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 MARCH 31, 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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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 532-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes [X] No ____
As of April 30, 1998, there were 4,249,553 shares of Common Stock, no par
value, outstanding.
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MADE2MANAGE SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Condensed Balance Sheets --
As of March 31, 1998 and December 31, 1997 3
Condensed Statements of Operations --
For the three months ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows --
For the three months ended March 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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MADE2MANAGE SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
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MARCH 31, DECEMBER 31,
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,922 $ 16,805
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 5,586 5,799
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . 300 367
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 596 648
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,404 23,619
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 2,401 1,876
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 65
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,805 $ 25,560
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 416 $ 556
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,056 595
Accrued compensation and related expenses . . . . . . . . . . . . . . . . . 879 1,406
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,355 4,345
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 6,706 6,902
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 354
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,207 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, 4,249,553 and
4,214,803 shares issued and outstanding in 1998 and 1997, respectively 19,938 19,927
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,340) (1,623)
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 18,598 18,304
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $ 25,805 $ 25,560
<FN>
See accompanying notes.
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MADE2MANAGE SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
Revenues:
Software . . . . . . . . . . . . . $ 2,622 $ 1,986
Services . . . . . . . . . . . . . 2,031 1,097
Hardware . . . . . . . . . . . . . 101 140
Total revenues . . . . . . . . . . 4,754 3,223
Costs of revenues:
Software . . . . . . . . . . . . . 145 157
Services . . . . . . . . . . . . . 1,025 628
Hardware . . . . . . . . . . . . . 69 97
Total costs of revenues . . . 1,239 882
Gross profit . . . . . . . . . . . 3,515 2,341
Operating expenses:
Sales and marketing. . . . . . . . 1,858 1,221
Product development. . . . . . . . 773 521
General and administrative . . . . 635 434
Total operating expenses . . . . . 3,266 2,176
Operating income . . . . . . . . . 249 165
Other income (expense), net. . . . 177 (22)
Income before income taxes . . . . 426 143
Income tax provision . . . . . . . 143 55
Net income . . . . . . . . . . . . $ 283 $ 88
Per share amounts:
Basic:
Net income per share . . $ .07 $ .23
Average number of shares 4,245 379
Diluted:
Net income per share . . $ .06 $ .04
Average number of shares 4,867 2,297
<FN>
See accompanying notes.
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MADE2MANAGE SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
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THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
Operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 283 $ 88
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 206 72
Provision for doubtful accounts . . . . . . . . . . . . 117 36
Loss on disposition of property and equipment . . . . . 34 --
Deferred income taxes . . . . . . . . . . . . . . . . . 117 49
Changes in assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . 96 682
Prepaid expenses and other . . . . . . . . . . . . 67 11
Accounts payable and accrued liabilities. . . . . . 321 (343)
Accrued compensation and related expenses . . . . . (527) (62)
Deferred revenue. . . . . . . . . . . . . . . . . . 157 145
Net cash provided by operating activities . . . . . . . 871 678
Investing activities - purchases of property and equipment. . . (765) (263)
Financing activities:
Proceeds from common stock options exercised. . . . . . . . 11 21
Proceeds from long-term obligations . . . . . . . . . . . . -- 143
Payments on long-term obligations . . . . . . . . . . . . . -- (290)
Net cash provided by financing activities . . . . . . . 11 (126)
Change in cash and cash equivalents . . . . . . . . . . . . . . 117 289
Cash and cash equivalents, beginning of period. . . . . . . . . 16,805 1,139
Cash and cash equivalents, end of period. . . . . . . . . . . . $ 16,922 $ 1,428
Supplemental disclosures:
Cash paid for:
Interest expense. . . . . . . . . . . . . . . . . . . . $ 2 $ 72
Income taxes. . . . . . . . . . . . . . . . . . . . . . 46 14
<FN>
See accompanying notes.
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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 interim condensed 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.
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.
