UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 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 ___________________
I-MANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0524931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
537 Congress Street
5th Floor
Portland, Maine 04101-3353
(Address of principal executive offices)
(207) 774-3244
(Registrant's telephone number, including area code)
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 requirements for the past 90 days.
Yes No X
------ ------
On August 21, 2000, 31,973,679 shares of the registrant's common stock, $.0001
par value, were issued and outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. Discussions containing
forward-looking statements may be found in the information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "--Certain Factors That May Affect Future Operating Results"
as well as in the Form 10-Q generally. The Company uses words such as
"believes," "intends," "expects," "anticipates," "plans," "estimates,"
"should," "may," "will," "scheduled" and similar expressions to identify
forward-looking statements. The Company used these words to describe its
present belief about future events relating to, among other things, our
changing business model, our expected marketing plans, future hiring,
expenditures and sources of revenue. Our forward-looking statements apply
only as of the date of this Form 10-Q. The Company's actual results could
differ materially from those anticipated in the forward-looking statements
for many reasons, including the risks described above and elsewhere in the
Form 10-Q.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. The Company is under
no duty to update any of the forward-looking statements after the date of this
Form 10-Q to conform these statements to actual results or to changes in our
expectations, other than as required by law.
2
I-MANY, INC
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 and December 31, 1999.................. 4
Statements of Income for the three months and six months
ended June 30, 2000 and 1999.............................................. 5
Statements of Cash Flows for the six months ended June 30, 2000 and 1999.. 6
Notes to Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and........... 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................. 20
Item 3. Defaults upon Senior Securities........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....................... 21
Item 5. Other Information......................................................... 22
Item 6. Exhibits and Reports of Form 8-K.......................................... 22
Signatures................................................................ 22
Exhibit Index............................................................. 23
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
I-MANY, INC.
BALANCE SHEETS
(In thousands)
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 474 $ 15,322
Accounts receivable, net of allowance for doubtful
accounts of $250 4,782 4,800
Unbilled receivables 3,781 2,454
Prepaid expenses and other current assets 736 832
-------- --------
Total current assets 9,773 23,408
Property and Equipment, net 9,346 4,041
Other Assets 1,368 33
-------- --------
Total assets $ 20,487 $ 27,482
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank overdraft $ -- $ 229
Line of credit 1,569 --
Accounts payable 7,371 2,819
Accrued expenses 4,996 5,017
Current portion of deferred service revenue 4,425 4,432
Unearned product revenue 908 2,038
Current portion of capital lease obligations 52 23
-------- --------
Total current liabilities 19,321 14,558
Deferred Service Revenue, net of current portion 156 217
Capital Lease Obligations, net of current portion 119 18
Commitments and Contingencies -- --
Series C Redeemable Convertible Preferred Stock 13,002 12,492
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $.01 par value --
Authorized - 2,100,000 shares
Issued and outstanding - 2,023,550 shares at
June 30, 2000 and December 31, 1999, respectively 20 20
Series B convertible preferred stock, $.01 par value --
Authorized - 400,000 shares
Issued and outstanding - 400,000 shares at
June 30, 2000 and December 31, 1999, respectively 4 4
Common stock, $.0001 par value --
Authorized - 100,000,000 shares
Issued and outstanding - 14,121,623 and 12,283,885 shares
at June 30, 2000 and December 31, 1999, respectively 1 1
Additional paid-in capital 9,733 5,522
Deferred stock-based compensation (202) (235)
Accumulated deficit (21,667) (5,115)
-------- --------
Total stockholders' equity (deficit) (12,111) 197
-------- --------
Total liabilities, redeemable preferred stock and
stockholder's equity (deficit) $ 20,487 $ 27,482
======== ========
The accompanying notes are an integral part of these financial statements.
4
I-MANY, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net Revenues:
Products $ 2,960 $ 1,761 $ 4,506 $ 4,067
Services 4,892 2,678 10,135 4,688
-------- -------- -------- --------
Total net revenues 7,852 4,439 14,641 8,755
Cost of revenues 4,590 1,105 7,834 1,922
-------- -------- -------- --------
Gross profit 3,262 3,334 6,807 6,833
Operating expenses:
Sales and marketing 7,809 1,360 12,200 2,638
Research and development 3,541 1,681 7,253 2,930
General and administrative 1,126 827 1,958 1,745
Depreciation and amortization 1,141 177 1,592 323
-------- -------- -------- --------
Total operating expenses 13,617 4,045 23,003 7,636
-------- -------- -------- --------
Loss from operations (10,355) (711) (16,196) (803)
Other income, net 15 35 154 69
-------- -------- -------- --------
Loss before income taxes (10,340) (676) (16,042) (734)
Provision for income taxes -- 281 -- 281
-------- -------- -------- --------
Net loss (10,340) (957) (16,042) (1,015)
Accretion of dividends on redeemable convertible preferred
Stock 258 -- 510 --
-------- -------- -------- --------
Net loss applicable to common stockholders $(10,598) $ (957) $(16,552) $ (1,015)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.76) $ (0.09) $ (1.25) $ (0.09)
======== ======== ======== ========
Weighted average common shares outstanding used in
computing basis and diluted net loss per share 13,966 11,055 13,268 10,801
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
I-MANY, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
Cash Flows from Operating Activities:
Net loss $(16,042) $ (1,015)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,559 313
Deferred income taxes -- (115)
Amortization of deferred stock-based compensation 33 9
Deferred rent -- (24)
Marketing expense related to issuance of warrants 2,620 0
Changes in current assets and liabilities:
Accounts receivable 18 2
Unbilled receivables (127) (111)
Prepaid expense and other current assets (161) (6)
Prepaid income taxes 257 217
Accounts payable 4,552 404
Accrued expenses (20) 60
Deferred service revenue (68) 149
Unearned product revenue (1,130) 371
-------- --------
Net cash provided by (used in) operating activities (8,509) 256
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (6,721) (615)
(Increase) decrease in other assets (1,336) 2
-------- --------
Net cash used in investing activities (8,057) (613)
-------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of common stock warrants 150 --
Payments on capital lease obligations (13) (18)
Proceeds from line of credit 1,569 --
Proceeds from exercise of stock options 241 22
Bank overdraft (229) --
-------- --------
Net cash provided by financing activities 1,718 4
-------- --------
Net Decrease in Cash and Cash Equivalents (14,848) (353)
Cash and Cash Equivalents, beginning of period 15,322 5,129
-------- --------
Cash and Cash Equivalents, end of period $ 474 $ 4,776
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 17 $ 6
======== ========
Cash paid during the period for taxes $ 0 $ 354
Supplemental Disclosure of Noncash Activities: ====== ======
Accretion of dividends on Series C preferred stock $ 510 $ --
======== ========
Property and equipment acquired under capital leases $ 143 $ --
======== ========
Issuance of warrants to purchase common stock $ 3,820 $ --
======== ========
The accompanying notes are an integral part of these financial statements.
