UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
- ---
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number: 333-38177
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<CAPTION>
<S> <C>
MADE2MANAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
INDIANA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-1665080
(State or other jurisdiction. . . . . . . . . . . . . . . . . . . . (I.R.S. Employer
of incorporation or organization) . . . . . . . . . . . . . . . . . Identification Number)
9002 PURDUE ROAD, INDIANAPOLIS, IN. . . . . . . . . . . . . . . . . 46268
(Address of principal executive offices). . . . . . . . . . . . . . (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 532-7000
- -------------------------------------------------------------------
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
------
As of October 31, 1998, there were 4,499,029 shares of Common stock, no par
value, outstanding.
PAGE
<PAGE>
MADE2MANAGE SYSTEMS, INC.
FORM 10-Q
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<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income
For the three months and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 20
---------------------------------------------------------------------- ----
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PAGE
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<S> <C> <C>
September 30, December 31,
1998 1997
--------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 11,359 $ 6,805
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,328 --
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . 7,362 5,799
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . 586 367
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 453 648
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 23,088 23,619
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 3,234 1,876
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . -- 65
Excess of cost over net assets acquired and other intangibles, net . . 1,632 --
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,954 $ 25,560
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 878 $ 556
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 808 595
Accrued compensation and related expenses. . . . . . . . . . . . . . . 1,506 1,406
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,330 4,345
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 9,522 6,902
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 842 354
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 10,364 7,256
--------------- --------------
Stockholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized, no shares
issued and outstanding in 1998 and 1997. . . . . . . . . . . . . . . . -- --
Common stock, no par value; 10,000,000 shares authorized,
4,412,967 and
4,214,803 shares issued and outstanding in 1998 and 1997, respectively 21,039 19,927
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (3,449) (1,623)
--------------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 17,590 18,304
--------------- --------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 27,954 $ 25,560
=============== ==============
See accompanying notes.
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PAGE
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MADE2MANAGE SYSTEMS, INC.
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<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unuadited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------- ------- ------------------- --------
Revenues:
Software. . . . . . . . . . . . . $ 4,162 $2,385 $ 10,256 $ 6,916
Services. . . . . . . . . . . . . 2,872 1,443 7,096 3,728
Hardware. . . . . . . . . . . . . 254 153 515 397
-------------------- ------- ------------------- --------
Total revenues . . . . . . . 7,288 3,981 17,867 11,041
-------------------- ------- ------------------- --------
Costs of revenues:
Software. . . . . . . . . . . . . 281 117 686 430
Services. . . . . . . . . . . . . 1,499 896 3,711 2,409
Hardware. . . . . . . . . . . . . 162 91 338 262
-------------------- ------- ------------------- --------
Total costs of revenues. . . 1,942 1,104 4,735 3,101
-------------------- ------- ------------------- --------
Gross profit . . . . . . . . 5,346 2,877 13,132 7,940
-------------------- ------- ------------------- --------
Operating expenses:
Sales and marketing . . . . . . . 2,670 1,594 6,782 4,324
Product development . . . . . . . 1,090 592 2,792 1,663
General and administrative. . . . 929 476 2,300 1,380
Acquired in-process technology. . 2,977 -- 2,977 --
-------------------- ------- ------------------- --------
Total operating expenses . . 7,666 2,662 14,851 7,367
-------------------- ------- ------------------- --------
Operating income (loss). . . . . . . . (2,320) 215 (1,719) 573
Other income (expense), net. . . . . . 122 (12) 448 (53)
-------------------- ------- ------------------- --------
Income (loss) before income taxes. . . (2,198) 203 (1,271) 520
Income tax provision . . . . . . . . . 274 76 555 197
-------------------- ------- ------------------- --------
Net income (loss). . . . . . . . . . . $ (2,472) $ 127 $ (1,826) $ 323
==================== ======= =================== ========
Per share amounts:
Basic:
Net income (loss) per share. $ (0.57) $ 0.32 $ (0.43) $ 0.83
======= =================== ========
Average number of shares . . 4,333 400 4,275 391
==================== ======= =================== ========
Diluted:
Net income per share . . . . $ (0.49) $ 0.05 $ (0.36) $ 0.14
==================== ======= =================== ========
Average number of shares . . 5,054 2,405 5,006 2,333
==================== ======= =================== ========
See accompanying notes.
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PAGE
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MADE2MANAGE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<S> <C> <C>
Nine Months Ended
September 30,
1998 1997
---- ----
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ (1,826) $ 323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . 738 274
Provision for doubtful accounts. . . . . . . . . . . . 426 280
Loss on disposition of property and equipment. . . . . 34 --
Deferred income taxes. . . . . . . . . . . . . . . . . 451 189
Acquired in-process technology . . . . . . . . . . . . 2,977 --
Changes in assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . (1,756) (747)
Prepaid expenses and other. . . . . . . . . . . . (139) (88)
Accounts payable and accrued liabilities. . . . . 391 59
Accrued compensation and related expenses . . . . 100 52
Deferred revenue. . . . . . . . . . . . . . . . . 1,843 1,214
Net cash provided by operating activities. . . . . . . 3,239 1,556
Investing activities:
Acquisition of Bridgeware, Inc., net of cash acquired . . . (3,479) --
Purchases of investments, net . . . . . . . . . . . . . . . (3,328) --
Purchases of property and equipment . . . . . . . . . . . . (1,882) (1,091)
Net cash used by financing activities. . . . . . . . . (8,689) (1,091)
Financing activities:
Proceeds from common stock options exercised. . . . . . . . 115 46
Proceeds from long-term obligations . . . . . . . . . . . . -- 604
Payments on long-term obligations . . . . . . . . . . . . . (111) (398)
Net cash provided by financing activities. . . . . . . 4 252
Change in cash and cash equivalents. . . . . . . . . . . . . . . (5,446) 717
Cash and cash equivalents, beginning of period . . . . . . . . . 16,805 1,139
Cash and cash equivalents, end of period . . . . . . . . . . . . $ 11,359 $ 1,856
=================== ========
Supplemental disclosures:
Cash paid for:
Interest expense . . . . . . . . . . . . . . . . . . . $ 4 $ 78
Income taxes . . . . . . . . . . . . . . . . . . . . . 248 21
Non-cash investing activities:
Issuance of 91,135 shares of common stock for
Bridgeware, Inc. acquisition . . . . . . . . . . . . . 997 --
See accompanying notes.
