================================================================================
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, 2000
Or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
____ to ____
Commission file number: 333-38177
MADE2MANAGE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1665080
------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9002 Purdue Road, Indianapolis, IN 46268
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 532-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
----- -----
As of October 31, 2000, there were 4,750,722 shares of Common Stock, no par
value, outstanding.
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<PAGE>
MADE2MANAGE SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999..................... 3
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2000 and 1999.... 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999.............. 5
Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........18
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................19
Signatures.........................................................19
- 2 -
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 4,743 $ 12,610
Marketable securities.......................................................... 7,275 1,800
Trade accounts receivable, net ................................................ 9,441 7,376
Prepaid expenses and other..................................................... 1,325 1,074
Income taxes refundable........................................................ 86 849
Deferred income taxes.......................................................... 2,262 737
--------- ---------
Total current assets........................................................ 25,132 24,446
Property and equipment, net........................................................ 4,918 4,795
Purchased technology and goodwill, net............................................. -- 2,296
Deferred income taxes.............................................................. 87 87
--------- ---------
Total assets................................................................ $ 30,137 $ 31,624
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,335 $ 1,331
Accrued liabilities............................................................ 2,270 2,017
Deferred revenue............................................................... 9,431 8,986
--------- ---------
Total current liabilities................................................... 13,036 12,334
Deferred revenue................................................................... 353 419
--------- ---------
Total liabilities........................................................... 13,389 12,753
--------- ---------
Shareholders' equity:
Preferred stock, no par value; 2,000,000 shares authorized, no shares
issued and outstanding in 2000 and 1999..................................... -- --
Common stock, no par value; 10,000,000 shares authorized, 4,750,722 and
4,652,168 issued and outstanding in 2000 and 1999, respectively............. 22,436 21,889
Accumulated deficit............................................................ (5,688) (3,018)
---------- ---------
Total shareholders' equity.................................................. 16,748 18,871
--------- ---------
Total liabilities and shareholders' equity.................................. $ 30,137 $ 31,624
========= =========
See accompanying notes.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software.................................................. $ 4,018 $ 2,159 $ 10,130 $ 10,722
Services.................................................. 3,980 3,941 12,398 12,323
Hardware.................................................. 317 313 784 855
--------- --------- --------- ---------
Total revenues......................................... 8,315 6,413 23,312 23,900
--------- --------- --------- ---------
Costs of revenues:
Software.................................................. 348 316 1,029 1,124
Write-down and amortization of purchased technology....... 1,212 98 1,409 295
Services.................................................. 2,104 2,133 6,301 6,613
Hardware.................................................. 207 199 557 571
--------- --------- --------- ---------
Total costs of revenues................................ 3,871 2,746 9,296 8,603
--------- --------- --------- ---------
Gross profit........................................... 4,444 3,667 14,016 15,297
--------- --------- --------- ---------
Operating expenses:
Sales and marketing....................................... 3,355 2,972 9,520 8,819
Product development....................................... 1,463 1,701 4,900 4,826
General and administrative................................ 1,158 1,072 3,337 3,172
Write-down and amortization of goodwill................... 763 62 887 186
--------- --------- --------- ---------
Total operating expenses............................... 6,739 5,807 18,644 17,003
--------- --------- --------- ---------
Operating loss................................................ (2,295) (2,140) (4,628) (1,706)
Other income, net............................................. 159 140 456 428
--------- --------- --------- ---------
Loss before income taxes...................................... (2,136) (2,000) (4,172) (1,278)
Income tax benefit............................................ (646) (740) (1,502) (473)
--------- --------- --------- ---------
Net loss...................................................... $ (1,490) $ (1,260) $ (2,670) $ (805)
========= ========= ========= =========
Per share amounts - basic and diluted:
Net loss............................................... $ (0.31) $ (0.27) $ (0.56) $ (0.18)
========= ========= ========= =========
Average number of shares............................... 4,746 4,618 4,735 4,588
========= ========= ========= =========
See accompanying notes.
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
MADE2MANAGE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss........................................................................ $ (2,670) $ (805)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization of property and equipment...................... 1,365 1,094
Write-down and amortization of purchased technology and goodwill............. 2,296 481
Provision for doubtful accounts.............................................. 683 425
Changes in assets and liabilities:
Trade accounts receivable................................................. (2,748) 1,937
Deferred and refundable income taxes...................................... (762) --
Prepaid expenses and other................................................ (251) 84
Accounts payable.......................................................... 4 (334)
Accrued liabilities....................................................... 253 (2,263)
Deferred revenue.......................................................... 379 (253)
--------- ---------
Net cash provided by (used in) operating activities.......................... (1,451) 366
---------- ---------
Investing activities:
Purchases of property and equipment............................................. (1,488) (2,235)
Purchases of marketable securities.............................................. (11,016) (9,900)
Sales of marketable securities.................................................. 5,541 6,250
--------- ---------
Net cash used in investing activities........................................ (6,963) (5,885)
---------- ---------
Financing activities:
Proceeds from issuance of common stock.......................................... 84 142
Proceeds from exercise of stock options......................................... 463 152
--------- ---------
Net cash provided by financing activities.................................... 547 294
--------- ---------
Change in cash and cash equivalents................................................. (7,867) (5,225)
Cash and cash equivalents, beginning of period...................................... 12,610 15,496
--------- ---------
Cash and cash equivalents, end of period............................................ $ 4,743 $ 10,271
========= =========
Supplemental disclosures - cash paid for:
Income taxes................................................................. $ -- $ 907
See accompanying notes.