6
I-MANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Accordingly,
certain information and footnote disclosures required for complete financial
statements are not included herein. It is recommended that these financial
statements be read in conjunction with the financial statements and related
notes of I-Many, Inc. (the "Company") for the year ended December 31, 1999 as
reported in the Company's Registration Statement on Form S-1 (SEC File No.
333-32346). In the opinion of management, all adjustments (consisting of normal,
recurring adjustments) considered necessary for a fair presentation of financial
position, results of operations and cash flows at the dates and for the periods
presented have been included. The balance sheet presented as of December 31,
1999 has been derived from the financial statements that have been audited by
the Company's independent public accountants. The results of operations for the
three and six months ended June 30, 2000 may not be indicative of the results
that may be expected for the year ended December 31, 2000, or for any other
period.
Note 2. Net Loss Per Share
Basic net loss per share was determined by dividing the net loss
applicable to common stockholders by the weighted-average number of shares of
common stock outstanding during the period. Diluted net loss per share was the
same as basic net loss per share for all periods presented since the effect of
any potentially dilutive security was excluded, as they are anti-dilutive as a
result of the Company's net losses. The total number of common equivalent shares
excluded from the diluted loss per share calculation was 12,580,383 and
9,878,637 for the three months ended June 30, 2000 and 1999, respectively, and
12,872,231 and 10,579,339 for the six months ended June 30, 2000 and 1999,
respectively.
Note 3. Initial Public Offering
On July 13, 2000, the Company completed an initial public offering of
7,500,000 shares of common stock at a per share price of $9.00. Subsequently on
August 15, 2000, our underwriters exercised an option to purchase an additional
1,125,000 shares of common stock to cover over-allotments. Net proceeds from the
offering and subsequent option exercise were approximately $70.7 million.
Pursuant to the Company's initial public offering, all outstanding shares of
preferred stock were converted into approximately 9,170,000 shares of common
stock.
Note 4. Line of Credit
In April 2000, the Company entered into a revolving line-of-credit
agreement with Silicon Valley Bank under which the Company could borrow up to
80% of eligible accounts receivable as defined in the agreement, such financed
receivables not to exceed $3 million. Borrowings under the line-of-credit
agreement bear interest at the bank's prime rate plus 2.0% per annum and are
secured by substantially all assets of the Company. At June 30, 2000, there were
borrowings of approximately $1.6 million outstanding under this agreement. In
July 2000, a portion of the net proceeds from the Company's initial public
offering was used to pay off the amount outstanding under the revolving line of
credit.
As consideration for entering into the line-of-credit agreement, the
Company issued to the bank a warrant to purchase 11,111 shares of the Company's
common stock. The warrant, which was formalized in July 2000 pursuant to the
Company's initial public offering, is exercisable for a period of two years
following July 13, 2000 and bears an exercise price of $9.00 per share. The
Company valued the warrant at approximately $49,000, which will be amortized as
additional interest expense over the term of the line-of-credit agreement.
7
Note 5. Significant Customers
The Company had certain customers whose revenues individually
represented a significant percentage of total net revenues, as follows:
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Customer A 21% * 29% *
Customer B 17% * * *
Customer C 14% * * *
Customer D * 31% * 17%
Customer E * 13% * 11%
Customer F * * * 11%
* Denotes revenues of less than 10% of the Company's total.
Note 6. Strategic Relationship Agreement
In May 2000, the Company entered into a Strategic Relationship
Agreement (the Agreement) with the Procter & Gamble Company (P&G), pursuant to
which P&G has designated the Company for a period of at least three years as
their exclusive provider of purchase contract management software for their
commercial products group. In addition, P&G has agreed to provide the Company
with certain strategic marketing and business development services over the term
of the Agreement. P&G also entered into an agreement to license certain software
and technology from the Company.
As consideration for entering into the Agreement, the Company will pay
P&G a royalty of up to 10% of the revenue generated from the commercial products
market, as defined. In addition, the Company granted to P&G a fully exercisable
warrant to purchase 875,000 shares of the Company's common stock. The warrant is
exercisable for a period of two years and the exercise price of the warrant is
$9.00 (the price per share to the public in the Company's initial public
offering). In addition, the Company agreed to grant P&G warrants to purchase up
to an additional 125,000 shares of common stock, exercisable at the then current
fair market value per share, upon the achievement of milestones set forth in the
Agreement, as defined.
Using the Black-Scholes option pricing model and based upon an exercise
price of $9.00 per share and a volatility factor of 85%, the Company has
calculated the fair value of the fully exercisable warrant to purchase 875,000
shares of common stock as approximately $3,820,000. In accordance with Emerging
Issues Task Force Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING,
GOODS OR SERVICES, this amount was recorded by the Company in May of 2000 as,
first, a reduction of the revenue derived from the license agreement with P&G,
and, second, a component of sales and marketing expense. The Company will
calculate and record the fair value of the warrants to purchase up to an
additional 125,000 shares of common stock as P&G provides the services set forth
in the Agreement.
Note 7. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not expect SFAS
No. 133 to have a material impact on its financial statements.
8
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB
OPINION NO. 25. The Interpretation clarifies the application of APB No. 25 in
certain situations, as defined. The interpretation is effective July 1, 2000,
but covers certain events occurring during the period after December 15, 1998,
but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 15, 1998, but before the
effective date, the effects of applying this Interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final Interpretation, (a) no adjustments would be made to the
financial statements for periods before the effective date, and (b) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. The Company expects that the
adoption of this interpretation would not have any effect on its financial
statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and related
notes. In addition to historical information, the following discussion and other
parts of this report contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
by such forward-looking statements due to various factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this report.
OVERVIEW
We provide software and Internet-based solutions and related
professional services that allow our clients to negotiate and manage complex
purchasing arrangements which facilitate business-to-business e-commerce. In
February 2000, we launched our proprietary Internet portal, I-many.com, which is
a website created and owned exclusively by us, which we expect will serve as a
marketplace for trading partners in the healthcare industry. Our historical
financial statements include minimal revenues from our I-many.com service
offering and from our efforts to license our Internet technology to operators of
websites. Prior to February 2000, our business model was focused principally
upon licensing software products and providing related services to entities
which maintain and manage the data necessary for contract management within
their own information systems. Our Contract Administration and Reporting System,
or CARS, software suite is used by 8 of the largest 10 and 15 of the largest 20
pharmaceutical manufacturers ranked according to annual revenues.
