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, 2001
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: 000-30883
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 X No
------ ------
On July 26, 2001, 34,791,854 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 uses these words to describe its present belief about future events
relating to, among other things, its expected marketing plans, future hiring,
expenditures and sources of revenue. This Form 10-Q may also contain third party
estimates regarding the size and growth of our market, which also are
forward-looking statements. 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
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.............................................. 4
Consolidated Statements of Operations for the three months and
six months ended June 30,2001 and 2000......................... 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000................................... 6
Notes to Consolidated Condensed Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial Condition... 13
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 24
Item 2. Changes in Securities and Use of Proceeds..................... 24
Item 3. Defaults upon Senior Securities............................... 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
Item 5. Other Information............................................. 24
Item 6. Exhibits and Reports of Form 8-K.............................. 24
Signatures.................................................... 25
Exhibit Index................................................. 26
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
I-MANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 41,428 $ 50,639
Accounts receivable, net of allowance 12,587 14,526
Prepaid expenses and other current assets 912 459
-------- ---------
Total current assets 54,927 65,624
Property and Equipment, net 7,413 8,625
Other Assets 2,703 1,059
Goodwill and Other Purchased Intangibles 23,801 10,080
-------- ---------
Total assets $ 88,844 $ 85,388
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,184 $ 3,644
Accrued expenses 5,160 4,598
Deferred service revenue 6,704 7,050
Unearned product revenue 1,115 1,220
-------- --------
Total current liabilities 15,163 16,512
-------- --------
Capital Lease Obligations, net of current portion 90 115
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Undesignated preferred stock, $.01 par value
Authorized - 5,000,000 shares
Issued and outstanding - 0 shares -- --
Common stock, $.0001 par value - -
Authorized - 100,000,000 shares
Issued and outstanding - 34,643,048 and 32,940,767 shares
at June 30, 2001 and December 31, 2000, respectively 3 3
Additional paid-in capital 112,043 98,746
Deferred stock-based compensation (117) (154)
Stock subscription receivable 193 --
Foreign currency translation account (3) --
Accumulated deficit (38,528) (29,834)
-------- --------
Total stockholders' equity 73,591 68,761
-------- --------
Total liabilities and stockholders' equity $ 88,844 $ 85,388
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
I-MANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net Revenues:
Product $ 5,858 $ 2,960 $14,339 $ 4,506
Services 7,215 4,892 13,999 10,135
------- -------- ------- --------
Total net revenues 13,073 7,852 28,338 14,641
Cost of revenues 4,173 4,590 8,529 7,834
------- -------- ------- --------
Gross profit 8,900 3,262 19,809 6,807
Operating expenses:
Sales and marketing 6,587 7,809 11,729 12,200
Research and development 3,790 3,541 7,287 7,253
General and administrative 2,184 1,126 4,150 1,958
Depreciation 1,414 1,141 2,779 1,592
Amortization of goodwill and other purchased
intangible assets 1,722 -- 2,570 --
In-process research and development 1,000 -- 1,000 --
------- -------- ------- --------
Total operating expenses 16,697 13,617 29,515 23,003
------- -------- ------- --------
Loss from operations (7,797) (10,355) (9,706) (16,196)
Other income, net 392 15 1,012 154
------- -------- ------- --------
Loss before income taxes (7,405) (10,340) (8,694) (16,042)
Provision for income taxes -- -- -- --
------- -------- ------- --------
Net loss (7,405) (10,340) (8,694) (16,042)
Accretion of dividends on redeemable convertible
preferred stock -- 258 -- 510
------- -------- ------- --------
Net loss applicable to common stockholders $(7,405) $(10,598) $(8,694) $(16,552)
======= ======== ======= ========
Basic and diluted net loss per common share $ (0.22) $ (0.76) $ (0.26) $ (1.25)
======= ======== ======= ========
Weighted average shares outstanding 34,285 13,966 33,693 13,268
======= ======== ======= ========
The accompanying notes are an integral part of these consolidated condensed
financial statements
5
