities:
Trade accounts receivable . . . . . . . . . (2,762) (1,710) (1,080)
Prepaid expenses and other. . . . . . . . . (268) (21) 29
Accounts payable and accrued liabilities. . 245 450 213
Accrued compensation and related expenses . 637 (8) 218
Deferred revenue. . . . . . . . . . . . . . 2,617 912 340
Net cash provided by operating activities . . 2,258 560 506
Investing activities:
Purchases of property and equipment . . . . . . (1,374) (584) (517)
Proceeds from sales of property and equipment . -- -- 4
Net cash used in investing activities . . . . (1,374) (584) (513)
Financing activities:
Proceeds from issuance of common stock, net of.
issuance costs. . . . . . . . . . . . . . . . 15,469 -- --
Proceeds from long-term obligations . . . . . . 684 333 282
Proceeds from exercise of warrants. . . . . . . 56 -- --
Proceeds from common stock options exercised. . 50 1 36
Payments on long-term obligations . . . . . . . (1,477) (204) (171)
Net cash provided by financing activities . . 14,782 130 147
Change in cash and cash equivalents . . . . . . . 15,666 106 140
Cash and cash equivalents, beginning of period. . 1,139 1,033 893
Cash and cash equivalents, end of period. . . . . $ 16,805 $ 1,139 $ 1,033
Supplemental disclosures:
Cash paid for:
Interest expense. . . . . . . . . . . . . . . $ 100 $ 75 $ 93
Income taxes. . . . . . . . . . . . . . . . . 34 18 26
Noncash investing and financing:
Conversion of convertible preferred stock to
common stock. . . . . . . . . . . . . . . . . 4,098 -- --
See accompanying notes.
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Made2Manage Systems, Inc. develops, markets and supports business management
systems for small and midsize manufacturing companies located primarily in the
United States. The Company is dependent upon its primary product, Made2Manage
for Windows, which is a fully integrated, Windows NT-based business software
ERP system for manufacturing companies.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Such investments are valued at
cost which approximates market value.
Property and Equipment
Property and equipment are stated at cost. Leasehold improvements are
amortized over the lesser of the term of the related lease or estimated useful
life. All other assets are depreciated using the straight-line method over
their estimated useful lives which range from three to ten years.
Computer Software Development Costs
The Company accounts for computer software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Costs
incurred prior to establishing the technological feasibility of computer
software products and enhancements to such products are expensed as incurred.
Software development costs incurred by the Company following technological
feasibility, defined by the Company as the existence of a working model of the
product, and prior to the time the product is available for general release to
customers, have not been material and, therefore, have not been capitalized in
1997, 1996 or 1995.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue from the sale of its software and hardware upon
receipt of an executed sales agreement and shipment to the customer provided
there are no vendor obligations to be fulfilled and collectibility is probable
in accordance with Statement of Position 91-1.
Services revenue includes support, education and consulting services. The
Company provides software support and product upgrades to its customers
through separately priced agreements. These support revenues are recognized on
a straight-line basis over the term of the agreement. Revenues from technical
training and consulting services are recognized as provided to customers.
Net Income Per Share
In January 1997, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earning Per Share." SFAS No.
128 specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating
the modified treasury stock method and the three percent materiality provision
and (c) revising the contingent share provision and the supplemental EPS data
requirements. SFAS No. 128 also makes a number of changes to existing
disclosure requirements.
SFAS No. 128 was adopted in the fourth quarter of 1997 and all prior period
earnings per share data was restated. The net income per share presents EPS
determined in accordance with SFAS No. 128 and is based upon the weighted
average number of common and common equivalent shares outstanding for the
period. Diluted common equivalent shares consist of convertible preferred
stock (using the "if converted" method), stock options and warrants (using the
treasury stock method) as prescribed by SFAS No. 128. Under the treasury stock
method the assumed proceeds from the exercise of stock options and warrants
are applied solely to the repurchase of common stock.
Fair Value of Financial Instrument
The fair value of the Company's financial instruments, which include cash and
cash equivalents, and bank notes payable, approximate their carrying value at
December 31, 1997 and 1996. The Company's commercialization funding obligation
(See Note 4), which had a carrying value of $200,000 at December 31, 1996, had
a fair market value of approximately $254,000 as of that date estimated based
on the current rate offered to the Company on debt with similar maturities.