- ----------------------------------------------------------------
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PAGE
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MADE2MANAGE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
Made2Manage Systems, Inc. (the "Company") develops, markets and supports
business management systems for small and midsize manufacturing companies
located primarily in the United States. The Company is dependent upon its
primary product, Made2Manage for Windows ("Made2Manage"), which is a fully
integrated, Windows NT-based business software Enterprise Resource Planning
system for manufacturing companies.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the financial statements and notes
thereto included in the Company's 1997 Annual Report to Stockholders. In
management's opinion, this information has been prepared on the same basis as
the annual financial statements and includes all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of the
information. All intercompany balances have been eliminated.
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.
The operating results for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash equivalents consist primarily of
U.S. government securities, municipal issues and interest-bearing deposits with
major banks. Such investments are valued at cost which approximates market
value.
3. EARNINGS PER SHARE
The earnings per share ("EPS") is determined in accordance with SFAS No. 128 and
is based upon the weighted average number of common and common equivalent shares
outstanding for the period. Diluted common equivalent shares consist of
convertible preferred stock (using the "if converted" method), stock options and
warrants (using the treasury stock method) as prescribed by SFAS No. 128. Under
the treasury stock method the assumed proceeds from the exercise of stock
options and warrants are applied solely to the repurchase of common stock.
PAGE
<PAGE>
The reconciliation of basic EPS to diluted EPS for the three and nine months
ended September 30, 1998 and 1997 follows (in thousands, except per share
amounts):
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<S> <C> <C> <C> <C> <C> <C>
Three Nine
Months Months
Income Per Share Income Per Share
(Loss) Shares Amount (Loss) Shares Amount
-------- ------ ----------- -------- ------ -----------
1998:
Basic EPS. . . . . . . . . . . $(2,472) 4,333 $ (0.57) $(1,826) 4,275 $ (0.43)
Adjustment for diluted EPS --
effect of stock options . -- 721 -- 731
------ -------- ------
Diluted EPS. . . . . . . . . . $(2,472) 5,054 (0.49) $(1,826) 5,006 (0.36)
======== ====== ======== ======
1997:
Basic EPS. . . . . . . . . . . $ 127 400 0.32 $ 323 391 0.83
Adjustment for diluted EPS:
Effect of preferred stock 1,480 1,480
Effect of stock options 521 458
Effect of warrants 4 4
------ ------
Diluted EPS. . . . . . . . . . $ 127 2,405 0.05 $ 323 2,333 0.14
- ----------------------------------- ======== ====== =========== ======== ====== ===========
</TABLE>
4. RECLASSIFICATIONS
Certain amounts in the 1997 unaudited condensed consolidated financial
statements have been reclassified to conform to the 1998 presentation.
5. ACQUISITION
On August 3, 1998, the Company acquired all of the outstanding capital stock of
Bridgeware, Inc. ("Bridgeware"), a privately held software company that
develops, markets and supports Advanced Planning and Scheduling software and
related services throughout North America, South America and Europe. The
transaction was consummated for $3.5 million in cash and 91,135 shares of the
Company's common stock, which had a market value of $997,000 at the date of
acquisition. An escrow account was established for $250,000 of the cash portion
of the purchase price and is subject to a closing balance sheet audit and
resolution of certain defined matters. The shares issued have not been
registered and are subject to re-sale in accordance with the provisions of Rule
144.
The acquisition was accounted for as a purchase. Accordingly, the results of
operation of Bridgeware and the fair market value of the acquired assets and
assumed liabilities are included in the Company's financial results from the
date of acquisition. Of the purchase price, $3.0 million was recorded as a
charge, in the third quarter of 1998, for acquired in-process technology which
has not reached technological feasibility and has no alternative future use.
The value of in-process research and development was determined by an
independent appraiser. The allocation of the remaining purchase price resulted
in an excess of the purchase price over the fair value of the net assets
acquired of $1.7 million. This amount represents intangible assets related to
purchased technology, the assembled workforce and goodwill which will be
amortized on a straight-line basis over useful lives of four, seven and five
years, respectively. The Company also acquired $594,000 in net tangible assets
and assumed liabilities of $885,000. Proforma statements are not shown as they
would not differ materially from reported results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains certain "forward-looking statements" that reflect the
Company's expectations regarding its future growth, results of operations,
performance, and business prospects and opportunities. Words such as,
"estimates," "believes," "anticipates," "plans" and similar expressions may be
used to identify these forward-looking statements, but are not the exclusive
means of identifying these statements. These statements reflect the Company's
current beliefs and are based on information currently available to the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties and other factors that could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by, these statements. These risks, uncertainties
and other factors include the Company's ability to develop and market existing
and acquired products; the Company's ability to successfully integrate its
acquired products; risks related to the Year 2000 challenge; the Company's
ability to adjust to changes in technology, customer preferences, enhanced
competition and new competitors in the ERP market; risks associated with
conducting a consulting services business; general economic and business
conditions, which may reduce or delay customers' purchases of the Company
products and services; and the Company's ability to anticipate variability of
quarterly revenues, manage rapid growth, attract and retain key employees,
deliver new product introductions, achieve market acceptance of the products,
and protect its proprietary software rights from infringement or
misappropriation. The Company is not obligated to update or revise these
forward-looking statements to reflect new events or circumstances or otherwise.
Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained in
the Company's SEC reports, including the report on Form 10-K for the year ended
December 31, 1997 and subsequently filed reports on Form 10-Q.
The Company develops, markets, licenses and supports Made2Manage, an open
architecture, standards-based, client/server Enterprise Resource Planning
("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.
