<PAGE>
This filing is made pursuant to Rule
424(b)(4)
Under the Securities Act of 1933, as
amended, in connection with
Registration No. 333-38177
2,325,000 SHARES
[LOGO]
COMMON STOCK
----------------
Of the 2,325,000 shares of Common Stock offered hereby (the "Shares"), 2,310,937
Shares are being sold by Made2Manage Systems, Inc. (the "Company") and 14,063
Shares are being sold by certain shareholders of the Company. The Company will
not receive any of the proceeds from the sale of Shares by the selling
shareholders, including those referenced below (the "Selling Shareholders"). See
"Principal and Selling Shareholders." Prior to this offering there has been no
public market for the Common Stock. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for quotation on The Nasdaq National Market under
the symbol "MTMS."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR A SUMMARY OF
CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK
FACTORS," COMMENCING ON PAGE 5 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC(1) DISCOUNTS(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $7.50 $.525 $6.975 $6.975
Total(3)...................... $17,437,500 $1,220,625 $16,118,786 $98,089
</TABLE>
(1) The initial public offering price has been determined by agreement between
the Company and the Representatives of the several Underwriters in
accordance with the recommendation of a "qualified independent underwriter"
as required by the Rules of the National Association of Securities Dealers,
Inc. The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $550,000.
(3) Certain shareholders have granted the Underwriters a 45-day option to
purchase up to 225,500 additional shares of Common Stock solely for the
purpose of covering over-allotments, if any. If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discounts and
Proceeds to Selling Shareholders will be $19,128,750, $1,339,013 and
$1,670,952, respectively. See "Underwriting."
------------------------------
The Shares are offered by the several Underwriters, subject to prior sale, when,
as and if delivered to and accepted by them, subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of the certificates representing such
shares will be made against payment therefor at the office of First Albany
Corporation, New York, New York on or about December 23, 1997.
First Albany Corporation
Van Kasper & Company
RvR Securities Corp.
THE DATE OF THIS PROSPECTUS IS DECEMBER 18, 1997
<PAGE>
The inside front cover of the prospectus contains four photographs of
individuals performing their jobs and in the middle of the pictures the
following text appears: "Power to the People." Below the photographs is the
following text: "Manufacturing Software That Gives Your People The Power To Work
Better, Together."
The inside cover page of the Prospectus then folds out and a schematic of the
various functions of Made2Manage appears. In the center of this fold-out, the
following words appear in a pyramid: Production, Finance, EIS, and Sales. Around
the pyramid is a circle containing the following words in clockwise order:
"Internet, Reporting and Messaging." Then in a concentric circle surrounding the
initial circle is the word "Vendor" on the right side of the concentric circle,
and on the left side is the word "Customer."
Stemming outward from this circle are six rays connecting a graphic and text
summarizing the feature displayed. The following is a summary of the graphic and
the exact language of the text. This summary begins with the ray extending
vertically upward from the center and continues in clockwise describing all
graphics and corresponding text.
1. The first ray connects the word "Production" in the center circle with a
three graphics and text. The main graphic is a computer screen illustrating the
Job Packet feature of Made2Manage. To the right of the main graphic are a small
picture of a welder and a small blow-up from the computer screen tool bar which
contains the following abbreviation "Prod." To the right of the main graphic is
the following text:
"JOB ORDERS
Made2Manage provides an easy-to-use, yet sophisticated job order tracking
feature. Because of the central database, the information related to a job
is available at the touch of a button from this screen. The Job Packet is a
unique feature that lets users view items on screen, thereby eliminating the
traditional paper documents that accompany a job through production.
Complete integration makes this possible."
2. The second ray connects the word "Internet" in the center circle with two
graphics and text. The main graphic is a computer screen of the Microsoft
Internet Explorer feature. To the right of the screen is a small graphic of an
individual performing his job. To the right of the main graphic is the following
text:
"INTERNET
Made2Manage's Internet Applications provide "self-service" access to
critical business information for your remote employees as well as access to
services for your customers and preferred vendors. Available to selected
individuals "on-demand" from anywhere via browser access, information and
services can keep people better informed and coordinated."
3. The third ray connects the word "Finance" in the center circle with three
graphics and text. The main graphic is a computer screen illustrating the
reporting function of Made2Manage. To the right of the main graphic are a small
graphic of an individual performing his job and a small blow-up from the
computer screen tool bar which contains the word "Finance." Below the main
graphic is the following text:
"REPORTING
Made2Manage supports a variety of reporting needs. Information about the
business is readily available. Users have the flexibility of using or
modifying standard Made2Manage reports or creating reports with the report
customization feature."
4. The fourth ray connects "EIS" in the center circle with two graphics and
text. The main graphic is a computer screen illustrating the EIS function of
Made2Manage. To the right of the screen is a small blow-up from the computer
screen tool bar which contains "EIS." To the left of the graphic is the
following text:
"EIS
The Executive Information System was developed just for management and made
to be easy to use. By means of exception reporting, EIS overviews display
real-time information on critical key indicators about the business. More
detailed reports are then available at the push of a button, which can then
be graphed as needed. Reports and graphs can be viewed or printed."
5. The fifth ray connects the word "Sales" in the center circle with three
graphics and text. The main graphic is a computer screen illustrating the
Product Configurator function of Made2Manage. To the right of the main graphic
is a small graphic of an individual performing his job and a small blow-up from
the computer screen tool bar which contains the word "Sales." Below the main
graphic is the following text.
"PRODUCT CONFIGURATOR
Made2Manage's Product Configurator helps Order Entry and Sales personnel
configure a custom product using a question and answer format. On-line
graphics, help files and document links provide all the information needed
to configure a product. Product Configurator will then create a bill of
material and rating for each item of a quote or sales order for use by
manufacturing."
6. The sixth ray connects the word "Messaging" in the center circle with three
graphics and text. The main graphic is a computer screen illustraing the
Notifier function of Made2Manage. To the right of the main graphic is a small
graphic of an individual performing her job and a small blow-up from the
computer screen tool bar which contains the word "Notifier." Below the main
graphic is the following text.
"MESSAGING
Workflow-enabled messaging is possible throughout the enterprise and the
supply chain with Notifier. Notifier will automatically send messages to
customers, employees, or vendors when pre-defined events occur. Messages can
be sent by fax, e-mail or pop-up message."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
"MADE2MANAGE" IS A REGISTERED TRADEMARK OF THE COMPANY, AND "NOTIFIER" IS A
TRADEMARK OF THE COMPANY FOR WHICH A FEDERAL REGISTRATION IS PENDING. THIS
PROSPECTUS ALSO INCLUDES TRADE NAMES AND TRADEMARKS OF OTHER COMPANIES.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND THE COMPANY'S FINANCIAL STATEMENTS
AND RELATED NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Made2Manage Systems, Inc. (the "Company") develops, markets and supports fully
integrated, Microsoft Windows-based business applications 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. Since its introduction in late
1995, Made2Manage has been licensed by more than 500 manufacturers in North
America, primarily in the United States. In addition, the Company continues to
support more than 150 manufacturing sites using the DOS-and UNIX-based
predecessors of Made2Manage.
The Company strategically targets manufacturers with annual revenues of between
$5 million and $50 million with a scalable product designed to support its
customers' growth. Advanced Manufacturing Research, Inc. ("AMR"), an independent
market research firm, has estimated that the ERP software market reached $7.2
billion in 1996 and projected that the market will grow at an average annual
rate of over 34% for the next five years. While the largest share of the ERP
software market in 1996 was attributable to applications aimed at large
manufacturers, the Company believes that the small and midsize segment of the
market is not only rapidly growing, but is also fragmented and underserved. In
addition, Windows NT is emerging as the platform of choice among small and
midsize manufacturing operations.
Unlike many competing ERP software applications, Made2Manage is a native, 32-bit
product that takes full advantage of the Microsoft Windows and Windows NT
platforms. Furthermore, Made2Manage was designed specifically as an integrated
business solution for small and midsize manufacturers, providing simplicity of
operation, rapid implementation, ease of administration and low total cost of
ownership. It is a fully integrated solution providing easy access to shared
information from all functional areas of a manufacturing organization.
Made2Manage improves information flow throughout a company and across the supply
chain. This enables a manufacturer to better meet the needs of its customers and
realize numerous competitive advantages, including the ability to customize
production, shorten manufacturing cycles and improve customer service.
The Company's objective is to be a leading provider of fully-integrated ERP
software solutions for manufacturers in its target market. The Company's
strategy for achieving this objective includes (i) maintaining its focus on the
unique requirements of small and midsize manufacturers; (ii) expanding its
distribution channels by increasing its direct sales and marketing force,
strengthening its relationship with value added resellers ("VARS") and exploring
international expansion opportunities; (iii) evaluating potential strategic
acquisitions; (iv) capitalizing on Year 2000 replacement opportunities; (v)
leveraging the scalable functionality and flexibility of its products to
accommodate customer growth; and (vi) continuing to achieve high levels of
customer satisfaction.
The Company was incorporated under the laws of Indiana as Teksyn, Inc. in 1986
and changed its name to Made2Manage Systems, Inc. in 1995. The Company's
principal executive offices are located at 9002 Purdue Road, Indianapolis, IN
46268, and its telephone number is (317) 875-9750.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
Shares offered by the Company................... 2,310,937 Shares
<S> <C>
Shares offered by the Selling Shareholders...... 14,063 Shares
Common Stock to be outstanding after the 5,272,236 shares of Common Stock(1)
offering......................................
Use of proceeds................................. For repayment of certain indebtedness,
capital expenditures, and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................... MTMS
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................................. $ 4,452 $ 5,935 $ 9,379 $ 6,138 $ 11,041
Operating income............................................... 546 447 700 374 573
Income tax provision (benefit)(2).............................. 5 6 (1,028) 17 197
Net income..................................................... 443 392 1,606 299 323
Pro forma net income per share(3).............................. .61 .15
Pro forma average number of shares(3).......................... 2,846 2,886
Supplemental pro forma net income per share(3)(4).............. .63 .13
Supplemental pro forma average number of shares(3)(4).......... 2,531 2,544
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,856 $ 16,482
Working capital........................................................................ 1,222 16,114
Total assets........................................................................... 8,566 23,192
Long-term obligations, less current portion............................................ 733 --
Total shareholders' equity............................................................. 2,485 18,110
</TABLE>
- ------------------------------
(1) Based on shares outstanding at September 30, 1997, including conversion of
1,479,824 shares of convertible preferred stock ("Convertible Preferred
Stock") convertible into the same number of shares of Common Stock, and
including (i) 1,060,785 shares of Common Stock issuable upon the exercise of
stock options outstanding as of September 30, 1997, of which 399,867 were
exercisable as of that date, and (ii) 14,063 shares of Common Stock issuable
upon the exercise and conversion of warrants outstanding as of September 30,
1997. See "Capitalization," "Management--Stock Option Plan" and Note 5 of
Notes to Financial Statements.
(2) Net income for the year ended December 31, 1996 includes an income tax
benefit of $1.2 million or $.44 per share resulting from the reversal 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. For subsequent periods the Company has
provided for income taxes utilizing federal and state statutory income tax
rates. See Note 7 of Notes to Financial Statements.
(3) Computed on the basis described in Note 1 of Notes to Financial Statements.
(4) Supplemental pro forma net income per share has been determined in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128").
(5) Adjusted to reflect the exercise and conversion of outstanding warrants to
purchase 14,063 shares of Common Stock and the sale of 2,310,937 Shares
offered by the Company hereby (after deducting the estimated underwriting
discounts and offering expenses payable by the Company), at an initial
public offering price of $7.50 per share, and the receipt of net proceeds
therefrom.
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING
FINANCIAL INFORMATION, SHARE AND PER SHARE DATA: (I) REFLECTS THE AUTOMATIC
CONVERSION OF ALL OF THE SHARES OF THE COMPANY'S OUTSTANDING CONVERTIBLE
PREFERRED STOCK INTO SHARES OF COMMON STOCK ON A ONE-FOR-ONE BASIS UPON THE
COMPLETION OF THIS OFFERING; (II) REFLECTS THE EXERCISE AND CONVERSION OF
OUTSTANDING WARRANTS FOR 14,063 SHARES OF COMMON STOCK; AND (III) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 225,500
SHARES OF COMMON STOCK. SEE "UNDERWRITING."
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS 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
POLICIES OF THE COMPANY REGARDING CAPITAL EXPENDITURES, FINANCING OR OTHER
MATTERS AND (III) INDUSTRY TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. ACTUAL RESULTS OR EVENTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN ANY FORWARD-LOOKING STATEMENTS FOR THE REASONS DISCUSSED IN
THIS SECTION AND THE SECTIONS ENTITLED "MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS, OR FOR OTHER REASONS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN
INVESTMENT IN THE SHARES OFFERED HEREBY.
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results."
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 enhancements and 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
5
<PAGE>
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. See "--Product Development",
"--Competition," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--The Product" and "Business--Competition."
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 that it will continue 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. See "Business--The Product."
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. See "--Dependence on Key Personnel," "--Product and
Market Concentration," "--Competition," "Business--The Product" and
"Business--Product Development."
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 against numerous companies, including
larger, more established companies with significantly greater financial
resources than the
6
<PAGE>
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. See "--Management of Growth,"
"Business--Employees" and "Management--Executive Officers and Directors."
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. See "--Dependence on Key Personnel,"
"Business--Competition," "Business-- Employees" and "Management--Executive
Officers and Directors."
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, including Dataworks
Corporation, Effective Management Systems, Inc., Fourth Shift Corporation, and
Symix Computer Systems which are public companies, and Lilly Software
Associates, which is a private company. 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, including
Baan Company, J.D. Edwards & Company, PeopleSoft, Inc., QAD, Inc. and SAP
America, Inc., 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. See
"Business--Competition."
7
<PAGE>
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. See
"Business--Sales and Marketing."
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. See "--Product and Market Concentration." 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. See
"Business--Intellectual Property."
SUBSTANTIAL CONTROL BY SINGLE SHAREHOLDER
Following completion of the offering, Hambrecht & Quist ("H&Q") and its
affiliates, as a group, will beneficially own approximately 29.3% 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 shareholder
8
<PAGE>
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. See
"Principal and Selling Shareholders" and "Underwriting."
EFFECT OF ANTITAKEOVER PROVISIONS
The Company's Amended and Restated Articles of Incorporation (the "Articles")
authorize the Board of Directors to issue, without shareholder approval, up to
two million shares of preferred stock with such rights and preferences as the
Board of Directors may determine in its sole discretion. The Made2Manage System,
Inc. Stock Option Plan (the "Stock 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. See "Management--Stock Option Plan." 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 shareholders 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. See "Description of Capital Stock--Other
Restrictions on Acquisition of Company."
BENEFITS OF OFFERING TO CURRENT SHAREHOLDERS AND MANAGEMENT
As a result of the offering contemplated by this Prospectus, at an initial
public offering price per share of $7.50, the Company's existing shareholders,
including certain members of the Company's management, will realize an immediate
increase of $2.96 in the net tangible book value per share of their investment
in the Company. See "Dilution." The offering also will result in the creation of
a public market for the Company's Common Stock, which the Company believes will
substantially increase the value of the interests in the Company held by
existing shareholders, including management. At an initial public offering price
of $7.50 per share, the aggregate value of all shares of Common Stock held by
the Company's management and all vested and unvested options to purchase shares
of the Company's Common Stock granted to the Company's management will increase
by approximately $2.8 million from the sum of the cost of such Common Stock and
the exercise price of such options. Assuming that the Underwriters' over-
allotment option is exercised in full, at an initial public offering price of
$7.50 per share, the Selling Shareholders, including the Company's Chairman,
will sell 239,563 shares of Common Stock and will realize proceeds, net of
applicable underwriting discounts, of approximately $1.7 million, of which
$348,750 of such net proceeds will be realized by the Company's Chairman. Other
than the Chairman, no executive officer or director is selling any shares of
Common Stock in the offering.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION
Prior to the offering contemplated by this Prospectus, there has been no public
market for the Shares, and there can be no assurance that an active public
market will develop or be sustained after the offering. The initial public
offering price was determined by negotiations between the Company and the
Representatives, in accordance with the recommendation of a qualified
independent underwriter, based upon a number of factors. 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
9
<PAGE>
adversely affect the market price of the Common Stock. Furthermore, purchasers
of the Shares offered by this Prospectus will suffer an immediate and
substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price. See "--Fluctuations of Quarterly
Operating Results; Seasonality," "Underwriting" and "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sale of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Shares.