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The reconciliation of basic EPS to diluted EPS for the three months ended
March 31, 1998 and 1997 follows (in thousands, except per share amounts):
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Per Share
INCOME SHARES AMOUNT
1998:
Basic EPS . . . . . . . . . . . . . . . . . . $ 283 4,245 $ .07
Adjustment for diluted EPS -- effect of stock
options 622
Diluted EPS . . . . . . . . . . . . . . . . . $ 283 4,867 $ .06
1997:
Basic EPS . . . . . . . . . . . . . . . . . . $ 88 379 $ .23
Adjustments for diluted EPS:
Effect of preferred stock 1,480
Effect of stock options 434
Effect of warrants 4
Diluted EPS . . . . . . . . . . . . . . . . . $ 88 2,297 $ .04
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4. RECLASSIFICATIONS
Certain amounts in the 1997 unaudited condensed consolidated financial
statements have been reclassified to conform to the 1998 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements may be deemed to include
statements regarding the intent, belief or current expectations of the Company
and its management with respect to (i) the Company's strategic plans, (ii) the
Company's future profitability, (iii) the Company's policies regarding capital
expenditures, financing or other matters, (iv) industry trends affecting the
Company's financial condition and results of operations, (v) the Company's
sales or marketing plans and (vi) the Company's growth strategy. Actual
results or events could differ materially from those anticipated in any
forward-looking statements for the reasons discussed in this Item 2, and
elsewhere in this report, or for other reasons. In light of the uncertainties
inherent in any forward-looking statement the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company or
the Company's management that the Company's plans and objectives will be
achieved.
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 licenses, services and
hardware. Software revenues are generated from licensing software to new
customers, from the conversion of existing DOS or UNIX customers to the
Windows version, from current customers increasing the number of licensed
users and from licensing new modules. The Company recognizes revenue from
software license fees and hardware upon shipment to the customer following
execution of a sales agreement. Service revenues are generated from (i) annual
fees paid by customers to receive the Company's customer support services and
Made2Manage software upgrades and (ii) from implementation, education and
consulting services. Support is typically purchased with the initial software
license and is renewable annually. Support fees are recognized ratably over
the term of the agreement. Service revenues from implementation, education and
consulting services are generally included in the initial agreement. The
Company recognizes revenue from these services as they are performed. Hardware
revenues are generated primarily from the sale of bar-coding and data
collection equipment used in connection with Made2Manage and constitute a
relatively small component of total revenues.
Software revenues for a particular quarter depend substantially on orders
received and products shipped in that quarter. Furthermore, large orders may
be significant to operating income in the quarter in which the corresponding
revenue is recognized.
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RESULTS OF OPERATIONS
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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.
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Three Months Ended Three Months Ended Percent
MARCH 31, MARCH 31, INCREASE
1998 1997 (DECREASE)
Revenues:
Software. . . . . . . . . . . 55.2% 61.6% 32.0%
Services. . . . . . . . . . . 42.7 34.1 85.1
Hardware. . . . . . . . . . . 2.1 4.3 (27.9)
Total revenues. . . . . . 100.0 100.0 47.5
Cost of revenues:
Software. . . . . . . . . . . 3.1 4.9 (7.6)
Services. . . . . . . . . . . 21.5 19.5 63.2
Hardware. . . . . . . . . . . 1.5 3.0 (28.9)
Total costs of revenues . 26.1 27.4 40.5
Gross profit. . . . . . . . . . . 73.9 72.6 50.1
Operating expenses:
Sales and marketing . . . . . 39.1 37.9 52.2
Product development . . . . . 16.3 16.2 48.4
General and administrative. . 13.3 13.4 46.3
Total operating expenses. 68.7 67.5 50.1
Operating income. . . . . . . . . 5.2 5.1 50.9
Other income (expense), net . . . 3.7 (.7) NM
Income before taxes . . . . . . . 8.9 4.4 197.9
Income tax provision (benefit). . 3.0 1.7 160.0
Net income. . . . . . . . . . . . 5.9% 2.7% 221.6
<FN>
NM - Not Meaningful
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues
Revenues are derived from software license fees, service and support fees and
hardware sales. Total revenues increased by over $1.5 million, or --47.5%, to
$4.8 million for the three months ended March 31, 1998 from $3.2 million for
the three months ended March 31, 1997. The increase was primarily due to a
greater volume of license transactions, an increase in average contract
amount, sales of new software modules, an increase in market awareness and
acceptance of the Company's Windows product and an expansion of the Company's
sales and marketing organizations. The Company has not historically
recognized significant annual revenues from any single customer.