We have generated revenues from both products and services.
Historically, product revenues have been principally comprised of software
license fees generated from our CARS software suite, which accounted for 46.5%
of net revenues in the six months ended June 30, 1999 and 30.8% of net revenues
for the six months ended June 30, 2000. Service revenues include maintenance and
support fees directly related to our CARS software suite and professional
service fees derived from consulting, installation, business analysis and
training services related to our software products. Service revenues accounted
for 53.5% of net revenues in the six months ended June 30, 1999 and 69.2% of net
revenues for the six months ended June 30, 2000.
Historically, software license agreements have been for a three-year
period. We recognize software license fees upon execution of a signed license
agreement and delivery of the software, provided that there are no significant
post-delivery obligations, the payment is fixed or determinable and collection
is probable. We provide an allowance for sales returns at the time of revenue
recognition based on historical experience. To date, such returns have not been
significant.
We recognize revenue for professional services as the services are
performed for time and materials contracts and we use the
percentage-of-completion method for fixed fee contracts. However, if customer
acceptance is required, we recognize revenue for professional services upon
client acceptance. We recognize training revenues as the services are provided.
We recognize maintenance and client support fees ratably over the term of the
maintenance contract on a straight-line basis. When maintenance and support is
included in the total license fee, we allocate a portion of the total fee to
maintenance and support based upon the price paid by the client to purchase
maintenance and support in the second year.
In the latter part of 1999, we started offering our clients an
enterprise agreement that includes the software license, maintenance and support
and a fixed number of days of professional services. Clients opting for this
enterprise agreement will enter into a three-year, fixed-fee, all-inclusive
agreement payable in three equal annual installments commencing upon the
execution of the agreement. Due to the extended payment terms, we recognize the
software license and maintenance components ratably over the term of the
enterprise agreement and recognize the professional service component as the
related services are performed, provided that the aggregate revenue recognized
under the enterprise agreement does not exceed the total cash received. During
the year ended December 31, 1999, we entered into two enterprise agreements
totaling $2.9 million. Of that amount, we recognized $200,000 in net revenues
during 1999 and
10
$559,000 in the six months ended June 30, 2000. We have not
entered into any new enterprise agreements during the first six months of 2000.
Our business model for our Internet initiatives contemplates that we
will generate future revenues in the following ways:
o administrative fees for establishing contracts through the portal, based on
a percentage of the revenue derived by the manufacturer from sales of its
products pursuant to these contracts;
o subscription fees paid by manufacturers, intermediaries and distributors
for access to our software and the contract data which will be hosted on
our servers; and
o license fees for our Internet technology infrastructure paid by operators
of websites;
We cannot assure you that we will be successful in generating revenues using
this business model.
Our operating expenses have increased significantly since 1996, from
$2.3 million for the 12 months ended December 31, 1996 to $13.6 million for the
six months ended June 30, 2000. These increases are primarily due to additions
to our staff, as we have expanded all aspects of our operations. As a result of
our expansion, we have grown from 46 employees as of December 31, 1996 to 271
employees at June 30, 2000.
After being profitable in both 1997 and 1998, we increased our spending
significantly during 1999 and 2000, principally for sales and marketing and
development expenses related to the development of our Imany.com portal. We
intend to continue to invest heavily in sales, marketing, research and
development, and, to a lesser extent, support infrastructure. We therefore
expect to continue to incur substantial operating losses for the foreseeable
future.
Our limited history and recent introduction of our Internet initiatives
make the prediction of future operating results very difficult. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies in new and rapidly evolving markets. We may not be successful in
addressing such risks and difficulties, and our failure to do to could seriously
harm our business.
RECENT EVENTS
On May 1, 2000, in connection with the establishment of a Strategic
Relationship Agreement with The Procter & Gamble Company (P&G), we issued a
fully-exercisable warrant to purchase up to 875,000 shares of our common stock
at an exercise price of $9.00 per share. This warrant is exercisable for a two
year period. During the second quarter of 2000, we recognized a non-cash expense
of $2.6 million for the warrant, equal to the value of the warrant, calculated
using the Black-Scholes option pricing model, less the amount to be billed to
P&G under the Agreement. In addition, we agreed to grant P&G an additional
warrant to purchase up to an additional 125,000 shares of common stock upon the
achievement of milestones set forth in the Agreement. This additional warrant,
if granted, will expire two years after issuance and will be exercisable at the
fair market value per share of our common stock at date of grant.
On July 13, 2000, the Company completed an initial public offering of
7,500,000 shares of common stock at a per share price of $9.00. Subsequently on
August 15, 2000, our underwriters exercised an option to purchase an additional
1,125,000 shares of common stock to cover over-allotments. Net proceeds from the
offering and subsequent option exercise were approximately $70.7 million.
Pursuant to the Company's initial public offering, all outstanding shares of
preferred stock were converted into approximately 9,170,000 shares of common
stock.
11
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
NET REVENUES
Net revenues increased by $3.4 million, or 77%, to $7.8 million for the
quarter ended June 30, 2000 from $4.4 million for the quarter ended June 30,
1999. Product revenues increased by $1.2 million, or 68%, to $3.0 million for
the quarter ended June 30, 2000, from $1.8 million for the quarter ended June
30, 1999. This increase is attributable to increases in both the number of
software licenses sold and the average size of the licenses. As a percentage of
total revenues, product revenues decreased to 37.7% for the quarter ended June
30, 2000, from 39.7% for the quarter ended June 30, 1999. This decrease in
product revenues as a percentage of total revenues is attributable to the
expansion of our professional services business. Service revenues increased by
$2.2 million, or 83%, to $4.9 million for the quarter ended June 30, 2000, from
$2.7 million for the quarter ended June 30, 1999. As a percentage of total
revenues, service revenues increased to 62.3% for the quarter ended June 30,
2000, from 60.3% for the quarter ended June 30, 1999. This increase in service
revenues both in dollars and as a percentage of total revenues is attributable
to an increase in the number of employees in our professional services group in
response to the growing demand on the part of our clients for more services
related to our CARS software suite.