Upon completion of this offering, the Company will have outstanding an aggregate
of 4,213,680 shares of Common Stock. The Shares sold in this offering will be
freely tradeable without restriction under the Securities Act.
The remaining 1,888,680 shares of Common Stock are "Restricted Shares," certain
of 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 the date of this Prospectus without the prior
written consent of the Company and 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 subject to lock-up agreements,
approximately 574,000 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 approximately 1,300,000 Restricted Shares subject to lock-up
agreements 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.
The Company also intends to file a registration statement covering the sale of
shares of Common Stock reserved for issuance under the Stock Option Plan and the
Made2Manage Systems, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan") approximately 30 days following the date of this Prospectus. As of
December 15, 1997, there were options outstanding to purchase 1,095,056 shares
of Common Stock at a weighted average price of $3.45 per share under the
Company's Stock Option Plan, of which 447,831 shares of Common Stock were then
vested and exercisable. Substantially all holders of options exercisable as of
December 15, 1997 have signed six month lock-up agreements. On November 21,
1997, the Company adopted the Stock Purchase Plan. The Company has reserved
100,000 shares of Common Stock for issuance under the Stock Purchase Plan, but
to date no shares of Common Stock have been issued under the Stock Purchase
Plan. Shares of Common Stock issued upon the exercise of options granted under
the Stock Option Plan and under the Stock Purchase Plan will, with some
restrictions in the case of the Stock Purchase Plan, become available for sale
in the public market upon the registration of the Stock Option Plan and the
Stock Purchase Plan. See "Management--Stock Option Plan," "--Stock Purchase
Plan," "Description of Capital Stock--Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
Following this offering, holders of approximately 1,479,824 shares of Common
Stock, have certain rights with respect to the registration of those shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights." 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 Shares. If the
Company were required to include 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. See "Shares Eligible for Future Sale."
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. The Company is currently restricted
from paying cash dividends under the terms of its lines of credit without the
prior written consent of the lender. See "Dividend Policy."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,310,937 Shares being
offered by it are estimated to be $15,569,000, at an initial public offering
price of $7.50 per share and after deducting the estimated underwriting
discounts and offering expenses payable by the Company. The remaining net
proceeds will be used by the Company to repay outstanding indebtedness of
approximately $1.0 million at September 30, 1997, to fund capital expenditures
of approximately $1.1 million and for working capital and general corporate
purposes. The principal purpose of this offering is to obtain additional capital
to create a public market for the Company's Common Stock and to facilitate the
Company's access to the public equity markets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources." A portion of the net proceeds may also be used for strategic
acquisitions of businesses, products or technologies complementary to those of
the Company. However, there are no current negotiations, commitments or
agreements with respect to any such acquisitions. The Company has not yet
determined the specific amount to be allocated to each of the foregoing uses,
hence the Company's management will retain broad discretion in the allocation of
the net proceeds. Pending such uses, the Company will invest the net proceeds in
short-term, investment-grade securities. The Company will not receive any
proceeds from the sale of Shares by the Selling Shareholders.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain any future earnings to develop
and expand its business. The Company is currently restricted from paying cash
dividends under the terms of its lines of credit without the prior written
consent of the lender. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
11
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30, 1997,
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock and the exercise and conversion of warrants outstanding, was
$2,541,000 or $1.34 per share. The net tangible book value per share is equal to
the Company's total tangible assets less total liabilities, divided by the total
number of shares of Common Stock outstanding. After giving effect to the sale by
the Company of 2,310,937 Shares offered hereby (resulting in estimated net
proceeds of $15,569,000 at an initial public offering price of $7.50 per share
and after deducting the estimated underwriting discounts and offering expenses
payable by the Company), the adjusted pro forma net tangible book value of the
Company as of September 30, 1997 would be approximately $18,110,000 or $4.30 per
share. This represents an immediate increase of $2.96 per share to existing
shareholders and an immediate dilution of $3.20 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $ 7.50
Pro forma net tangible book value per share as of September 30,
1997......................................................... $ 1.34
Increase per share attributable to new investors............... 2.96
---------
Adjusted pro forma net tangible book value per share at September
30, 1997 after offering giving effect to the offering by the
Company........................................................ 4.30
---------
Dilution per share to new investors.............................. $ 3.20
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis after giving effect to the
offering, the number of Shares purchased from the Company, the total
consideration paid and the average price per share paid by existing shareholders
and by the new investors purchasing the Shares offered hereby at an initial
public offering price of $7.50 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............................. 1,900,514 45.1 $ 4,454,000 20.4% $ 2.34
New investors(1)..................................... 2,310,937 54.9 17,332,000 79.6 7.50
---------- --------- ------------- ---------
Total................................................ 4,211,451 100.0% $ 21,786,000 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>
- ------------------------
(1) The above computations assume the exercise and conversion of warrants
outstanding and no exercise after September 30, 1997 of any options
outstanding under the Stock Option Plan. As of September 30, 1997, there
were options outstanding to purchase a total of 1,060,785 shares of Common
Stock at a weighted average exercise price of $3.31 per share and warrants
outstanding for 14,063 shares at an exercise price of $4.00 per share. To
the extent these options are exercised, there will be further dilution to
new investors. See "Capitalization," "Management--Stock Option Plan" and
Note 5 of Notes to Financial Statements.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of September
30, 1997, (i) on an actual basis and (ii) on an as adjusted basis after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this offering, to the exercise and conversion
of warrants and to the receipt of the estimated net proceeds from the sale by
the Company of 2,310,937 shares of Common Stock pursuant to this offering at the
initial public offering price of $7.50 per share:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations--including current portion............................................. $ 999 $ --
--------- ---------
Shareholders' equity:
Preferred Stock, no par value; 3,662,111 shares authorized and 1,479,824 shares outstanding
(actual); 2,000,000 shares authorized and none outstanding (as adjusted)................. 4,042 --
Common Stock, no par value; 10,000,000 shares authorized; 406,627 shares outstanding
(actual); 4,211,451 shares outstanding (as adjusted)(1).................................. 356 20,023
Accumulated deficit...................................................................... (1,913) (1,913)
--------- ---------
Total shareholder's equity............................................................... 2,485 18,110
--------- ---------
Total capitalization................................................................... $ 3,484 $ 18,110
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) The above computations assume the exercise and conversion of warrants
outstanding and no exercise after September 30, 1997 of any options
outstanding under the Stock Option Plan. As of September 30, 1997, there
were options outstanding to purchase a total of 1,060,785 shares of Common
Stock at a weighted average exercise price of $3.31 per share and warrants
outstanding for 14,063 shares at an exercise price of $4.00 per share. To
the extent these options are exercised, there will be further dilution to
new investors. See "Management--Stock Option Plan" and Note 5 of Notes to
Financial Statements.
13
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected statement of operations data for the years ended December
31, 1994, 1995 and 1996 and the nine months ended September 30, 1997 and the
balance sheet data as of December 31, 1995 and 1996 and September 30, 1997 are
derived from and should be read in conjunction with the financial statements and
notes thereto included elsewhere herein, audited by Coopers & Lybrand L.L.P. The
selected statement of operations data for the years ended December 31, 1992 and
1993 and selected balance sheet data as of December 31, 1992, 1993 and 1994 are
also derived from audited financial statements which are not included herein.
The selected statement of operations data for the nine months ended September
30, 1996 is derived from and should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein. In the opinion
of the Company, such unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for such period. The financial results for the nine
months ended September 30, 1997, are not necessarily indicative of the results
to be expected for any other interim period or the full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software............................ $ 2,793 $ 2,414 $ 2,494 $ 3,572 $ 6,140 $ 3,733 $ 6,916
Services............................ 723 1,068 1,748 2,160 2,998 2,238 3,728
Hardware............................ 974 456 210 203 241 167 397
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................... 4,490 3,938 4,452 5,935 9,379 6,138 11,041
--------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
Software............................ 545 470 382 417 599 318 430
Services............................ 542 836 977 1,175 1,762 1,214 2,409
Hardware............................ 731 406 171 163 164 121 262
--------- --------- --------- --------- --------- --------- ---------
Total costs of revenues........... 1,818 1,712 1,530 1,755 2,525 1,653 3,101
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................... 2,672 2,226 2,922 4,180 6,854 4,485 7,940
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing................. 1,355 1,054 1,122 1,717 3,282 2,093 4,324
Product development................. 191 318 530 1,189 1,718 1,210 1,663
General and administrative.......... 1,540 830 724 827 1,154 808 1,380
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.......... 3,086 2,202 2,376 3,733 6,154 4,111 7,367
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............... (414) 24 546 447 700 374 573
Other expense, net.................... 108 114 98 49 122 58 53
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... (522) (90) 448 398 578 316 520
Income tax provision (benefit)(1)..... -- -- 5 6 (1,028) 17 197
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... $ (522) $ (90) $ 443 $ 392 $ 1,606 $ 299 $ 323
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income per share(2)..... $ .61 $ .15
--------- ---------
--------- ---------
Pro forma average number of
shares(2)........................... 2,846 2,886
--------- ---------
--------- ---------
Supplemental pro forma net income per
share(2)(3)......................... $ .63 $ .13
--------- ---------
--------- ---------
Supplemental pro forma average number
of shares(2)(3)..................... 2,531 2,544
--------- ---------
--------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 399 $ 158 $ 893 $ 1,033 $ 1,139 $ 1,856
Working capital................................... (728) (585) 219 461 1,173 1,222
Total assets...................................... 1,567 1,496 2,270 3,576 6,666 8,566
Long-term obligations, less current portion....... 390 651 349 452 436 733
Total shareholders' equity (deficit).............. (787) (877) 80 509 2,116 2,485
</TABLE>
- ------------------------
(1) Net income for the year ended December 31, 1996 includes an income tax
benefit of $1.2 million or $.44 per share resulting from the reversal 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. For subsequent periods the Company has
provided for income taxes utilizing federal and state statutory income tax
rates. See Note 7 of Notes to Financial Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) Supplemental pro forma net income per share has been determined in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128").
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL
INFORMATION CONTAINED HEREIN, THE DISCUSSIONS IN THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW AND IN THE SECTION ENTITLED "RISK FACTORS" AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
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. License revenues
after 1995 have been derived principally 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 revenues upon shipment of software to the customer following
execution of a sales agreement. Service revenues are generated from annual fees
paid by customers to receive the Company's customer support services and
Made2Manage software upgrades. Support contracts are typically purchased with
the initial software license and are renewable annually. Support contract
renewal fees are due in advance of the support period and are recognized ratably
over the term of the contract. Service revenues are also derived from
implementation, education and consulting services, the majority of which are
purchased as part of the initial contract. 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.
The sales cycle for the Company's products is typically three to nine months and
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. Accordingly, the Company believes that quarter-to-quarter
comparisons of its results of operations are not necessarily indicative of the
results to be expected for any future periods. See "Risk Factors--Fluctuations
of Quarterly Operating Results; Seasonality" and "--Quarterly Results."
16
<PAGE>
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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Software............................................................. 56.0% 60.2% 65.4% 60.8% 62.6%
Services............................................................. 39.3 36.4 32.0 36.5 33.8
Hardware............................................................. 4.7 3.4 2.6 2.7 3.6
--------- --------- --------- --------- ---------
Total revenue...................................................... 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Cost of revenues:
Software............................................................. 8.6 7.0 6.4 5.2 3.9
Services............................................................. 21.9 19.8 18.7 19.7 21.8
Hardware............................................................. 3.9 2.8 1.8 2.0 2.4
--------- --------- --------- --------- ---------
Total cost of revenues............................................. 34.4 29.6 26.9 26.9 28.1
--------- --------- --------- --------- ---------
Gross profit....................................................... 65.6 70.4 73.1 73.1 71.9
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing.................................................. 25.2 28.9 35.0 34.1 39.1
Product development.................................................. 11.9 20.0 18.3 19.7 15.1
General and administrative........................................... 16.2 14.0 12.3 13.2 12.5
--------- --------- --------- --------- ---------
Total operating expenses........................................... 53.3 62.9 65.6 67.0 66.7
--------- --------- --------- --------- ---------
Operating income....................................................... 12.3 7.5 7.5 6.1 5.2
Other expense, net..................................................... 2.2 .8 1.3 1.0 .5
--------- --------- --------- --------- ---------
Income before taxes.................................................... 10.1 6.7 6.2 5.1 4.7
Income tax provision (benefit)......................................... .1 0.1 (10.9) .2 1.8
--------- --------- --------- --------- ---------
Net income............................................................. 10.0% 6.6% 17.1% 4.9% 2.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUES
Revenues are derived from software license fees, service and support fees and
hardware sales. Total revenues increased by $4.9 million, or 79.9%, to $11.0
million in the first nine months of 1997 from $6.1 million in the same period in
1996. This increase was primarily due to a greater volume of license
transactions, an increase in average contract size and sales of new software
modules. The increase in revenue was primarily attributable to increased market
awareness and acceptance of the Company's Windows product and expansion of the
Company's sales and marketing organizations. The Company does not expect
revenues to continue to grow at this rate. The Company has not historically
recognized significant quarterly revenues from any single customer.
SOFTWARE REVENUES. Software revenues increased by $3.2 million, or 85.3%, to
$6.9 million in the first nine months of 1997 from $3.7 million in the same
period in 1996. Software license revenues constituted 62.6% and 60.8% of total
revenues in the first nine months of 1997 and 1996, respectively. The increase
in revenues in the first nine months of 1997 compared to the same period in 1996
was primarily due to a greater volume of license transactions and an increase in
average transaction size.
17
<PAGE>
SERVICES REVENUES. Services revenues increased by $1.5 million, or 66.6%, to
$3.7 million in the first nine months of 1997 from $2.2 million in the same
period in 1996. These revenues constituted 33.8% and 36.5% of total revenues in
the first nine months of 1997 and 1996, respectively. The increase in the dollar
amount recognized was primarily due to increased support fees from a larger
installed base of customers and increased revenues from implementation,
education and consulting services. Although services revenues as a percentage of
total revenues has decreased in recent years as the result of the Company's
significant software license revenue growth, management anticipates that
services revenues as a percentage of total revenues will increase in the future
due to a larger installed base of customers.
HARDWARE REVENUES. Hardware revenues as a percent of total revenues were 3.6%
in the first nine months of 1997 and 2.7% in the same period of 1996. Management
of the Company anticipates that hardware revenues will continue to represent a
relatively small percentage of the Company's total revenues.
COSTS OF REVENUES
COST OF SOFTWARE REVENUES. Costs of software revenues consist primarily of
costs of third-party software, product media, documentation, duplication and
shipping. Costs of software revenues totaled $430,000 and $318,000 in the first
nine months of 1997 and 1996, respectively, resulting in gross profits of 93.8 %
and 91.5 % of software revenues, respectively.
COST OF SERVICE REVENUES. Costs of services revenues consist primarily of the
costs of providing customer technical support, implementation and consulting
services and education. Costs of services totaled $2.4 million and $1.2 million
in the first nine months of 1997 and 1996, respectively, resulting in gross
profits of 35.4% and 46.8% of service revenues, respectively. The dollar
increase was primarily due to increased costs of providing implementation and
consulting services.