The commercialization funding obligation was repaid in full on March 31, 1997.
2. COMPUTER SOFTWARE DEVELOPMENT COSTS
During 1995 the Company recorded amortization expense for previously
capitalized computer software development costs. As a result of the completion
of the Company's Windows-based product in late 1995, management fully
amortized those costs associated with the predecessor product.
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
December 31, 1997 December 31, 1996
Computer equipment . . . . . . . . . . . . . . $ 1,404 $ 763
Furniture and equipment. . . . . . . . . . . . 884 406
Leasehold improvements . . . . . . . . . . . . 270 15
2,558 1,184
Less accumulated depreciation and amortization 682 263
$ 1,876 $ 1,921
4. DEBT AND CREDIT AGREEMENTS
Line of Credit
The Company has a $1,000,000 working capital facility with a bank which had no
amounts outstanding at December 31, 1997. This line of credit expires July 1,
1998. Interest is at the prime rate plus .75% (9.25% at December 31, 1997).
Long Term Obligations
Long-term obligations are summarized as follows (in thousands):
1997 1996
Bank notes payable . . . . . . . . . $ -- $ 556
Commercialization funding obligation -- 200
Other. . . . . . . . . . . . . . . . -- 37
-- 793
Less current portion . . . . . . . . -- 357
$ -- $ 436
The commercialization funding agreement was repaid in March 1997 and all other
outstanding indebtedness was repaid in December 1997 with the proceeds from
the Company's initial public offering.
5. STOCKHOLDERS' EQUITY
In December 1997, the Company completed an initial public offering of
2,310,937 shares of common stock at $7.50 per share, resulting in net proceeds
of $15,469,000 after deducting underwriting discounts and other costs. All
issued and outstanding Series A, B, C and D convertible preferred stock were
automatically converted into an aggregate of 1,493,885 shares of common stock
upon the completion of the offering.
Preferred Stock
Authorized preferred stock not currently designated is issuable in series
under such terms and conditions as the Board of Directors may determine.
Stock Warrants
The Company issued warrants that entitled the holders to purchase 14,063
shares of series C preferred stock at an exercise price of $4.00 per share. In
conjunction with the initial public offering of the Company's common stock
these warrants were exercised and the series C preferred stock was converted
to common stock.
Common Stock Options
The Company's Option Plan, adopted in 1990 and amended in July 1996 and
November 1997, authorizes the granting of incentive and nonqualified stock
options. The Board of Directors has approved up to an aggregate of 1,800,000
shares for issuance under this plan. The exercise price of the options must
not be less than the fair market value of the common stock for incentive
options, or 85% of the fair market value for nonqualified options, at the date
of grant. Options granted under the Option Plan generally vest over four
years, with 25% exercisable one year from date of grant and the remaining 75%
at the rate of 1/48th of the amount granted in each of the next 36 consecutive
months. Options granted prior to 1996 generally expire five years from the
date of grant and options granted subsequently expire ten years from date of
grant. The plan terminates in 2001 but may be terminated by the Board of
Directors at any time.
At December 31, 1997, options for 489,163 shares of common stock were
available for future grants under the plan.
Activity in the option plan is summarized as follows:
Years Ended December 31
1997 1997 1996 1996 1995 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year . 856,368 $ 2.45 349,325 $ 0.22 318,250 $ 0.23
Granted. . . . . . . . . . . . . 293,000 6.12 529,500 3.86 176,500 0.25
Exercised. . . . . . . . . . . . (33,437) 1.49 (3,438) 0.20 (141,031) 0.26
Forfeited. . . . . . . . . . . . (22,000) 2.94 (19,019) 1.18 (4,394) 0.21
Outstanding at end of year . . . . 1,093,931 3.45 856,368 2.45 349,325 0.22
Options exercisable at end of year 455,797 1.85 217,622 0.21 137,751 0.20
Options outstanding at December 31, 1997 are summarized as follows:
Weighted
Average
Remaining Number of
Exercise Number Contractual Shares
Price Outstanding Life Exercisable
0.20 272,993 1.32 years 229,076
0.40 30,000 2.68 16,875
3.50 367,438 8.10 168,307
4.40 61,000 8.43 22,873
5.30 74,000 8.91 18,666
5.75 214,000 9.10 --
6.85 36,000 9.58 --
7.50 38,500 9.87 --
The Company applies APB Opinion 25 and related Interpretations in accounting
for its option plan. Accordingly, no compensation cost has been recognized.