</TABLE>
- 5 -
<PAGE>
MADE2MANAGE SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
Made2Manage Systems, Inc. (the "Company") develops, markets, licenses and
supports enterprise business system software solutions for small and midsize
manufacturing companies located primarily in the United States. The Company is
dependent upon its primary product, Made2Manage for Windows, which is a fully
integrated, Microsoft Windows based business software 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 consolidated financial statements and
notes thereto included in the Company's December 31, 1999 Annual Report to
Shareholders. 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.
Certain amounts for 1999 have been restated to conform to the 2000 presentation.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances have been eliminated.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and 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.
3. Cash Equivalents and Marketable Securities
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Marketable securities consist of
debt instruments with maturities between three and twelve months and are
classified as available-for-sale. Cash equivalents and marketable securities are
valued at cost, which approximates market value.
4. Net Loss per Share
Net loss per share ("EPS") is determined in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share", 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.
Common stock equivalents were not included in the diluted EPS calculations due
to net losses in each period.
- 6 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. These statements reflect our expectations regarding our
strategic plans, future growth, results of operations, performance, business
prospects and opportunities. Words such as "estimates," "believes,"
"anticipates," "plans" and similar expressions may be used to identify these
forward-looking statements, but are not the exclusive means of identifying these
statements. These statements reflect our current beliefs and are based on
information currently available to us. Accordingly, these statements are subject
to known and unknown risks, uncertainties and other factors that could cause our
actual growth, results, performance, business prospects and opportunities to
differ from those expressed in, or implied by, these statements. In light of the
uncertainties inherent in any forward-looking statement the inclusion of a
forward-looking statement herein should not be regarded as a representation by
us that our plans and objectives will be achieved. Actual results or events
could differ materially from those anticipated in any forward-looking statements
for the reasons discussed in this section, in the "Business Environment and Risk
Factors" section below, and elsewhere in this report, or for other reasons. We
are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances or otherwise. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained in the Company's SEC
reports, including the report on Form 10-K for the year ended December 31, 1999.
Overview
We develop, market, license and support Made2Manage, an open architecture,
standards-based, client/server and web based enterprise business system software
solution for small and midsize manufacturers engaged in engineer-to-order,
make-to-order, assemble-to-order, make-to-stock and mixed styles of production.
We have developed manufacturing software applications for this market since our
inception in 1986.
During 1998 we acquired Bridgeware, Inc., a company that offers advance planning
and scheduling software, for a combination of cash and common stock totaling
$4.5 million. In connection with this acquisition, we recorded a $1.9 million
in-process technology charge. The remaining costs of the acquisition were
recorded as assets and were expected to be amortized over lives of five and
seven years. During the third quarter 2000, we decided to accelerate development
of an integrated multi-level planning suite that will largely replace the
acquired technology. That decision resulted in an impairment of the purchased
technology asset and related goodwill. The impaired assets were written down to
their net realizable value and resulted in a non-cash, pre-tax charge of $2.0
million. The after-tax effect of the charge was $1.5 million.
In March 2000 we introduced m2mEport, our web site dedicated to the needs of
small and midsize manufacturers. m2mEport was subsequently split into three
distinct web sites, M2MEXPRESS, M2MEXPERT and M2MVIP. Each site is designed to
meet specific e-commerce business needs of small and midsize manufacturers. The
M2MEXPRESS web site is designed to provide small and midsize manufacturing
companies access to Made2Manage via the Internet through a hosted Application
Service Provider option. The M2MEXPERT web site provides Made2Manage customers
with Internet resources, including virtual education courses, cyber consulting
and support services 24 hours per day, seven days a week through the use of an
online searchable information database for troubleshooting. M2MVIP was launched
in the third quarter 2000 and offers small and midsize manufacturing companies a
range of collaborative opportunities with both their customers and their
suppliers. We believe M2MVIP will assist the manufacturer in sustaining customer
loyalty through improved service.
Made2Manage is sold internationally. In January 2000 we entered into a
distributor relationship with 4Front Technologies to sell, market and support
our product in Europe. 4Front Technologies was recently acquired by NCR
Corporation. The impact of this acquisition on our European sales activity has
not yet been determined. Currently approximately 99% of our revenues are derived
from customers in the United States.
