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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002
Or
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number: 0-23459
MADE2MANAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1665080
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9002 PURDUE ROAD, INDIANAPOLIS, IN 46268
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 532-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
---- ----
As of October 31, 2002, there were 4,918,072 shares of Common Stock, no par
value, outstanding.
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MADE2MANAGE SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
As of September 30, 2002 and December 31, 2001......................................... 3
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months ended September 30, 2002 and 2001........................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months ended September 30, 2002 and 2001.................................. 5
Notes to Condensed Consolidated Financial Statements................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20
ITEM 4. Controls and Procedures................................................................ 20
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................................................... 21
Signatures ....................................................................................... 22
Certifications....................................................................................... 23
Index to Exhibits.................................................................................... 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, December 31,
2002 2001
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 15,421 $ 12,688
Marketable securities.......................................................... 900 2,377
Trade accounts receivable, net ................................................ 4,490 6,796
Prepaid expenses and other..................................................... 1,125 1,543
-------- ---------
Total current assets........................................................ 21,936 23,404
Property and equipment, net........................................................ 2,090 2,557
--------- ---------
Total assets................................................................ $ 24,026 $ 25,961
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 498 $ 468
Accrued liabilities............................................................ 2,020 2,671
Current portion of capitalized lease........................................... 110 --
Deferred revenue............................................................... 9,129 9,784
--------- ---------
Total current liabilities................................................... 11,757 12,923
Capitalized lease.................................................................. 55 --
Deferred revenue................................................................... 552 679
--------- ---------
Total liabilities........................................................... 12,364 13,602
--------- ---------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized, no shares
issued and outstanding at September 30, 2002 and December 31, 2001.......... -- --
Common stock, no par value; 10,000,000 shares authorized, 4,912,599 and
4,839,646 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively............................................. 22,878 22,615
Accumulated other comprehensive income......................................... -- 34
Accumulated deficit............................................................ (11,216) (10,290)
--------- ---------
Total shareholders' equity.................................................. 11,662 12,359
--------- ---------
Total liabilities and shareholders' equity.................................. $ 24,026 $ 25,961
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Revenues:
Software.................................................. $ 1,408 $ 3,191 $ 6,502 $ 10,795
Services.................................................. 5,162 4,871 15,673 14,210
Hardware.................................................. 137 239 446 672
--------- --------- --------- ---------
Total revenues.......................................... 6,707 8,301 22,621 25,677
--------- --------- --------- ---------
Costs of revenues:
Software.................................................. 272 641 1,235 2,126
Services.................................................. 2,180 2,140 6,478 7,028
Hardware.................................................. 106 147 326 466
Restructuring charge...................................... (198) -- (198) 640
--------- --------- --------- ---------
Total costs of revenues................................. 2,360 2,928 7,841 10,260
--------- --------- --------- ---------
Gross profit............................................ 4,347 5,373 14,780 15,417
--------- --------- --------- ---------
Operating expenses:
Sales and marketing....................................... 2,863 2,828 8,808 9,422
Product development....................................... 1,302 1,490 3,956 4,713
General and administrative................................ 974 1,114 3,163 3,570
Restructuring charge...................................... -- -- -- 952
--------- --------- --------- ---------
Total operating expenses................................ 5,139 5,432 15,927 18,657
--------- --------- --------- ---------
Operating loss................................................ (792) (59) (1,147) (3,240)
Other income, net............................................. 65 104 221 409
--------- --------- --------- ---------
Income (loss) before income taxes............................. (727) 45 (926) (2,831)
Income tax provision (benefit)................................ -- 20 -- (1,274)
--------- --------- --------- ---------
Net income (loss)............................................. $ (727) $ 25 $ (926) $ (1,557)
========= ========= ========= =========
Per share amounts:
Basic:
Net income (loss) per share............................. $ (0.15) $ 0.01 $ (0.19) $ (0.32)
========= ========= ========= =========
Weighted average shares outstanding..................... 4,902 4,828 4,879 4,820
========= ========= ========= =========
Diluted:
Net income (loss) per share............................. $ (0.15) $ 0.01 $ (0.19) $ (0.32)
========= ========= ========= =========
Weighted average shares outstanding..................... 4,902 4,876 4,879 4,820
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------
2002 2001
---------- ----------
Operating activities:
Net loss........................................................................ $ (926) $ (1,557)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation................................................................. 1,138 1,471
Restructuring charge related to write-down of impaired property & equipment.. -- 781
Provision for doubtful accounts.............................................. 275 611
Changes in assets and liabilities:
Trade accounts receivable................................................. 2,031 3,786
Prepaid expenses and other................................................ 418 80
Deferred income taxes..................................................... -- (1,273)
Accounts payable.......................................................... 30 (506)
Accrued liabilities....................................................... (651) (819)
Deferred revenue.......................................................... (782) (266)
---------- ----------
Net cash provided by operating activities.................................... 1,533 2,308
--------- ---------
Investing activities:
Purchases of property and equipment............................................. (416) (518)
Purchases of marketable securities.............................................. (2,687) (12,150)
Sales and maturities of marketable securities................................... 4,130 5,707
--------- ---------
Net cash provided by (used in) investing activities.......................... 1,027 (6,961)
--------- ---------
Financing activities:
Principal payments under capitalized lease...................................... (90) --
Proceeds from issuance of common stock.......................................... 53 64
Proceeds from exercise of stock options......................................... 210 11
--------- ---------
Net cash provided by financing activities.................................... 173 75
--------- ---------
Change in cash and cash equivalents................................................. 2,733 (4,578)
Cash and cash equivalents, beginning of period...................................... 12,688 11,336
--------- ---------
Cash and cash equivalents, end of period............................................ $ 15,421 $ 6,758
========= =========
Supplemental schedule of non-cash investing activities:
A capital lease obligation of approximately $255 was incurred in the first
quarter of 2002 when the Company entered into a lease for new computers.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
MADE2MANAGE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Made2Manage Systems, Inc. (the "Company"), an Indiana corporation formed in
1986, develops, markets, licenses and supports comprehensive enterprise business
systems for small and midsize manufacturers located primarily in the United
States. The Company is dependent upon its principal product, the Made2Manage(R)
Enterprise Business System, which provides fully integrated solutions that
manage a manufacturer's entire business environment, from selling and design, to
manufacturing and distribution, finance and human resources, and customer
service and support. This comprehensive enterprise business system features
Made2Manage Enterprise Resource Planning ("M2M(TM) ERP"), Made2Manage Supply
Chain Management ("M2M SCM"), Made2Manage Customer Relationship Management ("M2M
CRM"), Made2Manage Business Intelligence ("M2M BI"), Made2Manage Enterprise
Portal ("M2M VIP") and Made2Manage Enterprise Integration ("M2M Link"). The
system is supported by a host of user services, including M2M Expert, the Web
site which provides the Company's customers with Internet resources including
support services 24 hours per day, seven days a week, cyber-consulting, and
virtual education courses.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission regarding interim financial reporting. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's 2001 Annual Report to Shareholders and Annual Report
on Form 10-K for the year ended December 31, 2001. In management's opinion, this
information has been prepared on the same basis as the annual consolidated
financial statements and includes all adjustments (consisting only of normal and
recurring adjustments) necessary for a fair presentation of the consolidated
financial position, results of operations and cash flows for each period
presented.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform with the 2002
presentation.
3. REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's revenue recognition policy is consistent with the requirements of
SEC Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, Statement of Position No. 97-2 ("SoP 97-2"), SOFTWARE
REVENUE RECOGNITION, and other applicable revenue recognition guidance and
interpretations. In general, the Company records revenue when it is realized, or
realizable, and earned. Revenues from software licenses and hardware are
recognized upon shipment, delivery or customer acceptance, based upon the
substance of the arrangement or as defined in the sales agreement provided there
are no significant remaining vendor obligations to be fulfilled and
collectability is reasonably assured. Software revenues are generated from
licensing software to new customers and from licensing additional users and new
applications to existing customers. Hardware revenues are generated primarily
from the sale
6
of bar-coding and data collection equipment used in connection with the
Made2Manage Enterprise Business System, and constitute a relatively small
component of total revenues.
The Company's sales arrangements typically include services in addition to
software and hardware. Service revenues are generated from annual fees paid by
customers to receive support services and software upgrades and also from
implementation, education and consulting services. For sales arrangements that
include bundled software, hardware and services, the Company accounts for any
undelivered service offering as a separate element of a multiple-element
arrangement. These services are usually not essential to the functionality of
the software and hardware. Amounts deferred for services are determined based
upon vendor-specific objective evidence of the fair value of the elements as
prescribed in SoP 97-2. Support revenues are recognized on a straight-line basis
over the term of the agreement. Revenues from technical training and consulting
services are recognized as provided to customers. If the services are essential
to the functionality of the software and hardware, revenue from the software and
hardware components is deferred until the essential services are complete.
Subscription-based offerings include support and maintenance, M2M Express, M2M
VIP and M2M University. The M2M Express thin client option is designed to
provide small and midsize manufacturing companies access to the Made2Manage
Enterprise Business System via the Internet through a hosted application service
provider. The M2M VIP enterprise portal offers manufacturing companies a range
of collaborative opportunities with their customers, sales channels and
suppliers. M2M University provides flexible, comprehensive educational
opportunities to customers via the Web and also through traditional classroom
training. Subscription revenues are recognized ratably over the subscription
period.
4. INCOME TAX BENEFIT
From 1999 and through 2001, the Company sustained cumulative tax operating
losses totaling $9 million, inclusive of two significant charges totaling $4.5
million related to the write-down and amortization of purchased technology
assets and a restructuring charge. Those losses had given rise to deferred tax
assets of $3.4 million. Although substantial loss carryforwards do not begin to
expire until 2018, current economic conditions make it difficult to predict full
recoverability of those tax assets in a period comparable to the period over
which they originated. Therefore, in the fourth quarter of 2001 a valuation
allowance was recorded against the $3.4 million of deferred tax assets to
reflect that uncertainty. Furthermore, the Company has not and does not
anticipate recording significant tax charges or benefits in 2002 due to this
charge.
5. OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- -------- --------- ---------
Net income (loss)......................................... $ (727) $ 25 $ (926) $ (1,557)
Other comprehensive loss:
Unrealized loss on marketable securities................ -- -- (34) --
--------- --------- --------- ---------
Total comprehensive income (loss)......................... $ (727) $ 25 $ (960) $ (1,557)
========= ========= ========= =========
6. NET INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") is determined in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER SHARE, and is
calculated by dividing net income by the weighted-average number of common
shares outstanding for the period. The calculation of diluted EPS is similar to
basic, except that the weighted-average number of shares outstanding includes
the impact of common equivalent shares. Diluted common equivalent shares consist
of stock options (using the treasury stock method) as prescribed by SFAS 128.
Common equivalent shares are included in the diluted EPS
7
calculation when dilutive. Under the treasury stock method, the assumed proceeds
from the exercise of stock options are applied solely to the repurchase of
common stock.
7. RESTRUCTURING
During the first quarter of 2001, management approved a restructuring plan
designed to align the Company's operations with the current technological and
economic environment. Elements of the restructuring plan included (1) facilities
rationalization as a result of increased market acceptance of the Company's
online education offerings, (2) cost reductions associated with M2M VIP after
the significant initial investment made in 2000 and (3) 16 employee separations
across most functional areas of the Company. In connection with the
restructuring, the Company recorded a $1.6 million pre-tax charge comprised of
restructuring liabilities of $811,000 and related asset impairments of $781,000.
The total $1.6 million pre-tax charge in the first quarter of 2001 was recorded
as $640,000 in costs of revenues and $952,000 in operating expenses.
During the third quarter of 2002, the Company completed its restructuring
activities and determined that $198,000 of restructuring liabilities originally
set aside in connection with M2M VIP will probably not be incurred and paid.
This amount has been accounted for as a reduction of costs of revenues in the
consolidated statements of operations. Of the remaining $613,000 expected to be
settled in cash, $500,000 were paid as of September 30, 2002. The outstanding
restructuring liabilities of $113,000 are recorded as a current liability in the
consolidated balance sheet and represent the Company's best estimate of
non-recoverable costs and expenses associated with sublet facilities.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS
142"), GOODWILL AND OTHER INTANGIBLE ASSETS, on January 1, 2002. SFAS 142
provides guidance on the financial accounting and reporting for acquired
goodwill and other intangible assets upon their initial acquisition and also
subsequent to their acquisition. SFAS 142 states that an intangible asset with a
finite useful life should be amortized over that life. Goodwill and an
intangible asset with an indefinite useful life should not be amortized;
however, they should be tested for impairment at least annually.
At December 31, 2001, the balance of the Company's goodwill asset was $186,000.