The Company's revenues are derived from software license fees, service and
support fees and hardware sales. Software revenues are generated from licensing
software to new customers, from the conversion of existing DOS or UNIX customers
to the Windows version of Made2Manage, from current customers increasing the
number of licensed users and from licensing new modules. The Company recognizes
revenue from software license fees and hardware upon shipment to the customer
following execution of a sales agreement. Service revenues are generated from
(i) annual fees paid by customers to receive the Company's customer support
services and Made2Manage software upgrades and (ii) implementation, education,
customization and consulting services. Support is typically purchased with the
initial software license and is renewable annually. Support fees are recognized
ratably over the term of the agreement. Service revenues from implementation,
education and consulting services are generally included in the initial
agreement. The Company recognizes revenue from these services as they are
performed. Hardware revenues are generated primarily from the sale of bar-coding
and data collection equipment used in connection with Made2Manage and constitute
a relatively small component of total revenues.
As discussed in Note 5 to the condensed consolidated financial statements the
Company acquired Bridgeware Inc. ("Bridgeware"), a software company that
develops, markets and supports Advanced Planning and Scheduling ("APS") software
and related services in August 1998. Bridgeware continues to license its
product directly to end-users, through value added resellers and through OEM
arrangements. During the third quarter of 1998, Bridgeware contributed $215,000
in total revenue. Additionally, the Company is in the process of integrating
the Bridgeware product with Made2Manage so that the APS functionality may be
offered to Made2Manage customers in the future.
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.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented by
certain items included in the Company's consolidated statements of operations
for the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Months Nine Months
Ended Percent Ended Percent
September 30, Increase September 30, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
-------------- ------ ---------- ------------------ ------ ----------
Revenues:
Software. . . . . . . 57.1% 59.9% 74.5% 57.4% 62.6% 48.3
Services. . . . . . . 39.4 36.3 99.0 39.7 33.8 90.3
Hardware. . . . . . . 3.5 3.8 66.0 2.9 3.6 29.7
-------------- ------ ------------------ ------
Total revenue. . 100.0 100.0 83.1 100.0 100.0 61.8
-------------- ------ ------------------ ------
Cost of revenues:
Software. . . . . . . 3.9 2.9 140.2 3.8 3.9 59.5
Services. . . . . . . 20.5 22.5 67.3 20.8 21.8 54.1
Hardware. . . . . . . 2.2 2.3 78.0 1.9 2.4 29.0
-------------- ------ ------------------ ------
Total costs of
revenues. . 26.6 27.7 75.9 26.5 28.1 52.7
-------------- ------ ------------------ ------
Gross profit . . 73.4 72.3 85.8 73.5 71.9 65.4
-------------- ------ ------------------ ------
Operating expenses:
Sales and marketing . 36.6 40.0 67.5 37.9 39.2 56.9
Product development . 15.0 14.9 84.1 15.6 15.1 67.9
General and
administrative . 12.7 12.0 95.2 12.9 12.5 66.7
Acquired in-process
technology . . . 40.9 -- NM 16.7 -- NM
-------------- ------ ------------------ ------
Total operating
expenses . 105.2 66.9 188.0 83.1 66.7 101.6
-------------- ------ ------------------ ------
Operating income (loss). . (31.8) 5.4 NM (9.6) 5.2 (400.0)
Other income (expense),
net. . . . . . . . . 1.7 (.3) NM 2.5 (.5) NM
-------------- ------ ------------------ ------
Income (loss) before
income taxes. . . . . (30.1) 5.1 NM (7.1) 4.7 (344.4)
Income tax provision . . . 3.8 1.9 260.5 3.1 1.8 181.7
-------------- ------ ------------------ ------
Net income (loss). . . . . (33.9)% 3.2% NM (10.2)% 2.9% NM
============== ====== ================== ======
NM - Not Meaningful
- --------------------------
</TABLE>
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues are derived from software license fees, service and support fees and
hardware sales. Total revenues increased by $3.3 million, or 83.1%, to $7.3
million for the three months ended September 30, 1998 from $4.0 million for the
three months ended September 30, 1997. Total revenues increased by $6.8 million,
or 61.8%, to $17.9 million for the nine months ended September 30, 1998 from
$11.0 million for the nine months ended September 30,1997. The increase for the
three and nine months ended September 30, 1998 was primarily due to a greater
volume of license transactions, an increase in average contract amount, sales of
new software modules and an increase in the delivery of implementation,
education and support services. Revenues were also positively impacted by (i)
the acquisition of Bridgeware which contributed $215,000 for the three and nine
months ended September 30, 1998, (ii) an increase in market awareness and
acceptance of the Company's Microsoft Windows-based product and (iii) an
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 $1.8 million, or 74.5%, to
$4.2 million for the three months ended September 30, 1998 from $2.4 million for
the three months ended September 30, 1997. For the nine months ended September
30,1998, software revenues increased by $3.4 million, or 48.3%, to $10.3 million
from $6.9 million for the nine months ended September 30, 1997. Software
license revenues constituted 57.1% and 59.9% of total revenues for the three
months ended September 30, 1998 and 1997, respectively, and 57.4% and 62.6% of
total revenues for the nine months ended September 30, 1998 and 1997,
respectively. The increase in software license revenues for the three and nine
months ended September 30, 1998 was primarily due to a greater volume of license
transactions and an increase in the average contract amount. The decrease in
the percentage of total revenues represented by software revenue results from
the greater rate of growth in services revenues.
Services Revenues. Services revenues increased by $1.5 million, or 99.0%, to
$2.9 million for the three months ended September 30, 1998 from $1.4 million for
the three months ended September 30, 1997. For the nine months ended September
30,1998, services revenues increased $3.4 million, or 90.3%, to $7.1 million
from $3.7 million for the nine months ended September 30,1997. These revenues
constituted 39.4% and 36.3% of total revenues for the three months ended
September 30, 1998 and 1997, respectively, and 39.7% and 33.8% of total revenues
for the nine months ended September 30, 1998 and 1997, respectively. The
increase in revenues for the three and nine months ended September 30, 1998 was
due to (i) an increase in support fees resulting from a larger user base, (ii)
increased delivery of implementation, consulting and customization services
offerings and (iii) delivery of expanded educational offerings.