- 7 -
<PAGE>
Our revenues are derived from software licenses, services and hardware. Software
revenues are generated from licensing software to new customers, and from
current customers increasing the number of licensed users and licensing new
applications. We recognize revenue from software license fees and hardware upon
shipment to the customer following execution of a sales agreement. Service
revenues are generated from annual fees paid by customers to receive support
services and software upgrades and also from implementation, education and
consulting services. Support is typically purchased as part of the initial sales
agreement 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. We
recognize revenue from these services as they are performed. Hardware revenues
are generated primarily from the sale of bar-coding and data collection
equipment used in connection with Made2Manage and constitute a relatively small
component of total revenues.
Software revenues for a particular quarter depend substantially on orders
received and products shipped in that quarter. Furthermore, large orders may be
significant to operating income in the quarter in which the corresponding
revenue is recognized.
Results of Operations
The following table sets forth the percentage of total revenues and percent
increase or decrease from the prior dollar amount represented by certain items
included in our unaudited statements of operations for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
-------------------- Increase -------------------- Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
--------- -------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Software............................. 48.3% 33.7% 86.1% 43.4% 44.9% (5.5)%
Services............................. 47.9 61.4 1.0 53.2 51.5 0.6
Hardware............................. 3.8 4.9 1.3 3.4 3.6 (8.3)
-------- -------- -------- --------
Total revenues.................... 100.0 100.0 29.7 100.0 100.0 (2.5)
-------- -------- -------- --------
Costs of revenues:
Software............................. 4.2 4.9 10.1 4.4 4.7 (8.5)
Purchased technology................. 14.6 1.5 NM 6.1 1.2 NM
Services............................. 25.3 33.3 (1.4) 27.0 27.7 (4.7)
Hardware............................. 2.5 3.1 4.0 2.4 2.4 (2.5)
-------- -------- -------- --------
Total costs of revenues........... 46.6 42.8 41.0 39.9 36.0 8.1
-------- -------- -------- --------
Gross profit...................... 53.4 57.2 21.2 60.1 64.0 (8.4)
-------- -------- -------- --------
Operating expenses:
Sales and marketing.................. 40.3 46.3 12.9 40.9 36.9 7.9
Product development.................. 17.6 26.5 (14.0) 21.0 20.2 1.5
General and administrative........... 13.9 16.7 8.0 14.3 13.3 5.2
Goodwill............................. 9.2 1.0 NM 3.8 0.8 NM
-------- -------- -------- --------
Total operating expenses.......... 81.0 90.5 16.0 80.0 71.2 9.7
-------- -------- -------- --------
Operating Loss........................... (27.6) (33.3) (7.2) (19.9) (7.2) (171.3)
Other income, net ....................... 1.9 2.2 13.6 2.0 1.8 6.5
-------- -------- -------- --------
Loss before income taxes................. (25.7) (31.1) (6.8) (17.9) (5.4) (226.4)
Income tax benefit....................... (7.8) (11.5) (12.7) (6.4) (2.0) 217.5
-------- -------- -------- --------
Net loss................................. (17.9)% (19.6)% (18.3)% (11.5)% (3.4)% (231.7)%
======== ======== ======== ========
<FN>
NM - Not meaningful.
</FN>
Comparison of Three and Nine Months Ended September 30, 2000 and 1999
</TABLE>
- 8 -
<PAGE>
Revenues
Revenues are derived from software license fees, service and support fees and
hardware sales. For the three months ended September 30, 2000, total revenues
increased by $1.9 million, or 29.7%, to $8.3 million from $6.4 million for the
three months ended September 30, 1999. For the nine months ended September 30,
2000, total revenues decreased by $588,000, or 2.5%, to $23.3 million from $23.9
million for the nine months ended September 30, 1999. Both the quarter and year
to date variances were attributed to the volume of software license
transactions. We believe that the increase in the third quarter 2000 over the
same period for the prior year reflects the gradual recovery of the enterprise
software market place, which has experienced a slow-down due in part to Year
2000 impacts on buying decisions. We also believe manufacturers are experiencing
some confusion regarding e-commerce solutions, which has further delayed buying
decisions. See "Business Environment and Risk Factors - Year 2000 Market
Dynamics" for a description of Year 2000 market dynamics and potential revenue
impact. We have not historically recognized significant annual revenues from any
single customer.
Software Revenues. For the three months ended September 30, 2000, software
revenues increased by $1.9 million, or 86.1%, to $4.0 million from $2.2 million
for the three months ended September 30, 1999. Software license revenues
constituted 48.3% and 33.7% of total revenues for the three months ended
September 30, 2000 and 1999, respectively. The increase in the third quarter
2000 over the same period for the prior year was driven by a higher number of
software license transactions, coupled with a larger average order size. For the
nine months ended September 30, 2000, software revenues decreased by $592,000,
or 5.5%, to $10.1 million from $10.7 million for the nine months ended September
30, 1999. Software license revenues constituted 43.4% and 44.9% of total
revenues for the nine months ended September 30, 2000 and 1999, respectively.