The following table presents pro forma net income had compensation cost been
determined based on the fair value at the grant date for awards under the plan
in accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
1997 1996 1995
Pro forma net income (in thousands) . . $ 234 $1,403 $ 388
Pro forma diluted net income per share. .10 .64 .21
Based on the Black-Scholes option-pricing model, the fair value at grant date
of options granted for the years ended December 31, 1997, 1996 and 1995 were
$2.91, $1.84 and $0.12, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
risk-free interest rate of 6%; expected life of one year beyond vesting date;
and volatility of 60%. In accordance with SFAS No. 123, only options granted
in 1997, 1996 and 1995 are included in these calculations and, accordingly,
the disclosures are not likely to be representative of the effect on pro forma
net income for future years because awards vest over several years and the
disclosures do not take into consideration pro forma expense related to grants
made prior to 1995 and additional awards that generally are made each year.
Employee Stock Purchase Plan
In October 1997 the Board of Directors adopted an Employee Stock Purchase Plan
("Purchase Plan") and reserved 100,000 shares of the Company's common stock
for issuance. Under the Purchase Plan, employees are granted the right to
purchase shares of common stock at a price per share that is equal to the
greater of (i) 85% of the beginning of the quarter market price or (ii) 90% of
the average market price during the quarter.
6. OPERATING LEASES
The Company has certain commitments, principally for office space, under
long-term operating leases. Future minimum lease payments required under these
noncancellable operating leases as of December 31, 1997 are as follows (in
thousands):
Payable in:
1998 . . . 411
1999 . . . 450
2000 . . . 459
2001 . . . 462
2002 . . . 465
Thereafter 116
$2,363
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$290,000, $171,000 and $142,000, respectively.
7. INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires
the use of the asset and liability approach of accounting for deferred income
taxes. Deferred tax assets and liabilities are recognized on differences
between the book and tax bases of assets and liabilities using presently
enacted tax rates. The provision (benefit) for income taxes is the tax payable
or recoverable for the period and the change during the period in deferred tax
assets and liabilities.
In the fourth quarter of 1996, the Company recorded an income tax benefit of
$1,199,000, reflecting the elimination of the remaining balance of a valuation
allowance which had been established to offset future tax benefits of net
operating loss carryforwards. The valuation allowance was reversed during 1996
based on management's analysis which considered the Company's profitable
operating results and future outlook because of the market acceptance of its
Windows product. As a result of this analysis, management determined it was
more likely than not that the deferred income taxes at December 31, 1996 would
be realized.
The components of the income tax provision (benefit) are as follows (in
thousands):
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
1997 1996 1995
Current . $ -- $ 4 $ --
Federal 22 25 6
State . 22 29 6
Deferred
Federal 293 (962) --
State . 51 (95) --
344 (1,057) --
366 (1,028) 6
The provision for income taxes differs from the federal statutory tax rate as
follows:
Year Year Year
Ended Ended Ended
December 31 December 31, December 31,
1997 1996 1995
Federal tax at statutory rate. . . . . . . . $ 333 $ 197 135
State income tax, net of federal tax benefit 48 23 6
Non-deductible expenses. . . . . . . . . . . 22 14 7
Research and experimentation credit. . . . . (50) (97) --
Reduction in valuation allowance (1,199) (155)
Other. . . . . . . . . . . . . . . . . . . . 13 34 3
366 (1,028) 6
Deferred tax asseta and liabilities are comprised of the following (in
thousands):
December 31, December 31,
1997 1996
Deferred tax assets:
Net operating loss carryforward . . . . . . . . . . . $ 368 $ 919
Research and experimentation tax credits carryforward 147 97
Accounts receivable allowance . . . . . . . . . . . . 107 70
Accrued vacation pay. . . . . . . . . . . . . . . . . 61 23
Deferred revenue. . . . . . . . . . . . . . . . . . . 131 17
Accrued interest expense. . . . . . . . . . . . . . . -- 16
Other . . . . . . . . . . . . . . . . . . . . . . . . -- 4
814 1,146
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . . . . . . (66) (54)
Deferred state tax. . . . . . . . . . . . . . . . . . (35) (35)
(101) (89)
$ 713 $ 1,057
Recorded as:
Current deferred income tax asset . . . . . . . . . . $ 648 $ 554
Long-term deferred income tax asset . . . . . . . . . 65 503
$ 713 $ 1,057
As of December 31, 1997, the Company had net operating loss carryforwards for
income tax reporting purposes which expire as follows (in thousands):
2006 $ 729
2007 298
2008 281
$1,308
The Company also has research and experimentation tax credits of $147,000 that
expire commencing in 2009.