COST OF HARDWARE. Costs of hardware are directly related to the hardware
revenues. Costs of hardware totaled $262,000 and $121,000 during the first nine
months of 1997 and 1996, respectively. The gross profit from hardware was 34.0%
and 27.5% of hardware revenues in the first nine months of 1997 and 1996,
respectively. Gross profit from hardware revenue has not been a significant part
of the Company's gross profit and the Company expects this to continue.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses include personnel
costs, commissions, travel, advertising, public relations programs and
promotional events such as trade shows and seminars. Sales and marketing
expenses were $4.3 million and $2.1 million in the first nine months of 1997 and
1996, respectively, representing 39.1% and 34.1% of total revenues in the first
nine months of 1997 and 1996, respectively. The increase in sales and marketing
expenses was primarily due to increased personnel related expenses and travel
costs.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses include salaries and
related benefits, occupancy and other overhead costs. Product development
expenses were $1.7 million and $1.2 million in the first nine months of 1997 and
1996, respectively, representing 15.1% and 19.7% of total revenues in the first
nine months of 1997 and 1996, respectively. The dollar increase was primarily
due to increased staffing required to complete new versions of Made2Manage. The
Company did not capitalize any software costs in either of these periods.
Management anticipates that the dollar amount of product development expenses
will continue to increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the costs of the Company's finance, human resources, information systems
and administrative departments. General and administrative expenses were $1.4
million and $808,000 in the first nine months of 1997 and 1996, respectively,
representing 12.5% and 13.2% of total revenues in the nine months of 1997 and
1996,
18
<PAGE>
respectively. The dollar increase resulted primarily from increased number of
personnel. Management anticipates that the dollar amount of general and
administrative expenses will continue to increase.
OTHER EXPENSE, NET
Other expense, net primarily consists of interest expense on bank term loans to
fund equipment additions and subordinated financing of the development and
commercialization of Made2Manage offset in part by interest earned on invested
cash balances. Other expense, net was $53,000 and $58,000 in the first nine
months of 1997 and 1996, respectively, representing 0.5% and 0.9% of total
revenues in the first quarter of 1997 and 1996, respectively. On March 31, 1997,
the Company repaid the outstanding balance of the commercialization funding
obligation which was incurred to fund the development and commercialization of
the Company's products. The obligation carried a 20% interest rate.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES
Total revenues increased by $3.4 million, or 58.0%, to $9.4 million in 1996 from
$5.9 million in 1995. Total revenues increased by $1.5 million, or 33.3%, in
1995 from $4.5 million in 1994. The increase in revenue was primarily
attributable to increased market awareness and acceptance of the Company's
Windows product and expansion of the Company's sales and marketing
organizations. The Company has not historically recognized significant annual
revenues from any single customer.
SOFTWARE REVENUES. Software revenues increased by $2.6 million, or 71.9%, to
$6.1 million in 1996 from $3.6 million in 1995. Software license revenues
constituted 65.4% and 60.2% of total revenues in 1996 and 1995, respectively.
The increase in software license revenues in 1996 compared to 1995 was primarily
due to a greater volume of license transactions and an increase in average
contract size.
Software revenues increased by $1.1 million, or 43.2%, to $3.6 million in 1995
from $2.5 million in 1994. Software license revenues constituted 56.0% of total
revenues in 1994. The increase in software license revenue in 1995 compared to
1994 was due to a greater volume of license transactions and an increase in
average contract size.
SERVICES REVENUES. Services revenues increased by $838,000, or 38.8%, to $3.0
million in 1996 from $2.2 million in 1995. These revenues increased by $412,000,
or 24.0%, in 1995 from $1.7 million in 1994. These revenues constituted 32.0%,
36.4% and 39.3% of total revenues in 1996, 1995 and 1994, respectively. The
increases in the dollar amount recognized were due to (i) increased support fees
from an expanded user base as a result of product installations, (ii) revenues
from expanded implementation and consulting services offerings and (iii)
revenues from expanded educational offerings.
HARDWARE REVENUES. Hardware revenues have remained relatively constant in
dollar amounts for the three years ended December 31, 1996 and have decreased as
a percent of revenue to 2.6% in 1996 from 3.4% and 4.7% in 1995 and 1994,
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.
COSTS OF REVENUES
COSTS OF SOFTWARE REVENUES. Costs of software revenues totaled $599,000,
$417,000 and $382,000 in 1996, 1995 and 1994, respectively, resulting in gross
profits of 90.2%, 88.3% and 84.7% of software revenues, respectively. Costs of
software in 1995 and 1994 also 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.
19
<PAGE>
COSTS OF SERVICE REVENUES. Costs of service revenues totaled $1.8 million, $1.2
million and $977,000 in 1996, 1995 and 1994, respectively, resulting in gross
profits of 41.2%, 45.6% and 44.1% 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.
COSTS OF HARDWARE. Costs of hardware totaled $164,000, $163,000 and $171,000 in
1996, 1995 and 1994, respectively. The gross profit from hardware was 32.0%,
19.7% and 18.6% of hardware revenues in 1996, 1995 and 1994, respectively.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $3.3 million,
$1.7 million and $1.1 million in 1996, 1995 and 1994, respectively, representing
35.0%, 28.9% and 25.2% 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 $1.7 million,
$1.2 million and $530,000 in 1996, 1995 and 1994, respectively, representing
18.3%, 20.0% and 11.9% of total revenues, respectively. The Company did not
capitalize any software development costs in 1996 or 1995. The increase in
product development expenses in 1995 from 1994 reflects the increase in staffing
to develop the Windows version of Made2Manage. The Windows version was initially
released in late 1995. Product development expenses increased during 1996 in
relation to 1995, but decreased as a percentage of revenue over the same period
as the Company spread development expenses across a broader revenue base.
GENERAL ADMINISTRATIVE EXPENSES. General and administrative expenses were $1.2
million, $827,000 and $724,000 in 1996, 1995 and 1994, respectively,
representing 12.3%, 14.0% and 16.2% 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 $122,000, $49,000 and $98,000 in 1996, 1995 and 1994,
respectively, representing 1.3%, 0.8% and 2.2% of total revenues, respectively.
The interest on the BMT obligation accounted for $66,000 of the 1996 other
expense, net of $122,000. The increase in 1996 compared to 1995 was due
primarily to increased borrowings. The decrease in 1995 from 1994 was due to a
restructuring of debt resulting in reduced borrowing costs.
INCOME TAX PROVISION (BENEFIT)
In 1994 and 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 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. For subsequent periods the
Company provided for income taxes utilizing federal and state statutory income
tax rates. See Note 7 of Notes to Financial Statements.
20
<PAGE>
QUARTERLY RESULTS
The following table sets forth the unaudited quarterly results of operations for
each of the quarters in 1996 and for the first three quarters of 1997. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented when read in
conjunction with the financial statements and notes thereto included elsewhere
in this Prospectus. The operating results in any quarter are not necessarily
indicative of future fiscal period results.
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------------- ------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software................................... $ 1,013 $ 1,174 $ 1,546 $ 2,407 $ 1,986 $ 2,545
Services................................... 672 783 783 760 1,097 1,188
Hardware................................... 30 55 82 74 140 104
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................... 1,715 2,012 2,411 3,241 3,223 3,837
----------- ----------- ----------- ----------- ----------- -----------
Cost of Revenues:
Software................................... 45 92 181 281 157 156
Services................................... 357 432 425 548 628 885
Hardware................................... 24 39 58 43 97 74
----------- ----------- ----------- ----------- ----------- -----------
Total costs of revenues.................. 426 563 664 872 882 1,115
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................. 1,289 1,449 1,747 2,369 2,341 2,722
----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Sales and marketing........................ 527 688 878 1,189 1,221 1,509
Product development........................ 362 408 440 508 521 550
General and administrative................. 287 233 288 346 434 470
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses................. 1,176 1,329 1,606 2,043 2,176 2,529
----------- ----------- ----------- ----------- ----------- -----------
Operating income............................. 113 120 141 326 165 193
Other expense, net........................... 19 19 20 64 22 19
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes................... 94 101 121 262 143 174
Income tax provision (benefit)............... 6 11 -- (1,045) 55 66
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... $ 88 $ 90 $ 121 $ 1,307 $ 88 $ 108
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
(AS A PERCENT OF TOTAL REVENUES)
Revenues:
Software................................... 59.1% 58.4% 64.1% 74.3% 61.6% 66.3%
Services................................... 39.2 38.9 32.5 23.4 34.0 31.0
Hardware................................... 1.7 2.7 3.4 2.3 4.4 2.7
----------- ----------- ----------- ----------- ----------- -----------
Total revenues........................... 100.0 100.0 100.0 100.0 100.0 100.0
----------- ----------- ----------- ----------- ----------- -----------
Cost of Revenues:
Software................................... 2.6 4.6 7.5 8.7 4.9 4.1
Services................................... 20.8 21.5 17.7 16.9 19.5 23.1
Hardware................................... 1.4 1.9 2.4 1.3 3.0 1.9
----------- ----------- ----------- ----------- ----------- -----------
Total costs of revenues.................. 24.8 28.0 27.6 26.9 27.4 29.1
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................. 75.2 72.0 72.4 73.1 72.6 70.9
----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Sales and marketing........................ 30.7 34.2 36.4 36.7 37.8 39.3
Product development........................ 21.1 20.3 18.3 15.6 16.2 14.3
General and administrative................. 16.8 11.6 11.9 10.7 13.5 12.3
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses................. 68.6 66.1 66.6 63.0 67.5 65.9
----------- ----------- ----------- ----------- ----------- -----------
Operating income............................. 6.6 5.9 5.8 10.1 5.1 5.0
Other expense, net........................... 1.1 .9 .8 2.0 .7 .5
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes................... 5.5 5.0 5.0 8.1 4.4 4.5
Income tax provision (benefit)............... .4 .5 -- (32.2) 1.7 1.7
----------- ----------- ----------- ----------- ----------- -----------
Net income................................... 5.1% 4.5% 5.0% 40.3% 2.7% 2.8%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
THIRD
QUARTER
-----------
<S> <C>
Revenues:
Software................................... $ 2,385
Services................................... 1,443
Hardware................................... 153
-----------
Total revenues........................... 3,981
-----------
Cost of Revenues:
Software................................... 117
Services................................... 896
Hardware................................... 91
-----------
Total costs of revenues.................. 1,104
-----------
Gross profit............................. 2,877
-----------
Operating Expenses:
Sales and marketing........................ 1,594
Product development........................ 592
General and administrative................. 476
-----------
Total operating expenses................. 2,662
-----------
Operating income............................. 215
Other expense, net........................... 12
-----------
Income before income taxes................... 203
Income tax provision (benefit)............... 76
-----------
Net income................................... $ 127
-----------
-----------
Revenues:
Software................................... 59.9%
Services................................... 36.2
Hardware................................... 3.9
-----------
Total revenues........................... 100.0
-----------
Cost of Revenues:
Software................................... 2.9
Services................................... 22.5
Hardware................................... 2.3
-----------
Total costs of revenues.................. 27.7
-----------
Gross profit................................. 72.3
-----------
Operating Expenses:
Sales and marketing........................ 40.0
Product development........................ 14.9
General and administrative................. 12.0
-----------
Total operating expenses................. 66.9
-----------
Operating income............................. 5.4
Other expense, net........................... .3
-----------
Income before income taxes................... 5.1
Income tax provision (benefit)............... 1.9
-----------
Net income................................... 3.2%
-----------
-----------
</TABLE>
21
<PAGE>
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
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
research and 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. See "Risk Factors--Fluctuations of Quarterly Operating Results;
Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through equity capital,
debt and cash generated from operations. At September 30, 1997, the Company had
$1.9 million of cash and cash equivalents.
Cash flows from operations were $1.5 million for the nine months ended September
30, 1997 and $560,000, $506,000 and $732,000 in 1996, 1995 and 1994,
respectively. Cash used in investing activities was primarily related to the
purchase of computer equipment and office furniture and aggregated $1,091,000
for the nine months ended September 30, 1997 and $584,000, $517,000 and $20,000
in 1996, 1995 and 1994, respectively. Net borrowings increased $206,000 during
the nine months ended September 30, 1997, including the repayment of the
outstanding balance of $167,000 for the commercialization funding obligation on
March 31, 1997. Net borrowings increased by $129,000 and by $111,000 in 1996 and
1995, respectively, and decreased by $232,000 in 1994.
At September 30, 1997, the Company had working capital of $1.2 million. Accounts
receivable, net of allowance for doubtful accounts, was $3.9 million at
September 30, 1997 and $3.4 million and $1.9 million at December 31, 1996 and
1995, respectively. The average accounts receivable days' outstanding was 89
days as of September 30, 1997. The current portion of deferred revenue increased
to $3.3 million at September 30, 1997 from $2.3 million and $1.3 million at
December 31, 1996 and 1995, respectively. Deferred revenue is related to support
agreements or contracted services, and the current portion of deferred revenue
is expected to be realized during the next twelve months.
The Company has a line of credit which provides for borrowings of up to
$600,000, $424,000 of which was used as of September 30, 1997. This line of
credit expires on May 1, 1998. Borrowings under this line of credit are
evidenced by an installment business loan note, which matures on May 1, 2001.
Borrowings under the note bear interest at the rate of prime plus 0.75% (9.25%
at September 30, 1997). In addition, the Company has a working capital facility
with a commercial bank which expires on July 1, 1998, and
22
<PAGE>
borrowings thereunder bear interest at the rate of prime plus 0.75% (9.25% at
September 30, 1997). Loans under the working capital facility are limited, in
the aggregate, to the lesser of $1 million and a "borrowing base" amount. As of
September 30, 1997, the Company satisfied the borrowing base requirements and
was eligible to borrow up to $1 million under this facility. The Company has not
borrowed under the working capital facility. The covenants in the credit
agreements restrict, among other things, the Company's ability to pay dividends.
Management believes that the net proceeds from the Company's portion of the
offering, combined with existing 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.
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share, was issued which establishes new standards for computing and
presenting earnings per share ("EPS"). Specifically, SFAS No. 128: (a)
eliminates the presentation of primary EPS and replace it with basic EPS, (b)
eliminates the modified treasury stock method and the three percent materiality
provision and (c) revised 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 is effective for financial statements
issued for periods ending after December 15, 1997; early implementation is not
permitted. As the Company is currently required to calculate EPS under the
modified treasury stock method, adoption of SFAS No. 128 will result in the
Company retroactively restating pro forma EPS for the nine months ended
September 30, 1997 and year ended December 31, 1996 from $.61 and $.15,
respectively, to $.63 and $.13, respectively.
In February 1997, the Financial Accounting Standards Board issued SFAS 129,
Disclosure of Information about Capital Structure. SFAS 129 requires companies
to disclose descriptive information about securities that is not necessarily
related to the computation of earnings per share. It also requires disclosure of
information about the liquidation preference of preferred stock and redeemable
stock. SFAS 129 is effective for financial statements for periods ending after
December 15, 1997. The Company does not expect that SFAS 129 will require
significant revision of prior disclosures.
In June 1997, SFAS No. 130, Comprehensive Income, was issued which becomes
effective in 1998 and requires reclassification of earlier financial statements
for comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains and
losses on certain securities, be shown in the financial statements. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. The Company does not
expect that SFAS No. 130 will have a material effect upon the Company's
financial statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued. This Statement will change the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company does not expect that SFAS No. 131 will have a material
effect upon the Company's financial statements.
23
<PAGE>
BUSINESS
The Company develops, markets and supports fully integrated, Microsoft
Windows-based business applications software for manufacturers. The Company's
principal product, Made2Manage, is an 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. Since its introduction in late 1995,
Made2Manage has been licensed by more than 500 manufacturers in North America,
primarily in the United States. In addition, the Company continues to support
more than 150 manufacturing sites using the DOS and UNIX-based predecessors of
Made2Manage.
INDUSTRY BACKGROUND
Over the past decade, manufacturers have been re-engineering their businesses in
response to increasing competitive pressures, more demanding vendor-customer
relationships and rapidly changing market requirements. Through this
re-engineering, manufacturers are striving to increase the efficiency of their
operations by reducing manufacturing time, developing greater flexibility to
respond to changes in market demand, lowering costs, providing superior customer
service and managing assets more productively across their operations. In order
to achieve these goals, manufacturers require information systems ("IS") that
effectively collect, organize and distribute enterprise-wide information from
disparate business functions.