In accordance with the requirements of SFAS 142, the Company ceased amortization
of its goodwill asset effective January 1, 2002. Prior to that, the amortization
of goodwill for the three and nine months ended September 30, 2001, was $13,000
and $39,000, respectively. As required by the adoption of SFAS 142, the Company
employed the transitional goodwill impairment test and determined that there is
no impairment loss of its goodwill asset.
The Company adopted Emerging Issues Task Force Issue No. 01-14 ("EITF 01-14"),
INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR "OUT-OF-POCKET"
EXPENSES INCURRED, in the first quarter of 2002. EITF 01-14 states that
reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement versus as a reduction of
expenses incurred. As required by the adoption of EITF 01-14, the Company has
reclassified the reimbursements of out-of-pocket expenses in prior periods from
a reduction of cost of services to services revenue in the comparative
condensed, consolidated financial statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED. THESE STATEMENTS REFLECT OUR EXPECTATIONS REGARDING OUR
STRATEGIC PLANS, FUTURE GROWTH, RESULTS OF OPERATIONS, PERFORMANCE, BUSINESS
PROSPECTS AND OPPORTUNITIES. WORDS SUCH AS "ESTIMATES," "BELIEVES,"
"ANTICIPATES," "PLANS" AND SIMILAR EXPRESSIONS MAY BE USED TO IDENTIFY THESE
FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING THESE
STATEMENTS. THESE STATEMENTS REFLECT OUR CURRENT BELIEFS AND ARE BASED ON
INFORMATION CURRENTLY AVAILABLE TO US. ACCORDINGLY, THESE STATEMENTS ARE SUBJECT
TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE OUR
ACTUAL GROWTH, RESULTS, PERFORMANCE, BUSINESS PROSPECTS AND OPPORTUNITIES TO
DIFFER FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE STATEMENTS. IN LIGHT OF THE
UNCERTAINTIES INHERENT IN ANY FORWARD-LOOKING STATEMENT, THE INCLUSION OF A
FORWARD-LOOKING STATEMENT HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY
US THAT OUR PLANS AND OBJECTIVES WILL BE ACHIEVED. ACTUAL RESULTS OR EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN ANY FORWARD-LOOKING STATEMENTS
FOR THE REASONS DISCUSSED IN THIS SECTION, IN THE "BUSINESS ENVIRONMENT AND RISK
FACTORS" SECTION BELOW, AND ELSEWHERE IN THIS REPORT, OR FOR OTHER REASONS. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES OR OTHERWISE. ADDITIONAL INFORMATION
CONCERNING FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS IS CONTAINED IN THE COMPANY'S SEC
REPORTS, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2001.
OVERVIEW
Since our inception in 1986, we have developed, marketed, licensed and supported
comprehensive enterprise software for small and midsize manufacturers engaged in
engineer-to-order, make-to-order, assemble-to-order, make-to-stock and mixed
styles of production. Our principal product, the Made2Manage(R) Enterprise
Business System, provides fully integrated solutions automating all business
processes used by manufacturers, from selling and design, to manufacturing and
distribution, finance and human resources, and customer service and support.
This comprehensive enterprise business system features Made2Manage Enterprise
Resource Planning ("M2M(TM) ERP"), Made2Manage Supply Chain Management ("M2M
SCM"), Made2Manage Customer Relationship Management ("M2M CRM"), Made2Manage
Business Intelligence ("M2M BI"), Made2Manage Enterprise Portal ("M2M VIP"), and
Made2Manage Enterprise Integration ("M2M Link"). The system is supported by a
host of user services, including M2M Expert, the Web site that provides our
customers with Internet resources including support services 24 hours per day,
seven days a week, cyber-consulting, and virtual education courses.
The Made2Manage Enterprise Business System is sold in the United States, Canada
and the United Kingdom. Historically, approximately 99% of our revenues have
been derived from customers in North America.
Our revenue recognition policy is consistent with the requirements of SEC Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, Statement of Position No. 97-2 ("SoP 97-2"), SOFTWARE REVENUE
RECOGNITION, and other applicable revenue recognition guidance and
interpretations. In general, we record revenue when it is realized, or
realizable, and earned. Revenues from software licenses and hardware are
recognized upon shipment, delivery or customer acceptance, based upon the
substance of the arrangement or as defined in the sales agreement provided there
are no significant remaining vendor obligations to be fulfilled and
collectability is reasonably assured. Software revenues are generated from
licensing software to new customers and from licensing additional users and new
applications to existing customers. Hardware revenues are generated primarily
from the sale of bar-coding and data collection equipment used in connection
with the Made2Manage Enterprise Business System, and constitute a relatively
small component of total revenues.
Our sales arrangements typically include services in addition to software and
hardware. Service revenues are generated from annual fees paid by customers to
receive support services and software upgrades and also from implementation,
education and consulting services. For sales arrangements that include bundled
software, hardware and services, we account for any undelivered service offering
as a separate element of a
9
multiple-element arrangement. These services are usually not essential to the
functionality of the software and hardware. Amounts deferred for services are
determined based upon vendor-specific objective evidence of the fair value of
the elements as prescribed in SoP 97-2. Support revenues are recognized on a
straight-line basis over the term of the agreement. Revenues from technical
training and consulting services are recognized as provided to customers. If the
services are essential to the functionality of the software and hardware,
revenue from the software and hardware components is deferred until the
essential services are complete.
Subscription-based offerings include support and maintenance, M2M Express, M2M
VIP and M2M University. The M2M Express thin client option is designed to
provide small and midsize manufacturing companies access to the Made2Manage
Enterprise Business System via the Internet through a hosted application service
provider. The M2M VIP enterprise portal offers manufacturing companies a range
of collaborative opportunities with their customers, sales channels and
suppliers. M2M University provides flexible, comprehensive educational
opportunities to customers via the Web and also through traditional classroom
training. Subscription revenues are recognized ratably over the subscription
period.