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. No
Company contributions had been made through December 31, 1995. The Board of
Directors approved a matching contribution of 25% of the first 6% of employee
contributions beginning January 1996. The Company's matching contribution to
the savings plan was $68,000 in 1997 and $39,000 in 1996.
9. EARNINGS PER SHARE
The reconciliation of basic earnings per share ("EPS) to diluted earnings per
share follows (in thousands, except per share amounts):
Per Share
Income Shares Amount
1997:
Basic EPS. . . . . . . . . . $ 613 524 $ 1.17
Adjustments for diluted EPS:
Effect of preferred stock 1,427
Effect of stock options 484
Effect of warrants 5
Diluted EPS. . . . . . . . . 613 2,440 $ .25
1996:
Basic EPS. . . . . . . . . . $ 1,606 375 $ 4.29
Adjustments for diluted EPS:
Effect of preferred stock 1,480
Effect of stock options 344
Effect of warrants 1
Diluted EPS. . . . . . . . . $ 1,606 $ 2,200 $ 0.73
1995:
Basic EPS. . . . . . . . . . $ 392 $ 297 $ 1.32
Adjustments for diluted EPS:
Effect of preferred stock 1,480
Effect of stock options 91
Effect of warrants --
Diluted EPS. . . . . . . . . $ 392 $ 1,868 $ .21
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, 1997.
This information has been prepared by the Company on the same basis as the
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 Financial Statements and notes thereto included elsewhere
herein. The Company's operating results for any one quarter are not
necessarily indicative of results for any future period.
Earnings per share for each quarter are computed independently of earnings per
share for the year. The sum of the quarterly earnings per share may not equal
the earnings per share for the year because of (i) transactions affecting the
weighted average number of shares outstanding in each quarter and (ii) the
uneven distribution of earnings during the year.
(All data is in thousands,
except per share data)
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
1997:. . . . . . . . . . . . . . 3/31 6/30 9/30 12/31 Total
Total revenues . . . . . . . . $ 3,223 $ 3,837 $ 3,981 $ 5,126 $16,167
Operating income . . . . . . . 165 193 215 441 1,014
Income tax provision (benefit) 55 66 76 169 366
Net income . . . . . . . . . . 88 108 127 290 613
Net income per share:
Basic. . . . . . . . . . . . .23 .28 .32 .32 1.17
Diluted. . . . . . . . . . . .04 .05 .05 .11 .25
1996:
Total revenues . . . . . . . . $1,715 $2,012 $2,411 $ 3,241 $ 9,379
Operating income . . . . . . . 113 120 141 326 700
Income tax provision (benefit) 6 11 -- (1,045) (1,028)
Net income . . . . . . . . . . 88 90 121 1,307 1,606
Net income per share:
Basic. . . . . . . . . . . . . .24 .24 .32 3.47 4.29
Diluted. . . . . . . . . . . . .04 .04 .05 .58 .73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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
Stockholders to be held on April 22, 1998 (the "Proxy Statement"), and is
incorporated herein by reference. Information with respect to Executive
Officers of the Company is set forth under the caption "Executive Officers of
the Registrant" in Part I, Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is contained in the section captioned
"Executive Compensation" of the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is contained in the section captioned
"Voting Securities and Principal Holders" of the Company's Proxy Statement and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements
The following information appears in Item 8 of Part I of this Report:
-Report of Independent Accountants
-Balance Sheets as of Decemter 31, 1997 and 1996
-Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995
-Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996,
and 1995
-Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995
-Notes to Financial Statements
2. Financial Statement Schedule
The following financial statement schedule is included in this Report:
-Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable,
or the required information is otherwise shown in the financial statements or
the notes thereto.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 . . Amended and Restated Articles of Incorporation of Made2Manage Systems, Inc.