In the 1960s and 1970s, manufacturers addressed their IS needs through highly
customized mainframe-based material requirements planning ("MRP") systems which
allowed manufacturers to manage the flow of materials at various stages of the
production process. MRP systems were superseded in the 1980s by manufacturing
resource planning ("MRP II") systems, also predominantly mainframe-based, which
allowed manufacturers to manage the labor and equipment components of the
production process as part of materials planning. More recently, there has been
a significant shift away from the traditional MRP II systems to ERP systems that
leverage the advantages of open client/server architectures and allow easier
access to information from all areas of the enterprise. Today's ERP systems
integrate many business applications, including customer quotations and order
entry, procurement and inventory management, manufacturing planning and control,
decision support, and finance and accounting.
According to AMR, the ERP software market reached $7.2 billion in 1996, an
increase of 31% over 1995. AMR projected the market will reach $9.6 billion in
1997 and grow at a compound annual growth rate of 36%, to over $20 billion in
2001. The Company believes that small and midsize manufacturers are a rapidly
growing segment of the ERP market because they are particularly impacted by the
following factors: (i) mass migration of small and midsize manufacturers to
Windows NT platforms; (ii) replacement of existing systems that no longer meet
current needs; (iii) implementation of ERP software to improve business
processes and reduce costs; (iv) improvement required in customer service,
including time-to-market and quality of service; and (v) need for a solution of
the Year 2000 problem.
MARKET OPPORTUNITY
While sales of large-scale ERP systems have grown dramatically in recent years,
these systems have achieved only limited acceptance by small and midsize
manufacturers, which the Company attributes to several factors. Small and
midsize manufacturers are often risk averse and resource constrained. These
manufacturers seek information systems that provide functional, scalable
solutions and that are easy to use, cost-effective, quick to deploy and require
limited IS infrastructure. These manufacturers have also found that ERP
solutions designed for large scale manufacturing operations lack the
flexibility, rapid deployment and ease of use that they require. Furthermore,
these ERP systems are designed for users whose roles are highly specialized,
whereas the roles of users of ERP systems at small and midsize manufacturers are
broader and less clearly defined. Large scale ERP systems are designed for a
broad set
24
<PAGE>
of manufacturing processes, including repetitive or continuous flow
manufacturing, and do not effectively address the needs of the flexible
engineer-to-order, make-to-order, make-to-stock and mixed mode manufacturing
typically performed by small and midsize manufacturers. These manufacturers lack
the economies of scale that distinguish large competitors and compete on the
basis of customizable, high quality manufacturing with rapid response times and
superior customer service.
The Company believes that while the largest share of the software market in 1996
was attributable to applications aimed at large scale manufacturers, the small
and midsize segment of the market is not only rapidly growing, but is also
fragmented and underserved by products focused on the needs of larger
manufacturers. Currently this market is being served by more than 50 ERP
vendors, many of whom are niche players.
Windows NT is rapidly emerging as the platform of choice among small and midsize
manufacturers. According to International Data Corporation estimates, Windows NT
is the fastest growing server operating system for new client/server
applications. Systems that are 32-bit and native to Windows take best advantage
of this rapidly emerging industry standard platform. Several ERP vendors are
targeting the small and midsize manufacturer market segments with legacy
applications that were originally designed for use by larger scale manufacturers
and are not true Windows-based products. The Company believes that such legacy
systems which have been modified to run Windows do not fully exploit the
benefits of Windows NT. The Company consequently believes that manufacturing
software vendors are becoming increasingly segmented into two groups, one that
has made the technological migration to Windows NT and the other that continues
to focus on offering legacy systems based on platforms such as UNIX and AS/400
and that of the two groups the former is growing more quickly than the latter.
THE MADE2MANAGE SOLUTION
Unlike many competing ERP software applications, Made2Manage is a native,
32-bit, Windows-based product designed specifically as an integrated business
solution for small and midsize manufacturers. Made2Manage is designed for
simplicity of operation, rapid implementation, ease of administration and low
total cost of ownership. It is a fully integrated solution providing easy access
to shared information from all functional areas of a manufacturing organization.
Made2Manage improves information flow throughout a company and across the supply
chain. This enables a manufacturer to better meet the needs of its customers and
realize numerous competitive advantages, including the ability to customize
production, shorten manufacturing cycles and improve customer service.
The Company believes it is uniquely positioned to meet the ERP needs of
manufacturers in its target market as a result of the following principal
elements of the Company's solution:
DESIGNED FOR SMALL AND MIDSIZE MANUFACTURERS
From overall business processes to individual user functions, Made2Manage is
designed to be the only business software required to manage and operate a small
or midsize manufacturing business. The Company employs a people and process
centered approach to product design which focuses on the role of the individual
within these organizations. Made2Manage is designed to enable users to do their
jobs more effectively on a consistent basis. It provides a fully integrated set
of modules specific to the demands of its target market in the areas of sales,
production, financial management and executive information systems all
integrated through system-wide capabilities and Internet applications linking a
manufacturers' employees, customers and vendors.
STANDARD MICROSOFT TECHNOLOGY PLATFORM
The Company designed and built Made2Manage for Windows from the ground up as a
32-bit native Windows application, rather than piecing together a solution by
adding a GUI to its existing DOS-based solution. Made2Manage received Mircosoft
Windows 95 certification in January 1996, and the Company was one of the
earliest vendors to offer a full ERP solution based on Windows NT. The Company
intends
25
<PAGE>
to continue its integration with Microsoft Office, BackOffice and other major
Microsoft initiatives. The Company believes its focus on Microsoft technologies,
rather than offering products that function on many different platforms, is
particularly suited to the needs of small and midsize manufacturers and
increases the Company's ability to leverage its product development efforts.
RAPID IMPLEMENTATION
To minimize the effects of business interruption and inconvenience from the
introduction of a new software system, the Company has developed an effective
implementation process supported by extensive consulting and training services.
As a result of this process, Made2Manage can be fully implemented in as little
as three months to six months.
LOWER TOTAL COST OF OWNERSHIP
The Company's ERP solution is designed to minimize the overall cost of
ownership, a key requirement of resource-constrained small and midsize
manufacturers. The ease of implementation and maintenance, as well as the cost
effectiveness of its open architecture, standards-based platform makes
Made2Manage a complete ERP software solution for its target market. In addition,
by providing extensive customer training and superior customer service and
support, Made2Manage minimizes the customer's need for IS personnel.
OBJECT-ORIENTED SCALABLE ARCHITECTURE
Made2Manage uses object-oriented techniques, facilitating the reuse of
internally written components, embedding third party components and remote
automation through OLE. Object-oriented architecture, along with standards based
technologies, shortens the development and implementation cycle, facilitates the
integration of acquired components, reduces the cost of product enhancements and
provides more efficient environments for customer support. Made2Manage scales
effectively across the range of requirements of customers within its target
market.
STRATEGY
The Company's objective is to be a leading provider of complete, integrated ERP
software solutions for small and midsize manufacturers. The Company's strategy
for achieving this objective incorporates the following elements:
MAINTAIN FOCUSED MARKET APPROACH
The Company targets small and midsize discrete manufacturers, focusing primarily
on manufacturers with annual revenues of between $5 and $50 million. The Company
has principally concentrated on four primary manufacturing sectors: fabricated
metal products; industrial machinery and equipment; computer and office
equipment; and transportation products. This approach has enabled the Company to
better understand the needs of its customers and use that knowledge to tailor
its product and services to meet those needs.
EXPAND DISTRIBUTION CHANNELS
The Company continues to add direct sales and marketing personnel and strengthen
its relationship with VARs in order to continue its growth in the United States
and Canada. The Company intends to explore international expansion strategies
and, in the longer term, plans to enter into relationships with overseas
distributors in order to expand into the international market. In anticipation
of international marketing, Made2Manage is double-byte enabled and includes
features that permit foreign currency translations and the use of different date
formats and languages.
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<PAGE>
EVALUATE POTENTIAL STRATEGIC ACQUISITIONS
The Company intends to evaluate, on a case by case basis, potential strategic
acquisitions that could enhance its current products and strengthen its
competitive position. However, there are no current negotiations, commitments or
agreements with respect to any such acquisitions.
CAPITALIZE ON YEAR 2000 REPLACEMENT OPPORTUNITIES
Many companies are facing significant business problems due to the failure of
their existing ERP systems to appropriately recognize years that follow 1999.
The Company believes that this problem will accelerate the migration to open
architecture, client/server-based ERP solutions that are configured to handle
this transition. The Company's Windows-based product has been fully Year 2000
compliant since inception. The Company believes that its Microsoft standardized
application is well positioned to meet customers' needs for Year 2000 compliant
solutions.
GROW WITH CUSTOMERS
Made2Manage's scalability allows small and midsize manufacturers to change
levels of operation, increase the number of concurrent users and expand
application functionality to accommodate growth. The Company provides tools and
services to support the conversion of the Company's DOS-based customers to its
Windows-based product. In the last 21 months, nearly 60% of the Company's DOS
customers have licensed its Windows-based product. Also, Made2Manage is able to
add additional product enhancements and modules developed by the Company or
third-party software developers. The Company believes this focus on scalable
functionality and flexibility contributes to long-term customer relationships.
ACHIEVE HIGH LEVELS OF CUSTOMER SATISFACTION
The Company is committed to maintaining high levels of customer satisfaction
with Made2Manage. To achieve this objective, the Company focuses its efforts on
delivering a high quality product that addresses specific application needs, is
easy to implement, incorporates an intuitive, user-friendly interface and
enables increased productivity. The Company offers extensive implementation
services, education programs, on-line and telephone support and user
documentation to facilitate the successful adoption and use of Made2Manage. The
Company believes that a continued commitment in this area is critical to its
long-term success.
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 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 utilizes open
architecture standards including OLE, OCX and ActiveX. Made2Manage can import
data from or export data to 14 different file formats, including industry
standard formats. Made2Manage is ODBC compliant and its data dictionary and
table structure are available on-line, facilitating the use of third party tools
for the retrieval and manipulation of Made2Manage data.
The Company believes that Made2Manage compares favorably with other products
because (i) it is a fully integrated software product that provides easy access
to shared information from all functional areas of a manufacturing organization;
(ii) its user interface and architecture are consistent with Microsoft
standards, are familiar to the user and may be used with popular business
applications; and (iii) it contains unique messaging features which are designed
to enhance collaboration within the manufacturer's organization and across the
supply chain.
27
<PAGE>
A graphic of the messaging function of Made2Manage, Notifier, will be inserted
here. On the left side of the page is a graphic of a computer screen, which
contains a number of tool bars along with a message to a customer. The text of
the message is as follows: "Larry, Here's the sales order we discussed on the
phone. Please review and approve, forwarding me your purchase order number and
we proceed with the job. Thanks for the opportunity. Bob." On the right side of
the page are graphics of how that message can be delivered to the customer. At
the top of the right side is a graphic of the message being delivered via a
"pop-up" screen on the customer's computer, in the middle of the right side is a
graphic of the message as delivered by e-mail and at the bottom of the right
side is a graphic of the message being delivered via facsimile.
NOTIFIER ENHANCES COLLABORATION WITHIN THE MANUFACTURER'S
ORGANIZATION AND ACROSS THE SUPPLY CHAIN.
The Company began offering the Windows version of Made2Manage in late 1995 when
it discontinued sales of the DOS version. The Company licensed Made2Manage to 87
new customers in 1995 (DOS as well as Windows), 138 in 1996 and 149 for the
first nine months of 1997. The cost of a Made2Manage license varies based upon
the number of concurrent users and the optional modules licensed. See "--Sales
and Marketing."
Made2Manage's features are fully integrated, allowing the user to navigate
through the system quickly and easily. Made2Manage minimizes the complexity of
purchasing decisions by selling its enterprise-wide application as a single
unit. However, the Company separately licenses certain optional features that
support requirements that are not common to all manufacturers.
28
<PAGE>
The product features are organized into five basic categories as follows:
<TABLE>
<S> <C> <C> <C>
I. EXECUTIVE INFORMATION SYSTEM
<CAPTION>
System Overviews
Reports and Graphs
Sales Performance
Production Performance Financial Performance
<S> <C> <C> <C>
II. SALES MANAGEMENT III. PRODUCTION MANAGEMENT IV. FINANCIAL MANAGEMENT
- - Quotations - Job Order Entry and - Job Splitting - Accounts Receivable
- - Sales Orders Release - Cycle Counting and - Accounts Payable
Processing - Labor Entry Physical Inventory - General Ledger
- - Features and Options - Purchasing and - Bill of Materials and - Cash Flow Projections
- - Rules-Based Product Inventory Routings - Order Costing
Configuration - Material Requirements - Production Scheduling - Payroll and Human
- - Customer Service Planning - Quality Control Resources
- - Sales Reports and - Shipping and - Production Reports - Financial Reports,
Graphs Receiving and Graphs Statements and Graphs
- - Sales Overview - Lot Control - Production Overview - Financial Overview
- Bar Code Data
Collection
</TABLE>
<TABLE>
<S> <C> <C>
V. SYSTEM-WIDE CAPABILITIES
<CAPTION>
Notifier SmartLink User Permissions and Preferences
Locator User-Defined Reports Internet applications
Navigator
<S> <C> <C>
</TABLE>
EXECUTIVE INFORMATION SYSTEM
The Executive Information System ("EIS") provides management with a tool to
promote high level planning, and enables line item "drill-downs" for thorough
and rapid analysis of enterprise-wide business activities. 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
29
<PAGE>
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. Advanced features like
Notifier provide a solid foundation for workflow management. 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. This messaging feature promotes collaboration within the
manufacturer's organization and across the supply chain. 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 the locator function to find a quote, sales
order status, job order status or purchase order. Additional "drill down" to
underlying data is supported. 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.
30
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A graphic of the Navigator function of Made2Manage will be inserted here. The
graphic is a computer screen which contains a number of tool bars and graphic
functions along with a schematic containing the following text:
System Data System Utilities
---------------------------------------------
Sales Management Production Management Financial Management
- ------------------------------------------------------------------------------
Executive Standard System Standard System User-Defined
Overview Reports Graphs Reports
NAVIGATOR PROVIDES A VISUAL REPRESENTATION OF THE ENTIRE MADE2MANAGE SYSTEM
AND THE RELATIONSHIP OF SYSTEM COMPONENTS.
SERVICE AND SUPPORT
The Company offers a full complement of services that allows its customers to
maximize the benefits of Made2Manage and facilitates a successful installation,
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 or the customer's
facility to instruct the project team and key users in fundamentals of
Made2Manage as well as provide in-depth knowledge of individual features.
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<PAGE>
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.
The Company utilizes tools and procedures for incident tracking, call
escalation, customer profiling, knowledge building and automated incident
resolution. Many of these functions are also provided to customers via
SmartLink, a feature of Made2Manage that allows customers to log inquiries,
search knowledge bases and retrieve responses electronically. The Company also
uses electronic communications and the Internet to provide technical bulletins,
new product features, product changes and education course catalogs to its
customer base. Customers can also check the status of their change requests,
submit new requests and examine the content of existing and future releases via
the Internet. Users are required to have a valid support agreement to access
this information.
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's sophisticated tracking system captures
feedback regarding requested enhancements or software problems, categorizing the
feedback by urgency, product functional area and applicable screen or report.
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 intends to continue to incorporate the latest technology standards
into Made2Manage. Internet modules scheduled for future release include field
sales support, executive information and order status applications. The Company
plans to release an enhanced version of Made2Manage including screen
customization, improved EDI support, OLE server support and
internationalization. The Company also
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<PAGE>
intends to offer a choice of database technology by adding support for
Microsoft's SQL Server database product.