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 and percent
increase or decrease from the prior year dollar amount represented by certain
items included in our unaudited, condensed consolidated statements of operations
for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENT SEPTEMBER 30, PERCENT
-------------------- INCREASE -------------------- INCREASE
2002 2001 (DECREASE) 2002 2001 (DECREASE)
--------- -------- ---------- -------- --------- ----------
Revenues:
Software............................. 21.0% 38.4% (55.9)% 28.7% 42.1% (39.8)%
Services............................. 77.0 58.7 6.0 69.3 55.3 10.3
Hardware............................. 2.0 2.9 (42.7) 2.0 2.6 (33.6)
-------- -------- -------- --------
Total revenues.................... 100.0 100.0 (19.2) 100.0 100.0 (11.9)
-------- -------- -------- --------
Costs of revenues:
Software............................. 4.1 7.7 (57.6) 5.5 8.3 (41.9)
Services............................. 32.5 25.8 1.9 28.7 27.4 (7.8)
Hardware............................. 1.6 1.8 (27.9) 1.4 1.8 (30.0)
Restructuring charge................. (3.0) -- NM (0.9) 2.5 (130.9)
--------- ------- --------- --------
Total costs of revenues........... 35.2 35.3 (19.4) 34.7 40.0 (23.6)
-------- -------- -------- --------
Gross profit...................... 64.8 64.7 (19.1) 65.3 60.0 (4.1)
-------- -------- -------- --------
Operating expenses:
Sales and marketing.................. 42.7 34.1 1.2 38.9 36.7 (6.5)
Product development.................. 19.4 18.0 (12.6) 17.5 18.4 (16.1)
General and administrative........... 14.5 13.4 (12.6) 14.0 13.9 (11.4)
Restructuring charge................. -- -- NM -- 3.7 NM
------ ------- ------ --------
Total operating expenses.......... 76.6 65.5 (5.4) 70.4 72.7 (14.6)
-------- -------- -------- --------
Operating loss........................... (11.8) (0.8) NM (5.1) (12.7) 64.6
Other income, net ....................... 1.0 1.3 (37.5) 1.0 1.6 (46.0)
-------- -------- -------- --------
Income (loss) before income taxes........ (10.8) 0.5 NM (4.1) (11.1) 67.3
Income tax provision (benefit)........... -- 0.2 NM -- (5.0) NM
------ -------- ------ ---------
Net income (loss)........................ (10.8)% 0.3% NM (4.1)% (6.1)% 40.5%
========= ======== ========= =========
NM - Not meaningful.
10
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
REVENUES
Revenues are derived from software licenses, service and support fees and
hardware sales. For the three months ended September 30, 2002, total revenues
decreased by $1.6 million, or 19.2%, to $6.7 million from $8.3 million for the
three months ended September 30, 2001. For the nine months ended September 30,
2002, total revenues decreased by $3.1 million, or 11.9%, to $22.6 million from
$25.7 million for the nine months ended September 30, 2001. The decline in total
revenues for both the quarter and the first nine months of the year resulted
from a slow down in software license revenues offset in part by continued growth
in our service revenues. We have not historically recognized significant annual
revenues from any single customer.
SOFTWARE REVENUES. For the three months ended September 30, 2002, software
license revenues decreased by $1.8 million, or 55.9%, to $1.4 million from $3.2
million for the three months ended September 30, 2001. Software revenues
constituted 21.0% and 38.4% of total revenues for the three months ended
September 30, 2002 and 2001, respectively. For the nine months ended September
30, 2002, software license revenues decreased by $4.3 million, or 39.8%, to $6.5
million from $10.8 million for the nine months ended September 30, 2001.
Software revenues constituted 28.7% and 42.1% of total revenues for the nine
months ended September 30, 2002 and 2001, respectively. The decline in software
license revenues largely reflected reduced spending by both new and existing
customers due to the slow economy.
SERVICE REVENUES. For the three months ended September 30, 2002, service
revenues increased by $291,000, or 6.0%, to $5.2 million from $4.9 million for
the three months ended September 30, 2001. These revenues constituted 77.0% and
58.7% of total revenues for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002, service revenues
increased by $1.5 million, or 10.3%, to $15.7 million from $14.2 million for the
nine months ended September 30, 2001. Service revenues constituted 69.3% and
55.3% of total revenues for the nine months ended September 30, 2002 and 2001,
respectively. The growth in service revenues was primarily driven by a larger
installed base of customers who are taking advantage of our subscription-based
support and education offerings. At September 30, 2002, over 80% of our
customers were on support.
HARDWARE REVENUES. For the three months ended September 30, 2002, hardware
revenues decreased by $102,000, or 42.7%, to $137,000 from $239,000 for the
three months ended September 30, 2001. These revenues constituted 2.0% and 2.9%
of total revenues for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002, hardware revenues
decreased by $226,000, or 33.6%, to $446,000 from $672,000 for the nine months
ended September 30, 2001. Hardware revenues constituted 2.0% and 2.6% of total
revenues for the nine months ended September 30, 2002 and 2001, respectively.
Our sales of hardware equipment are limited to bar-coding and data collection
equipment necessary to utilize certain features of the Made2Manage Enterprise
Business System and typically move with software revenues.
INTERNATIONAL REVENUES. International revenues from our operations in the United
Kingdom have historically represented less than 1% of our total revenues. There
were no new system sales in the first nine months of 2002 as compared to sales
of $120,000 in the first nine months of 2001.
COSTS OF REVENUES
COSTS OF SOFTWARE REVENUES. For the three months ended September 30, 2002 and
2001, costs of software revenues totaled $272,000 and $641,000, respectively,
resulting in gross profit margins of 80.7% and 79.9%, respectively. For the nine
months ended September 30, 2002 and 2001, costs of software revenues totaled
$1.2 million and $2.1 million, respectively, resulting in gross profit margins
of 81.0% and 80.3%, respectively. The increase in software profit margins was
due to a lower proportion of software revenues being generated from third party
products, which carry a higher cost than our proprietary products. The
percentage of software sales from third party products was 12% in the third
quarter of 2002 as compared to
11
20% in the third quarter of 2001. For the first nine months of 2002, third party
products made up 14% of total software revenues versus 17% in the first nine
months of 2001. Additionally, there was a higher mix of new system sales sold by
our direct sales force, which have lower discounts than sales through our value
added resellers.
COSTS OF SERVICE REVENUES. For the three months ended September 30, 2002 and
2001, costs of service revenues totaled $2.2 million and $2.1 million,
respectively, resulting in gross profit margins of 57.8% and 56.1%,
respectively. For the nine months ended September 30, 2002 and 2001, costs of
service revenues totaled $6.5 million and $7.0 million, respectively, resulting
in gross profit margins of 58.7% and 50.5%, respectively. The improvement in
service profit margins was attributable to a combination of continued growth in
our service revenues and a reduction in the costs to deliver those services.
Some of these cost efficiencies are the result of the restructuring plan
implemented during the first quarter of 2001. Additionally, we have continued to
advance our use of technology to reduce costs in all areas of our offerings,
while improving the quality of service.