(Incorporated by reference to Exhibit 3.1 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 Exhibit 3.2 to Registration Statement on Form S-1,
Registration No. 333-38177).
4.1 . . Specimen Stock Certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-38177).
4.2 . . See Exhibits 3.1 and 3.2.
No Exhibit
10.1. . Abra Cadabra Software Reseller Agreement between Abra Cadabra Software, Inc.
and Made2Manage Systems, Inc., dated August 1, 1995 (Incorporated by reference
to Exhibit 10.3 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.2. . License Agreement by and between Sourcemate Information Systems, Inc. and
Teksyn, Inc. dated April 1, 1986 (Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form S-1, Registration No. 333-38177).
10.7. . First Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated September 27, 1995 (Incorporated by reference
to Exhibit 10.11 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.8. . Second Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated March 27, 1996 (Incorporated by reference to
Exhibit 10.12 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.9. . Third Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by reference to
Exhibit 10.13 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.11 . Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated March 20, 1995 (Incorporated by reference to
Exhibit 10.15 to Registration Statement on Form S-1, Registration No. 333-38177).
10.12 . Form of Made2Manage Systems, Inc. Stock Option Agreement (Incorporated by
reference to Exhibit 10.16 to Registration Statement on Form S-1, Registration No.
333-38177).
10.13 . Made2Manage Systems, Inc. Employee Stock Option Plan (Incorporated by
reference to Exhibit 10.17 to Registration Statement on Form S-1, Registration No.
333-38177).
10.14 . Fourth Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated May 14, 1997 (Incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-1, Registration No. 333-38177).
10.15 . Master Demand Business Loan Note by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated May 14, 1997 in the amount of $1,000,000
(Incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.17 . Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by reference to
Exhibit 10.21 to Registration Statement on Form S-1, Registration No. 333-38177).
10.18 . Made2Manage Systems, Inc. Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.22 to Registration Statement on Form S-1, Registration
No. 333-38177).
10.19 . Third Amended and Restated Modification Agreement (Incorporated by reference
to Exhibit 10.23 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.20 . Credit Agreement by and between NBD Bank, N.A. and Teksyn, Inc. dated June 9,
1995 (Incorporated by reference to Exhibit 10.24 to Registration Statement on
Form S-1, Registration No. 333-38177).
11.1. . Statement Regarding Computation of Per Share Earnings.
No Exhibit.
No Exhibit.
No Exhibit.
No Exhibit
No Exhibit
No Exhibit
23.1. . Consent of Coopers & Lybrand L.L.P., independent public accountants.
No Exhibit.
No Exhibit.
No Exhibit.
27.1. . Financial Data Schedule.
No Exhibit.
No Exhibit.
(b ) Reports on Form 8-K. None.
(c ) Exhibits. See Index to Exhibits.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MADE2MANAGE SYSTEMS, INC.
By:
Date: March 2, 1998 . . . /s/David B. Wortman
David B. Wortman
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature. . . . . . . . . . . . . . . . . . . . Title (Capacity) Date
/s/David B. Wortman. . . . . . . . . . . . . . . President, Chief Executive Officer March 2, 1998
David B. Wortman . . . . . . . . . . . . . . . . and Director
(Principal Executive Officer)
/s/Stephen R. Head . . . . . . . . . . . . . . . Vice President, Finance and March 2, 1998
Stephen R. Head. . . . . . . . . . . . . . . . . Administration, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/Ira Coron . . . . . . . . . . . . . . . . . . Chairman of the Board of Directors March 2, 1998
Ira Coron
/s/Gregory F. Ehlinger . . . . . . . . . . . . . Director March 2, 1998
Gregory F. Ehlinger
/s/Standish H. O'Grady . . . . . . . . . . . . . Director March 2, 1998
Standish H. O'Grady
MADE2MANAGE SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A. . . . . . . . . . . . COLUMN B COLUMN C COLUMN C COLUMN D COLUMN E
Additions Additions
Charged Charged
Balance at to Costs to Balance
Beginning and Support at the End of
Description . . . . . . . . . . of Period Expenses Revenue Deductions Period
Year Ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 75 $ 90 $ -- $ (73) $ 92
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 92 $ 140 $ -- $ (44) $ 188
Year Ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 188 $ 244 $ 169 $ (311) $ 290
INDEX TO EXHIBITS
Number Assigned in Regulation S-K
Item 601 . . . . . . . . . . . . . Exhibit Number
Description of Exhibit
(2) No Exhibit.