Software Revenues. Software revenues increased by $600,000, or 32.0%, to $2.6
million for the three months ended March 31, 1998 from $2.0 million for the
three months ended March 31, 1997. Software license revenues constituted 55.2%
and 61.6% of total revenues for the three months ended March 31, 1998 and
1997, respectively. The increase in software license revenues for the three
months ended March 31, 1998 was primarily due to a greater volume of license
transactions and an increase in average contract amount.
Services Revenues. Services revenues increased by $934,000, or 85.1%, to $2.0
million for the three months ended 1998 from $1.1 million for the three months
ended March 31, 1997. These revenues constituted 42.7% and 34.1% of total
revenues for the three months ended March 31, 1998 and 1997, respectively. The
increase in revenues were due to (i) an increase in support fees resulting
from an expanded user base, (ii) delivery of expanded implementation and
consulting services offerings and (iii) delivery of expanded educational
offerings.
Hardware Revenues. Hardware revenues decreased by $39,000, or 27.9%, to
$101,000 for the three months ended March 31, 1998 from $140,000 for the three
months ended March 31, 1997. These revenues constituted 2.1% and 4.3% of
total revenues for the three months ended March 31, 1998 and 1997,
respectively. During the three months ended March 31,1998, 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 $145,000 and
$157,000 for the three months ended March 31, 1998 and 1997, respectively,
resulting in gross profits of 94.5% and 92.1% of software revenues,
respectively. The increase in the gross profit for the three months ended
March 31, 1998 was due to a reduction in the sales of certain third party
software that the Company resells.
Costs of Services Revenues. Costs of services revenues totaled $1.0 million
and $628,000 for the three months ended March 31, 1998 and 1997, respectively,
resulting in gross profits of 49.5% and 42.8% 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 $69,000 and $97,000 for the three
months ended March 31, 1998 and 1997, respectively. The gross profit from
hardware was 31.7% and ----30.7% of hardware revenues for the three months
ended March 31, 1998 and 1997, respectively.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses were $1.9 million
and $1.2 million for the three months ended March 31, 1998 and 1997,
respectively, representing 39.1% and 37.9% of total revenues, respectively.
The increase in sales and marketing expenses was primarily due to increased
(i) staffing as the Company expanded its field sales force and marketing
staff, (ii) commissions as a result of increased software license revenues,
(iii) marketing activities, including promotional activities and (iv) travel
expenses related to sales and marketing efforts.
Product Development Expenses. Product development expenses were $773,000 and
$521,000 for the three months ended March 31, 1998 and 1997, respectively,
representing 16.3% and 16.2% 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
$635,000 and $434,000 for the three months ended March 31, 1998 and 1997,
respectively, representing 13.3% and 13.4% of total revenues, respectively.
The dollar increase of $201,000 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 Income (Expense), Net
Other income (expense), net was $177,000 and $(22,000) for the three months
ended March 31, 1998 and 1997, respectively, representing 3.7% and (.7)% 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. 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 was 33.6% and 38.5% for the three
months ended March 31, 1998 and 1997, respectively. The effective rate is
lower for the three months ended March 31, 1998 due to the impact of tax free
interest included in other income (expense), net.
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 March 31, 1998,
the Company had $16.9 million of cash and cash equivalents resulting
principally from the proceeds of the Company's initial public offering.
Cash flows from operations were $871,000 and $678,000 for the three months
ended March 31, 1998 and 1997, respectively. Cash was used in investing
activities for the purchase of computer and telephone equipment and office
furniture which aggregated $765,000 and $263,000 for the three months ended
March 31, 1998 and 1997, respectively.