COST OF REVENUES
Cost of revenues consists primarily of payroll and related costs and
subcontractor costs for providing professional services and maintenance and
support services, and to a lesser extent to amounts due to third parties for
integrated technology. Historically, cost of product revenues has not been a
significant component of total cost of revenues. Cost of revenues increased by
$3.5 million, or 315%, to $4.6 million for the quarter ended June 30, 2000, from
$1.1 million for the quarter ended June 30, 1999. This increase is due primarily
to the increased number of employees in our professional services group, which
grew from 31 in the second quarter of 1999 to 83 in the second quarter of 2000,
as well as increased costs related to subcontractor consultants working on our
professional service engagements, which increased from $472,000 in the second
quarter of 1999 to $2.2 million in the second quarter of 2000. As a percentage
of net revenues, cost of revenues increased to 58.5% for the quarter ended June
30, 2000, from 24.9% for the quarter ended June 30, 1999. This increase in cost
of revenues as a percentage of net revenues is attributable to the increased
level of service revenues, which typically generate lower margins than product
revenues, and an increase in the personnel, both internal and subcontracted,
within our professional services organization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
payroll and related benefits for sales and marketing personnel, commissions for
sales personnel, travel costs, recruiting fees, expenses for trade shows and
advertising and public relations expenses. In May 2000, we recognized a
one-time, non-cash marketing expense of $2.6 million related to the value
associated with the granting of a common stock warrant to Procter and Gamble.
Our sales and marketing expense, including the warrant charge, increased 474% to
$7.8 million in the three months ended June 30, 2000 from $1.4 million in the
three months ended June 30, 1999. Excluding the warrant charge, sales and
marketing expenses increased by $3.8 million, or 281%, to $5.2 million for the
second quarter of 2000. As a percentage of net revenues, sales and marketing
expense, excluding the warrant charge, increased to 66.1% for the quarter ended
June 30, 2000, from 30.6% for the quarter ended June 30, 1999. This increase in
sales and marketing expense both in dollars and as a percentage of net revenues
is primarily the result of advertising, marketing and promotional materials
related to our Internet portal, an increase in salaries and related costs
because of an increase in the number of sales and marketing personnel, and
increased participation at trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of payroll and related costs for development personnel and external
consulting costs associated with the development of our products and services.
Research and development costs, including the costs of developing computer
software, are charged to operations as they are incurred. Software development
costs incurred to build I-many.com, our Internet portal, are accounted for in
accordance with Statement of
12
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Under this Statement of Position, costs incurred
during the preliminary project stage are expensed as incurred, and costs
incurred during the application development stage are capitalized. In the second
quarter of 2000, we incurred $2.7 million of direct costs for the continued
development of our Internet portal, of which $1.3 million was capitalized and
$1.4 million was expensed. No such costs were incurred in the quarter ended June
30, 1999. Excluding costs related to our Internet portal, research and
development expenses increased by $500,000, or 30%, to $2.2 million for the
quarter ended June 30, 2000, from $1.7 million for the quarter ended June 30,
1999. As a percentage of net revenues, research and development expenses
increased to 45.1% for the second quarter of 2000 from 37.9% for the second
quarter of 1999. This increase in both dollars and as a percentage of net
revenues is primarily due to external consulting costs incurred to build our
Internet portal and an increase in salary costs related to an increase in the
number of research and development personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for personnel in our administrative,
finance and human resources departments, and legal, accounting and other
professional service fees. General and administrative expenses increased by
$299,000, or 36%, to $1.1 million for the second quarter of 2000 from $827,000
for the second quarter of 1999. As a percentage of net revenues, general and
administrative expenses decreased to 14.3% for the quarter ended June 30, 2000,
from 18.6% for the quarter ended June 30, 1999. The increase in general and
administrative expenses in dollars is primarily attributable to an increase in
the number of administrative, finance and human resources employees, and to
higher professional fees. We expect general and administrative costs to increase
in absolute dollars as we continue to expand our infrastructure and incur costs
as a public company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $964,000, or 545%, from $177,000 in the second quarter of 1999 to
$1.1 million in the second quarter of 2000. This increase is a result of
significant additions of computer hardware and software for our Internet portal
and for our increased personnel, and amortization of capitalized website
development costs associated with the development of I-many.com. In the quarter
ended June 30, 2000, the amortization expense related to capitalized software
development costs amounted to $728,000. There was no amortization of capitalized
software development costs in the quarter ended June 30, 1999.
OTHER INCOME, NET. Other income, net decreased by $20,000, or 57%, from
$35,000 in the quarter ended June 30, 1999, to $15,000 in the quarter ended June
30, 2000. This decrease is the result of interest earned on lower average cash
balances.
PROVISION FOR INCOME TAXES. We have incurred operating losses for all
quarters in 1999 and 2000 and have consequently recorded a valuation allowance
for the full amount of our net deferred tax asset, as the future realization of
the tax benefit is uncertain. No provision for income taxes has been recorded in
the quarter ended June 30, 2000. The tax provision of $281,000 in the quarter
ended June 30, 1999 represents the reversal of a deferred tax asset previously
recorded in 1998.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
NET REVENUES
Net revenues increased by $5.9 million, or 67%, to $14.6 million for
the six months ended June 30, 2000 from $8.7 million for the six months ended
June 30, 1999. Product revenues increased by $439,000, or 11%, to $4.5 million
for the six months ended June 30, 2000 from $4.1 million for the six months
ended June 30, 1999. This increase is attributable to an increase in the average
size of licenses sold, partially offset by a decrease in the number of software
licenses sold, in the six months ended June 30, 2000 as compared to the six
months ended June 30, 1999. As a percentage of net revenues, product revenues
decreased to 30.8% for the six months ended June 30, 2000 from 46.5% for the six
months ended June 30, 1999.
Service revenues increased by $5.4 million, or 116%, to $10.1 million
for the six months ended June 30, 2000 from $4.7 million for the six months
ended June 30, 1999. As a percentage of net revenues, service revenues increased
to 69.2% for the six months ended June 30, 2000 from 53.5% for the six months
13
ended June 30, 1999. This increase in service revenues both in dollars and as a
percentage of net revenues is attributable to the increase in software licenses
for which maintenance and support fees are being earned, and to an overall
increase in professional services, including implementation and training.