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 $636,000, $1.2 million, $1.7
million and $1.7 million for the years ended December 31, 1994, 1995 and 1996
and the nine months ended September 30, 1997, respectively. The Company
capitalized certain of the development costs it incurred in developing the
predessor DOS and UNIX versions of Made2Manage. Remaining unamortized
development costs were expensed in 1995. The Company has expensed all the
development costs associated with the development of the Windows version of
Made2Manage. At September 30, 1997, the Company's development staff consisted of
approximately 35 individuals involved in design, development, documentation and
quality assurance.
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. See "Risk Factors--
Product Concentration" and "Risk Factors--Product Development and Technological
Change."
SALES AND MARKETING
The Company markets its products and services in markets throughout the United
States and Canada. The Company currently has 16 United States sales
representatives, supported by two regional managers and six manufacturing
applications consultants. The Company also distributes Made2Manage through
approximately 20 VARs. The Company has implemented procedures to reduce conflict
between its direct and indirect sales channels and between individual VARs.
The Company manages its sales efforts through a structured, multi-stage sales
process. The first stage, lead qualification, is often performed at the
Company's headquarters. The direct sales representative is then provided with
detailed information about the prospective customer, its operations, its system
requirements and its decision making process. This enables the field
representative to manage a greater number of accounts and to focus on the later
states of the sales cycle. The Company believes its sales process provides it
with a competitive advantage.
MARKETS AND CUSTOMERS
The Company's customers are small and midsize discrete manufacturers 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.
33
<PAGE>
The Company's target market consists primarily of small and midsize discrete
manufacturers with an emphasis on manufacturers with annual revenues of between
$5 million and $50 million. 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,
including Dataworks Corporation, Effective Management Systems, Fourth Shift
Corporation and Symix Computer Systems, all of which are public companies, and
Lilly Software Associates, which is a private company. In addition, there are
numerous small and regional vendors that offer alternative systems. Several
software companies that have traditionally marketed ERP systems to larger
manufacturers, including Baan Company, J.D. Edwards & Company, PeopleSoft, Inc.,
QAD, Inc. and SAP America, Inc., 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.
A number of companies offer products similar to Made2Manage that are directed at
the market for ERP systems. 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. There can be no assurance that these
means of protection will be effective against unauthorized reproduction or
"pirating." Policing unauthorized use of computer software is difficult, and
software "piracy" is and can be expected to remain a persistent problem within
the software industry.
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, due to the
rapid pace of innovation within the computer industry, factors such as
technological and creative skill of personnel, knowledge and experience of
management, name recognition, maintenance and support of software products, the
ability to develop, enhance, market and acquire software products and services
and the establishment of strategic relationships in the industry are as
important as patent, copyright and other legal protections for its technology.
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. See "Risk Factors-- Intellectual Property."
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<PAGE>
EMPLOYEES
As of September 30, 1997, the Company employed 137 people, consisting of 44 in
sales and marketing, 35 in product development, 41 in services and 17 in
administration. Competition for qualified management and technical employees is
intense in the software industry and the Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
The Company's success will depend in large part upon its ability to continue to
attract and retain qualified employees. Each employee signs a confidentiality
and nondisclosure agreement upon joining the Company. The Company believes that
its relations with its employees are satisfactory.
FACILITIES
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 under
leases that are for one year or less in one other location 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 15, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Ira Coron(1)(2).................... 68 Chairman of the Board of Directors
David B. Wortman................... 46 President, Chief Executive Officer and Director
Christopher D. Clapp............... 37 Vice President, Marketing
Oliver C. Fowler................... 44 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
Gregory F. Ehlinger(1)(2).......... 35 Director
Standish H. O'Grady(1)............. 37 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
IRA CORON has been the Chairman of the Board of Directors of the Company since
1993. Mr. Coron has served as Chairman of California Amplifier, Inc. since March
1994 and served also as that Company's Chief Executive Officer until August
1997. From 1989 to 1994, he was an independent management consultant to several
companies and venture capital firms. He retired from TRW, Inc. in 1989, after
serving in numerous senior management positions since 1967, including Vice
President and General Manager of TRW's Electronic Components Group. He is also a
director of the Wireless Cable Association, and a director of CMC Industries. He
is a graduate of The U.S. Military Academy with a B.S. in engineering.
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 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 currently 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
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<PAGE>
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 which 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.
GREGORY F. EHLINGER has been a Director of the Company since 1990. He has been a
Vice President and Treasurer of Irwin Financial Corporation since 1992. From
1988 through 1992, Mr. Ehlinger was an associate of Miller Venture Partners. Mr.
Ehlinger has a B.A. in economics and psychology and a M.B.A. from the University
of Virginia.
STANDISH H. O'GRADY has been a Director of the Company since 1987. Mr. O'Grady
is a Managing Director in the venture capital department of Hambrecht & Quist
California, a subsidiary of Hambrecht & Quist Group, a venture capital,
investment banking and securities brokerage firm specializing in emerging growth
companies. Mr. O'Grady has served in various positions with Hambrecht & Quist
California's venture capital department since 1986. Mr. O'Grady previously
worked at Intel Corporation. He is currently a director of numerous private
companies. He holds a B.S.E. degree in chemical engineering from Princeton
University and an M.B.A. from the Amos Tuck School of Business Administration at
Dartmouth College.
Each Director holds office until the next annual meeting of stockholders and
until his successor is duly elected and qualified. Officers are elected by the
Board of Directors at each annual meeting and serve at the pleasure of the Board
of Directors.
The Board of Directors has established an Audit Committee consisting of Messrs.
Coron and Ehlinger and a Compensation Committee consisting of Messrs. Coron,
Ehlinger and O'Grady. The Audit Committee reviews with the Company's independent
auditors the scope and timing of their audit services and any other services
they are asked to perform, the auditor's report on the Company's financial
statements following completion of their audit, and the Company's policies and
procedures with respect to internal accounting and financial controls. In
addition, the Audit Committee makes annual recommendations to the Board of
Directors for the appointment of independent auditors for the ensuing year. The
Compensation Committee reviews and recommends to the Board of Directors the
compensation and benefits of all
37
<PAGE>
officers of the Company, reviews general policy matters relating to compensation
and benefits of employees of the Company and administers the Stock Option Plan.
See "--Stock Option Plan."
DIRECTORS COMPENSATION
Mr. Coron is paid $4,000 per quarter plus expenses for each meeting of the Board
of Directors he attends. Messrs. Coron, Ehlinger and O'Grady each annually
receive an option for 5,000 shares of Common Stock, pursuant to the Stock Option
Plan, at the fair market value of the stock on the date of grant, 25% of which
is exercisable on the first anniversary of the date of the grant and 75% of
which is exercisable at the rate of 1/48th of the amount granted each month
thereafter. See "--Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid to, or for the
account of, the Chief Executive Officer of the Company and the Company's other
most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 during the year ended December 31, 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (# OF SHARES) COMPENSATION(1)
- ---------------------------------------------------------- ---------- --------- ------------- -----------------
<S> <C> <C> <C> <C>
David B. Wortman
President and Chief Executive Officer................... $ 140,000 $ 48,151 75,000 $ 2,531
Oliver C. Fowler
Vice President, Sales................................... 100,000 44,287 25,000 2,262
Gary W. Rush
Vice President, Development............................. 90,000 27,244 62,000 2,136
Joseph S. Swern
Vice President, Services and Support.................... 92,000 30,150 20,000 1,246
</TABLE>
- ------------------------
(1) Consists of Company matching contributions to the 401(k) plan and life
insurance premiums.
38
<PAGE>
OPTIONS
The following table sets forth certain information concerning grants of stock
options to each of the Named Executive Officers during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
GRANTED(1)(2) IN YEAR ($/SHARE)(3) DATE 5% 10%
------------- ------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David B. Wortman.................... 75,000 14.2% $ 3.50 1/26/06 $ 165,085 $ 418,357
Oliver C. Fowler.................... 25,000 4.7 3.50 1/26/06 55,028 139,457
Gary W. Rush........................ 62,000 11.7 3.50 1/26/06 136,470 345,842
Joseph S. Swern..................... 20,000 3.8 3.50 1/26/06 44,023 111,562
</TABLE>
- ------------------------
(1) Options granted under the Stock Option Plan become exercisable over a
four-year period, 25% on the first anniversary of the date of grant and
1/48 of the total each month thereafter, with vesting subject to the
employee's continued employment. Stock options are issued at the estimated
fair market value at the date of grant. The exercise of the options may be
accelerated in the event of certain occurrences including the sale of the
Company.
(2) Subsequent to December 31, 1996, the Company granted options to purchase
shares of Common Stock to the Named Executive Officers at $5.75 per share as
follows: Mr. Wortman, 30,000 shares; Mr. Fowler, 15,000 shares; Mr. Rush,
20,000 shares; and Mr. Swern, 20,000 shares.
(3) All options were granted at fair market value as determined by the Board of
Directors of the Company on the date of grant based upon a third-party
valuation. The exercise price may in some cases be paid by delivery of other
shares or by offset of the shares subject to the options.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any Named Executive Officer or any other holder
of the Company's securities that the actual stock price appreciation over
the ten year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants made
to the Named Executive Officers.
39
<PAGE>
The following table sets forth certain information concerning exercisable and
unexercisable stock options held by the Named Executive Officers at December 31,
1996.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
ON VALUE -------------------------- --------------------------
EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David B. Wortman................ -- $ -- 33,957 96,043 $ 188,461 $ 285,539
Oliver C. Fowler................ -- -- 20,833 54,167 115,623 218,127
Gary W. Rush.................... -- -- 14,322 75,668 79,543 215,357
Joseph S. Swern................. -- -- 9,375 40,625 50,156 155,344
</TABLE>
- ------------------------
(1) Calculated on the basis of the fair market value of the underlying shares of
Common Stock at December 31, 1996 of $5.75 per share, as determined by the
Company's Board of Directors based upon a third-party valuation, minus the
per share exercise price.
STOCK OPTION PLAN
A total of 1,800,000 shares of Common Stock are reserved for issuance upon
exercise of options granted under the Stock Option Plan, as adopted on August
16, 1990 and amended on July 8, 1996 and November 21, 1997. As of December 15,
1997, options to purchase an aggregate of 1,095,056 shares of Common Stock were
outstanding at a weighted average exercise price of $3.45 per share. There are
currently 489,163 shares of Common Stock reserved for grant under the Stock
Option Plan. No stock options may be granted under the Stock Option Plan after
August 16, 2000.
The Stock Option Plan is administered by the Compensation Committee, which is
composed solely of non-employee directors of the Company. Participants in the
Stock Option Plan are employees, including officers of the Company, non-employee
directors, independent contractors, consultants, vendors and suppliers to the
Company as may be selected from time to time by the Compensation Committee.
Subject to the terms of the Stock Option Plan, the Compensation Committee is
authorized to determine the number of shares of Common Stock subject to each
option granted thereunder, the exercise price of such option, the time and
conditions of exercise of such option and all other terms and conditions of such
option. The Stock Option Plan does, however, provide that non-employee directors
will automatically be granted an option to purchase 20,000 shares of Common
Stock upon becoming a member of the Board of Directors and an option to purchase
5,000 shares of Common Stock on each yearly anniversary of joining the Board of
Directors. Such options are exercisable at the fair market value of the Common
Stock on the date of grant.
Options granted under the Stock Option Plan may be incentive stock options
("ISOs"), as defined by Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or nonqualified stock options that do not meet the
requirements of Section 422 of the Code ("NQSOs"). ISOs may be granted only to
employees of the Company. The per share exercise price of a NQSO will not be
less than 85% of the fair market value of the Common Stock at the date of grant,
and the per share exercise price of an ISO will be not less than 100% of the
fair market value of the Common Stock on the date of the grant, except that the
per share exercise price for ISOs granted to holders of 10% or more of the total
combined voting power of all outstanding classes of stock of the Company ("10%
Shareholders") will be not less than 110% of such fair market value. In
addition, for each participant, the maximum aggregate fair market value on the
date of grant of all shares subject to ISOs first exercisable in any one year
may not exceed $100,000.
40
<PAGE>
Options will expire on a date determined by the Compensation Committee, provided
that in the case of ISOs, the options will expire not more than ten years from
the date of grant (five years in the case of ISOs issued to 10% Shareholders).
If an option holder's service with the Company is terminated, whether by
retirement or otherwise, options granted under the Stock Option Plan generally
will expire 30 days after the termination of employment or of service as a
director, as the case may be, unless termination occurs as a result of death or
permanent disability, in which case such options will expire one year after such
event. In addition, the Compensation Committee has the discretion to extend the
expiration date of options following termination of employment or termination of
services as a director, as the case may be. Options are not transferable other
than by will or the laws of descent and distribution.
Pursuant to the Stock Option Plan, options become exercisable with respect to
1/4 of the shares on the first anniversary of the date of the grant and with
respect to 1/48 of the shares on the last day of each of the next 36 consecutive
months. The Stock Option Plan provides for an acceleration of the exercisability
of option grants at the discretion of the Compensation Committee. In the event
of a merger of the Company with or into another corporation in which the Company
does not survive or a sale of substantially all of the Company's assets, all
outstanding options vest immediately and become fully exercisable, provided that
if the Board of Directors determines that such immediate vesting is not in the
best interests of the Company, then all outstanding options shall be assumed or
an equivalent option substituted by the successor corporation. If any options
become exercisable immediately, the Compensation Committee must notify each
holder that the option is exercisable for a period of not less than 10 or more
60 days from the date of the notice and that all options not exercised by such
date will terminate.
STOCK PURCHASE PLAN
On November 21, 1997, the Company adopted the Stock Purchase Plan. The Company
has reserved 100,000 shares of Common Stock for issuance under the Stock
Purchase Plan. Any full-time employee of the Company, including officers, may
elect to have a specified amount deducted from his or her compensation, up to a
maximum of 10% of his or her adjusted wages each payroll period. On the last
business day of each quarter, the cash withheld from each employee's
compensation during that quarter will be used to purchase directly from the
Company the largest number of whole shares of Common Stock that can be purchased
with such amount at a price equal to the greater of (i) 85% of the closing price
of the Common Stock on The Nasdaq National Market on the first business day of
the quarter or (ii) 90% of the average closing price of the Common Stock on The
Nasdaq National Market for each business day of the quarter.
An employee may not purchase shares of Common Stock in any year having a fair
market value of more than $25,000, and no shares of Common Stock will be
purchased on behalf of an employee, if after such purchase the employee would
own 5% or more of the total combined voting power or value of all classes of
stock of the Company. An employee's interest in the amount of cash and/or shares
held on his or her behalf will be fully vested and nonforfeitable at all times.
All shares of Common Stock purchased by an employee will be held by the Company
or an agent of the Company and will be registered in the name of the Stock
Purchase Plan. The Company or its agent will abstain from voting any shares held
under the Stock Purchase Plan.
An employee may have any shares of Common Stock held on his or her behalf under
the Stock Purchase Plan distributed to him or her in certain circumstances. Any
increase in the number of shares of Common Stock reserved for issuance under the
Stock Purchase Plan must be approved by the Company's shareholders.
401(K) SAVINGS PLAN
The Company has a defined contribution retirement plan (the "401(k) Plan"),
intended to qualify under Sections 401(a) and 401(k) of the Code. All employees
of the Company are eligible to participate in the
41
<PAGE>
401(k) Plan on the first day of the calendar quarter concurrent with or
following 90 days of employment. The 401(k) Plan provides that each participant
may contribute from 1% to 15% of compensation, subject to statutory limitations.