At March 31, 1998, the Company had working capital of $16.7 million, including
accounts receivable, net of allowance for doubtful accounts, of $5.6 million.
The average accounts receivable days sales outstanding was 106 days as of
March 31, 1998 and was 102 days at December 31, 1997. Deferred revenue
increased to $4.9 million at March 31, 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, and (ii) a greater number of support
agreements for multiple years of support, which are recognized on a
straight-line basis over the support period. Deferred revenue is related to
support agreements or contracted services, and the current portion of deferred
revenue is expected to be recognized in revenue during the next twelve months.
The Company has a revolving credit agreement with a commercial bank which
expires on July 1, 1998, under which borrowings bear interest at the rate of
prime plus .75% per annum (9.25% at March 31, 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 March 31, 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. The Company has not
borrowed under the revolving line of credit.
Management believes that cash and cash equivalents, cash flow from operations
and credit commitments will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements at least
through 1998.
YEAR 2000 COMPLIANCE
The 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.
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 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 an third-party providers whose
services are critical to the Company. The Company intends to continue to
monitor the efforts of such providers with respect to Year 2000 compliance.
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 of this non-compliance and customers were given
aggressive upgrade pricing and assistance to migrate to the current Year 2000
compliant Windows version.
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 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 clients 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 product delivery or in closings of sales near the end
of a quarter could cause quarterly revenues and, to a greater degree, net
income to fall substantially short of anticipated levels. In addition, the
Company has experienced a seasonal pattern in its operating results, with the
fourth quarter typically having the highest total revenues and operating
income and the first quarter having historically reported lower revenues and
operating income compared to the fourth quarter of the preceding year.
Other factors, many of which are beyond the Company's control, that may
contribute to fluctuations in quarterly operating results include the size of
individual orders, the timing of product introductions or enhancements by the
Company and its competitors, competition and pricing in the manufacturing
software industry, market acceptance of new products, reduction in demand for
existing products, the shortening of product life cycles as a result of new
product introductions by the Company or its competitors, product quality
problems, personnel changes, conditions or events in the manufacturing
industry, and general economic conditions.
The sales cycle for Made2Manage typically ranges from three to nine months.
However, license signing may be delayed for a number of reasons outside the
control of the Company. Since software is generally shipped as orders are
received, the Company historically has operated without significant backlog.
Because the Company's operating expenses are based on anticipated revenue
levels and a high percentage of the Company's expenses are relatively fixed in
the short term, small variations in the timing of revenue recognition can
cause a significant fluctuation in operating results from quarter to quarter
and may result in unanticipated quarterly earnings shortfalls or losses. In
addition, the Company currently intends to increase its operating expenses in
anticipation of continued growth and to fund expanded product development
efforts. To the extent such expenses precede, or are not subsequently followed
by, increased revenues, the Company's business, financial condition and
results of operations could be materially and adversely affected.
Product and Market Concentration
All of the Company's revenues are currently derived from licenses of
Made2Manage and related sales of support, services and hardware. In the near
term, Made2Manage and related services are expected to continue to account for
substantially all of the Company's revenues. Accordingly, any event that
adversely affects the sale of Made2Manage, such as competition from other
products, significant quality problems, incompatibility with third party
hardware or software products, negative publicity or evaluation, reduced
market acceptance of, or obsolescence of the hardware platforms on, or
software environments in, which Made2Manage operates, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's business depends substantially upon the software expenditures of
small and midsize manufacturers, which in part depend upon the demand for such
manufacturers' products. A recession or other adverse event affecting
manufacturing industries in the United States could impact such demand,
forcing manufacturers in the Company's target market to curtail or postpone
capital expenditures on business information systems. While in the long term
the Company plans to distribute Made2Manage in international markets, the
Company has no significant experience in international markets and there can
be no assurance that such expansion can be successfully accomplished. Any
adverse change in the amount or timing of software expenditures by the
Company's target customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Third Party Technologies
Made2Manage 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 and resells various third party products, including
Microsoft Visual Foxpro, Microsoft Project, InstallShield, Abra for Windows,
FRx, Cryptor 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
The Company has experienced rapid growth in its business and operations. While
the Company has managed this growth to date, there can be no assurance that it
will be able to effectively do so in the future. The ability of the Company to
manage its growth successfully is contingent on a number of factors including
its ability to implement and improve its own operational, financial and
management information systems and to motivate and effectively manage its
employees. If the Company were unable to manage future growth effectively, its
business, financial condition and results of operations would be materially
and adversely affected.