COST OF REVENUES
Cost of revenues increased by $5.9 million, or 308%, to $7.8 million
for the six months ended June 30, 2000 from $1.9 million for the six months
ended June 30, 1999. This increase is due to the increased number of employees
in our professional services group, as well as increased costs related to
subcontractor consultants working on our professional service engagements, which
increased from $495,000 in the six months ended June 30, 1999 to $3.3 million in
the six months ended June 30, 2000. As a percentage of net revenues, cost of
revenues increased to 53.5% for the six months ended June 30, 2000 from 22.0%
for the six months ended June 30, 1999. This increase in cost of revenues as a
percentage of net revenues is attributable to the increased level of service
revenues, which typically generate lower margins than product revenues, and an
increase in the personnel, both internal and subcontracted, within our
professional services organization.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by $9.6
million, or 362%, to $12.2 million for the six months ended June 30, 2000, from
$2.6 million for the six months ended June 30, 1999. Excluding the one-time
non-cash charge related to the warrant granted to Procter & Gamble, sales and
marketing expenses increased by $7.0 million, or 263%, to $9.6 million for the
six months ended June 30, 2000 from $2.6 million for the six months ended June
30, 1999. As a percentage of net revenues, sales and marketing expenses,
excluding the warrant charge, increased to 65.4% for the six months ended June
30, 2000 from 30.1% for the six months ended June 30, 1999. This increase in
sales and marketing expense both in dollars and as a percentage of net revenues
is primarily the result of advertising, marketing and promotional materials
related to our Internet portal, an increase in salaries and related costs
because of an increase in the number of sales and marketing personnel, and
increased participation at trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by $4.3 million, or 148%, to $7.2 million for the six months ended June 30, 2000
from $2.9 million for the six months ended June 30, 1999. This increase is
primarily due to an increase in research and development personnel and
associated recruiting and training costs incurred to develop new software
products within the CARS software suite. Additionally, subcontractor costs
associated with the development of the I-many.com Internet portal amounted to
$7.8 million for the six months ended June 30, 2000, of which $3.3 million was
expensed. No such costs were incurred for the six months ended June 30, 1999. As
a percentage of net revenues, research and development expenses increased to
49.5% for the six months ended June 30, 2000 from 33.5% for the six months ended
June 30, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $213,000, or 12%, to $2.0 million for the six months ended June 30,
2000 from $1.7 million for the six months ended June 30, 1999. As a percentage
of net revenues, general and administrative expenses decreased to 13.4% for the
six months ended June 30, 2000 from 19.9% for the six months ended June 30,
1999. The increase in general and administrative expenses in dollars is
primarily related to the addition of administrative, finance and human resources
employees to support our increased sales, marketing and development activities,
recruiting fees and also to increased costs associated with legal and accounting
professional fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.3 million, or 393%, to $1.6 million for the six months ended
June 30, 2000 from $323,000 for the six months ended June 30, 1999. This
increase is a result of additions of computer hardware and computer software
related to our increased personnel as well as the amortization of capitalized
website costs associated with the development of I-many.com. In the six months
ended June 30, 2000, the amortization expense related to capitalized software
development costs amounted to $935,000. There was no amortization of capitalized
software development costs in the six months ended June 30, 1999.
14
OTHER INCOME, NET. Other income, net increased by $85,000 to $154,000
for the six months ended June 30, 2000 from $69,000 for the six months ended
June 30, 1999. This increase is primarily the result an increase in interest
income from higher cash balances in the six months ended June 30, 2000.
PROVISION FOR INCOME TAXES. We have incurred operating losses for all
quarters in 1999 and 2000 and have consequently recorded a valuation allowance
for the full amount of our net deferred tax asset, as the future realization of
the tax benefit is uncertain. No provision for income taxes has been recorded in
the six months ended June 30, 2000. The tax provision of $281,000 in the six
months ended June 30, 1999 represents the reversal of a deferred tax asset
previously recorded in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On July 13, 2000, we completed our initial public offering and issued
7,500,000 shares of our common stock at an initial public offering price of
$9.00 per share. On August 15, 2000 our underwriters exercised a 30-day option
to purchase an additional 1,125,000 shares of common stock to cover
over-allotments. Net cash proceeds to us from the initial public offering and
subsequent option exercise were approximately $70.7 million. From inception
until our initial public offering, our capital and liquidity needs have been
met, in large part, with the net proceeds from the private placement of debt and
equity securities, cash flows generated from operations and through equipment
lease financings.
At June 30, 2000, we had cash and cash equivalents of $474,000 and a
working capital deficit of $9.5 million. On June 30, 2000, we had no long-term
debt, other than obligations under capital lease financings. In April 2000, we
entered into a $3.0 million revolving line-of-credit agreement with Silicon
Valley Bank under which we could borrow up to 80% of eligible accounts
receivable, as defined in the agreement, bearing interest at the bank's prime
rate (9.25% at June 30, 2000) plus 2.0%. As of June 30, 2000, outstanding
borrowings under this line amounted to $1.6 million. A portion of the proceeds
from the initial public offering was used to pay off this line in July 2000.
Net cash used in operating activities for the six months ended June 30,
2000 was $8.5 million, as compared to net cash provided by operating activities
of $257,000 in the six months ended June 30, 1999. For the six months ended June
30, 2000, our net loss of $16.0 million, as adjusted for depreciation and
amortization of $1.6 million and the $2.6 million non-cash charge related to the
issuance of warrants to Procter & Gamble, was partially offset by an increase in
accounts payable of $4.6 million.
Net cash used in investing activities was $8.1 million for the six
months ended June 30, 2000 and $600,000 for the six months ended June 30, 1999.
Net cash used in investing activities for the six months ended June 30, 2000
primarily reflects purchases of property and equipment, including approximately
$4.6 million of capitalized software development costs incurred related to the
building of I-many.com, our proprietary Internet portal. The net cash used in
investing activities for the six months ended June 30, 2000 also included $1.3
million of increases in deferred financing costs related to our initial public
offering.
Net cash provided by financing activities was $1.7 million for the six
months ended June 30, 2000, primarily from borrowings against our line of
credit, and to a lesser extent, exercises of warrants and stock options. This
was partially offset by paying down a bank overdraft. Net cash provided by
financing activities was $4,000 for the six months ended June 30, 1999.
We currently anticipate that the total net proceeds of our public
offering of July 13, 2000 and the subsequent exercise of the over-allotment
option of $70.7 million, together with our available funds, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. Our future long-term capital
needs will depend significantly on the rate of growth of our business, the
timing of expanded product and service offerings and the success of these
offerings once they are launched. Any projections of future long-term cash
needs and cash flows are subject to substantial uncertainty. If the net
proceeds of our public offering, together with our available funds and cash
generated from operations, are insufficient to satisfy our long term
liquidity needs, we may seek to sell additional equity or debt securities to
raise funds, and those securities may have rights, preferences or privileges
senior to those of the rights of our common stock. In connection with such a
sale of stock, our stockholders may experience dilution. In addition, we
cannot be certain that additional financing will be available to us on
favorable terms when required, or at all.