I-MANY, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net loss $ (8,694) $(16,042)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 5,313 1,559
In-process research and development 1,000 --
Amortization of deferred stock-based compensation 36 33
Marketing expense related to issuance of warrant 800 2,620
Changes in current assets and liabilities:
Accounts receivable 2,920 (109)
Prepaid expense and other current assets (403) 96
Accounts payable (1,575) 4,552
Accrued expenses 240 (20)
Deferred service revenue (1,047) (68)
Unearned product revenue (106) (1,130)
-------- --------
Net cash used in operating activities (1,516) (8,509)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (1,390) (6,721)
Additional cash paid to acquire Chi-Cor Information Management, Inc. (1,078) --
Cash paid to acquire Vintage Software, Inc. (731) --
Cash paid to acquire Intersoft International, Inc. (591) --
Cash paid to acquire BCL Vision, Ltd. (4,463) --
Increase in other assets (1,645) (1,336)
-------- --------
Net cash used in investing activities (9,898) (8,057)
-------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of common stock warrants -- 150
Payments on capital lease obligations (25) (13)
Proceeds from line of credit -- 1,569
Proceeds from exercise of stock options 2,123 241
Proceeds from Employee Stock Purchase Plan 108 --
Bank overdraft -- (229)
-------- --------
Net cash provided by financing activities 2,206 1,718
-------- --------
Effect of foreign exchange rate changes (3) --
-------- --------
Net Decrease in Cash and Cash Equivalents (9,211) (14,848)
Cash and Cash Equivalents, beginning of period 50,639 15,322
-------- --------
Cash and Cash Equivalents, end of period $ 41,428 $ 474
======== ========
6
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 12 $ 17
======== ========
Cash refunded during the period for income taxes $ -- $ (253)
======== ========
Supplemental Disclosure of Noncash Activities:
Accretion of dividends on Series C preferred stock $ -- $ 510
======== ========
Property and equipment acquired under capital lease $ -- $ 143
======== ========
Issuance of warrants to purchase common stock $ 800 $ 3,820
======== ========
As of June 30, 2001, the Company recorded additional purchase price
related to its acquisition of Chi-Cor Information Management, Inc. on
November 16, 2000, as follows:
Fair value of additional assets acquired $ (2,060) $ --
Additional cash paid 1,078 --
Additional common stock to be issued 881 --
-------- --------
Additional liabilities assumed $ (101) $ --
======== ========
On January 25, 2001, the Company acquired Vintage Software, Inc. as follows:
Fair value of assets acquired $ (1,168) $ --
Cash paid for acquisition 731 --
Common stock issued 400 --
-------- --------
Liabilities assumed $ (37) $ --
======== ========
On March 2, 2001, the Company acquired Intersoft International, Inc. as follows:
Fair value of assets acquired $ (3,242) $ --
Cash paid for acquisition 591 --
Common stock issued 2,240 --
-------- --------
Liabilities assumed $ (411) $ --
======== ========
On April 9, 2001, the Company acquired BCL Vision, Ltd. as follows:
Fair value of assets acquired $(12,042) $ --
Cash paid for acquisition 4,463 --
Common stock issued 6,900 --
-------- --------
Liabilities assumed $ (679) $ --
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
I-MANY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2000 as
reported in the Company's Annual Report on Form 10-K. 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 consolidated balance sheet presented as of December 31, 2000 has
been derived from the financial statements that have been audited by the
Company's independent public accountants not contained herein. The results of
operations for the three months and six months ended June 30, 2001 may not be
indicative of the results that may be expected for the year ending December 31,
2001, 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 securities 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 were 3,106,997 and
12,580,383 for the three months ended June 30, 2001 and 2000, respectively, and
3,212,947 and 12,872,231 for the six months ended June 30, 2001 and 2000,
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 9, 2000, our underwriters exercised an option to purchase an additional
1,125,000 shares of common stock at a per share price of $9.00 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. 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,
2001 2000 2001 2000
---- ---- ---- ----
Customer A 12% 21% 13% 29%
Customer B * 17% * *
Customer C * 14% * *
* Denotes revenues of less than 10% of the Company's total.
8
NOTE 5. ACQUISITIONS
CHI-COR INFORMATION MANAGEMENT, INC.
On November 16, 2000, the Company acquired in a merger transaction all
of the outstanding capital stock of Chi-Cor Information Management, Inc.