Insufficient Customer Commitment
To obtain the maximum rewards of Made2Manage, customers must commit resources
to implement and manage the product and to train their employees in the use of
the product. The failure of customers to commit sufficient resources to those
tasks or to carry them out effectively could result in customer
dissatisfaction with Made2Manage. If a significant number of customers became
dissatisfied, the Company's reputation could be tarnished and the Company's
business, financial condition and results of operations could be materially
and adversely affected.
Competition
The business management applications software market is intensely competitive,
rapidly changing and significantly affected by new product offerings and other
market activities. The Company faces competition from a variety of software
vendors, including application software vendors, software tool vendors and
relational database management systems vendors. A number of companies offer
Windows compatible products that are directed at the market for ERP systems.
The technologies the Company used to develop Made2Manage are generally
available and widely known and include technologies developed by Microsoft.
There can be no assurance that the Company's competitors will not develop
products based on the same technology upon which Made2Manage is based.
The Company's competitors include a large number of software and system
vendors, many of which are public companies and also private companies. In
addition, there are numerous national and regional vendors that offer
alternative systems. Several software companies that have traditionally
marketed ERP systems to larger manufacturers have announced initiatives to
market ERP systems to midsize manufacturers. Many of the Company's existing
competitors, as well as a number of potential competitors, have significantly
greater financial, technical and marketing resources and a larger installed
base of customers than the Company. There can be no assurance that such
competitors will not offer or develop products that are superior to
Made2Manage or that achieve greater market acceptance. If such competition
were to result in significant price declines or loss of market share 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 or "bugs," despite testing by the
Company, which are discovered only after the product has been installed and
used by customers. There can be no assurance that errors will not be found in
existing or future releases of the Company's software or that any such errors
will not impair the market acceptance of these products. A customer could be
required to cease operations temporarily and some or all of its key
operational data could be lost or damaged if its information systems fail as
the result of human error, mechanical difficulties or quality problems in
Made2Manage or third party technologies utilized by Made2Manage. The Company
has insurance covering product liability or damages arising from negligent
acts, errors, mistakes or omissions; however there can be no assurance that
this insurance will be adequate. A claim against the Company, if successful
and of a sufficient magnitude, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Proprietary Rights; Risk of Infringement
The Company relies primarily on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its proprietary rights. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop products incorporating technology
that is substantially equivalent or superior to the Company's technology.
Furthermore, other than a pending United States patent application for
software related to the Material Requirements Planning regeneration feature
included in Made2Manage, the Company has no patents or patent applications
pending, and existing copyright laws afford only limited protection. In the
event that the Company is unable to protect its proprietary rights, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
There can be no assurance that the Company will not be subject to claims that
its technology infringes on the intellectual property of third parties, that
the Company would prevail against any such claims or that a licensing
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. Any such claim, with or without merit, would likely
be time consuming and expensive to defend and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Substantial Control by Single Stockholder
Hambrecht & Quist ("H&Q") and its affiliates, as a group, beneficially own
approximately 28.5% of the Company's outstanding Common Stock. As a result,
H&Q and its affiliates will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Concentration of stock
ownership could also have the effect of delaying or preventing a change in
control of the Company.