COSTS OF HARDWARE REVENUES. For the three months ended September 30, 2002 and
2001, costs of hardware revenues totaled $106,000 and $147,000, respectively,
resulting in gross profit margins of 22.6% and 38.5%, respectively. For the nine
months ended September 30, 2002 and 2001, costs of hardware revenues totaled
$326,000 and $466,000, respectively, resulting in gross profit margins of 26.9%
and 30.7%, respectively.
RESTRUCTURING CHARGE. During the first quarter of 2001, management approved a
restructuring plan designed to align our operations with the current
technological and economic environment. Elements of the restructuring plan
included (1) facilities rationalization as a result of increased market
acceptance of our online education offerings, (2) cost reductions associated
with M2M VIP after the significant initial investment made in 2000 and (3) 16
employee separations across most functional areas of the company. In connection
with the restructuring, we recorded a $1.6 million pre-tax charge comprised of
restructuring liabilities of $811,000 and related asset impairments of $781,000.
The total $1.6 million pre-tax charge in the first quarter of 2001 was recorded
as $640,000 in costs of revenues and $952,000 in operating expenses.
During the third quarter of 2002, we completed our restructuring activities and
determined that $198,000 of restructuring liabilities originally set aside in
connection with M2M VIP will probably not be incurred and paid. This amount has
been accounted for as a reduction of costs of revenues in the consolidated
statements of operations. Of the remaining $613,000 expected to be settled in
cash, $500,000 were paid as of September 30, 2002. The outstanding restructuring
liabilities of $113,000 are recorded as a current liability in the consolidated
balance sheet and represent our best estimate of non-recoverable costs and
expenses associated with sublet facilities.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. For the three months ended September 30, 2002 and
2001, sales and marketing expenses were $2.9 million and $2.8 million,
respectively, representing 42.7% and 34.1% of total revenues, respectively. For
the nine months ended September 30, 2002 and 2001, sales and marketing expenses
were $8.8 million and $9.4 million, respectively, representing 38.9% and 36.7%
of total revenues, respectively. The reduction in sales and marketing expenses
was primarily related to lower sales commissions due to the decline in software
revenues. The lower commissions were substantially offset by severance expenses
incurred in the third quarter of 2002 as a result of changes made to improve the
effectiveness of the sales organization.
PRODUCT DEVELOPMENT EXPENSES. For the three months ended September 30, 2002 and
2001, product development expenses were $1.3 million and $1.5 million,
respectively, representing 19.4% and 18.0% of total revenues, respectively. For
the nine months ended September 30, 2002 and 2001, product development expenses
were $4.0 million and $4.7 million, respectively, representing 17.5% and 18.4%
of total revenues, respectively. The decrease in development expenses was
largely attributable to portions of the restructuring plan related to M2M VIP
implemented during the first quarter of 2001. We did not
12
capitalize any software development costs during these periods, since the
capitalizable portion was not significant.
GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended September 30,
2002 and 2001, general and administrative expenses were $1.0 million and $1.1
million, respectively, representing 14.5% and 13.4% of total revenues,
respectively. For the nine months ended September 30, 2002 and 2001, general and
administrative expenses were $3.2 million and $3.6 million, respectively,
representing 14.0% and 13.9% of total revenues, respectively. The decrease in
general and administrative expenses was due in part to reduced bad debt expense
resulting from our continued focus on credit and collection efforts. The success
of these efforts was also reflected in improved average days sales outstanding
of 60 days at September 30, 2002 as compared to 79 days at September 30, 2001.
OTHER INCOME, NET
For the three months ended September 30, 2002 and 2001, other income, net was
$65,000 and $104,000, respectively, representing 1.0% and 1.3% of total
revenues, respectively. For the nine months ended September 30, 2002 and 2001,
other income, net was $221,000 and $409,000, respectively, representing 1.0% and
1.6% of total revenues, respectively. The decrease in other income was due
primarily to lower interest rates on investment securities.
INCOME TAX BENEFIT
From 1999 and through 2001, we sustained cumulative tax operating losses
totaling $9 million, inclusive of two significant charges totaling $4.5 million
related to the write-down and amortization of purchased technology assets and a
restructuring charge. Those losses had given rise to deferred tax assets of $3.4
million. Although substantial loss carryforwards do not begin to expire until
2018, current economic conditions make it difficult to predict full
recoverability of those tax assets in a period comparable to the period over
which they originated. Therefore, in the fourth quarter of 2001 a valuation
allowance was recorded against the $3.4 million of deferred tax assets to
reflect that uncertainty. Furthermore, we have not and do not anticipate
recording significant tax charges or benefits in 2002 due to this charge.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through equity capital and cash
generated from operations. As of September 30, 2002, we had $16.3 million of
cash, cash equivalents and marketable securities, reflecting positive cash flow
of $1.3 million for the first nine months of 2002.
At September 30, 2002, we had working capital of $10.2 million. Accounts
receivable, net of allowance for doubtful accounts, were $4.5 million and $6.8
million at September 30, 2002 and December 31, 2001, respectively, which
translated into an average days sales outstanding of 60 days and 71 days,
respectively. Deferred revenues, which principally relate to support agreements
and contracted services, decreased to $9.7 million at September 30, 2002, from
$10.5 million at December 31, 2001. The decreases in both accounts receivable
and deferred revenues were associated with lower new system sales in the third
quarter of 2002 as compared to the fourth quarter of 2001. We have no bank debt.
We believe that cash and cash equivalents, marketable securities and cash flow
from operations will be sufficient to meet our currently anticipated working
capital and capital expenditure requirements at least through the next 12
months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
GOODWILL AND OTHER INTANGIBLE ASSETS, on January 1, 2002. SFAS 142 provides
guidance on the financial accounting and reporting for acquired goodwill and
other intangible assets upon their initial acquisition and also subsequent to
their acquisition. SFAS 142 states that an intangible asset with a finite useful
life should be amortized
13
over that life. Goodwill and an intangible asset with an indefinite useful life
should not be amortized; however, they should be tested for impairment at least
annually.
At December 31, 2001, the balance of our goodwill asset was $186,000. In
accordance with the requirements of SFAS 142, we ceased amortization of our
goodwill asset effective January 1, 2002. Prior to that, the amortization of
goodwill for the three and nine months ended September 30, 2001, was $13,000 and
$39,000, respectively. As required by the adoption of SFAS 142, we employed the
transitional goodwill impairment test and determined that there is no impairment
loss of our goodwill asset.