The Company may also make discretionary contributions based on a certain
percentage of a participant's contributions under the 401(k) Plan, as determined
by the Company, or such other additional amounts as the Company may deem
appropriate. The Board of Directors approved a matching contribution of 25% of
the first 6% of employee contributions beginning January 1996. The Company
contributions under the 401(k) Plan totaled $39,000 for the year ended December
31, 1996.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Indiana Business Corporation Law, Articles of the Company
require the Company to indemnify its officers and directors from certain
liabilities, if the officer or director acted in good faith and in a manner he
reasonably believed, in the case of conduct in his official capacity, was in the
best interests of the Company, and in all other cases, was not opposed to the
best interests of the Company, and, with respect to any criminal proceeding, the
officer or director had reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful. The Articles
further provide that the Company may advance to its officers and directors
expenses incurred in connection with proceedings against them for which they may
be indemnified, if the Company receives a written affirmation from such officer
or director of his good faith belief that he met the standard of conduct
described above and that he will repay all advanced expenses if it is ultimately
determined that he did not meet such standard of conduct. At present, the
Company is not aware of any pending or threatened litigation or proceeding
involving an officer, director, employee or agent of the Company in which
indemnification would be required or permitted.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ira Coron, Standish O'Grady and Greg Ehlinger served on the Compensation
Committee during 1996. None of the members of the Compensation Committee is now
serving or has previously served as an employee or officer of the Company and
none of the Company's executive officers serves as a director of, or in any
compensation related capacity for, companies with which members of the
Compensation Committee are affiliated.
CERTAIN TRANSACTIONS
On February 11, 1997, the Company entered into an independent contractor
agreement with Gerald V. Roch pursuant to which the Company agreed to pay Mr.
Roch $7,000 per month for consulting services he provides to the Company. This
agreement terminates on December 31, 1997. Until early 1997, Mr. Roch was a
director and an executive vice president of the Company. Mr. Roch is a principal
shareholder of the Company and will sell shares of Common Stock if the
Underwriters' overallotment option is exercised. See "Principal and Selling
Shareholders."
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 15, 1997 and immediately
following the completion of this offering, by (i) each person who is known by
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer,
(iv) all directors and executive officers of the Company as a group and (v) each
Selling Shareholder. This table assumes no exercise of the Underwriters'
overallotment option. See "Underwriting." Unless otherwise noted, all addresses
are in care of the Company at 9002 Purdue Road, Indianapolis, Indiana 46268.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) SHARES TO OFFERING(1)(2)
----------------------- BE SOLD IN -----------------------
NAME NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Hambrecht & Quist Group(3)...... 1,210,601 64.1% -- 1,210,601 28.7%
John Hancock Leasing Corporation......................... 13,008 * 13,008 -- --
Richard B. Lapin......................................... 1,055 * 1,055 -- --
Ira Coron(4)............................................. 106,666 5.3 -- 106,666 2.5
Gregory F. Ehlinger(5)................................... 18,500 * -- 18,500 *
Standish H. O'Grady(6)................................... 1,235,101 65.3 -- 1,235,101 29.3
David B. Wortman(7)...................................... 143,853 7.3 -- 143,853 3.3
Oliver C. Fowler(8)...................................... 51,666 2.7 -- 51,666 1.2
Gary W. Rush(9).......................................... 58,083 3.0 -- 58,083 1.4
Joseph S. Swern(10)...................................... 33,125 1.7 -- 33,125 *
Alan R. McLean(11)....................................... 6,000 * -- 6,000 *
J. Irwin Miller(12)...................................... 249,259 13.2 -- 249,259 5.9
William I. Miller(13).................................... 25,941 1.4 -- 25,941 *
Gerald V. Roch(14)....................................... 91,982 4.9 -- 91,982 2.2
Norma Roch(15)........................................... 86,982 4.6 -- 86,982 2.1
David O. Thomas(16)...................................... 30,000 1.6 -- 30,000 *
All executive officers and directors as a group
(9 persons)(17)........................................ 1,695,326 74.4 -- 1,695,326 36.8
</TABLE>
- ------------------------
* Less than 1% of outstanding Common Stock.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the Company believes that the persons
named in the table have sole voting and investment power with respect to
all shares of Common Stock.
(2) Applicable percentage of ownership as of December 15, 1997 is based upon
1,888,680 shares of Common Stock outstanding, including 1,479,824 shares of
Common Stock issuable upon the conversion of the Convertible Preferred
Stock. Applicable percentage ownership after the offering is based upon
4,213,680 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission.
(3) Consists of: 33,355 shares of Common Stock owned by Hamco Capital
Corporation; 623,406 shares of Common Stock owned by H&Q London Ventures;
202,614 shares of Common Stock owned by Ivory & Sime Enterprise Capital,
plc; 287,044 shares of Common Stock owned by Hambrecht & Quist California;
1,730 shares of Common Stock owned by Hambrecht & Quist Venture Partners;
and 62,452 shares of Common Stock owned by Hambrecht 1980 Revocable Trust.
All of the aforementioned entities (the "H&Q Entities") are controlled,
directly or indirectly, by Hambrecht & Quist Group. The address for each of
the H&Q Entities is One Bush Street, San Francisco, California, 94104.
43
<PAGE>
(4) Includes 106,666 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997. If the Underwriters'
overallotment option is exercised in full, Mr. Coron will sell 50,000
shares of Common Stock and thereafter beneficially own 56,666 shares of
Common Stock, representing 1.3% of the outstanding Common Stock.
(5) Includes 3,375 shares of Common Stock issuable upon the exercise of options
within 60 days of December 15, 1997.
(6) Includes 1,210,601 shares of Common Stock owned by the H&Q Entities. Mr.
O'Grady, a director of the Company, is an affiliate of the H&Q Entities,
and accordingly may be attributed beneficial ownership of the shares of
Common Stock owned by the H&Q Entities. Mr. O'Grady disclaims beneficial
ownership of the shares of Common Stock held by the H&Q Entities, except to
the extent of his pecuniary interest therein. Also includes 2,313 shares of
Common Stock issuable upon the exercise of options within 60 days of
December 15, 1997.
(7) Includes 93,853 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997.
(8) Includes 51,666 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997.
(9) Includes 54,083 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997.
(10) Includes 33,125 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997.
(11) If the Underwriters' overallotment option is exercised in full, Mr. McLean
will sell 6,000 shares of Common Stock and thereafter will not
beneficially own any shares of Common Stock.
(12) The address for Mr. Miller is 301 Washington Street, Columbus, Indiana
47201. If the Underwriters' overallotment option is exercised in full, Mr.
Miller will sell 50,000 shares of Common Stock, and thereafter will
beneficially own 199,259 shares of Common Stock, representing 4.7% of the
outstanding Common Stock.
(13) If the Underwriters' overallotment option is exercised in full, Mr. Miller
will sell 5,500 shares of Common Stock and thereafter will beneficially
own 20,441 shares of Common Stock, representing less than 1% of the
outstanding Common Stock.
(14) If the Underwriters' overallotment option is exercised in full, Mr. Roch
will sell 45,000 shares of Common Stock and thereafter beneficially own
46,982 shares of Common Stock, representing 1.1% of the outstanding Common
Stock. Until early 1997, Mr. Roch was a director and an executive vice
president of the Company.
(15) If the Underwriters' overallotment option is exercised in full, Mrs. Roch
will sell 45,000 shares of Common Stock and thereafter beneficially own
41,982 shares of Common Stock, representing less than 1% of the
outstanding Common Stock.
(16) If the Underwriters' overallotment option is exercised in full, Mr. Thomas
will sell 24,000 shares of Common Stock and thereafter beneficially own
6,000 shares of Common Stock, representing less than 1% of the outstanding
Common Stock.
(17) Includes 389,413 shares of Common Stock issuable upon the exercise of
options within 60 days of December 15, 1997.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the Company
will consist of ten million shares of Common Stock and two million shares of
preferred stock (the "Preferred Stock"). As of December 15, 1997, there were
408,856 shares of Common Stock issued and outstanding held of record by 27
shareholders.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
matters voted upon by shareholders, subject to limitations discussed under the
caption "Other Restrictions on Acquisition of the Company," below. Under Indiana
law and pursuant to the Articles, the holders of the Common Stock possess
exclusive voting power in the Company and will continue to possess exclusive
voting power, unless a new class of Preferred Stock is issued and voting rights
are granted to the holders thereof or unless the Articles are amended as
provided therein and pursuant to Indiana law. Subject to preferences that may be
applicable to shares of Preferred Stock issued in the future, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board out of funds legally available therefor and, in the event of liquidation
or dissolution of the Company, all assets of the Company (after payment or
provision for payment of all debts and liabilities of the Company) available for
distribution, in cash or in kind. See "Dividend Policy." Shareholders of the
Company have no pre-emptive rights to acquire additional shares of Common Stock
which may be subsequently issued. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board is authorized, without further action by the shareholders, to issue up
to two million shares of Preferred Stock in one or more series. The Board is
authorized to fix and state the relative rights, preferences, privileges and
restrictions thereof, including voting rights, dividend rights, conversion
rights, terms of redemption, liquidation preferences, the number of shares
constituting any series and the designation of such series. Preferred Stock may
rank prior to the Common Stock as to dividend rights and/ or liquidation
preferences and may have full or limited voting rights. The holders of Preferred
Stock will be entitled to vote as a separate class or series under certain
circumstances (principally in cases directly affecting the rights of the then
existing holders of Preferred Stock, such as a merger, share exchange or
modification of terms of the Preferred Stock), regardless of any other voting
rights which such holders may have. Accordingly, the Board can, without
shareholder approval, issue Preferred Stock with voting and conversion rights
that would materially adversely affect the voting power of the holders of the
Common Stock. The issuance of Preferred Stock could have the effect of
decreasing the market price of the Shares. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company. If the Company issues any Preferred Stock that would disproportionately
reduce the voting rights of the Common Stock, the Common Stock could be required
to delist from The Nasdaq National Market. The Company has no current plan to
issue any Preferred Stock.
REGISTRATION RIGHTS
Upon the closing of the offering, the holders of 1,479,824 shares of Common
Stock (the "Registrable Securities") are entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Shares
Eligible for Future Sale." Under the terms of an agreement between the Company
and the holders of the Registrable Securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other security holders exercising registration rights,
those holders are entitled to notice of registration and are entitled to include
shares of Registrable
45
<PAGE>
Securities therein. The holders of Registrable Securities may also require the
Company to file a registration statement under the Securities Act at its expense
with respect to their Registrable Securities, and the Company is required to use
its best efforts to effect the registration of at least 20% of the Registrable
Securities of each holder making the request and of each holder joining such
request, subject to, among other things, the right of the Company not to effect
any registration within 180 days following the offering made hereby. Further,
certain holders of the Registrable Securities may require the Company to file
additional registration statements on Form S-3. These registration rights are
subject to certain conditions and limitations, among them the reasonably
anticipated aggregate price of the shares offered to the public must exceed one
million dollars. See "Risk Factors--Shares Eligible for Future Sale;
Registration Rights."
OTHER RESTRICTIONS ON ACQUISITION OF THE COMPANY
As an Indiana corporation, the Company is governed by the provisions of the
Indiana Business Corporation Law (the "IBCL").
VOTING REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS. Chapter 43 of the IBCL
establishes a five-year period beginning with the beneficial acquisition of 10%
of the voting power of the outstanding voting shares of a "resident domestic
corporation" (which definition includes the Company) during which certain
business transactions involving the acquiring shareholder are prohibited unless,
prior to the acquisition of such interest, the board of directors approves the
acquisition of such interest or the proposed business combination. After the
five-year period expires, a business combination involving the acquiring
shareholder may take place only upon approval by a majority of the disinterested
shares, or if the other shareholders receive a formula price based on the higher
of the highest price paid by the acquiring shareholder or the market value at
the time of the announcement of the proposed transaction, whichever is higher.
The minimum price for shares other than common shares is to be determined under
criteria similar to that for common shares, except the minimum price as defined
cannot be less than the highest preferential amount to which the shares are
entitled in the event of any liquidation, dissolution or winding up of the
corporation.
CHANGES OF CONTROL. Under Chapter 42 of the IBCL, with certain exceptions, a
person proposing to acquire or acquiring voting shares of an "issuing public
corporation" (which definition includes corporations having at least 100
shareholders, their principal place of business, office or substantial assets
within Indiana, and in which more than 10% of shareholders are Indiana
residents, 10% of shares are owned by Indiana residents, or 10,000 or more
shareholders are Indiana residents) sufficient to entitle that person to
exercise voting power within any of the ranges of one-fifth to one-third of all
voting power, more than one-third but less than one-half of all voting power, or
a majority or more of all voting power (a "control share acquisition") may give
a notice of such fact to the corporation containing certain specified data. The
acquiring person may request that the directors call a special meeting of
shareholders for the purpose of considering the voting rights to be accorded the
shares so acquired ("control shares"), and the control shares have voting rights
only to the extent granted by a resolution approved by the shareholders. The
resolution must be approved by a majority of the votes entitled to be cast by
each voting group entitled to vote separately on the proposal, excluding shares
held by the acquiring person and shares held by management. Control shares as to
which the required notice has not been filed may be redeemed at fair market
value by the corporation if the corporation is authorized to do so by its
articles of incorporation or bylaws before a control share acquisition has
occurred. The Company has not adopted such a provision in its Articles or
Bylaws. Control shares not afforded full voting rights by the shareholders may
also be redeemed. Shareholders are entitled to dissenters rights with respect to
the control share acquisition in the event that the control shares are accorded
full voting rights and the acquiring person has acquired control shares with a
majority of all voting power.
OTHER PROVISIONS OF THE IBCL. The IBCL specifically authorizes directors, in
considering the best interest of a corporation, to consider both the long- and
short-term interests of the corporation, as well as the effects of any action on
shareholders, employees, suppliers and customers of the corporation, and
communities in
46
<PAGE>
which offices or other facilities of the corporation are located and any other
factors the directors consider pertinent. Under the IBCL, directors are not
required to approve a proposed business combination or other corporate action if
they determine in good faith that the action is not in the best interests of the
corporation. In addition, the IBCL states that directors are not required to
redeem any rights under or render inapplicable a shareholder rights plan or to
take or decline to take any other action solely because of the effect such
action or inaction might have on a proposed change of control of the corporation
or the amounts to be paid to shareholders upon such a change of control. The
Delaware Supreme Court has held that defensive measures in response to a
potential takeover must be "reasonable in relation to the threat posed." The
IBCL explicitly provides that the different or higher degree of scrutiny imposed
in Delaware and certain other jurisdictions upon director actions taken in
response to potential changes in control will not apply.
The IBCL requires directors to discharge their duties, based on the facts then
known to them, in good faith, with the care an ordinary, prudent person in a
like position would exercise under similar circumstances and in a manner the
director reasonably believes to be in the best interests of the corporation. A
director is not liable for any action taken as a director or for failure to take
any action unless the director has breached or failed to perform the duties of
the director's office in compliance with the foregoing standard and the breach
or failure to perform constitutes willful misconduct or recklessness.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock Transfer
& Trust Company, 40 Wall Street, New York, New York 10005.
INFORMATION PROVIDED TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports containing
audited financial statements and with quarterly reports for the first three
quarters of each fiscal year containing unaudited summary financial information.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have outstanding an
aggregate of 4,213,680 shares of Common Stock. Of these shares, all the Shares
sold in this offering will be freely tradeable without restrictions or further
registration under the Securities Act and the remaining 1,888,680 shares of
Common Stock held by existing shareholders will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act (the "Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act.
The officers, directors, certain shareholders, and holders of outstanding stock
options of the Company have agreed not to, directly or indirectly, issue, offer
to sell, sell, grant an option for the purchase or sale of, transfer, pledge,
assign, hypothecate, or otherwise encumber or dispose of any securities issued
by the Company, including shares of Common Stock or securities convertible into
or exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any share of Common Stock for a period of six months from the
effective date of the Registration Statement, without the prior written consent
of the First Albany Corporation and the Company. An appropriate legend shall be
marked on the face of certificates representing all such securities. The Company
also has agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or any options or warrants to purchase Common
Stock other than shares or options issued under the Company's stock option
plans, for a period of six months after the date of this Prospectus, except with
the prior written consent of First Albany Corporation.
47
<PAGE>
Substantially all of the Restricted Shares are subject to the Lock-Up Agreements
(the "Lock-up Restricted Shares"). Approximately 574,000 Lock-Up Restricted
Shares will be available for sale in the public market immediately following the
expiration of the six month lock-up period, pursuant to Rule 144(k), and
approximately 1,300,000 Lock-Up Restricted Shares will become eligible for sale
in the public market immediately following the expiration of the six month
lock-up period, subject to the volume and other limitations of Rule 144 and Rule
701, as discussed below. The remaining Lock-up Restricted Shares will begin to
be eligible for sale at various times thereafter pursuant to Rule 144.