The year to date decrease in software revenues was principally due to a lower
number of software license transactions, which was partially offset by a larger
average order size.
Services Revenues. For the three months ended September 30, 2000, services
revenues increased by $39,000, or 1.0%, to $4.0 million from $3.9 million for
the three months ended September 30, 1999. These revenues constituted 47.9% and
61.4% of total revenues for the three months ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000, services revenues
increased by $75,000, or 0.6%, to $12.4 million from $12.3 million for the nine
months ended September 30, 1999. These revenues constituted 53.2% and 51.5% of
total revenues for the nine months ended September 30, 2000 and 1999,
respectively. While support revenues were up due to support fees from an
expanded user base, education and consulting revenues were down due to a lower
volume of software license transactions.
Hardware Revenues. For the three months ended September 30, 2000, hardware
revenues increased by $4,000, or 1.3%, to $317,000 from $313,000 for the three
months ended September 30, 1999. These revenues constituted 3.8% and 4.9% of
total revenues for the three months ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000, hardware revenues
decreased by $71,000, or 8.3%, to $784,000 from $855,000 for the nine months
ended September 30, 1999. These revenues constituted 3.4% and 3.6% of total
revenues for the nine months ended September 30, 2000 and 1999, respectively.
The year to date decrease in hardware revenues was principally due to a lower
volume of software license transactions. We limit the type of hardware equipment
we sell to bar-coding and data collection equipment necessary to utilize certain
features of Made2Manage.
Subscription Revenues. Subscription revenues from M2MEXPRESS were $21,000 for
the nine months ended September 30, 2000. There were no revenues from M2MVIP.
However, more than 70 customers have signed up for M2MVIP services during a free
introductory period. Subscription revenues are included in services revenues in
the consolidated statements of operations.
International Revenues. International revenues for the nine months ended
September 30, 2000 totaled $197,000 for software, hardware and support and
represented 0.8% of total revenues.
- 9 -
<PAGE>
Costs of Revenues
Costs of Software Revenues. For the three months ended September 30, 2000 and
1999, costs of software revenues totaled $348,000 and $316,000, respectively,
resulting in gross profit margins of 91.3% and 85.4% of software revenues,
respectively. For the nine months ended September 30, 2000 and 1999, costs of
software revenues totaled $1.0 million and $1.1 million, respectively, resulting
in gross profit margins of 89.8% and 89.5% of software revenues, respectively.
Write-Down and Amortization of Purchased Technology. In August 1998, we acquired
our Bridgeware subsidiary, which gave rise to the purchased technology asset.
During the third quarter 2000, we decided to accelerate development of an
integrated multi-level planning suite that will largely replace the acquired
technology. That decision resulted in an impairment of the purchased technology
asset which was written down to net realizable value. The non-cash write-down of
purchased technology was $1.2 million as compared to amortization of $98,000 in
the third quarter of 1999. For the nine months ended September 30, 2000, the
write-down and amortization of purchased technology was $1.4 million as compared
to amortization of $295,000 for the nine months ended September 30, 1999.
Costs of Services Revenues. For the three months ended September 30, 2000 and
1999, costs of services revenues totaled $2.1 million in each period, resulting
in gross profit margins of 47.1% and 45.9%, respectively. For the nine months
ended September 30, 2000 and 1999, costs of services revenues totaled $6.3
million and $6.6 million, respectively, resulting in gross profit margins of
49.2% and 46.3%, respectively. The decrease in costs was primarily due to
operating efficiencies gained, resulting in lower personnel costs.
Costs of Hardware Revenues. For the three months ended September 30, 2000 and
1999, costs of hardware revenues totaled $207,000 and $199,000, respectively.
The gross profit margins from hardware were 34.7% and 36.4% of hardware revenues
for the three months ended September 30, 2000 and 1999, respectively. For the
nine months ended September 30, 2000 and 1999, costs of hardware revenues were
$557,000 and $571,000, respectively. Gross profit margins from hardware were
29.0% and 33.2% of hardware revenues for the nine months ended September 30,
2000 and 1999, respectively.
Operating Expenses
Sales and Marketing Expenses. For the three months ended September 30, 2000 and
1999, sales and marketing expenses were $3.4 million and $3.0 million,
respectively, representing 40.3% and 46.3% of total revenues, respectively. For
the nine months ended September 30, 2000 and 1999, sales and marketing expenses
were $9.5 million and $8.8 million, respectively, representing 40.9% and 36.9%
of total revenues, respectively. The increase in sales and marketing expenses
was primarily due to recruiting related costs for two new executives, e-commerce
marketing efforts, and increased activity with our European sales operation.