(ChiCor) for an initial purchase price of $13.5 million, which consisted of cash
of $5.7 million, a portion of which was used to pay off ChiCor's outstanding
bank loan of $754,000, 251,601 shares of Company common stock with a fair value
at the date of closing of $4.9 million, assumed liabilities of $2.5 million and
transaction costs of $458,000. In addition, upon achievement of certain
quarterly revenue and income milestones through December 31, 2001, the ChiCor
shareholders are entitled to additional consideration of up to $6.9 million,
one-half of which is payable in cash and the balance payable in the form of
Company stock. The acquisition was accounted for as a purchase business
combination in accordance with Accounting Principles Board (APB) Opinion No. 16,
BUSINESS COMBINATIONS. The Company has consolidated the operations of ChiCor
beginning on the date of acquisition. The Company retained an independent
appraiser for the purpose of allocating the initial consideration of $13.5
million to the tangible and intangible assets acquired and the liabilities
assumed.
Based on the revenue and income levels realized by ChiCor during the
three month periods ended June 30, 2001 and March 31, 2001, the ChiCor
shareholders were entitled to receive additional consideration of $452,000 and
$1.6 million, respectively, and the $1.6 million earnout amount was paid in cash
and stock in May 2001. The additional consideration for the three month period
ended June 30, 2001 will be paid in cash and stock no later than August 15,
2001. At June 30, 2001, the one-half stock portion of this amount was recorded
as Stock Subscription Receivable and the cash portion was recorded in Accrued
Expenses, with the entire amount treated as additional purchase price and
recorded as goodwill. Any additional consideration paid to the ChiCor
shareholders as a result of future quarterly earnouts will likewise be treated
as additional purchase price and recorded as goodwill.
VINTAGE SOFTWARE, INC.
On January 25, 2001, the Company acquired all of the outstanding
capital stock of Vintage Software, Inc. (Vintage), a software company, which
marketed a competing product to the Company's CARS software suite of products to
mid-market pharmaceutical companies. The aggregate purchase price of $1.1
million included cash of $433,000, 34,096 shares of Company common stock with a
fair value of $400,000, $200,000 in earnout bonuses, and transaction costs of
$98,000. The acquisition was accounted for as a purchase business combination in
accordance with APB Opinion No. 16, BUSINESS COMBINATIONS and the Company has
consolidated the operations of Vintage beginning on the date of acquisition. No
proforma information for the periods ended June 30, 2001 has been presented as
this purchase was not material.
INTERSOFT INTERNATIONAL, INC.
On March 2, 2001, the Company acquired all of the outstanding capital
stock of Intersoft International, Inc. (Intersoft), a supplier of sales and
marketing automation products for the foodservice broker industry. The initial
purchase price of $2.8 million included cash of $500,000, 115,733 shares of
Company common stock with a fair value of $2.2 million and transaction costs of
$99,000. In addition, upon achievement of certain quarterly revenue and income
milestones through March 31, 2002, the Intersoft shareholders are entitled to
additional consideration of up to $1.25 million, payable in the form of Company
stock. The acquisition was accounted for as a purchase business combination in
accordance with APB Opinion No. 16, BUSINESS COMBINATIONS and the Company has
consolidated the operations of Intersoft beginning on the date of acquisition.
No proforma information for the periods ended June 30, 2001 has been presented
as this purchase was not material.
Based on the revenue and income levels realized by Intersoft during the
three month period ended June 30, 2001, the Intersoft shareholders will receive
additional
9
consideration of $39,000 to be paid in stock no later than August 15, 2001. At
June 30, 2001, this amount was recorded as Stock Subscription Receivable and
treated as additional purchase price and recorded as goodwill. Any additional
consideration paid to the Intersoft shareholders as a result of future quarterly
earnouts will be treated as additional purchase price and recorded as goodwill.
BCL VISION LTD.
On April 9, 2001, the Company acquired all of the outstanding capital
stock of BCL Vision Ltd. (BCL), a provider of collection and dispute management
software and services based in London, United Kingdom. The initial purchase
price of $12.0 million consists of cash of $4.0 million, 690,000 shares of
Company common stock with a fair value of $6.9 million, assumed liabilities of
$679,000 and transaction costs of $424,000. In addition, upon achievement of a
certain revenue milestone through June 30, 2001 which was not realized, the BCL
shareholders would have been entitled to additional consideration of up to $1.0
million, payable in the form of Company stock. The acquisition was accounted for
as a purchase business combination in accordance with APB Opinion No. 16,
BUSINESS COMBINATIONS and the Company has consolidated the operations of BCL
beginning on the date of acquisition. The Company retained an independent
appraiser for the purpose of allocating the initial consideration of
approximately $12.0 million to the tangible and intangible assets acquired and
the liabilities assumed.