Hardware Revenues. Hardware revenues increased by $101,000, or 66.0%, to
$254,000 for the three months ended September 30, 1998 from $153,000 for the
three months ended September 30, 1997. For the nine months ended September
30,1998, hardware revenue increased by $118,000, or 29.7%, to $515,000 from
$397,000 for the nine months ended September 30, 1997. These revenues
constituted 3.5%, 3.8%, 2.9%, and 3.6% of total revenues for the three and nine
month periods ended September 30, 1998 and 1997, respectively. The Company
limits the type of hardware equipment it sells 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 $281,000 and
$117,000 for the three months ended September 30, 1998 and 1997, respectively,
resulting in gross profits of 93.2% and 95.1% of software revenues,
respectively. For the nine months ended September 30,1998, costs of software
revenues totaled $686,000 and for the nine months ended September 30,1997, costs
of software revenues totaled $430,000, resulting in gross profits of 93.3% and
93.8% of software revenues, respectively. The slight decrease in the gross
profit for the three and nine months ended September 30, 1998 was due to an
increase in the licensing of certain lower margin third party software.
Costs of Services Revenues. Costs of services revenues totaled $1.5 million and
$896,000 for the three months ended September 30, 1998 and 1997, respectively,
resulting in gross profits of 47.8% and 37.9% of service revenues, respectively.
Cost of services revenues totaled $3.7 million and $2.4 million for the nine
months ended September 30, 1998 and 1997, respectively, resulting in gross
profits of 47.7% and 35.4% of service revenues, respectively. The dollar
increases in cost were due primarily to the growth in the Company's installed
customer base and related support and services costs, which increased primarily
due to an increase in the staffing levels for technical support, implementation,
consulting and education services. Additionally, in 1997 there were
non-recurring costs to develop a product migration assistance program which
caused the margin percentage to be lower compared to 1998.
Costs of Hardware. Costs of hardware totaled $162,000 and $91,000 for the three
months ended September 30, 1998 and 1997, respectively. The gross profit from
hardware was 36.2% and 40.5% of hardware revenues for the three months ended
September 30, 1998 and 1997, respectively. Costs of hardware totaled $338,000
and $262,000 for the nine months ended September 30,1998 and 1997, respectively.
Gross profits were 34.4% and 34.0% of hardware revenues for the nine months
ended September 30,1998 and 1997, respectively.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $2.7 million and
$1.6 million for the three months ended September 30, 1998 and 1997,
respectively, representing 36.6% and 40.0% of total revenues, respectively. For
the nine months ended September 30, 1998 and 1997, sales and marketing expenses
were $6.8 million and $4.3 million, respectively, representing 38.0% and 39.2%
of total revenues, respectively. The dollar increase in sales and marketing
expenses was primarily due to (i) increased staffing as the Company expanded its
field sales force and marketing staff, (ii) increased commissions as a result of
increased software license revenues, (iii) expanded marketing activities,
including promotional activities and (iv) increased travel expenses related to
sales and marketing efforts.
Product Development Expenses. Product development expenses were $1.1 million and
$592,000 for the three months ended September 30, 1998 and 1997, respectively,
representing 15.0% and 14.9% of total revenues, respectively. Development
expenses were $2.8 million for the nine months ended September 30,1998 and $1.7
million for the nine months ended September 30,1997, or 15.6% and 15.1% of total
revenues, respectively. The increase was a result of increased staffing. The
Company did not capitalize any software development costs during these periods.
General and Administrative Expenses. General and administrative expenses were
$929,000 and $476,000 for the three months ended September 30, 1998 and 1997,
respectively, representing 12.7% and 12.0% of total revenues, respectively.
General and administrative expenses were $2.3 million and $1.4 million for the
nine months ended September 30,1998 and 1997, respectively, representing 12.9%
and 12.5% 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.
Acquired In-Process Technology. Included in operating expenses for the three
and nine months ended September 30, 1998 is a charge of $3.0 million as a result
of the acquisition of in-process technology in connection with the acquisition
of Bridgeware.
On a proforma basis, exclusive of the charge for of in-process technology
related to the acquisition of Bridgeware, results of operations would be
comparatively reported as follows.
Results excluding in-process technology charge:
- ---------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------- ------ ------------------ -------
Total revenues . . . . . . . . . . . . $ 7,288 $3,981 $ 17,867 $11,041
Operating income excluding in-process
technology charge . . . . . . . . 657 215 1,258 573
Net income excluding in-process
technology charge . . . . . . . . 505 127 1,151 323
Basic:
Net income per share excluding
in-process technology charge $ 0.12 $ 0.32 $ 0.27 $ 0.83
=================== ====== ================== =======
Average shares outstanding. . . . 4,333 400 4,275 391
=================== ====== ================== =======
Diluted:
Net income per share excluding
in-process technology charge $ 0.10 $ 0.05 $ 0.23 $ 0.14
=================== ====== ================== =======
Average shares outstanding. . . . 5,054 2,405 5,006 2,333
- -------------------------------------- =================== ====== ================== =======
</TABLE>
Other Income (Expense), Net
Other income (expense), net was $122,000 and $(12,000) for the three months
ended September 30, 1998 and 1997, respectively, representing 1.7% and (.3)% of
total revenues, respectively. For the nine months ended September 30, 1998 and
1997, other income (expense), net was $448,000 and $(53,000), representing 2.5%
and (.5)% of total revenues, respectively. Other income in 1998 is principally a
result of interest earned on the proceeds of the Company's initial public
offering, which was completed in December 1997. The other expense in 1997 was
principally interest on borrowings, which were subsequently repaid from proceeds
of the initial public offering.