In general, under Rule 144 beginning 90 days after the date of this Prospectus,
any holder of Restricted Shares, including an affiliate of the Company, as to
which at least one year has elapsed since the later of the date of acquisition
of the shares from the Company or an affiliate, would be entitled within any
three-month period to sell a number of shares of Common Stock that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 42,000 shares upon the completion of this offering) or the
average weekly trading volume of the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who beneficially
owns Restricted Shares is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above, provided that at least two years have
elapsed since the later of the date the shares were acquired from the Company or
from an affiliate of the Company. The foregoing is a summary of Rule 144 and is
not intended to be a complete description of it.
As of December 15, 1997, there were 1,095,056 shares of Common Stock subject to
outstanding options issued pursuant to the Stock Option Plan, of which 447,831
were vested as of that date. The Company intends to file a registration
statement under the Securities Act to register shares of Common Stock reserved
for issuance under the Stock Option Plan, thus permitting the sale of such
shares by non-affiliates in the public market without restriction under the
Securities Act. Such registration statement will become effective immediately
upon filing.
Subject to certain limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from the Company by its employees, directors,
officers, consultants or advisers prior to the closing of this offering pursuant
to written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Commission has indicated that
Rule 701 will apply to stock options granted by the Company before this
offering, along with the shares acquired upon exercise of such options.
Securities issued in reliance on Rule 701 are deemed to be Restricted Shares
and, subject to the contractual limitations described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements. See "Risk Factors--Shares Eligible for Future Sale; Registration
Rights."
On November 21, 1997, the Company adopted the Stock Purchase Plan. The Company
has reserved 100,000 shares of Common Stock for issuance under the Stock
Purchase Plan, but to date no shares of Common Stock have been issued
thereunder. Pursuant to the Stock Purchase Plan, all shares of Common Stock
issued thereunder must be held for six months before they may be sold. The
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock reserved for issuance under the Stock Purchase
Plan thus permitting sale of such shares by non-affiliates in the public market
without restriction under the Securities Act after the six month holding period
required by the Stock Purchase Plan. Such registration statement will become
effective immediately upon filing.
48
<PAGE>
UNDERWRITING
The underwriters of this offering of Common Stock (the "Underwriters"), for whom
First Albany Corporation, Van Kasper & Company and RvR Securities Corp. are
serving as representatives (the "Representatives"), have agreed, subject to the
terms and conditions of the Underwriting Agreement (the form of which is filed
as an exhibit to the Registration Statement of which this Prospectus is a part)
to purchase, and the Company and the Selling Shareholder have agreed to sell
them severally, the number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
First Albany Corporation ........................................................ 642,500
Van Kasper & Company ............................................................ 385,500
RvR Securities Corp. ............................................................ 257,000
BancAmerica Robertson Stephens .................................................. 70,000
BT Alex. Brown .................................................................. 70,000
CIBC Oppenheimer ................................................................ 70,000
Cowen & Company ................................................................. 70,000
A.G. Edwards & Sons, Inc. ....................................................... 70,000
Hambrecht & Quist ............................................................... 70,000
Lehman Brothers ................................................................. 70,000
NationsBanc Montgomery Securities, Inc. ......................................... 70,000
Advest, Inc. .................................................................... 30,000
Dain Bosworth Incorporated ...................................................... 30,000
Everen Securities, Inc. ......................................................... 30,000
Janney Montgomery Scott Inc. .................................................... 30,000
Edward D. Jones & Co., L.P. ..................................................... 30,000
Legg Mason Wood Walker Incorporated ............................................. 30,000
McDonald & Company Securities, Inc. ............................................. 30,000
Mesirow Financial, Inc. ......................................................... 30,000
Needham & Company, Inc. ......................................................... 30,000
The Ohio Company ................................................................ 30,000
The Robinson-Humphrey Company ................................................... 30,000
SoundView Financial Group, Inc. ................................................. 30,000
C.E. Unterberg, Towbin .......................................................... 30,000
Wheat First Butcher Singer ...................................................... 30,000
City Securities Corporation ..................................................... 15,000
NatCity Investments, Inc. ....................................................... 15,000
David A. Noyes & Co. ............................................................ 15,000
Wm Smith Securities, Incorporated ............................................... 15,000
----------
Total........................................................................ 2,325,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters to
purchase shares of Common Stock are subject to certain conditions, and that if
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all shares of Common Stock agreed to be purchased by
the Underwriters pursuant to the Underwriting Agreement must be so purchased
(other than those subject to the Underwriters' overallotment option described
below).
The Company has been advised that the Underwriters propose to offer the shares
of Common Stock directly to the public initially at the public offering price
set forth on the cover page of this Prospectus, and to certain selected dealers
(who may include the Underwriters) at such public offering price less a
concession not in excess of $.28 per share. The Underwriters may allow, and the
selected dealers may
49
<PAGE>
reallow, a concession not in excess of $.10 per share to certain other brokers
and dealers. After the public offering, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
Certain of the Selling Shareholders of the Company have granted to the
Underwriters an option, exercisable no later than 45 days after the date of this
Prospectus, to purchase up to 225,500 additional shares of Common Stock at the
price to public set forth on the cover page of this Prospectus, less the
underwriting discounts set forth on the cover page of this Prospectus, solely to
cover over-allotments. To the extent that the Underwriters exercise this option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof as the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total shares offered, and
such Selling Shareholders will be obligated, pursuant to the option, to sell
such shares of Common Stock to the Underwriters.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The officers, directors, certain shareholders, and holders of outstanding stock
options of the Company have agreed not to, directly or indirectly, issue, offer
to sell, sell, grant an option for the purchase or sale of, transfer, pledge,
assign, hypothecate, or otherwise encumber or dispose of any securities issued
by the Company, including shares of Common Stock or securities convertible into
or exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any share of Common Stock for a period of six months from the
effective date of the Registration Statement, without the prior written consent
of First Albany Corporation and the Company. An appropriate legend shall be
marked on the face of certificates representing all such securities. The Company
also has agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or any options or warrants to purchase Common
Stock other than shares or options issued under the Company's stock option
plans, for a period of six months after the date of this Prospectus, except with
the prior written consent of First Albany Corporation. First Albany Corporation
may release all or a portion of the shares of Common Stock from the terms of the
lock-up agreements at its discretion.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with this offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
At the request of the Company, the Underwriters have reserved up to 100,000 of
the Shares offered by the Company hereby for sale at the initial public offering
price to certain employees of the Company and other persons, none of whom is
expected to be a director or executive officer of the Company. The number of
Shares available for sale to the general public will be reduced to the extent
that such persons purchase such
50
<PAGE>
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other Shares offered
hereby.
Prior to the offering, there has been no public market for the Company's Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives of the Underwriters and
does not necessarily bear any direct relationship to the Company's assets,
current earnings or book value or to any other established criteria of value,
although these factors considered in establishing the initial public offering
price. Among the other factors to be considered in determining the initial
public offering price will be prevailing market conditions, the industry in
which the Company operates, as assessment of the Company's management, its
operating results, its capital structure, the business potential of the Company
and the demand for similar securities of comparable companies.
Persons affiliated and associated with RvR Securities Corp. beneficially own an
aggregate of 1,235,101 shares of the Company's Common Stock. See "Principal and
Selling Shareholders." Consequently, this offering will be conducted in
accordance with the applicable provisions of Rule 2720 of the Rules of the
National Association of Securities Dealers, Inc. In accordance with those
provisions, First Albany Corporation (the "Independent Underwriter") has served
as a "qualified independent underwriter." The Independent Underwriter has
performed due diligence with respect to the information contained herein and has
participated in the preparation of the Registration Statement of which this
Prospectus is a part. The price of the shares of Common Stock to be offered
hereby will not be higher than the maximum public offering price recommended by
the Independent Underwriter.
LEGAL MATTERS
The validity of Shares offered hereby will be passed upon for the Company and
for the Selling Shareholders by Ice Miller Donadio & Ryan, Indianapolis,
Indiana. Orrick, Herrington & Sutcliffe LLP, New York, New York has acted as
counsel for the Underwriters in connection with this offering.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997, and for each of the three years in the period ended December
31, 1996 and the nine months ended September 30, 1997, included in the
Registration Statement of which this Prospectus is a part, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, Washington,
D.C. 20549 (the "Commission"), a Registration Statement on Form S-1 under the
Securities Act with respect to the Shares offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Shares offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed as part thereof through the
Electronic Data Gathering, Analysis and Retrieval system. Statements contained
in this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and, in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement.
Each statement is qualified in all respects by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, is
publicly available through the Commissions' World Wide Web site
(http:/www.sec.gov) or may be inspected without charge at the Commission's
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the Commission.
51
<PAGE>
MADE2MANAGE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Statements:
Report of Independent Accountants.......................................................................... F-2
Balance Sheets as of December 31, 1995, 1996 and September 30, 1997........................................ F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 (unaudited) and 1997.................................................................. F-4
Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 (unaudited) and 1997.................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Made2Manage Systems, Inc.
We have audited the accompanying balance sheets of Made2Manage Systems, Inc. as
of December 31, 1995 and 1996 and September 30, 1997, and the statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996 and for the nine months ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
November 12, 1997
F-2
<PAGE>
MADE2MANAGE SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
-------------------- ------------------------
1995 1996 ACTUAL
--------- --------- ----------- PRO FORMA
-----------
(UNAUDITED)
(NOTE 9)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 1,033 $ 1,139 $ 1,856
Trade accounts receivable, net of allowance for doubtful accounts
of $92, $188 and $256 in 1995, 1996 and 1997, respectively..... 1,880 3,450 3,917
Prepaid expenses and other....................................... 78 99 187
Deferred income taxes............................................ -- 554 393
--------- --------- -----------
Total current assets........................................... 2,991 5,242 6,353
Property and equipment, net........................................ 585 921 1,738
Deferred income taxes.............................................. -- 503 475
--------- --------- -----------
Total assets................................................... $ 3,576 $ 6,666 $ 8,566
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................ $ 212 $ 357 $ 266
Accounts payable................................................. 190 426 561
Accrued liabilities.............................................. 266 480 404
Accrued compensation and related expenses........................ 547 539 591
Deferred revenue................................................. 1,315 2,267 3,309
--------- --------- -----------
Total current liabilities...................................... 2,530 4,069 5,131
Long-term obligations, net of current portion...................... 452 436 733
Deferred revenue................................................... 85 45 217
--------- --------- -----------
Total liabilities.............................................. 3,067 4,550 6,081
--------- --------- -----------
Commitments (Note 6)
Shareholders' Equity:
Convertible preferred stock, no par value:
Series A; 79,137 shares authorized, issued and outstanding in
1995, 1996 and 1997, no shares pro forma..................... 178 178 178 $ --
Series B; 255,331 shares authorized, issued and outstanding in
1995, 1996 and 1997, no shares pro forma..................... 471 471 471 --
Series C; 577,643 shares authorized and 563,580 issued and
outstanding in 1995, 1996 and 1997, no shares pro forma...... 2,234 2,234 2,234 --
Series D; 750,000 shares authorized and 581,776 issued and
outstanding in 1995, 1996 and 1997, no shares pro forma...... 1,159 1,159 1,159 --
Preferred stock, no par value; 2,000,000 shares authorized, no
shares issued and outstanding in 1996, 1997 and pro forma...... -- -- --
Common stock, no par value; 10,000,000 shares authorized,
373,106, 376,544, 406,627 and 1,886,451 shares issued and
outstanding in 1995, 1996, 1997 and pro forma, respectively.... 309 310 356 4,398
Accumulated deficit.............................................. (3,842) (2,236) (1,913) (1,913)
--------- --------- ----------- -----------
Total shareholders' equity..................................... 509 2,116 2,485 $ 2,485
--------- --------- ----------- -----------
-----------
Total liabilities and shareholders' equity..................... $ 3,576 $ 6,666 $ 8,566
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
MADE2MANAGE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ------------------------
1994 1995 1996 1997
--------- --------- --------- 1996 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software................................................ $ 2,494 $ 3,572 $ 6,140 $ 3,733 $ 6,916
Services................................................ 1,748 2,160 2,998 2,238 3,728
Hardware................................................ 210 203 241 167 397
--------- --------- --------- ----------- -----------
Total revenues........................................ 4,452 5,935 9,379 6,138 11,041
--------- --------- --------- ----------- -----------
Costs of revenues:
Software................................................ 382 417 599 318 430
Services................................................ 977 1,175 1,762 1,214 2,409
Hardware................................................ 171 163 164 121 262
--------- --------- --------- ----------- -----------
Total costs of revenues............................... 1,530 1,755 2,525 1,653 3,101
--------- --------- --------- ----------- -----------
Gross profit.......................................... 2,922 4,180 6,854 4,485 7,940
--------- --------- --------- ----------- -----------
Operating expenses:
Sales and marketing..................................... 1,122 1,717 3,282 2,093 4,324
Product development..................................... 530 1,189 1,718 1,210 1,663
General and administrative.............................. 724 827 1,154 808 1,380
--------- --------- --------- ----------- -----------
Total operating expenses.............................. 2,376 3,733 6,154 4,111 7,367
--------- --------- --------- ----------- -----------
Operating income.......................................... 546 447 700 374 573
Other expense, net........................................ 98 49 122 58 53
--------- --------- --------- ----------- -----------
Income before income taxes................................ 448 398 578 316 520
Income tax provision (benefit)............................ 5 6 (1,028) 17 197
--------- --------- --------- ----------- -----------
Net income................................................ $ 443 $ 392 $ 1,606 $ 299 $ 323
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Per share amounts:
Pro forma:
Net income per share.................................. $ .61 $ .15
--------- -----------
--------- -----------
Average number of shares.............................. 2,846 2,886
--------- -----------
--------- -----------
Unaudited Supplemental pro forma determined based on
SFAS No. 128 (Note 1):
Net income per share.................................. $ .63 $ .13
--------- -----------
--------- -----------
Average number of shares.............................. 2,531 2,544
--------- -----------
--------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
MADE2MANAGE SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
------------------------ ------------------------ ------------------------ -----------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994....... 79,137 $ 178 255,331 $ 471 563,580 $ 2,234 329,461
Issuance of shares............ -- -- -- -- -- -- 252,315
Exercise of stock options..... -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- --
----------- ----- ----------- ----- ----------- ----------- -----------
Balances, December 31, 1994..... 79,137 178 255,331 471 563,580 2,234 581,776
Exercise of stock options..... -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- --
----------- ----- ----------- ----- ----------- ----------- -----------
Balances, December 31, 1995..... 79,137 178 255,331 471 563,580 2,234 581,776
Exercise of stock options..... -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- --
----------- ----- ----------- ----- ----------- ----------- -----------
Balances, December 31, 1996..... 79,137 178 255,331 471 563,580 2,234 581,776
Exercise of stock options..... -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- --
----------- ----- ----------- ----- ----------- ----------- -----------
Balances, September 30, 1997.... 79,137 $ 178 255,331 $ 471 563,580 $ 2,234 581,776
----------- ----- ----------- ----- ----------- ----------- -----------
----------- ----- ----------- ----- ----------- ----------- -----------
<CAPTION>
COMMON STOCK
------------------------ TOTAL
NUMBER OF ACCUMULATED SHAREHOLDERS'
AMOUNT SHARES AMOUNT DEFICIT EQUITY
----------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994....... $ 654 199,075 $ 263 $ (4,677) $ (877)
Issuance of shares............ 505 -- -- -- 505
Exercise of stock options..... -- 33,000 10 -- 10
Net income.................... -- -- -- 443 443
----------- ----------- ----- ------------- ------
Balances, December 31, 1994..... 1,159 232,075 273 (4,234) 81
Exercise of stock options..... -- 141,031 36 -- 36
Net income.................... -- -- -- 392 392
----------- ----------- ----- ------------- ------
Balances, December 31, 1995..... 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..... 1,159 376,544 310 (2,236) 2,116
Exercise of stock options..... -- 30,083 46 -- 46
Net income.................... -- -- -- 323 323
----------- ----------- ----- ------------- ------
Balances, September 30, 1997.... $ 1,159 406,627 $ 356 $ (1,913) $ 2,485
----------- ----------- ----- ------------- ------
----------- ----------- ----- ------------- ------
</TABLE>
See accompanying notes.