We adopted Emerging Issues Task Force Issue No. 01-14 ("EITF 01-14"), INCOME
STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR "OUT-OF-POCKET"
EXPENSES INCURRED, in the first quarter of 2002. EITF 01-14 states that
reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the income statement versus as a reduction of
expenses incurred. As required by the adoption of EITF 01-14, we have
reclassified the reimbursements of out-of-pocket expenses in prior periods from
a reduction of cost of services to services revenue in the comparative
condensed, consolidated financial statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT, THE FOLLOWING FACTORS
COULD AFFECT OUR ACTUAL RESULTS AND COULD CAUSE SUCH RESULTS TO DIFFER
MATERIALLY FROM THOSE ACHIEVED IN THE PAST OR EXPRESSED IN OUR FORWARD-LOOKING
STATEMENTS.
FLUCTUATIONS OF QUARTERLY OPERATING RESULTS; SEASONALITY
We have experienced in the past, and expect to experience in the future,
significant fluctuations in quarterly operating results. A substantial portion
of our revenues in each quarter is from software licenses signed and product
shipped in that quarter, and such revenues historically have been recorded
largely in the third month of the quarter, with a concentration in the last week
of that third month. Accordingly, our quarterly results of operations are
difficult to predict, and delays in closings of sales near the end of a quarter
or product delivery could cause quarterly revenues and, to a greater degree, net
income to fall substantially short of anticipated levels. In addition, we have
experienced a seasonal pattern in our operating results, with the fourth quarter
typically having the highest total revenues and operating income and the first
quarter having historically reported lower revenues and operating income
compared to the fourth quarter of the preceding year.
Other factors, many of which are beyond our control, that may contribute to
fluctuations in quarterly operating results include the size of individual
orders, the timing of product introductions or enhancements by us and our
competitors, competition and pricing in the manufacturing software industry,
market acceptance of new products, reduction in demand for existing products,
the shortening of product life cycles as a result of new product introductions
by us or our competitors, product quality problems, personnel changes,
conditions or events in the manufacturing industry, and general economic
conditions.
The sales cycle for the Made2Manage Enterprise Business System typically ranges
from three to nine months. However, license signing may be delayed for a number
of reasons outside of our control. Since software is generally shipped as orders
are received, we have historically operated without significant backlog.
Because our operating expenses are based on anticipated revenue levels and a
high percentage of our expenses are relatively fixed in the short term, small
variations in the timing of revenue recognition can cause a significant
fluctuation in operating results from quarter to quarter and may result in
unanticipated quarterly earnings shortfalls or losses. In addition, we may
increase operating expenses in anticipation of continued growth and to fund
expanded product development efforts. To the extent such expenses precede, or
are not subsequently followed by, increased revenues, our business, financial
condition and results of operations could be materially and adversely affected.
14
PRODUCT AND MARKET CONCENTRATION
Our revenues are currently derived from licenses of the Made2Manage Enterprise
Business System and related services and third party software and hardware
products. In the near term, the Made2Manage Enterprise Business System and
related services are expected to continue to account for the majority of our
revenues. Accordingly, any event that adversely affects the sale of the
Made2Manage Enterprise Business System to new customers as well as the continued
use of the Made2Manage Enterprise Business System by our installed base of
customers, such as competition from other products, significant quality
problems, negative publicity or evaluation, reduced market acceptance of, or
obsolescence of the hardware platforms on, or software environments in which the
Made2Manage Enterprise Business System operates, could have a material adverse
effect on our business, financial condition and results of operations.
Additionally, as our sales of third party software and hardware products have
increased, incompatibility with those products could also have a material
adverse effect.
Our business depends substantially upon the software expenditures of small and
midsize manufacturers, which in part depend upon the demand for such
manufacturers' products. An economic slow-down or other adverse event affecting
manufacturing industries in our target regions could impact such demand, causing
manufacturers in our target market to curtail or postpone capital expenditures
for business information systems. Any adverse change in the amount or timing of
software expenditures by our target customers could have a material adverse
effect on our business, financial condition and results of operations.
DEPENDENCE ON THIRD-PARTY TECHNOLOGIES
The Made2Manage Enterprise Business System uses a variety of third-party
technologies, including operating systems, tools and other applications
developed and supported by Microsoft Corporation. The Made2Manage Enterprise
Business System relies heavily on Microsoft Visual Studio, Microsoft SQL Server,
and Microsoft.NET. Other Microsoft programming tools and applications used by
the Made2Manage Enterprise Business System include VBA, ActiveX, OLE, ODBC,
OLEDB, MSMQ, and Internet Information Server. There can be no assurance that
Microsoft Corporation will continue to support the operating systems, tools and
other applications utilized by the Made2Manage Enterprise Business System or
that they will continue to be widely accepted in our target market.
Additionally, we use Visual Objects from Computer Associates and certain
optimization software from ILOG Inc.
We resell various third-party products, including software from Microsoft,
Powerway, Best Software, Concord Business Systems, and ADS Inc. and bar code
hardware. There can be no assurance that these third-party vendors will continue
to support these technologies or that these technologies will retain their level
of acceptance among manufacturers in our target market. The occurrence of any of
these events could have a material adverse effect on our business, financial
condition and results of operations.
PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE
Our growth and future financial performance depend in part upon our ability to
enhance existing applications and to develop and introduce new applications to
incorporate technological advances that satisfy customer requirements or
expectations. As a result of the complexities inherent in product development,
there can be no assurance that either improvements to the Made2Manage Enterprise
Business System or applications that we develop in the future will be delivered
on a timely basis or ultimately accepted in the market. Any failure by us to
anticipate or respond adequately to technological developments or end-user
requirements, or any significant delays in product development or introduction,
could damage our competitive position and have a material adverse effect on our
business, financial condition and results of operations.
INTERNET AND POTENTIAL FOR SUBSCRIPTION REVENUE BUSINESS MODEL
15
We believe the Internet is changing the way businesses operate and therefore the
software needs of our customers. We believe our customers will increasingly
require e-business applications and software solutions that will enable them to
engage in commerce or service over the Internet. If we are unable to respond to
emerging industry standards and technological changes, we may not be able to
deliver products and services that meet our customers' changing needs. If we are
not successful in addressing these changing needs, our products may become
obsolete and our financial results may be materially and adversely impacted.