Income Tax Provision
The income tax provision effective rate, excluding the charge off of in-process
research technology, was 35.2% and 37.4% for the three months ended September
30, 1998 and 1997, respectively. The income tax provision effective rate,
excluding the charge of in-process technology, was 32.5% and 37.9% for the nine
months ended September 30,1998 and 1997, respectively. The effective rate is
lower for the three and nine months ended September 30, 1998 compared to the
three and nine months ended June 30, 1997 due to the impact of tax free interest
included in other income (expense), net in 1998. The acquired in process
technology charge is not deductible for income tax purpose.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through equity capital,
including the Company's initial public offering of Common stock in December
1997, debt and cash generated from operations. As of September 30, 1998, the
Company had $14.7 million of cash, cash equivalents and investments resulting
principally from the proceeds of the Company's initial public offering. Cash,
cash equivalents and investments are lower than the $16.8 million reported at
December 31, 1997 primarily due to the $3.5 million cash payment related to the
Bridgeware acquisition.
Cash flows from operations were $3.2 million and $1.6 million for the nine
months ended September 30, 1998 and 1997, respectively. Cash was used in
investing activities to purchase short term investments of $3.3 million for the
nine months ended September 30, 1998 and for the purchase of computer and
telephone equipment, office furniture and internal software systems which
aggregated $1.9 million and $1.1 million for the nine months ended September 30,
1998 and 1997, respectively.
At September 30, 1998, the Company had working capital of $13.6 million,
including accounts receivable, net of $7.4 million. The average accounts
receivable days sales outstanding was 91 days as of September 30, 1998 and was
102 days at December 31, 1997. Deferred revenue increased to $7.2 million at
September 30, 1998 from $4.7 million at December 31, 1997 due to (i) an
increased number of contracts that included service fees, which are deferred
until provided, (ii) an increased number of customers with support agreements
and (iii) a greater number of support agreements for multiple years of support,
which are recognized on a straight-line basis over the support period. Deferred
revenue is related to support agreements or contracted services, and the current
portion of deferred revenue is expected to be recognized in revenue during the
next twelve months.
The Company has a revolving credit agreement with a commercial bank, which
expires on July 1, 1999, under which borrowings bear interest at the prime rate
per annum (8.25% at September 30, 1998). Loans under the revolving credit
agreement are limited, in the aggregate, to the lesser of $1 million and a
"borrowing base" amount. As of September 30, 1998, the Company satisfied the
borrowing base requirements and was eligible to borrow up to the maximum of $1.0
million under the revolving credit agreement. As of September 30, 1998, the
Company had not borrowed under the revolving credit agreement.
The Company acquired Bridgeware on August 3, 1998 in a purchase transaction
which included a cash payment of $3.5 million.
Management believes that cash and cash equivalents, investments, 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 1999.
YEAR 2000 COMPLIANCE
The Year 2000 issue relates to whether computer systems will properly recognize
and process information relating to dates in and after the year 2000. These
systems could fail or produce erroneous results if they cannot adequately
process dates beyond the year 1999 and are not corrected ("the Year 2000
Problem"). Significant uncertainty exists in the software industry concerning
the potential consequences that may result from the failure of software to
adequately address the Year 2000 issue.
The Year 2000 Problem potentially impacts the Company in the following principal
areas: (i) the Company's software products, including third party products
resold by the Company; (ii) the Company's internal technology systems; (iii) the
Company's noninternal technology systems that contain embedded computer devices;
and (iv) the business systems of the Company's resellers and key suppliers.
Company Products. The Company continuously tests its newly developed software
for Year 2000 compliance and, as of this date, is not aware of any problems
related to Year 2000 compliance for software products it is currently
distributing. The Company's legacy DOS and UNIX products are not Year 2000
compliant and no further sales, distribution or development of these products
is, to the Company's knowledge, taking place. The Company notified customers of
these prior versions in 1996, and subsequently, of this non-compliance and
customers were offered significantly discounted pricing and implementation
assistance to migrate to the current Year 2000 compliant Windows version. The
Company is requesting certification of Year 2000 compliance from providers of
third party products that the Company resells. The certification is expected to
be completed by March 1999.
Internal Technology Systems. The Company utilizes a combination of its own
software and other commercially available software for its internal operations.
At this time, the Company believes that there will be no significant costs
associated with the Year 2000 issue for its internal operations. The Company
is not presently aware of any Year 2000 issues that have been encountered by a
third-party provider whose services are critical to the Company. The Company
intends to complete an evaluation of providers with respect to Year 2000
compliance by March 1999.
Noninternal Technology Systems. Noninternal technology systems include
security systems, elevators and other systems that contain an embedded computer
or computer like device that is used to control the operation of machinery and
equipment. The Company is in the process of assessing whether there are any
Year 2000 Problems with noninternal technology systems. The assessment is
expected to be completed by March 1999. At the completion of the assessment the
Company will develop a contingency plan, if necessary, to address any issues.
Third Party Resellers and Key Suppliers. The Company will be inquiring of
theYear 2000 readiness of it's resellers and key suppliers over the next several
months, to be completed by March 1999. No one reseller is responsible for a
material amount of the Company's license fees.
Although, based on its on-going evaluations, the Company does not believe the
Year 2000 will have a significant impact on the Company's internal operations or
on the Company's Windows-based software developed by the Company for clients,
there can be no assurance for any company or industry, including the Company,
that interruptions of operations will not occur because of Year 2000 problems or
that the Company will not become involved in disputes with customers regarding
Year 2000 problems involving software licensed to clients.
ACCOUNTING PRONOUNCEMENTS
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2), was issued in October 1997. SOP 97-2
is effective for transactions entered into by the Company after December 31,
1997. SOP-2 provides guidance on the recognition of revenue for software
arrangements consisting of multiple elements. The revenue for an individual
element is allocated based on the relative fair market value of that element as
compared to the total price. Revenue is recognized on each element as that
element is performed or completed. SOP 97-2 did not have a material effect upon
the Company's 1998 financial statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
Fluctuations of Quarterly Operating Results; Seasonality
The Company has experienced in the past, and expects to experience in the
future, significant fluctuations in quarterly operating results. A substantial
portion of the Company's software license revenue in each quarter is from
licenses signed and product shipped in that quarter, and such revenues
historically have been recorded largely in the third month of a quarter, with a
concentration of revenues mostly in the last week of that third month.