PROVATO, INC.
On June 26, 2001, the Company entered into an amended and restated
agreement to acquire all of the outstanding capital stock of Provato, Inc.
("Provato"), which amended a prior agreement signed on April 18, 2001. In
connection with the merger, the Company has agreed to issue up to 1,984,808
shares of the Company's common stock to the shareholders of Provato. The Company
will assume Provato's liabilities of approximately $1.0 million and expects to
incur transaction costs of approximately $1.7 million, which includes up to
$1.25 million of Provato's merger-related costs. In addition, the Company
entered into a Convertible Note Purchase Agreement dated June 26, 2001 whereby
Provato agreed to issue, and the Company agreed to purchase, a series of
convertible notes during the time preceding the merger not to exceed a total of
$2.0 million. Each note will have a two-year maturity from the date of issuance
and will accrue interest at the prime rate plus 2%. Using the closing price of
I-many's stock at July 23, 2001 of $6.79 per share, the purchase price of the
merger transaction (including the principal balance of the notes purchased by
the Company) would be valued at up to $18.2 million. The acquisition will be
accounted for as a purchase business combination in accordance with Accounting
Principles Board (APB) Opinion No. 16, BUSINESS COMBINATIONS and the Company
will consolidate the operations of Provato beginning on the date of acquisition.
The Company has retained an independent appraiser for the purpose of allocating
the value of the merger consideration to the tangible and intangible assets
acquired and the liabilities assumed. The Company expects this transaction to be
closed on August 16, 2001.
NOTE 6. STRATEGIC RELATIONSHIP AGREEMENTS
PROCTER & GAMBLE COMPANY
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. To date, no such royalties have been earned or paid. In
addition, the Company granted to P&G a fully exercisable warrant to purchase
875,000 shares of the
10
Company's common stock. The warrant, which was exercisable for a period of two
years at an exercise price of $9.00 per share, was converted into 561,960 shares
of common stock via a cashless exercise during 2000. In addition, the Company
agreed to grant P&G warrants to purchase up to 125,000 additional 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 125,000
additional shares of common stock as P&G provides the services set forth in the
Agreement.
ACCENTURE
In April 2001, the Company entered into a Marketing Alliance Agreement
(the Agreement) with Accenture LLP, pursuant to which Accenture has designated
the Company for a period of at least one year as their preferred provider of
automated contract management solutions. In addition, Accenture has agreed to
provide the Company with certain strategic marketing and business development
services at no charge over the term of the Agreement.
As consideration for entering into the Agreement, the Company has
designated Accenture as its preferred business integration provider for the
Company's CARS suite of products. In addition, the Company granted to Accenture
a fully exercisable warrant to purchase 124,856 shares of the Company's common
stock. The warrant is exercisable for a period of three years at an exercise
price of $9.725 per share. In addition, the Company has agreed to grant
Accenture additional future warrants, each with a value equal to 10% of any
revenues generated from certain future software licenses to Accenture's clients
and prospects.
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. Effective January 1, 2001, the
Company adopted SFAS No. 133 as amended. The adoption of SFAS No. 133 as amended
did not have a material impact on the Company's financial statements.
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 was effective July 1, 2000,
but covered certain events occurring during the period after December 15, 1998,
but before the effective date. To the extent that events covered by this
interpretation occurred during the period after December 15, 1998, but before
the effective date, the effects of applying this Interpretation were 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. Effective July 1, 2000,
the
11
Company adopted this interpretation, the adoption of which had no material
impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS. SFAS
No. 141, which requires all business combinations to be accounted for using the
purchase method, is effective for all business combinations initiated after June
30, 2001.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement applies to goodwill and intangible assets
acquired after June 30, 2001, as well as to goodwill and intangible assets
previously acquired. Under this statement, goodwill and other certain intangible
assets deemed to have an infinite life will no longer be amortized. Instead,
these assets will be reviewed for impairment on a periodic basis. This statement
is effective for the Company on July 1, 2001 with respect to any acquisitions
completed after June 30, 2001, and on January 1, 2002 for all other goodwill and
intangible assets. Management is currently evaluating the impact that this
statement will have on the Company's financial statements.
12
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 "Certain Factors That May Affect Our Future
Operating Results" and elsewhere in this report.