(3). . . . . . . . . . . . . . . . 3.1 Amended and Restated Articles of Incorporation of Made2Manage
Systems, Inc. (Incorporated by reference to Exhibit 3.1 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 Exhibit 3.2 to Registration Statement on
Form S-1, Registration No. 333-38177).
(4). . . . . . . . . . . . . . . . 4.1 Specimen Stock Certificate for Common Stock (Incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-1, Registration No.
333-38177).
4.2 See Exhibits 3.1 and 3.2.
(9) No Exhibit
(10) . . . . . . . . . . . . . . . 10.1 Abra Cadabra Software Reseller Agreement between Abra Cadabra
Software, Inc. and Made2Manage Systems, Inc., dated August 1, 1995
(Incorporated by reference to Exhibit 10.3 to Registration Statement on
Form S-1, Registration No. 333-38177).
10.2 License Agreement by and between Sourcemate Information Systems, Inc
and Teksyn, Inc. dated April 1, 1986 (Incorporated by reference to
Exhibit 10.4 to Registration Statement on Form S-1, Registration No.
333-38177).
10.7 First Amendment to Credit Agreement by and between NBD Bank, N.A.
and Made2Manage Systems, Inc. dated September 27, 1995 (Incorporated
by reference to Exhibit 10.11 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.8 Second Amendment to Credit Agreement by and between NBD Bank,
N.A. and Made2Manage Systems, Inc. dated March 27, 1996
(Incorporated by reference to Exhibit 10.12 to Registration Statement on
Form S-1, Registration No. 333-38177).
10.9 Third Amendment to Credit Agreement by and between NBD Bank, N.A
. and Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by
reference to Exhibit 10.13 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.11 Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated March 20, 1995 (Incorporated by
reference to Exhibit 10.15 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.12 Form of Made2Manage Systems, Inc. Stock Option Agreement
(Incorporated by reference to Exhibit 10.16 to Registration Statement on
Form S-1, Registration No. 333-38177).
10.13 Made2Manage Systems, Inc. Employee Stock Option Plan (Incorporated
by reference to Exhibit 10.17 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.14 Fourth Amendment to Credit Agreement by and between NBD Bank, N.A.
and Made2Manage Systems, Inc. dated May 14, 1997 (Incorporated by
reference to Exhibit 10.18 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.15 Master Demand Business Loan Note by and between NBD Bank, N.A.
and Made2Manage Systems, Inc. dated May 14, 1997 in the amount of
1,000,000 (Incorporated by reference to Exhibit 10.19 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.17 Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.18 Made2Manage Systems, Inc. Employee Stock Purchase Plan (Incorporated
by reference to Exhibit 10.22 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.19 Third Amended and Restated Modification Agreement (Incorporated by
reference to Exhibit 10.23 to Registration Statement on Form S-1,
Registration No. 333-38177).
10.20 Credit Agreement by and between NBD Bank, N.A. and Teksyn, Inc.
dated June 9, 1995 (Incorporated by reference to Exhibit 10.24 to
Registration Statement on Form S-1, Registration No. 333-38177).
(11) . . . . . . . . . . . . . . . 11.1 Statement Regarding Computation of Per Share Earnings.
(12) No Exhibit.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit
(21) No Exhibit
(22) No Exhibit
(23) . . . . . . . . . . . . . . . 23.1 Consent of Coopers & Lybrand L.L.P., independent public accountants.
(24) No Exhibit.
(25) No Exhibit.
(26) No Exhibit.
(27) . . . . . . . . . . . . . . . 27.1 Financial Data Schedule.
(28) No Exhibit.
(99) No Exhibit.