Accordingly, the Company's quarterly results of operations are difficult to
predict, and delays in closings of sales near the end of a quarter or product
delivery could cause quarterly revenues and, to a greater degree, net income to
fall substantially short of anticipated levels. In addition, the Company has
experienced a seasonal pattern in its operating results, with the fourth quarter
typically having the highest total revenues and operating income and the first
quarter having historically reported lower revenues and operating income
compared to the fourth quarter of the preceding year.
Other factors, many of which are beyond the Company's control, that may
contribute to fluctuations in quarterly operating results include the size of
individual orders, the timing of product introductions or enhancements by the
Company and its competitors, competition and pricing in the manufacturing
software industry, market acceptance of new products, reduction in demand for
existing products, the shortening of product life cycles as a result of new
product introductions by the Company or its competitors, product quality
problems, personnel changes, conditions or events in the manufacturing industry,
and general economic conditions.
The sales cycle for Made2Manage typically ranges from three to nine months.
However, license signing may be delayed for a number of reasons outside the
control of the Company. Since software is generally shipped as orders are
received, the Company historically has operated without significant backlog.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are relatively fixed in the
short term, small variations in the timing of revenue recognition can cause a
significant fluctuation in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses. In addition,
the Company currently intends to increase its operating expenses in anticipation
of continued growth and to fund expanded product development efforts. To the
extent such expenses precede, or are not subsequently followed by, increased
revenues, the Company's business, financial condition and results of operations
could be materially and adversely affected.
Product and Market Concentration
The Company's revenues are currently derived from licenses of Made2Manage,
including optional modules, licensing of Bridgeware's Advanced Planning and
Scheduling products and third-party software, and related support, services and
hardware. In the near term, Made2Manage and related services are expected to
continue to account for substantially all of the Company's revenues.
Accordingly, any event that adversely affects the sale of Made2Manage, such as
competition from other products, significant quality problems, incompatibility
with third party hardware or software products, negative publicity or
evaluation, reduced market acceptance of, or obsolescence of the hardware
platforms on, or software environments in, which Made2Manage operates, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's business depends substantially upon the software expenditures of
small and midsize manufacturers, which in part depend upon the demand for such
manufacturers' products. A recession or other adverse event affecting
manufacturing industries in the United States could impact such demand, forcing
manufacturers in the Company's target market to curtail or postpone capital
expenditures for business information systems. Any adverse change in the amount
or timing of software expenditures by the Company's target customers could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Third Party Technologies
Made2Manage uses a variety of third party technologies, including operating
systems, tools and other applications developed and supported by Microsoft
Corporation ("Microsoft"). There can be no assurance that Microsoft will
continue to support the operating systems, tools and other applications utilized
by Made2Manage or that they will continue to be widely accepted in the Company's
target market. Made2Manage relies heavily on Microsoft's Visual Studio, and
there can be no assurance that Microsoft will not discontinue or otherwise fail
to support Visual Studio or any of its components. In addition, the Company uses
a number of other programming tools and applications, including ActiveX, OLE,
ODBC, OLEDB and Internet Information Server.
The Company sub-licenses various third party products, including Microsoft
Visual Foxpro, Microsoft Project, products from PowerWay, Best Software, FRx and
EC Company and bar code hardware and software. There can be no assurance that
these third party vendors will continue to support these technologies or that
these technologies will retain their level of acceptance among manufacturers in
the Company's target market. The occurrence of any of these events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Development
The Company's growth and future financial performance depend in part upon its
ability to enhance existing applications and to develop and introduce new
applications to incorporate technological advances that satisfy customer
requirements or expectations. As a result of the complexities inherent in
product development, there can be no assurance that either improvements to
Made2Manage or applications the Company develops in the future will be delivered
on a timely basis or ultimately accepted in the market. Any failure by the
Company to anticipate or respond adequately to technological development or
end-user requirements, or any significant delays in product development or
introduction, could damage the Company's competitive position and have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel
The Company's success depends to a significant extent upon a number of key
employees, including members of senior management. None of the Company's
employees is subject to an employment contract. The Company's ability to
implement its business strategy is substantially dependent on its ability to
attract, on a timely basis, and retain skilled personnel, especially sales,
service and support personnel. Competition for such personnel is intense, and
the Company competes for such personnel with numerous companies, including
larger, more established companies with significantly greater financial
resources than the Company. There can be no assurance that the Company will be
successful in attracting and retaining skilled personnel. The loss of the
services of one or more of the key employees or the failure to attract and
retain qualified employees could have a material adverse effect on the Company's
business, financial condition and results of operations.
Management of Growth; International Expansion
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. 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. If the Company were unable to manage future growth
effectively, its business, financial condition and results of operations would
be materially and adversely affected.
Risks Associated with Acquisitions
As part of its business strategy, the Company expects to review acquisition
prospects that would complement its existing product offerings, augment its
market coverage or enhance its technological capabilities or that may otherwise
offer growth opportunities. Acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect the Company's
operating results and/or the price of the Company's common stock. Acquisitions
entail numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business and financial condition
or results of operations.
Insufficient Customer Commitment
To obtain the maximum rewards of Made2Manage, customers must commit resources to
implement and manage the product and to train their employees in the use of the
product. The failure of customers to commit sufficient resources to those tasks
or to carry them out effectively could result in customer dissatisfaction with
Made2Manage. If a significant number of customers became dissatisfied, the
Company's reputation could be tarnished and the Company's business, financial
condition and results of operations could be materially and adversely affected.
Competition
The business management applications software market is intensely competitive,
rapidly changing and significantly affected by new product offerings and other
market activities. The Company faces competition from a variety of software
vendors, including application software vendors, software tool vendors and
relational database management systems vendors. A number of companies offer
Windows compatible products that are directed at the market for ERP systems. The
technologies the Company used to develop Made2Manage are generally available and
widely known and include technologies developed by Microsoft. There can be no
assurance that the Company's competitors will not develop products based on the
same technology upon which Made2Manage is based.
The Company's competitors include a large number of software and system vendors,
many of which are public companies. In addition, there are numerous
international, national and regional vendors that offer alternative systems.
Several software companies that have traditionally marketed ERP systems to
larger manufacturers have announced initiatives to market ERP systems to midsize
manufacturers. 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 for Made2Manage, the Company's business, financial
condition and results of operation would be adversely affected.