15
IMPACT OF YEAR 2000
As of the date of this filing, we have not incurred any significant
business disruptions as a result of year 2000 issues. However, while no such
occurrence has developed, year 2000 issues may arise related to key suppliers,
clients, service providers and information systems that have not become readily
apparent. As a result, we will continue to monitor our year 2000 compliance and
the year 2000 compliance of our suppliers and customers. We do not expect to
incur any material costs in the future in connection with year 2000 computer
issues. However, we can provide no assurance that we will not be adversely
affected by the non-compliance of our suppliers, clients, service providers and
information systems in the future.
CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
In addition to other information in this Form 10-Q, the following
factors that may affect our future operating results should be carefully
considered in evaluating I-many and its business because such factors currently
may have a significant impact on I-many's business, operating results and
financial condition. As a result of the risk factors set forth below and
elsewhere in this Form 10-Q, and the risks discussed in I-many's other
Securities and Exchange Commission filings, actual results could differ
materially from those projected in any forward looking statements.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES IN THE
FORESEEABLE FUTURE
We incurred net losses of approximately $5.2 million in the year ended
December 31, 1999 and $16.6 million in the six months ended June 30, 2000 and we
had an accumulated deficit at June 30, 2000 of $21.7 million. We expect to
continue spending significantly, principally for sales, marketing and
development expenses, and therefore expect to continue to incur significant
losses for the foreseeable future. Although we have been profitable in certain
prior years, and although our revenues have grown, our business model is
evolving and we cannot assure you that we will achieve sufficient revenues to
become profitable in the future. If our revenue grows more slowly than we
anticipate or if our operating expenses either increase more than we expect or
cannot be reduced in light of lower than expected revenue, we may not be
profitable.
OUR INTERNET INITIATIVES REPRESENT A NEW BUSINESS MODEL FOR US AND WE CANNOT BE
CERTAIN THAT OUR CLIENTS WILL PAY FOR OUR PRODUCTS AND SERVICES IN THE MANNER WE
ARE ANTICIPATING
We launched our Internet portal and began to market our Internet
technology in February 2000. Until that time, our business model was focused
principally upon the licensing of software products for a one-time license fee
and providing related services to entities which maintain and manage the data
necessary for contract management within their own information systems. Our
Internet initiatives represent an extension of the existing business model for
both us and our clients and we cannot be certain that our clients will accept
our business model and the manner in which we expect to charge for our products
and services. In addition, our recent focus on our Internet portal has required,
and will continue to require, a significant commitment of resources, including
the attention of management and significant cash expenditures. If we cannot
generate revenue on the basis we anticipate, we may not be profitable.
IT IS DIFFICULT FOR US TO PREDICT WHEN OR IF SALES WILL OCCUR AND WE OFTEN INCUR
SIGNIFICANT SELLING EXPENSES IN ADVANCE OF OUR RECOGNITION OF THE RELATED
REVENUE
Our clients view the purchase of our software applications and related
professional services as a significant and strategic decision. As a result,
clients carefully evaluate our software products and services. The length of
this evaluation process is affected by factors such as the client's need to
rapidly implement a solution and whether the client is new or is extending an
existing implementation. The license of our software products may also be
subject to delays if the client has lengthy internal budgeting, approval and
evaluation processes which are quite common in the context of introducing large
enterprise-wide tools. We may incur significant selling and marketing expenses
during a client's evaluation period, including the
16
costs of developing a full proposal and completing a rapid proof of concept or
custom demonstration, before the client places an order with us. Clients may
also initially purchase a limited number of licenses before expanding their
implementations. Larger clients may purchase our software products as part of
multiple simultaneous purchasing decisions, which may result in additional
unplanned administrative processing and other delays in the recognition of our
license revenues. If revenues forecasted from a significant client for a
particular quarter are not realized or are delayed, we may experience an
unplanned shortfall in revenues during that quarter. This may cause our
operating results to be below the expectations of public market analysts or
investors, which could cause the value of our common stock to decline.
WE HAVE TWO MANAGEMENT LOCATIONS AND AS WE CONTINUE TO GROW WE MAY EXPERIENCE
DIFFICULTIES IN OPERATING FROM THESE TWO FACILITIES
Certain members of our management team are based at our corporate
headquarters located in Portland, Maine, and other members of our management
team are based at our sales office in Edison, New Jersey. As we grow, the
geographic distance between these offices could make it more difficult for our
management and other employees to effectively communicate with each other and,
as a result, could place a significant strain on our managerial, operational and
financial resources. Our total revenue increased from $7.5 million in the year
ended December 31, 1997 to $14.6 million in the six months ended June 30, 2000,
and the number of our employees increased from 67 as of December 31, 1997 to 271
as of June 30, 2000. To accommodate this growth, we must implement new or
upgraded operating and financial systems, procedures and controls. We may not
succeed in these efforts. Our failure to expand and integrate these systems in
an efficient manner could prevent us from successfully implementing our business
model. If we continue to grow, we will need to recruit, train and retain a
significant number of employees, particularly employees with technical,
marketing and sales backgrounds. Because these individuals are in high demand,
we may not be able to attract the staff we need to accommodate our expansion.
WE ARE HIGHLY DEPENDENT UPON THE HEALTHCARE INDUSTRY AND FACTORS WHICH ADVERSELY
AFFECT THAT MARKET COULD ALSO ADVERSELY AFFECT US
Substantially all of our revenue to date has come from pharmaceutical
companies and a limited number of other clients in the healthcare industry, and
our future growth depends, in large part, upon increased sales to the healthcare
market. As a result, demand for our solutions could be affected by any factors
which could adversely affect the demand for healthcare products which are
purchased and sold pursuant to contracts managed through our solutions. The
financial condition of our clients and their willingness to pay for our
solutions are affected by factors which may impact the purchase and sale of
healthcare products, including competitive pressures, decreasing operating
margins within the industry, currency fluctuations, active geographic expansion
and government regulation. The healthcare market is undergoing intense
consolidation. We cannot assure you that we will not experience declines in
revenue caused by mergers or consolidations among our clients and potential
clients.
OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET HAVE NOT YET
RESULTED IN SIGNIFICANT REVENUE, AND WE CANNOT BE SURE THAT OUR INITIATIVES IN
THESE OTHER MARKETS WILL BE SUCCESSFUL
As part of our growth strategy, we have begun initiatives to sell our
products and services in markets other than the healthcare market, including the
food and beverage, commercial products, building products, electronics,
agricultural/chemical, retail and other industries. While we believe that the
contractual purchase relationships between manufacturers and customers in these
markets have similar attributes to those in the healthcare markets, we cannot
assure you that our assumptions are correct or that we will be successful in
adapting our technology to these other markets. Although we have recently
entered into a strategic relationship with Procter & Gamble, we do not yet know
how rapidly or successfully our purchase contract management software solutions
will be implemented in the commercial products industry. In connection with our
efforts in other industries, it will be necessary for us to hire additional
personnel with expertise in these other markets.
OUR BUSINESS MODEL INCLUDES HOSTING OUR SOFTWARE APPLICATIONS ON BEHALF OF OUR
CLIENTS AND MAINTAINING THEIR CRITICAL SALES DATA, AND IF OUR SYSTEMS FAIL OR
THE DATA IS LOST OR CORRUPTED, OUR CLIENTS MAY LOSE CONFIDENCE IN US
17
We offer to host our software products on our computers or on computers
hosted on our behalf for access by our clients and we offer to maintain certain
of our clients' critical sales data on our computers or on computers hosted on
our behalf. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins, human error, computer viruses, intentional acts of vandalism and
similar events could damage these systems and result in loss of customer data or
a loss in the ability of our clients to access the software we are hosting for
their use. Our clients would lose confidence in us and could stop doing business
with us if our systems were affected by any of these occurrences or if any
client data were lost. Our insurance policies may not adequately compensate us
for any losses that may occur due to any failures or interruptions in our
systems or loss of data.
THE POLITICAL, ECONOMIC OR REGULATORY HEALTHCARE ENVIRONMENT REGARDING THE
PURCHASING PRACTICES AND OPERATION OF HEALTHCARE ORGANIZATIONS COULD AFFECT THE
DEMAND FOR OUR SOLUTIONS OR OUR BUSINESS MODEL
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Factors such as changes in
reimbursement policies for healthcare expenses and general economic conditions
affect the purchasing practices and operations of healthcare organizations.
Changes in regulations or the issuance of interpretations affecting the
healthcare industry, such as any increased regulation of the purchase and sale
of our clients' products, could require us to make unplanned enhancements of our
solutions, or result in delays or cancellations of orders or reduced demand for
our solutions or affect our ability to adopt our pricing model or otherwise
implement our business strategy. The federal and state governments have
periodically considered and adopted programs to reform or amend the U.S.
healthcare system at both the federal and state level. These programs have
included laws and regulations which prohibit payments for arranging for sales of
government-reimbursed drugs and provisions to increase governmental involvement
in healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry providers operate. Although we have received legal
advice regarding the pricing of our solutions with respect to these laws,
regulations and provisions, and believe we are operating consistently with that
advice, we would experience a decrease in our anticipated revenues if we are
required to modify our pricing model, or if our clients express a reluctance to
pay us in accordance with a given business model without more legal certainty
than we are able to give them.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING NEW TECHNOLOGIES OR BUSINESSES WHICH COULD
HINDER OUR EXPANSION EFFORTS
We intend in the future to consider acquisitions of or investments in
complementary businesses, products, services or technologies. We cannot assure
you that we will be able to identify appropriate acquisition or investment
candidates. Even if we do identify suitable candidates, we cannot assure you
that we will be able to make such acquisitions or investments on commercially
acceptable terms. Furthermore, we may incur debt or issue equity securities to
pay for any future acquisitions. The issuance of equity securities could be
dilutive to our existing stockholders.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, WE MAY HAVE DIFFICULTY
INTEGRATING THOSE NEW TECHNOLOGIES OR BUSINESSES
Any company that we acquire is likely to be distant from our
headquarters in Portland, Maine and will have a culture different from ours as
well as technologies, products and services that our employees will need to
understand and integrate with our own. We will have to assimilate those
employees, technologies and products and that effort is difficult,
time-consuming and may be unsuccessful. If we are not successful, our investment
in the acquired entity may be lost, and even if we are successful, the process
of integrating an acquired entity may divert our attention from our core
business.
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OPERATING RESULTS IF OUR REVENUES
ARE BELOW EXPECTATIONS WHICH COULD RESULT IN A DECLINE OF OUR STOCK PRICE
A significant percentage of our expenses, particularly personnel costs
and rent, are fixed costs and are based in part on expectations of future
revenues. We may be unable to reduce spending in a timely
18
manner to compensate for any significant fluctuations in revenues. Accordingly,
shortfalls in revenues may cause significant variations in operating results in
any quarter. If our quarterly results do not meet the expectations of market
analysts or investors, our stock price is likely to decline.
WE HAVE MANY COMPETITORS AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY
The market for our products and services is competitive and subject to
rapid change. We encounter significant competition for the sale of our contract
management software from the internal information systems departments of
existing and potential clients, software companies that target the contract
management markets, professional services organizations and Internet-based
merchants offering healthcare products through online catalogs. In addition, we
encounter competition for our contracting portal from other Internet-based
exchanges, including exchanges established by manufacturers of healthcare
products. Our competitors vary in size and in the scope and breadth of products
and services offered. We anticipate increased competition for market share and
pressure to reduce prices and make sales concessions, which could materially and
adversely affect our revenues and margins.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Such competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees and strategic partners. We cannot assure you that our
competitors will not develop products or services that are equal or superior to
our solutions or that achieve greater market acceptance than our solutions. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. We cannot
assure you that we will be able to compete successfully or that competitive
pressures will not require us to make concessions that will adversely affect our
revenues and our margins, or reduce the demand for our products and services.
WE RELY SIGNIFICANTLY UPON CERTAIN KEY INDIVIDUALS AND OUR BUSINESS WILL SUFFER
IF WE ARE UNABLE TO RETAIN THEM
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of A.
Leigh Powell, our Chief Executive Officer, and other key employees. The loss of
the services of any key employee could have a material adverse effect on our
business, financial condition and results of operations.
CONCENTRATION OF OWNERSHIP MAY GIVE SOME STOCKHOLDERS SUBSTANTIAL INFLUENCE AND
MAY PREVENT OR DELAY A CHANGE IN CONTROL WHICH COULD DEPRESS THE PRICE OF OUR
STOCK
After taking into account our recent initial public offering, executive
officers, directors and their affiliates, in the aggregate, own approximately
42% of our outstanding common stock. As a result, these stockholders will be
able to influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
delay, deter or prevent a change in control of I-many and may make some
transactions more difficult or even impossible without the support of these
stockholders and could depress the price of our common stock.