Effect of Antitakeover Provisions
The Company's Amended and Restated Articles of Incorporation (the "Articles")
authorize the Board of Directors to issue, without stockholder approval, up to
two million shares of preferred stock with such rights and preferences as the
Board of Directors may determine in its sole discretion. The Option Plan
provides that, unless a committee of the Company's Board of Directors decides
to the contrary, all outstanding options vest and become immediately
exercisable upon a merger or similar transaction. In addition, certain
provisions of Indiana law could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. Further, certain provisions of Indiana law
impose various procedural and other requirements that could make it more
difficult for stockholders to effect certain corporate actions. The foregoing
provisions could discourage an attempt by a third party to acquire a
controlling interest in the Company without the approval of the Company's
management even if such third party were willing to purchase shares of Common
Stock at a premium over its then market price.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new applications by the Company
or its competitors, the failure of the Company's earnings to meet the
expectations of securities 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 April
30, 1998, the Company had 4,249,553 shares of Common Stock outstanding, of
which 1,819,913 shares of Common Stock are "Restricted Shares," which are
subject to restrictions under the Securities Act. Substantially all of the
Restricted Shares are subject to lock-up agreements under which the holders
have agreed not to sell or otherwise dispose of any of their shares for a
period of six months after December 19, 1997 ("Lock-up Agreements") without
the prior written consent of First Albany Corporation. In its sole discretion
and at any time without notice, First Albany Corporation may release all or
any portion of the shares of Common Stock subject to the Lock-up Agreements.
Of the Restricted Shares, 275,209 will become available for sale in the public
market immediately following expiration of the six month lock-up period
pursuant to Rule 144(k), and 1,520,198 will become eligible for sale in the
public market following the expiration of the six month lock-up period,
subject to the volume and other limitations of Rule 144 and Rule 701. As of
April 30, 1998, there were options outstanding to purchase 1,414,906 shares of
Common Stock at a weighted average price of $4.75 per share under Made2Manage
Systems, Inc. Stock Option Plan (the "Option Plan"), of which options to
purchase 542,783 shares of Common Stock were then vested and exercisable. All
holders of options exercisable as of April 30, 1998 have signed Lock-up
Agreements. The Company has reserved 133,438 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"). To date, 1,372 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 1.5 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 29, 1998, the Company issued 20,000 shares of Common Stock to Ira
Coron, the Chairman of the Company's Board of Directors upon the exercise of
options granted pursuant to the Option Plan for $4,000. The issuance of these
shares was exempt from registration under the Securities Act of 1933, as
amended, by reason of Section 4(2) thereof and Rule 701 of the Securities and
Exchange Commission (the "SEC").
On December 19, 1997, the SEC declared the Company's Registration Statement on
Form S-1, File No. 333-38177, effective. Item 5 of Part II of the Company's
Form 10-K for the fiscal year ended December 31, 1997 set forth information
regarding the amount and the use of the proceeds from the offering pursuant to
such Registration Statement. Such information has not changed since its
disclosure in the Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on April 22, 1998 at which meeting
the stockholders approved the following proposals.
<TABLE>
<CAPTION>
Proposal 1 Election of Directors to serve until the next Annual Meeting of
Shareholders.
<S> <C> <C> <C>
Votes Votes
For Against Abstentions
Ira Coron . . . . . 3,732,942 1,790 --
Gregory F. Ehlinger 3,733,942 790 --
David B. Wortman. . 3,733.942 790 --
</TABLE>
<TABLE>
<CAPTION>
Proposal 2 The stockholders approved an amendment to Option Plan to
annually increase the number of shares available and reserved for issuance
under the Option Plan by 5% of the total number of shares of Common Stock
outstanding on the last day of the prior fiscal year plus the total number of
shares of Common Capital Stock reserved for issuance upon the exercise of
stock options outstanding on the last day of the prior fiscal year.
<S> <C>
Votes For . . 2,293,707
Votes Against 580,054
Abstentions . 12,575
</TABLE>
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>
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: April 30, 1998
MADE2MANAGE SYSTEMS, INC.