OVERVIEW
We provide software and Internet-based solutions and related
professional services that allow our clients to more effectively manage their
business-to-business relationships. Our products and services were originally
developed to manage complex contract purchasing relationships in the healthcare
industry. Our Contract Administration and Reporting System, or CARS, software
suite is used by 8 of the largest 10 and 16 of the largest 20 pharmaceutical
manufacturers, ranked according to annual revenues. We are seeking to expand our
products and services to new vertical markets, particularly the consumer
packaged goods and foodservice industries. Our acquisitions of Chi-Cor
Information Management, Inc. (ChiCor) in November 2000 and Intersoft
International, Inc. (Intersoft) in March 2001 have provided us with accepted
products, customers and expertise in these new vertical markets.
Currently, we can deliver our products through a variety of means,
including software licensed for installation on our clients' computer systems,
software licensed on an application service provider basis which we host on our
servers, and the licensing of technology to enable our clients to establish
their own private or public portals and exchanges.
We have generated revenues from both products and services. Product
revenues, which had been principally comprised of software license fees
generated from our CARS software suite and now include deductions and trade
funds management products and cash and trade receivables management software
pursuant to our acquisitions of ChiCor and BCL Vision, accounted for 30.8% of
net revenues in the six months ended June 30, 2000 and 50.6% of net revenues for
the six months ended June 30, 2001. Service revenues include maintenance and
support fees directly related to our licensed software products and professional
service fees derived from consulting, installation, business analysis and
training services related to our software products. Service revenues accounted
for 69.2% of net revenues in the six months ended June 30, 2000 and 49.4% of net
revenues for the six months ended June 30, 2001.
Historically, software license agreements have been for a three-year
period. We generally 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. In cases where significant post-delivery obligations
exist, such as customization or enhancements to the core software, we recognize
the entire fee on a percentage-of-completion basis, and include the entire fee
in product revenues. 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 from 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.
13
After being profitable in both 1997 and 1998, we increased our spending
significantly during 1999 and the first half of 2000, principally to increase
the size of our sales and marketing workforce and for development and marketing
expenses related to the development of our web-based initiatives. Our operating
expenses (excluding acquisition-related amortization and write-offs) have
increased significantly since 1997, from $4.2 million for the 12 months ended
December 31, 1997 to $43.4 million for the 12 months ended December 31, 2000 and
$25.9 million for the six months ended June 30, 2001. These increases are
primarily due to additions to our staff, including through acquisitions, as we
have expanded all aspects of our operations. We have grown from 46 employees as
of December 31, 1996 to 402 employees at June 30, 2001.
RECENT EVENTS
On April 9, 2001, we acquired all of the outstanding capital stock of
BCL Vision Ltd. (BCL) for a purchase price of up to $13.0 million. The initial
consideration of $12.0 million consisted of cash of $4.0 million, 690,000 shares
of Company common stock with a fair value at the time of acquisition of $6.9
million, assumed liabilities of $679,000 and transaction costs of $424,000. In
addition, upon achievement of a certain revenue milestone through June 30, 2001
which was not realized, the BCL shareholders would have been entitled to
additional consideration of up to $1.0 million, payable in the form of Company
stock. This acquisition was recorded in the quarter ended June 30, 2001 and the
BCL operating results from the date of acquisition are included in the June 30,
2001 financial statements.
On April 11, 2001, in connection with the establishment of a Marketing
Alliance Agreement (the Agreement) with Accenture LLP, we issued a fully
exercisable warrant to purchase 124,856 shares of the Company's common stock.
The warrant is exercisable for a period of three years at an exercise price of
$9.725 per share. We have recorded the $800,000 value of this warrant as a
marketing charge in the June 30, 2001 financial statements. In addition, the
Company has agreed to grant Accenture additional future warrants, each with a
value equal to 10% of the revenue generated from certain future software
licenses to Accenture clients.
On June 26, 2001 we signed an amended agreement to acquire Provato,
Inc. in a merger transaction, amending an agreement dated April 18, 2001 that
originally governed the transaction. In connection with the merger, we have
agreed to issue up to 1,984,808 shares of the Company's common stock to the
shareholders of Provato and will assume Provato's liabilities of approximately
$1.0 million. We expect to incur transaction costs of approximately $1.7
million, which includes up to $1.25 million of Provato's merger-related costs.