OUR CHARTER AND BYLAWS COULD DISCOURAGE ACQUISITION PROPOSALS, DELAY A CHANGE IN
CONTROL OR PREVENT TRANSACTIONS THAT ARE IN YOUR BEST INTERESTS
Our certificate of incorporation and bylaws state that any action that
can be taken by stockholders must be done at an annual or special meeting and
may not be done by written consent, and require reasonable advance notice of a
stockholder proposal or director nomination. Furthermore, the chairman of the
board, the president, the board of directors and the holders of at least 30% of
the shares of our capital stock are the only people who may call a special
meeting. The amended and restated certificate of incorporation and amended and
restated bylaws also provide that members of the board of directors may
19
only be removed by the vote of the holders of a majority of the shares entitled
to vote for that director. In addition, the board of directors has the
authority, without further action by the stockholders, to fix the rights and
preferences of and issue 5,000,000 shares of preferred stock. These provisions
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control of management, including transactions in which you might
otherwise receive a premium for your shares. In addition, these provisions may
limit your ability to approve other transactions that you find to be in your
best interests.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
The market price of our common stock is likely to be highly volatile
and may fluctuate substantially. As a result, investors in our common stock may
experience a decrease in the value of their shares regardless of our operating
performance or prospects. In addition, the stock market has, from time to time,
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation was often brought against that company. Many
technology-related companies have been subject to this type of litigation. We
may also become involved in this type of litigation. Litigation is often
expensive and diverts management's attention and resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The primary
objective of the Company's investment activities is to preserve principal while
maximizing yields without assuming significant risk. This is accomplished by
investing in widely diversified investments, consisting primarily of short-term,
investment-grade securities. Due to the nature of our investments, we believe
there is no material risk exposure.
As of June 30, 2000, the Company's investment portfolio was immaterial,
most of its $474,000 balance in cash and cash equivalents consisting of amounts
in non-interest bearing checking accounts.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Modification of Constituent Instruments
None
(b) Change in Rights
None
(c) Changes in Securities
On May 1, 2000, the Company issued a fully-exercisable warrant to
purchase up to 875,000 shares of our common stock in connection with the
establishment of a Strategic Relationship Agreement with The Procter & Gamble
Company (P&G). The warrant is exercisable for a period of two years and the
exercise price is $9.00 per share. In addition, the Company agreed to grant P&G
a warrant to purchase up to an additional 125,000 shares of common stock upon
the achievement of milestones set forth in the Agreement.
20
This warrant, if granted, will expire two years after issuance and will be
exercisable at the fair market value per share of our common stock at date of
grant. This warrant was issued pursuant to an exemption by reason of
Section 4(2) under the Securities Act of 1933.
During the quarter ended June 30, 2000, the Company issued an aggregate
of 126,088 shares of its common stock upon the exercise of outstanding options
to purchase common stock. Those shares were issued pursuant to an exemption by
reason of Rule 701 under the Securities Act of 1933.
On March 5, 2000, the Board of Directors authorized a 2.5-for-one stock
split of our common stock, to be effected in the form of a stock dividend. The
stock split was effected on July 11, 2000 by distribution to each stockholder of
record of 1.5 shares of common stock for each share of common stock held.
All of the above amounts in this Item 2(c) give effect to the
aforementioned 2.5-for-one stock split.
(d) Use of Proceeds
On July 13, 2000, the Company completed the initial public offering of
its common stock. The managing underwriters in the offering were FleetBoston
Robertson Stephens Inc., J.P. Morgan Securities Inc., and SG Cowen Securities
Corporation. The shares of the common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (No. 333-32346). The Securities and Exchange Commission declared the
Registration Statement effective July 12, 2000.
The offering commenced on July 12, 2000 and terminated on July 13,
2000 after we had sold 7,500,000 shares of common stock registered under the
Registration Statement. Subsequently on August 15, 2000, our underwriters
exercised their option to purchase the remaining 1,125,000 shares of common
stock registered under the Registration Statement to cover over-allotments.
The initial public offering price was $9.00 per share for an aggregate
initial public offering of $77.6 million.
The actual expenses incurred for the account of the Company in
connection with the offering and the subsequent option exercise were $5.4
million in underwriting discounts and commissions and approximately $1.5 million
in other offering expenses. None of the costs and expenses related to the
offering were paid directly or indirectly to any director, officer, general
partner of the Company or their associates, persons owning 10 percent or more of
any class of equity securities of the Company or affiliates of the Company.
After deducting the underwriting discounts and commissions and the
other offering expenses, the net offering proceeds to the Company were
approximately $70.7 million. The Company used the net proceeds to retire all
of its $2.6 million in short-term debt and to provide working capital to fund
the Company's operations. Funds that have not been used have been invested in
money market funds and other investment grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent of stockholders in lieu of a special
meeting, dated May 10, 2000, the holders of shares of common stock and preferred
stock representing an aggregate of 16,738,527 votes, approved the following
matters:
1. An amendment to our certificate of incorporation increasing from
12,000,00 to 100,000,000 the number of shares of common stock the
Company is authorized to issue.
2. The amendment and restatement of our certificate of
incorporation, subject to the closing of our initial public
offering of common stock, providing for, among other things:
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(a.) the creation of a class of "blank check" preferred stock,
which the Board of Directors could issue from time to time
with such dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and
conversion rights as the Board of Directors may determine
from time to time (including rights which are senior to
those of the common stock);
(b.) the elimination of the right of stockholders to take written
actions in lieu of a meeting;
(c.) the inclusion of provisions which would allow directors to
consider multiple constituencies when considering an
unsolicited offer to acquire the Company; and
(d.) the requirement of a 66 2/3% vote to amend the foregoing
provisions.
3. The amendment and restatement of our by-laws, subject to the
filing of our Amended and Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware.
4. The adoption of our 2000 Stock Incentive Plan, pursuant to which
we may grant a broad variety of stock-based awards, such as stock
options and restricted stock, to employees, officers, directors,
consultants and advisors, of up to 2,500,000 shares of common
stock.
5. The adoption of our 2000 Employee Stock Purchase Plan, pursuant
to which all employees meeting certain employment criteria may
purchase shares of the Company's common stock through payroll
deductions at a 15% discount.
6. The adoption of our 2000 Non-Employee Director Stock Option Plan
pursuant to which the Company may issue up to 562,500 shares of
common stock to non-employee directors of the Company.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Exhibit Index are filed herewith.
(b) We did not file a current report on Form 8-K during the quarter
ended June 30, 2000.
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.
I-MANY, INC
Date: August 28, 2000 By: /s/ Philip M. St. Germain
-----------------------------------
Philip M. St. Germain
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
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