Product Development Expenses. For the three months ended September 30, 2000 and
1999, product development expenses were $1.5 million and $1.7 million,
respectively, representing 17.6% and 26.5% of total revenues, respectively. For
the nine months ended September 30, 2000 and 1999, product development expenses
were $4.9 million and $4.8 million, respectively, representing 21.0% and 20.2%
of total revenues, respectively. The increase in product development expenses
was substantially the result of our investment in e-commerce initiatives. We did
not capitalize any software development costs during these periods pursuant to
Statement of Financial Accounting Standards No. 86 (SFAS No. 86).
General and Administrative Expenses. For the three months ended September 30,
2000 and 1999, general and administrative expenses were $1.2 million and $1.1
million, respectively, representing 13.9% and 16.7% of total revenues,
respectively. For the nine months ended September 30, 2000 and 1999, general and
administrative expenses were $3.3 million and $3.2 million, respectively,
representing 14.3% and 13.3% of total revenues, respectively.
- 10 -
<PAGE>
Write-down and Amortization of Goodwill. In August 1998, we recorded purchased
technology and related goodwill associated with the acquisition of our
Bridgeware subsidiary. During the third quarter 2000, we decided to accelerate
development of an integrated multi-level planning suite that will largely
replace the acquired technology. That decision resulted in an impairment of the
purchased technology asset and related goodwill. The non-cash write-down of
goodwill to net realizable value was $763,000 as compared to amortization of
$62,000 in the third quarter of 1999. For the nine months ended September 30,
2000, the write-down and amortization of goodwill was $887,000 as compared to
amortization of $186,000 for the nine months ended September 30, 1999. See
"Costs of Revenues - Write-down and Amortization of Purchased Technology" for
impact of writing down the purchased technology asset.
Other Income, Net
For the three months ended September 30, 2000 and 1999, other income, net was
$159,000 and $140,000, respectively, representing 1.9% and 2.2% of total
revenues, respectively. For the nine months ended September 30, 2000 and 1999,
other income, net was $456,000 and $428,000, respectively, representing 2.0% and
1.8% of total revenues, respectively. The increase in the dollar amount of other
income, net was due primarily to higher interest rates on invested securities.
Income Tax Benefit
For the three months ended September 30, 2000 and 1999, the income tax benefit
effective rate was 30.2% and 37.0%, respectively. For the nine months ended
September 30, 2000 and 1999, the income tax benefit effective rate was 36.0% and
37.0%, respectively. The effective rate for both the three and nine months ended
September 30, 2000 is lower due to the write-down of goodwill, which is not tax
deductible.
Liquidity and Capital Resources
We have funded our operations primarily through equity capital, debt and cash
generated from operations. As of September 30, 2000, we had $4.7 million of cash
and cash equivalents and $7.3 million invested in marketable securities.
The net change in cash was a reduction of $7.9 million for the nine months ended
September 30, 2000 and resulted primarily from $5.5 million in net purchases of
marketable securities with maturities from three months to one year..
At September 30, 2000, we had working capital of $12.1 million, including
accounts receivable, net, of $9.4 million. The average accounts receivable days
outstanding was 102 days as of September 30, 2000 and was 93 days at December
31, 1999. Deferred revenue is related to support agreements or contracted
services and was $9.8 million at September 30, 2000 or $379,000 higher than the
balance at December 31, 1999.
We have a revolving credit agreement with a commercial bank which expires on
April 30, 2001, borrowings under which bear interest at the prime rate (9.5% at
September 30, 2000). Loans under the revolving credit agreement are limited, in
the aggregate, to $2 million. We have not borrowed under the revolving line of
credit.
We believe that cash and cash equivalents, cash flow from operations and credit
commitments will be sufficient to meet our currently anticipated working capital
and capital expenditure requirements at least for the next twelve months.
Inflation
We believe that inflation has not had a material impact on our operations.
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Accounting Pronouncements
In December 1998, the Securities and Exchange Commission Staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
No. 101) which provides guidance on the recognition, presentation, and
disclosure of revenue in the financial statements. Subsequent amendments require
implementation in 2001. The Company is quantifying the effects of this
pronouncement, if any.
Business Environment and Risk Factors
In addition to other information contained in this report, the following factors
could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward looking
statements.
Fluctuations of Quarterly Operating Results; Seasonality
We have experienced in the past, and expect to experience in the future,
significant fluctuations in quarterly operating results. A substantial portion
of our 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, our quarterly
results of operations are difficult to predict, and delays in closings of sales
near the end of a quarter or product delivery could cause quarterly revenues
and, to a greater degree, net income to fall substantially short of anticipated
levels. In addition, we have experienced a seasonal pattern in our operating
results, with the fourth quarter typically having the highest total revenues and
operating income and the first quarter having historically reported lower
revenues and operating income compared to the fourth quarter of the preceding
year.
Other factors, many of which are beyond our control, that may contribute to
fluctuations in quarterly operating results include the size of individual
orders, the timing of product introductions or enhancements by us and our
competitors, competition and pricing in the manufacturing software industry,
market acceptance of new products, reduction in demand for existing products,
the shortening of product life cycles as a result of new product introductions
by us or our competitors, product quality problems, personnel changes,
conditions or events in the manufacturing industry, and general economic
conditions.