Relationships with Value Added Resellers
Historically, the Company has distributed its software products through a direct
sales force and a network of value added resellers ("VARs"). A significant
portion of licenses of Made2Manage sold to new customers is sold by VARs. If
some or all of the VARs in the Company's network reduce their efforts to sell
Made2Manage, promote competing products or terminate their relationships with
the Company, the Company's business, financial condition and results of
operation would be materially and adversely affected. Furthermore, VARs
frequently develop strong relationships with their customers, so if VARs in the
Company's network criticize the Company or its products to their customers, the
Company's reputation could be damaged, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
Product Liability and Lack of Insurance
The Company markets, sells and supports a software product used by manufacturers
to manage their business operations and to store substantially all of their
operational data. Software programs as complex as those offered by the Company
may contain undetected errors, despite testing by the Company, which are
discovered only after the product has been installed and used by customers.
There can be no assurance that errors will not be found in existing or future
releases of the Company's software or that any such errors will not impair the
market acceptance of these products. A customer could be required to cease
operations temporarily and some or all of its key operational data could be lost
or damaged if its information systems fail as the result of human error,
mechanical difficulties or quality problems in Made2Manage or third party
technologies utilized by Made2Manage. The Company has insurance covering product
liability or damages arising from negligent acts, errors, mistakes or omissions;
however there can be no assurance that this insurance will be adequate. A claim
against the Company, if successful and of a sufficient magnitude, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Proprietary Rights; Risk of Infringement
The Company relies primarily on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its proprietary rights. There can be no assurance
that these protections will be adequate or that the Company's competitors will
not independently develop products incorporating technology that is
substantially equivalent or superior to the Company's technology. Furthermore,
other than pending United States patent applications for software included in
Made2Manage related to the Material Requirements Planning regeneration feature
and a navigational interface for the enterprise, the Company has no patents or
patent applications pending, and existing copyright laws afford only limited
protection. In the event that the Company is unable to protect its proprietary
rights, the Company's business, financial condition and results of operations
could be materially and adversely affected.
There can be no assurance that the Company will not be subject to claims that
its technology infringes on the intellectual property of third parties, that the
Company would prevail against any such claims or that a licensing agreement will
be available on reasonable terms in the event of an unfavorable ruling on any
such claim. Any such claim, with or without merit, would likely be time
consuming and expensive to defend and could have a material adverse effect on
the Company's business, financial condition and results of operations.
Substantial Control by Single Stockholder
As of October 31, 1998, Hambrecht & Quist ("H&Q") and its affiliates, as a
group, beneficially own approximately 26.9% of the Company's outstanding common
stock. As a result, H&Q and its affiliates will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Concentration of stock ownership could also have the effect of delaying or
preventing a change in control of the Company.
Effect of Antitakeover Provisions
The Company's Amended and Restated Articles of Incorporation (the "Articles")
authorize the Board of Directors to issue, without stockholder approval, up to
two million shares of preferred stock with such rights and preferences as the
Board of Directors may determine in its sole discretion. The Option Plan
provides that, unless a committee of the Company's Board of Directors decides to
the contrary, all outstanding options vest and become immediately exercisable
upon a merger or similar transaction. In addition, certain provisions of Indiana
law could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Further, certain provisions of Indiana law impose various
procedural and other requirements that could make it more difficult for
stockholders to effect certain corporate actions. The foregoing provisions could
discourage an attempt by a third party to acquire a controlling interest in the
Company without the approval of the Company's management even if such third
party were willing to purchase shares of Common stock at a premium over its then
market price.
Possible Volatility of Stock Price
The trading price of the Company's Common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new applications by the Company or
its competitors, the failure of the Company's earnings to meet the expectations
of securities analysts and investors, as well as other events or factors. In
addition, the stock market has from time to time experienced extreme price and
volume fluctuations which have particularly affected the market price of many
high technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Common stock.
Shares Eligible for Future Sale; Registration Rights
The sale of a substantial number of shares of common stock in the public market
could adversely affect the market price of common stock. As of October 31, 1998,
the Company had 4,499,029 shares of common stock outstanding, of which 1.3
million shares of common stock are "Restricted Shares," which are subject to
volume and other limitations of Rule 144 and Rule 701restrictions under the
Securities Act. As of October 31, 1998, there were options outstanding to
purchase 1,386,360 shares of common stock at a weighted average price of $5.86
share under Made2Manage Systems, Inc. Stock Option Plan (the "Option Plan"), of
which options to purchase 510,984 shares of common stock were then vested and
exercisable. The Company has reserved 5,890 shares for future grant under the
Option Plan. The Company has reserved 100,000 shares of common stock for
issuance under the Made2Manage Systems, Inc. Employee Stock Purchase Plan (the
"Stock Purchase Plan"). As of October 31, 1998, 3,810 shares have been issued
under the Stock Purchase Plan. The Company filed registration statements
registering shares of common stock issued pursuant to the Option Plan and Stock
Purchase Plan on January 30, 1998. Accordingly, shares issued pursuant to these
plans will be saleable in the public market upon issuance, subject to certain
restrictions.
Holders of approximately 1.2 million shares of common stock, have certain rights
with respect to the registration of their shares under the Securities Act. If
the holders of registration rights cause a large number of shares of common
stock to be registered and sold in the public market, such sales could have a
material adverse effect on the market price for the common stock. If the Company
were required to include these shares in a Company-related registration under
the Securities Act pursuant to the exercise of piggyback registration rights,
such sales could have a material adverse effect on the Company's ability to
raise capital.
Absence of Dividends
The Company does not anticipate paying any cash dividends on its Common stock in
the foreseeable future. The Company currently intends to retain its earnings, if
any, for the development of its business.