Furthermore, advances in Internet and e-commerce applications may lead the
enterprise business system market to rapid acceptance of Application Service
Provider ("ASP"), a hosted method of delivering business system solutions. The
ASP method of delivery uses a subscription revenue model, which could improve
predictability of future revenues but delay revenue recognition and cash
collections as compared to the current method. Although we have not yet seen
evidence of it, a rapid change to the ASP business model could materially and
adversely impact our near term financial results and financial position.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant extent upon a number of key employees,
including members of senior management. No employee is subject to an employment
contract. Our ability to implement business strategy is substantially dependent
on our ability to attract, on a timely basis, and retain skilled personnel,
especially sales, service, support and development personnel. Competition for
such personnel is intense, and we compete for such personnel with numerous
companies, including larger, more established companies with significantly
greater financial resources. There can be no assurance that we will be
successful in attracting and retaining skilled personnel. The loss of the
services of one or more of the key employees or the failure to attract and
retain qualified employees could have a material adverse effect on our business,
financial condition and results of operations.
MANAGEMENT OF GROWTH; INTERNATIONAL EXPANSION
We have experienced growth in our domestic business and operations. While we
have managed this growth to date, there can be no assurance that we will be able
to effectively do so in the future. Our ability to manage growth successfully is
contingent on a number of factors including our ability to implement and improve
operational, financial and management information systems and to motivate and
effectively manage employees.
We distribute the Made2Manage Enterprise Business System in the United Kingdom.
We rely on MacroScope Ltd., which replaced NCR Corporation as our reseller in
the United Kingdom, to sell and service the United Kingdom market place. There
can be no assurance that MacroScope Ltd. will be successful in expanding our
presence in the international arena. At present, our international plans include
only Canada and the United Kingdom.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of our business strategy, we expect to review acquisition prospects that
would complement our existing product offerings, augment market coverage,
enhance technological capabilities, or that may otherwise offer growth
opportunities. Acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect operating results and/or the price of
our common stock. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations, technologies and products, diversion of
management's attention from other business concerns, risks of entering markets
in which we have no or limited prior experience and potential loss of key
employees of acquired organizations. No assurance can be given as to our ability
to successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure to do so could have a
material adverse effect on our business, financial condition or results of
operations.
16
INSUFFICIENT CUSTOMER COMMITMENT
To obtain the benefits of the Made2Manage Enterprise Business System, customers
must commit resources to implement and manage the product and to train their
employees in the use of the product. The failure of customers to commit
sufficient resources to those tasks or to carry them out effectively could
result in customer dissatisfaction with the Made2Manage Enterprise Business
System. If a significant number of customers became dissatisfied, our reputation
could be tarnished and our business, financial condition and results of
operations could be materially and adversely affected.
COMPETITION AND INDUSTRY CONSOLIDATION
The enterprise software market is fragmented, intensely competitive and rapidly
changing. We face competition from a variety of software vendors, including
application software vendors, software tool vendors and relational database
management system vendors. Several large technology companies have recently
expanded into the enterprise software market by acquiring established vendors in
the market. Additionally, several software companies that have traditionally
marketed enterprise software to larger manufacturers have announced initiatives
to target small and midsize manufacturers. Compared to us, many of our existing
competitors, as well as a number of potential competitors, have significantly
greater financial, technical and marketing resources and a larger base of
customers. There can be no assurance that such competitors will not offer or
develop products that are superior to the Made2Manage Enterprise Business System
or that achieve greater market acceptance. If such competition were to result in
significant price declines or loss of market share for the Made2Manage
Enterprise Business System, our business, financial condition and results of
operation would be adversely affected.
The technologies we use to develop the Made2Manage Enterprise Business System
are generally available and widely known, including technology developed by
Microsoft Corporation. The Made2Manage Enterprise Business System competes with
other products principally on the basis that it is specifically designed for
small and midsize manufacturers, is relatively easy to implement and use, and is
supported by a well-developed system of service and support. In addition, we
believe that advanced features for messaging and Internet access differentiate
the Made2Manage Enterprise Business System. We believe that the Made2Manage
Enterprise Business System compares favorably with the products offered by
competitors, but there can be no assurance that we will continue to compete
successfully against such products or that we will be able to compete
successfully against future products.
RELATIONSHIPS WITH VALUE ADDED RESELLERS
We distribute our software products through a direct sales force and a network
of value added resellers ("VARs"). A significant portion of licenses of the
Made2Manage Enterprise Business System sold to new customers is sold by VARs.
Additionally, we rely on MacroScope Ltd., which replaced NCR Corporation as our
reseller in the United Kingdom, to sell and service the United Kingdom market
place. If some or all of the VARs reduce their efforts to sell the Made2Manage
Enterprise Business System, promote competing products or terminate their
relationships with us, our business, financial condition and results of
operation would be materially and adversely affected. Furthermore, VARs
frequently develop strong relationships with their customers, so if VARs
criticize us or our products to their customers, our reputation could be
damaged, which could have a material adverse effect on our business, financial
condition or results of operations.
PRODUCT LIABILITY AND INSUFFICIENT INSURANCE
We market, sell and support software products used by manufacturers to manage
their business operations and to store substantially all of their operational
data. Software programs as complex as those we offer may contain undetected
errors, despite testing, which are discovered only after the product has been
installed and used by customers. There can be no assurance that errors will not
be found in existing or future releases of our software or that any such errors
will not impair the market acceptance of these products. A customer could be
required to cease operations temporarily and some or all of its key operational
data could be lost or
17
damaged if its information systems fail as the result of human error, mechanical
difficulties or quality problems in the Made2Manage Enterprise Business System
or third-party technologies utilized by the Made2Manage Enterprise Business
System.
We have insurance covering product liability or damages arising from negligent
acts, errors, mistakes or omissions; however there can be no assurance that this
insurance will be adequate. Additionally, we are subject to other legal
proceedings and claims in the normal course of business. A claim against us, if
successful and of a sufficient magnitude, could have a material adverse effect
on our business, financial condition and results of operations.
DEPENDENCE ON PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
We rely primarily on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect our proprietary rights. There can be no assurance that these
protections will be adequate or that competitors will not independently develop
products incorporating technology that is substantially equivalent or superior
to our technology. We have a United States patent for software related to
Materials Requirements Planning regeneration and patent applications pending for
software included in the Made2Manage Enterprise Business System related to a
navigational interface and an e-commerce hosting approach for the enterprise.
However, we have no other patents or patent applications pending, and existing
copyright laws afford only limited protection. In the event that we are unable
to protect our proprietary rights, our business, financial condition and results
of operations could be materially and adversely affected.
There can be no assurance that we will not be subject to claims that our
technology infringes on the intellectual property of third parties, that we
would prevail against any such claims or that a licensing agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim. Any such claim, with or without merit, would likely be time consuming and
expensive to defend and could have a material adverse effect on our business,
financial condition and results of operations.