The sales cycle for Made2Manage typically ranges from three to nine months.
However, license signing may be delayed for a number of reasons outside of our
control. Since software is generally shipped as orders are received, we have
historically operated without significant backlog.
Because our operating expenses are based on anticipated revenue levels and a
high percentage of our expenses are relatively fixed in the short term, small
variations in the timing of revenue recognition can cause a significant
fluctuation in operating results from quarter to quarter and may result in
unanticipated quarterly earnings shortfalls or losses. In addition, we may
increase operating expenses in anticipation of continued growth and to fund
expanded product development efforts. To the extent such expenses precede, or
are not subsequently followed by, increased revenues, our business, financial
condition and results of operations could be materially and adversely affected.
Year 2000 Market Dynamics
We believe the Year 2000 planning cycle reduced demand for enterprise business
systems in 1999. In addition, each customer's evaluation of its need to achieve
Year 2000 compliance with other internal systems potentially lengthened the
sales cycle. We believe that in 1999 certain customers and potential customers
were engaged in testing and correcting system Year 2000 problems, and such
customers may have chosen to defer system investments during 1999, negatively
impacting our revenues. Additionally, prior year sales may have been increased
due to customers' need to address Year 2000 issues. Such Year 2000 demand most
likely was reduced in 1999 due to the lead time required to implement new
systems, possibly negatively impacting our revenues. Our sales cycles may
lengthen in 2000 and future years due to lessened urgency of customers' system
investment decisions. Because Year 2000 related impacts on customer purchasing
decisions were unprecedented, we have a limited ability to determine the impact
of the Year 2000 market dynamics on our quarter-to-quarter revenues in 2000.
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Product and Market Concentration
Our revenues are currently derived from licenses of Made2Manage, including
optional modules 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 our 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 our business, financial condition and results of operations.
Our 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 our target market to curtail or postpone capital expenditures
for business information systems. Any adverse change in the amount or timing of
software expenditures by our target customers could have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Third Party Technologies
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 our target
market. Made2Manage relies heavily on Microsoft's Visual Studio and Microsoft
Sequel Server, and there can be no assurance that Microsoft will not discontinue
or otherwise fail to support Visual Studio or Sequel Server or any of its
components. In addition, we use a number of other programming tools and
applications, including ActiveX, OLE, ODBC, OLEDB, MSMQ, Site Server and
Internet Information Server.
We sublicense various third party products, including Microsoft Visual FoxPro,
Microsoft Sequel Server, Microsoft Project, products from Powerway, Best
Software, ADS Inc., Interact Commerce and FRx, 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 our target market. The occurrence of any of
these events could have a material adverse effect on our business, financial
condition and results of operations.
Product Development and Rapid Technological Change
Our growth and future financial performance depend in part upon our ability to
enhance existing applications and to develop and introduce new applications to
incorporate technological advances that satisfy customer requirements or
expectations. As a result of the complexities inherent in product development,
there can be no assurance that either improvements to Made2Manage or
applications that we develop in the future will be delivered on a timely basis
or ultimately accepted in the market. Any failure by us to anticipate or respond
adequately to technological development or end-user requirements, or any
significant delays in product development or introduction, could damage our
competitive position and have a material adverse effect on our business,
financial condition and results of operations.
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<PAGE>
Internet and Potential for Subscription Revenue Business Model
We believe the Internet is changing the way businesses operate and therefore the
software needs of customers. We believe customers will increasingly require
eBusiness applications and software solutions that will enable them to engage in
commerce or service over the Internet. If we are unable to respond to emerging
industry standards and technological changes we may not be able to deliver
products and services that meet our customer's changing needs. If we are not
successful in addressing these changing needs our products may become obsolete
and our financial results may be materially and adversely impacted.
Furthermore, advances in Internet and e-commerce applications may lead the
enterprise business system market to rapid acceptance of Application Service
Provider (ASP), a hosted method of delivering business system solutions. The ASP
method of delivery is a subscription revenue model and although subscriptions
could improve predictability of future revenue, it delays revenue recognition
and cash collections as compared to the current method. Therefore, if there is a
rapid change to the ASP business model our near term financial results and
financial position may be materially and adversely impacted.
Dependence on Key Personnel
Our success depends to a significant extent upon a number of key employees,
including members of senior management. No employee is subject to an employment
contract. Our ability to implement business strategy is substantially dependent
on our ability to attract, on a timely basis, and retain skilled personnel,
especially sales, service, support and development personnel. Competition for
such personnel is intense, and we compete for such personnel with numerous
companies, including larger, more established companies with significantly
greater financial resources. There can be no assurance that we will be
successful in attracting and retaining skilled personnel. The loss of the
services of one or more of the key employees or the failure to attract and
retain qualified employees could have a material adverse effect on our business,
financial condition and results of operations.