/s/ David B. Wortman
David B. Wortman
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Stephen R. Head
Stephen R. Head
Vice President, Finance and Administration,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C>
Number Assigned
in Regulation S-K. Exhibit
Item 601 . . . . . Number Description of Exhibit
(2) No Exhibit.
(3). . . . . . . . 3.1 Amended and Restated Articles of Incorporation of Made2Manage Systems, Inc.
(Incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1,
Registration No. 333-38177).
3.2 Amended and Restated Code of By-Laws of Made2Manage Systems, Inc.
(Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1,
Registration No. 333-38177).
(4). . . . . . . . 4.1 Specimen Stock Certificate for Common Stock (Incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-38177).
4.2 See Exhibits 3.1 and 3.2.
(9) No Exhibit
(10) . . . . . . . 10.1 Abra Cadabra Software Reseller Agreement between Abra Cadabra Software, Inc.
and Made2Manage Systems, Inc., dated August 1, 1995 (Incorporated by reference
to Exhibit 10.3 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.2 License Agreement by and between Sourcemate Information Systems, Inc. and
Teksyn, Inc. dated April 1, 1986 (Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form S-1, Registration No. 333-38177).
10.7 First Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated September 27, 1995 (Incorporated by reference
to Exhibit 10.11 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.8 Second Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated March 27, 1996 (Incorporated by reference to
Exhibit 10.12 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.9 Third Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by reference to
Exhibit 10.13 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.11 Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated March 20, 1995 (Incorporated by reference to
Exhibit 10.15 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.12 Form of Made2Manage Systems, Inc. Stock Option Agreement (Incorporated by
reference to Exhibit 10.16 to Registration Statement on Form S-1, Registration
No. 333-38177).
10.13 Made2Manage Systems, Inc. Employee Stock Option Plan (Incorporated by
reference to Exhibit 10.17 to Registration Statement on Form S-1, Registration
No. 333-38177).
10.14 Fourth Amendment to Credit Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated May 14, 1997 (Incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.15 Master Demand Business Loan Note by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated May 14, 1997 in the amount of $1,000,000
(Incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-
1, Registration No. 333-38177).
10.17 Continuing Security Agreement by and between NBD Bank, N.A. and
Made2Manage Systems, Inc. dated June 25, 1996 (Incorporated by reference to
Exhibit 10.21 to Registration Statement on Form S-1, Registration No. 333-
38177).
10.18 Made2Manage Systems, Inc. Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.22 to Registration Statement on Form S-1, Registration
No. 333-38177).
10.19 Third Amended and Restated Modification Agreement between Teksyn, Inc., the
Series A. Purchasers, the Series B Purchasers, the Series C Purchasers and the
Series D Purchasers (ass 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).
10.20 Credit Agreement by and between NBD Bank, N.A. and Teksyn, Inc. dated June
9, 1995 (Incorporated by reference to Exhibit 10.24 to Registration Statement on
Form S-1, Registration No. 333-38177).
(11) No Exhibit.
(12) No Exhibit.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit
(21) No Exhibit
(22) No Exhibit
(23) No Exhibit.
(24) No Exhibit.
(25) No Exhibit.
(26) No Exhibit.
(27) . . . . . . . 27.1 Financial Data Schedule.
(28) No Exhibit.
(99) No Exhibit.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MADE2MANAGE SYSTEMS, INC. AS OF AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,922
<SECURITIES> 0
<RECEIVABLES> 5,852
<ALLOWANCES> 266
<INVENTORY> 28
<CURRENT-ASSETS> 23,404
<PP&E> 3,187
<DEPRECIATION> 786
<TOTAL-ASSETS> 25,805
<CURRENT-LIABILITIES> 6,706
<BONDS> 0
0
0
<COMMON> 19,938
<OTHER-SE> (1,340)
<TOTAL-LIABILITY-AND-EQUITY> 25,805
<SALES> 101
<TOTAL-REVENUES> 4,754
<CGS> 69
<TOTAL-COSTS> 1,239
<OTHER-EXPENSES> (177)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 426
<INCOME-TAX> 143
<INCOME-CONTINUING> 283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