EFFECT OF ANTITAKEOVER PROVISIONS
The Amended and Restated Articles of Incorporation of Made2Manage Systems, Inc.
(the "Articles"), authorize the Board of Directors to issue, without shareholder
approval, up to two million shares of preferred stock with such rights and
preferences as the Board of Directors may determine in its sole discretion. The
Made2Manage Systems, Inc., Employee Stock Option Plan (the "Stock Option Plan")
provides that, unless the Board of Directors or a committee of the Board of
Directors decides to the contrary, all outstanding options vest and become
immediately exercisable upon a merger or similar transaction. In addition,
certain provisions of Indiana law could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control. Further, certain provisions of Indiana law
impose various procedural and other requirements that could make it more
difficult for shareholders to effect certain corporate actions. The foregoing
provisions could discourage an attempt by a third party to acquire a controlling
interest without the approval of management even if such third party were
willing to purchase shares of common stock at a premium over its then market
price.
Our Board of Directors believes that it is imperative to diminish the inevitable
distraction of key executive employees by the personal uncertainties and risks
created by a pending or threatened change in control. In order to encourage such
executives' full undivided time, attention, loyalty, and dedication, the Board
of Directors has approved the Made2Manage Systems, Inc., Executive Salary
Continuation Plan (the "Salary Continuation Plan"). Pursuant to the terms of the
Salary Continuation Plan, we have entered into agreements with the President and
each of the Vice Presidents of the company pursuant to which each of them will
receive certain severance payments in the event their employment with the
company is terminated within twelve months of a change in control or ownership
of the company.
18
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of our common stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new applications by us or our competitors, the
failure of earnings to meet the expectations of securities analysts and
investors, as well as other events or factors. In addition, the Company's stock
has limited trading volume which can result in price volatility. Also, the stock
market has from time to time experienced extreme price and volume fluctuations
which have particularly affected the market price of many high technology
companies and which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of our common stock in the public
market could adversely affect the market price of the common stock. As of
October 31, 2002, we had 4,918,072 shares of common stock outstanding, of which
548,706 shares of common stock are "Restricted Shares," which are subject to
volume and other limitations of Rule 144 and Rule 701 restrictions under the
Securities Act. As of October 31, 2002, there were 2,175,078 options outstanding
to purchase shares of common stock at a weighted average price of $5.83 per
share under the Company's stock option plans, of which options to purchase
1,181,365 shares of common stock were then vested and exercisable. At October
31, 2002, we had reserved 671,662 shares of common stock for future grant under
the 1999 Made2Manage Systems, Inc., Employee Stock Option Plan (the "Stock
Option Plan"). We have reserved 200,000 shares of common stock for issuance
under the Made2Manage Systems, Inc., Employee Stock Purchase Plan (the "Stock
Purchase Plan"). As of October 31, 2002, 86,766 shares have been issued under
the Stock Purchase Plan. We have filed registration statements registering
shares of common stock issued pursuant to the Stock Option Plan and the Stock
Purchase Plan on January 30, 1998. Accordingly, shares issued pursuant to these
plans will be saleable in the public market upon issuance, subject to certain
restrictions.
ABSENCE OF DIVIDENDS
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain earnings, if any, for the
development of our business.
INVESTMENT RISK
Despite the high credit ratings on our cash equivalents and investments, there
is no assurance such agencies will not default on their obligations which could
result in losses of principal and accrued interest.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We transact limited business in various foreign currencies, primarily in the
British pound sterling and Canadian dollar. We do not have any significant
receivables or obligations denominated in foreign currencies. We do not have any
foreign currency swaps or derivatives, and we are not currently subject to
material foreign currency exchange risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's chief
executive officer and chief financial officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date
within ninety days before the filing date of this quarterly report. Based on
that evaluation, the chief executive officer and the chief financial officer
have concluded that the Company's disclosure controls and procedures are
effective and designed to ensure that material information relating to the
Company and the Company's consolidated subsidiaries are made known to them
by others within those entities.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of the evaluation.
20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period
ended September 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MADE2MANAGE SYSTEMS, INC.
(Registrant)
Date: November 13, 2002 /s/ DAVID B. WORTMAN
-------------------------------------------
David B. Wortman
Chairman of the Board, President and
Chief Executive Office
(Principal Executive Officer)
Date: November 13, 2002 /s/ TRACI M. DOLAN
-------------------------------------------
Traci M. Dolan
Vice President, Finance and Administration,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
(Principal Accounting Officer)
22
CERTIFICATIONS
I, David B. Wortman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Made2Manage
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ DAVID B. WORTMAN
--------------------------------------
David B. Wortman
Chairman of the Board, President and
Chief Executive Officer
23
I, Traci M. Dolan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Made2Manage
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ TRACI M. DOLAN
-------------------------------------------
Traci M. Dolan
Vice President, Finance and Administration,
Chief Financial Officer
Secretary and Treasurer
24
INDEX TO EXHIBITS
Number Assigned in
Regulation S-K Exhibit
Item 601 Number Description of Exhibit
-------- ---------- ----------------------
(3) 3.1 Amended and Restated Articles of Incorporation of Made2Manage
Systems, Inc. (Incorporated by reference to Registration Statement
on Form S-1, Registration No. 333-38177.)
3.2 Amended and Restated Code of By-Laws of Made2Manage Systems, Inc.
(Incorporated by reference to Registration Statement on Form S-1,
Registration No. 333-38177.)
(4) 4.1 Specimen Stock Certificate for Common Stock (Incorporated by
reference to Registration Statement on Form S-1, Registration No.
333-38177.)
4.2 Other rights of securities holders - see Exhibits 3.1 and 3.2
(10) 10.1 Form of Made2Manage Systems, Inc., Stock Option Agreement
(Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1, Registration No. 333-38177.)
10.2 1999 Made2Manage Systems, Inc., Employee Stock Option Plan
(Incorporated by reference to March 31, 1999 Form 10-Q.)
10.3 Amendment to the 1999 Made2Manage Systems, Inc., Employee Stock Option
Plan (Incorporated by reference to March 31, 2000 schedule 14-a, appendix 1.)
10.4 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.)
10.5 First Amendment to the Made2Manage Systems, Inc., Employee Stock
Purchase Plan (Incorporated by reference to June 30, 2002 Form
10-Q.)
10.6 Made2Manage Systems, Inc., Executive Salary Continuation Plan
(Incorporated by reference to September 30, 2001 Form 10-Q.)
(21) 21.1 List of Subsidiaries (Incorporated by reference to December 31,
2000 Form 10-K.)
N/A 99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
N/A 99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
25