Management of Growth; International Expansion
We have experienced rapid growth in our domestic business and operations. While
we have managed this growth to date, there can be no assurance that we will be
able to effectively do so in the future. Our ability to manage growth
successfully is contingent on a number of factors including our ability to
implement and improve operational, financial and management information systems
and to motivate and effectively manage employees.
While we have begun to distribute Made2Manage in international markets, we have
no significant experience in international markets and there can be no assurance
that such expansion can be successfully accomplished. Additionally, we rely
extensively on our European distributor, 4Front Technologies, to sell and
service the European market place. 4Front Technologies was recently acquired by
NCR Corporation. The impact of this acquisition has not yet been determined. If
4Front Technologies is unable or unsuccessful in promoting, selling and
servicing Made2Manage our financial condition and results of operations could be
materially and adversely affected.
Risks Associated with Acquisitions
As part of our business strategy, we expect to review acquisition prospects that
would complement our existing product offerings, augment market coverage,
enhance technological capabilities, or that may otherwise offer growth
opportunities. Acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect operating results and/or the price of
our common stock. Acquisitions entail numerous risks, including difficulties in
the assimilation of acquired operations, technologies and products, diversion of
management's attention from other business concerns, risks of entering markets
in which we have no or limited prior experience and potential loss of key
employees of acquired organizations. No assurance can be given as to our ability
to successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure to do so could have a
material adverse effect on our business and financial condition or results of
operations.
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<PAGE>
Insufficient Customer Commitment
To obtain the benefits 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, our
reputation could be tarnished and our 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. We face 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 business management
systems. The technologies we use to develop Made2Manage are generally available
and widely known and include technologies developed by Microsoft. There can be
no assurance that competitors will not develop products based on the same
technology upon which Made2Manage is based.
Our 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 business management systems to larger
manufacturers have announced initiatives to market business management systems
to midsize manufacturers. Compared to us, many of the 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.
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, our business, financial condition and
results of operation would be adversely affected.
Relationships with Value Added Resellers
We distribute our software products through a direct sales force and a network
of value added resellers ("VARs"). A significant portion of licenses of
Made2Manage sold to new customers is sold by VARs. If some or all of the VARs
reduce their efforts to sell Made2Manage, promote competing products or
terminate their relationships with us, our business, financial condition and
results of operation would be materially and adversely affected. Furthermore,
VARs frequently develop strong relationships with their customers, so if VARs
criticize us or our products to their customers, our reputation could be
damaged, which could have a material adverse effect on our business, financial
condition or results of operations.
Additionally, we rely extensively on our European distributor, 4Front
Technologies, to sell and service the European market place. 4Front Technologies
was recently acquired by NCR Corporation. The impact of this acquisition has not
yet been determined. If 4Front Technologies is unable or unsuccessful in
promoting, selling and servicing Made2Manage our financial condition and results
of operations could be materially and adversely affected.
Product Liability and Lack of Insurance
We market, sell and support software products used by manufacturers to manage
their business operations and to store substantially all of their operational
data. Software programs as complex as those we offer may contain undetected
errors, despite testing, which are discovered only after the product has been
installed and used by customers. There can be no assurance that errors will not
be found in existing or future releases of our software or that any such errors
will not impair the market acceptance of these products. A customer could be
required to cease operations temporarily and some or all of its key operational
data could be lost or 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. We have insurance covering product
liability or damages arising from negligent acts, errors, mistakes or omissions;
however there can be no assurance that this insurance will be adequate. A claim
against us, if successful and of a sufficient magnitude, could have a material
adverse effect on our business, financial condition and results of operations.
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<PAGE>
Dependence on Proprietary Rights; Risk of Infringement
We rely primarily on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect our proprietary rights. There can be no assurance that these
protections will be adequate or that competitors will not independently develop
products incorporating technology that is substantially equivalent or superior
to our technology. 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 we have no patents or patent applications pending, and existing
copyright laws afford only limited protection. In the event that we are unable
to protect our proprietary rights, our business, financial condition and results
of operations could be materially and adversely affected.
There can be no assurance that we will not be subject to claims that our
technology infringes on the intellectual property of third parties, that we
would prevail against any such claims or that a licensing agreement will be
available on reasonable terms in the event of an unfavorable ruling on any such
claim. Any such claim, with or without merit, would likely be time consuming and
expensive to defend and could have a material adverse effect on our business,
financial condition and results of operations.
Substantial Control by Single Shareholder
As of October 31, 2000, Hambrecht & Quist ("H&Q") and its affiliates, as a
group, beneficially owned approximately 20.7% of our outstanding common stock.
As a result, H&Q and its affiliates will be able to exercise significant
influence over all matters requiring shareholder 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.
Effect of Antitakeover Provisions
Our Amended and Restated Articles of Incorporation (the "Articles") authorize
the Board of Directors to issue, without shareholder approval, up to two million
shares of preferred stock with such rights and preferences as the Board of
Directors may determine in its sole discretion. The Made2Manage Systems, Inc.