F-5
<PAGE>
MADE2MANAGE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ------------------------
1994 1995 1996 1997
--------- --------- --------- 1996 -----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income............................................. $ 443 $ 392 $ 1,606 $ 299 $ 323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment.......................................... 58 91 204 134 274
Amortization of software development costs........... 112 196 -- -- --
Provision for doubtful accounts...................... 132 90 140 93 280
Loss on disposition of property and equipment........ 11 17 44 -- --
Deferred income taxes................................ -- -- (1,057) -- 189
Changes in assets and liabilities:
Trade accounts receivable.......................... (223) (1,080) (1,710) (383) (747)
Prepaid expenses and other 64 29 (21) (3) (88)
Accounts payable and accrued liabilities........... (197) 213 450 20 59
Accrued compensation and related expenses.......... 153 218 (8) (143) 52
Deferred revenue................................... 179 340 912 185 1,214
--------- --------- --------- ----------- -----------
Net cash provided by operating activities............ 732 506 560 202 1,556
--------- --------- --------- ----------- -----------
Investing activities:
Purchases of property and equipment.................... (20) (517) (584) (416) (1,091)
Proceeds from sales of property and equipment.......... 1 4 -- -- --
Capitalization of software development costs........... (106) -- -- -- --
--------- --------- --------- ----------- -----------
Net cash used in investing activities................ (125) (513) (584) (416) (1,091)
--------- --------- --------- ----------- -----------
Financing activities:
Proceeds from long-term obligations.................... -- 282 333 252 604
Payments on long-term obligations...................... (232) (171) (204) (158) (398)
Proceeds from common stock options exercised........... 10 36 1 1 46
Proceeds from issuance of Series D preferred stock..... 350 -- -- -- --
--------- --------- --------- ----------- -----------
Net cash provided by financing activities............ 128 147 130 95 252
--------- --------- --------- ----------- -----------
Change in cash and cash equivalents...................... 735 140 106 (119) 717
Cash and cash equivalents, beginning of period........... 158 893 1,033 1,033 1,139
--------- --------- --------- ----------- -----------
Cash and cash equivalents, end of period................. $ 893 $ 1,033 $ 1,139 $ 914 $ 1,856
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosures:
Cash paid for:
Interest expense..................................... $ 129 $ 93 $ 75 $ 55 $ 78
Income taxes......................................... -- 26 18 17 21
Noncash investing and financing activities:
Equipment acquired under capital lease obligations..... 70 -- -- -- --
Conversion of notes payable and related accrued
interest to Series D preferred stock................. 155 -- -- -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Made2Manage Systems, Inc. develops, markets and supports innovative management
information 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
ERP business software 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.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited financial statements for the nine months ended September 30, 1996
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the results of operations and cash flows for that period in
accordance with generally accepted accounting principles. Results for interim
periods are not necessarily indicative of results for the entire year.
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 3 to 10 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 1995, 1996
or during the nine months ended September 30, 1997.
F-7
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized costs are amortized on a product-by-product basis once the product
is available for general release. Amortization is the greater of the amount
computed using the ratio of the current year's gross revenues and the total of
current and anticipated future gross revenues for that product or the
straight-line method over the remaining economic life of such products, which
does not exceed 36 months.
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 contract. Revenues from technical
training and consulting services are recognized as provided to customers.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based upon the pro forma weighted average
number of common and common equivalent shares outstanding for the period. Pro
forma common equivalent shares consist of convertible preferred stock (using the
"if converted" method) and stock options and warrants (using the modified
treasury stock method). In accordance with Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, common and common equivalent shares
issued during the twelve months immediately preceding the initial public
offering are included in the calculation of pro forma net income per share for
all periods presented, using the estimated offering price included in Amendment
No. 1 to the Registration Statement on Form S-1 filed in connection with the
initial public offering described in Note 9.
Under the modified treasury stock method, the assumed proceeds from the exercise
of stock options and warrants are first applied to the repurchase of 20% of the
shares of common stock outstanding, and are thereafter applied to the reduction
of outstanding debt, with the remaining proceeds invested in short-term
investments. As a result, net income used to calculate net income per share for
the years ended December 31, 1996 and the nine months ended September 30, 1997
has been increased by $117,000 and $110,000, respectively. This increase in pro
forma net income reflects the net of tax effect of the assumed decrease in
interest expense from the assumed retirement of outstanding debt and the assumed
increase in interest income from the assumed investment in short-term
investments.
Because of the significant impact the assumed conversion has on the Company's
capital structure and net income per share, historical net income per share has
been excluded from the financial statements as it is not considered meaningful.
SUPPLEMENTAL PRO FORMA 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
F-8
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 requirement.
The supplemental pro forma net income presented on the Statement of Operations
presents EPS determined in accordance with SFAS No. 128 and is based upon the
pro form weighted average number of common and common equivalent shares
outstanding for the period, using the estimated offering price. Pro forma common
equivalent shares consist of convertible preferred stock (using the "if
converted" method) and 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. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997.
The computational method used to determine the Company's supplemental pro forma
net income per share determined in accordance with SFAS No. 128 differs
significantly from the method used to determine pro forma net income per share
in accordance with current generally accepted accounting principles. The effect
of these different computational methods on net income per share varies
depending on the relative level of net income. Earnings per share presented in
the Company's quarterly and annual financial statements at December 31, 1997 and
thereafter will be determined in accordance with SFAS No. 128.
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, 1995 and 1996 and September 30, 1997. The Company's
commercialization funding obligation (see Note 4), which has a carrying value of
$334,000 and $201,000 at December 31, 1995 and 1996 respectively, has a fair
market value of approximately $449,000 and $254,000 as of those dates and is
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 1994 and 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.
F-9
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Computer equipment........................................... $ 480 $ 763 $ 1,324
Furniture and equipment...................................... 282 406 821
Leasehold improvements....................................... 4 15 130
--------- --------- ------
766 1,184 2,275
Less accumulated depreciation and amortization............... 181 263 537
--------- --------- ------
$ 585 $ 921 $ 1,738
--------- --------- ------
--------- --------- ------
</TABLE>
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 September 30, 1997. This line of credit expires July 1,
1998. Interest is at the prime rate plus 0.75% (9.25% at September 30, 1997).
EQUIPMENT LINES OF CREDIT
The Company has two equipment lines of credit with a bank totaling $1,000,000.
One line of credit, which expires May 1, 1998, provides for borrowings of up to
$600,000 and had $424,000 outstanding at September 30, 1997. Amounts borrowed
under this line of credit are repayable in equal monthly installments with
interest at the prime rate plus 0.75% (9.25% at September 30, 1997). The other
line of credit provides for borrowings of up to $400,000, expires December 1,
1997 and had no amounts outstanding at September 30, 1997.
LONG TERM OBLIGATIONS
Long-term obligations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Bank notes payable........................................... $ 279 $ 556 $ 974
Commercialization funding obligation......................... 334 200 --
Other........................................................ 51 37 25
--------- --------- ------
664 793 999
Less current portion......................................... 212 357 266
--------- --------- ------
$ 452 $ 436 $ 733
--------- --------- ------
--------- --------- ------
</TABLE>
F-10
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 IS UNAUDITED)
4. DEBT AND CREDIT AGREEMENTS (CONTINUED)
Bank notes payable at September 30, 1997 require monthly payments of $22,000,
plus interest at the prime rate plus 1.0% (9.50% at September 30, 1997). The
notes are collateralized by accounts receivable and property and equipment, and
include restrictive covenants, the most significant of which require the Company
to maintain a specified ratio of total liabilities to tangible net worth and
cash flow coverage of interest and principal.
The commercialization funding obligation required monthly principal payments of
$11,000 plus interest at 3%. The effective interest on the obligation was 20%
with the balance of the unpaid interest payable based on Company revenues
following the repayment of principal. This obligation and all accrued interest
was repaid on March 31, 1997. This loan was subordinate to the other borrowings.
Scheduled repayments of long-term obligations as of September 30, 1997 for the
years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997................................................................................. $ 69
1998................................................................................. 325
1999................................................................................. 333
2000................................................................................. 201
2001................................................................................. 71
---------
$ 999
---------
---------
</TABLE>
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock has the same voting and dividend participation
rights as common stock, and has a preference in liquidation over common stock.
Under their provisions, all series of preferred stock will automatically convert
to common stock upon the consummation of an initial public offering in
accordance with their terms or if the holders of not less than 75% of such
preferred shares approve the conversion. Each share of Series A, B, C and D
preferred stock are convertible into one share of common stock. At any time
after the conversion of 63,310 shares of Series A preferred, 204,264 shares of
Series B preferred, 462,114 shares of Series C preferred and 320,000 shares of
Series D preferred, the Company, at its option, may redeem the remaining
outstanding shares of preferred stock at a per share price of $3.06, $3.36,
$4.40 and $2.20 for Series A, B, C and D preferred stock, respectively.
The Series A has a fourth liquidation preference of $2.78 per share, the Series
B has a third liquidation preference up to $1.96 per share and fourth
liquidation preference of $1.098 per share, the Series C has a second
liquidation preference of $4.00 per share and the Series D has a first
liquidation preference of $2.00 per share.
PREFERRED STOCK
Authorized preferred stock not currently designated is issuable in series under
such terms and conditions as the board of directors may determine.
F-11
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS
In conjunction with a 1990 capital lease transaction, the Company issued
warrants that entitle the holders to purchase 14,063 shares of series C
preferred stock through November 1998 at an exercise price of $4.00 per share.
COMMON STOCK OPTIONS
The Company's Stock Option Plan, adopted in 1990 and amended in July 1996,
authorizes the granting of incentive and nonqualified stock options. The Board
of Directors has approved up to an aggregate of 1,600,000 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 Stock Option Plan generally vest over four years, with 25% exercisable
one year from date of grant and the remaining 75% at the rate of 1/48th of the
amount granted at the end of each succeeding full month. 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 September 30, 1997, options for 325,663 shares of common stock were available
for future grants under the plan.
Activity in the option plan is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
1994 1995 1996 1997
---------------------- ----------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period................... 294,250 $ 0.24 318,250 $ 0.23 349,325 $ 0.22 856,368 $ 2.45
Granted.................. 61,000 0.20 176,500 0.25 529,500 3.86 254,500 5.91
Exercised................ (33,000) 0.30 (141,031) 0.26 (3,438) 0.20 (30,083) 1.55
Forfeited................ (4,000) 0.30 (4,394) 0.21 (19,019) 1.18 (20,000) 2.55
--------- ---------- --------- ----------
Outstanding at end of
period................... 318,250 0.23 349,325 0.22 856,368 2.45 1,060,785 3.31
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Options exercisable at end
of period................ 247,123 0.23 137,751 0.20 217,622 0.21 399,867 1.61
</TABLE>
F-12
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Options outstanding at September 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER OF SHARES
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- ---------------- ----------- --------------- -----------------
<C> <C> <S> <C>
$0.20 275,618 2.58 years 220,234
0.40 30,000 2.93 15,000
3.50 368,167 8.35 145,572
4.40 61,000 8.69 19,061
5.30 74,000 9.17 --
5.75 214,000 9.35 --
6.85 38,000 9.83 --
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Pro forma net income (in thousands).......................... $ 388 $ 1,403 $ 50
Pro forma net income per share............................... .53 .06
</TABLE>
Based on the option-pricing model, the fair value at grant date of options
granted for the years ended December 31, 1995, 1996 and the nine months ended
September 30, 1996 and 1997 was $0.12, $1.84 and $2.81, 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
1995, 1996 and 1997 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 generally are made each year.
F-13
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
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 September 30, 1997 for the years ended
December 31 are as follows (in thousands):
<TABLE>
<S> <C>
Payable in:
1997.............................................................. $ 83
1998.............................................................. 411
1999.............................................................. 450
2000.............................................................. 459
2001.............................................................. 462
Thereafter........................................................ 581
---------
$ 2,446
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1997 was $73,000, $142,000, $171,000 and $207,000,
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.
F-14
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
The components of the income tax provision (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------------- ENDED SEPTEMBER
1994 1995 1996 30, 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal........................................... $ -- $ -- $ 4 $ --
State............................................. 5 6 25 8
--------- --------- --------- -----
5 6 29 8
--------- --------- --------- -----
Deferred:
Federal........................................... -- -- (962) 166
State............................................. -- -- (95) 23
--------- --------- --------- -----
-- -- (1,057) 189
--------- --------- --------- -----
$ 5 $ 6 $ (1,028) $ 197
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
The provision for income taxes differs from the federal statutory tax rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------------- ENDED SEPTEMBER
1994 1995 1996 30, 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate..................... $ 152 $ 135 $ 197 $ 177
State income tax, net of federal tax benefit...... 17 16 23 21
Non-deductible expenses........................... 4 7 14 15
Research and experimentation credit............... -- -- (97) (20)
Reduction in valuation allowance.................. (169) (155) (1,199) --
Other............................................. (1) 3 34 4
--------- --------- --------- -----
$ 5 $ 6 $ (1,028) $ 197
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
F-15
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward............................................ $ 1,159 $ 919 $ 611
Research and experimentation tax credits carry forward..................... -- 97 117
Accounts receivable allowance.............................................. 34 70 83
Accrued vacation pay....................................................... 7 23 64
Deferred revenue........................................................... 32 17 80
Accrued interest expense................................................... -- 16 --
Other...................................................................... 1 4 11
--------- --------- -----
1,233 1,146 966
--------- --------- -----
Deferred tax liabilities:
Depreciation............................................................... (34) (54) (63)
Deferred state tax......................................................... -- (35) (35)
--------- --------- -----
(34) (89) (98)
--------- --------- -----
Valuation allowance.......................................................... (1,199) -- --
--------- --------- -----
$ -- $ 1,057 $ 868
--------- --------- -----
--------- --------- -----
Recorded as:
Current deferred income tax asset.......................................... $ -- $ 554 $ 393
Long-term deferred income tax asset........................................ -- 503 475
--------- --------- -----
$ -- $ 1,057 $ 868
--------- --------- -----
--------- --------- -----
</TABLE>
As of September 30, 1997, the Company had net operating loss carryforwards for
income tax reporting purposes which expire as follows (in thousands):
<TABLE>
<S> <C>
2005........................................................ $ 176
2006........................................................ 1,145
2007........................................................ 298
2008........................................................ 281
---------
$ 1,900
---------
</TABLE>
The Company also has research and experimentation tax credits of $117,000 which
expire commencing in 2009.
8. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan which 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
F-16
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
8. EMPLOYEE SAVINGS PLAN (CONTINUED)
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 $39,000 in 1996 and $53,000 in the nine
months ended September 30, 1997.
9. SUBSEQUENT EVENTS (UNAUDITED)
In October 1997, the Company initiated an initial public offering of its common
stock. Upon completion of this offering, all of the Company's outstanding
convertible preferred stock will convert into an aggregate of 1,479,824 shares
of its common stock.
The pro forma shareholders' equity as of September 30, 1997 is presented on the
face of the balance sheet to reflect the pro forma automatic conversion of the
Company's outstanding convertible preferred stock as if the transaction had
occurred at that date.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR, THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
BY THIS PROSPECTUS OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Dilution.................................................................. 12
Capitalization............................................................ 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
Business.................................................................. 24
Management................................................................ 36
Certain Transactions...................................................... 42
Principal and Selling Shareholders........................................ 43
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL JANUARY 12, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,325,000 SHARES
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FIRST ALBANY CORPORATION
VAN KASPER & COMPANY
RVR SECURITIES CORP.
DECEMBER 18, 1997
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