Investment Risk
Despite the high credit ratings on the Company's cash equivalents, there is no
assurance such agencies will not default on their obligations which could result
in losses of principal and accrued interest to the Company.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Acquisition
On August 3, 1998, the Company acquired all of the outstanding capital stock of
Bridgeware, Inc. ("Bridgeware"), a privately held software company that
develops, markets and supports Advanced Planning and Scheduling software and
related services throughout North America, South America and Europe. The
transaction was consummated for $3.5 million in cash and 91,135 shares of the
Company's common stock, which had a market value of $997,000 at the date of
acquisition. An escrow account was established for $250,000 of the cash portion
of the purchase price and is subject to a closing balance sheet audit and
resolution of certain defined matters. The shares issue have not been registered
and are subject to re-sale in accordance with the provisions of Rule 144.
The acquisition was accounted for as a purchase. Accordingly, the results of
operation of Bridgeware and the fair market value of the acquired assets and
assumed liabilities are included in the Company's financial results from the
date of acquisition. Of the purchase price, $3.0 million was recorded as a
charge, in the third quarter of 1998, for acquired in-process technology which
has not reached technological feasibility and has no alternative future use.
The value of in-process research and development was determined by an
independent appraiser. The allocation of the remaining purchase price resulted
in an excess of the purchase price over the fair value of the net assets
acquired of $1.7 million. This amount represents intangible assets related to
purchased technology, the assembled workforce and goodwill which will be
amortized on a straight-line basis over useful lives of four, seven and five
years, respectively. The Company also acquired $594,000 in net tangible assets
and assumed liabilities of $885,000. Proforma statements are not shown as they
would not differ materially from reported results.
Board of Directors
On July 22, 1998, three software industry executives joined the Company's board
of directors, and the board was expanded to five members. The newly elected
board members are: Michael Cullinane, 48, executive vice president, chief
financial officer, and a director of PLATINUM technology, inc. (Nasdaq: PLAT), a
worldwide leader in software products and consulting services that manage and
improve the IT infrastructure; John Dillon, 48, president, chief executive
officer, and a director of Hyperion Solutions Corporation (Nasdaq: HYSL), a
leading provider of analytic application software for reporting, analysis,
modeling and planning; and Richard Halperin, 50, chief executive officer and a
director of Coherent Network International, Inc., a GIS software company
specializing in the utility and telecom industries. Gregory F. Ehlinger, vice
president and treasurer of Irwin Financial Corporation and a director of
Made2Manage since 1990, stepped down from the board. The resignation did not
reflect any disagreement with respect to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the current
period.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 5, 1998
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MADE2MANAGE SYSTEMS, INC.
/s/ David B. Wortman. . . . . . . . /s/ Stephen R. Head
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David B. Wortman. . . . . . . . . . Stephen R. Head
President, Chief Executive Officer. Vice President, Finance and Administration,
and Director. . . . . . . . . . . . Chief Financial Officer,
(Principal Executive Officer) . . . Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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PAGE
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INDEX TO EXHIBITS
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Number Assigned
in Regulation S-K. Exhibit
Item 601 . . . . . Number Description of Exhibit
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(2). . . . . . . . 2.0 Stock Purchase Agreement, dated August 3, 1998, among
Made2Manage Systems, Inc and the stockholders of Bridgeware
Inc. (Incorporated by reference in June 30,1998 10Q filing).
(3). . . . . . . . 3.1 Amended and Restated Articles to Incorporation of Made2Manage
Systems, Inc. (Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, Registration No. 333-38177).
3.2 Amended and Restated Code of By-Laws of Made2Manage
Systems, Inc. (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1, Registration No. 333-38177).
(4). . . . . . . . 4.1 Specimen Stock Certificate for Common stock (Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-1,
Registration No. 333-38177).
4.2 See Exhibits 2.0, 3.1 and 3.2.
(10) . . . . . . . 10.2 License Agreement by and between Sourcemate Information
Systems, Inc. and Teksyn, Inc. dated April 1, 1986 (Incorporated
by reference to Exhibit 10.4 to Registration Statement on Form
S-1, Registration No. 333-38177).
10.12 Form of Made2Manage Systems, Inc. Stock Option Agreement
(Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.13 Made2Manage Systems, Inc. Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.17 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.18 Made2Manage Systems, Inc. Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 10.22 to Registration
Statement on Form S-1, Registration No. 333-38177).
10.19 Third Amended and Restated Modification Agreement between
Teksyn, Inc., the Series A. Purchasers, the Series B Purchasers, the
Series C Purchasers and the Series D Purchasers (as defined
therein) dated as of April 12, 1991 (Incorporated by reference to
Exhibit 10.23 to Registration Statement on Form S-1, Registration
No. 333-38177).
10.25 Amended and Restated Credit Agreement by and between NBD
Bank, N.A. and Made2Manage Systems, Inc. dated May 26, 1998
(Incorporated by reference to June 30,1998 10Q filing).
10.26 Replacement Master Demand Business Loan Note by and between
Made2Manage Systems, Inc. and NBD Bank, N.A. dated May 29,
1998 (Incorporated by reference to June 30,1998 10Q filing).
10.27 Best Software, Inc. Linked Software Dealer Agreement by and
between Best Software, Inc. and Made2Manage Systems, Inc.
dated May 14, 1998 (Incorporated by reference to June 30,1998
10Q filing).
(11) No Exhibit.
(5) No Exhibit.
(18) No Exhibit
(19) No Exhibit
(22) No Exhibit
(23) No Exhibit.
(24) No Exhibit.
(27) . . . . . . . 27.1 Financial Data Schedule.
(99) No Exhibit.
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,359
<SECURITIES> 3,328
<RECEIVABLES> 7,859
<ALLOWANCES> 497
<INVENTORY> 106
<CURRENT-ASSETS> 23,088
<PP&E> 4,682
<DEPRECIATION> 1,525
<TOTAL-ASSETS> 27,954
<CURRENT-LIABILITIES> 9,522
<BONDS> 0
0
0
<COMMON> 21,039
<OTHER-SE> (3,449)
<TOTAL-LIABILITY-AND-EQUITY> 27,954
<SALES> 515
<TOTAL-REVENUES> 17,867
<CGS> 338
<TOTAL-COSTS> 4,735
<OTHER-EXPENSES> (448)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,271)
<INCOME-TAX> 555
<INCOME-CONTINUING> (1,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,826)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.36)
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