Stock Option Plan (the "Option Plan") provides that, unless the Board of
Directors or a committee of the Board of Directors decides to the contrary, all
outstanding options vest and become immediately exercisable upon a merger or
similar transaction. In addition, certain provisions of Indiana law could have
the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control. Further, certain
provisions of Indiana law impose various procedural and other requirements that
could make it more difficult for shareholders to effect certain corporate
actions. The foregoing provisions could discourage an attempt by a third party
to acquire a controlling interest without the approval of management even if
such third party were willing to purchase shares of common stock at a premium
over its then market price.
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<PAGE>
Possible Volatility of Stock Price
The trading price of our common stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new applications by us or our competitors, the
failure of earnings to meet the expectations of securities analysts and
investors, as well as other events or factors. In addition, the 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
The sale of a substantial number of shares of our common stock in the public
market could adversely affect the market price of the common stock. As of
October 31, 2000, we had 4,750,722 shares of common stock outstanding, of which
976,793 shares of common stock are "Restricted Shares," which are subject to
volume and other limitations of Rule 144 and Rule 701 restrictions under the
Securities Act. As of October 31, 2000, there were options outstanding to
purchase 2,037,253 shares of common stock at a weighted average price of $6.72
per share under the Company's stock option plans, of which options to purchase
1,020,480 shares of common stock were then vested and exercisable. We have
reserved 9,035 shares of common stock for future grant under the Option Plan. We
have 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, 2000, 41,640 shares have been issued under the Stock Purchase Plan.
We have filed registration statements registering shares of common stock issued
pursuant to the Made2Manage Systems, Inc. Stock 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.
Absence of Dividends
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We currently intend to retain earnings, if any, for the
development of our business.
Investment Risk
Despite the high credit ratings on our cash equivalents and investments, there
is no assurance such agencies will not default on their obligations which could
result in losses of principal and accrued interest.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We transact business in various foreign currencies, primarily in the United
Kingdom and Canada. We do not have any significant receivables or obligations
denominated in foreign currencies. We do not have any foreign currency swaps or
derivatives and we are not currently subject to material foreign currency
exchange risk.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the current period.
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 13, 2000
MADE2MANAGE SYSTEMS, INC.
/s/ David B. Wortman /s/ Traci M. Dolan
---------------------------------- --------------------------------------
David B. Wortman Traci M. Dolan
President, Chief Executive Officer Vice President, Finance and
and Director Administration, Chief Financial
(Principal Executive Officer) Officer, Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
Index to Exhibits
Number Assigned in
Regulation S-K Exhibit
Item 601 Number Description of Exhibit
-------- ------ ----------------------
(2) 2.0 Stock Purchase Agreement, dated August 3,
1998, among Made2Manage Systems, Inc. and the
stockholders of Bridgeware, Inc.
(Incorporated by reference to June 30, 1998
Form 10-Q.)
(3) 3.1 Amended and Restated Articles of
Incorporation of Made2Manage Systems, Inc.
(Incorporated by reference to Registration
Statement on Form S-1, Registration No.
333-38177.)
3.2 Amended and Restated Code of By-Laws of
Made2Manage Systems, Inc. (Incorporated by
reference to Registration Statement on Form
S-1, Registration No. 333-38177.)
(4) 4.1 Specimen Stock Certificate for Common Stock
(Incorporated by reference to Registration
Statement on Form S-1, Registration No.
333-38177.)
4.2 Other rights of securities holders - see
Exhibits 3.1 and 3.2.
(10) 10.12 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.)
10.18 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.)
10.27 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 Form 10-Q.)
10.28 Business Loan Agreement by and between Bank
One, Indiana, NA and Made2Manage Systems,
Inc. dated March 19, 1999 (Incorporated by
reference to March 31, 1999 Form 10-Q.)
10.29 Promissory Note by and between Bank One,
Indiana, NA and Made2Manage Systems Inc.
dated March 19, 1999 (Incorporated by
reference to March 31, 1999 Form 10-Q.)
10.30 1999 Made2Manage Systems, Inc. Employee Stock
Option Plan (Incorporated by reference to
March 31, 1999 Form 10-Q.)
10.31 Amendment to the 1999 Made2Manage Systems,
Inc. Employee Stock Option Plan (Incorporated
by reference to March 31, 2000 schedule 14-a,
appendix 1.)
10.32 First Amendment to Business Loan Agreement by
and between Bank One, Indiana, NA and
Made2Manage Systems, Inc. dated April 1, 2000
(Incorporated by reference to March 31, 2000
Form 10-Q.)
10.33 Promissory Note Modification Agreement by and
between Bank One, Indiana, NA and Made2Manage
Systems, Inc. dated April 1, 2000
(Incorporated by reference to March 31, 2000
Form 10-Q.)
(21) 21.1 List of Subsidiaries (Incorporated by
reference to December 31,1999 Form 10-K.)
(27) 27.1 Financial Data Schedule
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