In addition, we entered into Convertible Note Purchase Agreement whereby we have
agreed to purchase convertible notes issued by Provato during the time preceding
the merger not to exceed $2.0 million. Using the closing price of the Company's
stock at July 23, 2001 of $6.79 per share, the purchase price of this merger
transaction (including the principal balance of the convertible notes purchased
by us) would be valued at up to $18.2 million. We expect this transaction will
close on August 16, 2001.
We are presently evaluating if an impairment in any of the Company's
long-term assets exists, particularly with respect to capitalized costs related
to the development of its proprietary internet portal. We believe that we may
write off our investment in the Company's internet portal in the third quarter
of 2001. (See "Certain Factors That May Affect Our Future Operating Results --
Our method of accounting for the costs we incurred in connection with the
development of our internet portal is based on our business model, and we may
incur a charge against earnings.") As of June 30, 2001, the net carrying value
of capitalized costs related to the Company's internet portal amounted to $2.4
million. As part of an evaluation of the current business model, the Company
reduced its workforce by 22 employees in a downsizing and restructuring of our
operations in July 2001.
14
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
NET REVENUES
Net revenues increased by $5.2 million, or 66%, to $13.1 million for
the quarter ended June 30, 2001 from $7.9 million for the quarter ended June 30,
2000. Product revenues increased by $2.9 million, or 98%, to $5.9 million for
the quarter ended June 30, 2001, from $3.0 million for the quarter ended June
30, 2000. This increase is attributable to an increase in the number of software
licenses sold, due in part to licenses of new products by the ChiCor subsidiary
subsequent to its acquisition in November 2000. During the three months ended
June 30, 2001, ChiCor license revenues accounted for 22 percent of consolidated
product revenues.
As a percentage of total net revenues, product revenues increased to
44.8% for the quarter ended June 30, 2001, from 37.7% for the quarter ended June
30, 2000. This increase in product revenues as a percentage of total net
revenues is attributable to the expansion of our software licensing activity, as
compared to the more modest growth rate of our professional services business.
Service revenues increased by $2.3 million, or 47%, to $7.2 million for the
quarter ended June 30, 2001, from $4.9 million for the quarter ended June 30,
2000.
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, amounts due to third parties for
royalties related to integrated technology. Historically, cost of product
revenues has not been a significant component of total cost of revenues. Cost of
revenues decreased by $417,000, or 9%, to $4.2 million for the quarter ended
June 30, 2001, from $4.6 million for the quarter ended June 30, 2000. This
decrease is due primarily to the reduction in subcontractor consulting costs
from $2.2 million in the second quarter of 2000 to $772,000 in the second
quarter of 2001, partially offset by increased salary and related costs
resulting from the increase in the number of employees in our professional
services group, which grew from 82 at June to 120 in the second quarter of 2001.
As a percentage of total net revenues, cost of revenues decreased to
31.9% for the quarter ended June 30, 2001, from 58.5% for the quarter ended June
30, 2000 and 33.2% for the quarter ended December 31, 2000. This decrease in
cost of revenues as a percentage of total net revenues is attributable to the
smaller level of service revenues as a percent of total revenues. Service
revenues typically generate lower margins than product revenues. Also,
subcontracted consulting costs were at particularly high levels in the quarter
ended June 30, 2000, and the subsequent displacement of subcontracted
consultants by less expensive hired staff has increased operating margins
significantly.
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. Also, sales and marketing expenses
included one-time, non-cash charges of $800,000 in the quarter ended June 30,
2001 and $2.6 million in the quarter ended June 30, 2000 related to the value
associated with the granting of common stock warrants to Accenture and Procter
and Gamble, respectively. Excluding the warrant charges, sales and marketing
expense increased by $598,000, or 12%, to $5.8 million in the three months ended
June 30, 2001 from $5.2 million in the three months ended June 30, 2000. This
increase in sales and marketing expense is primarily the result of an increase
in headcount levels from 72 at June 30, 2000 to 105 at June 30, 2001 and higher
commission costs attributable to the increase in product revenues, partially
offset by significant reductions in spending for advertising, marketing and
promotional materials related to our web-based initiatives, and decreases in
travel
15
expenses. As a percentage of total net revenues, sales and marketing expense
excluding non-cash warrant charges decreased to 44.3% for the quarter ended June
30, 2001 from 66.1% for the quarter ended June 30, 2000.
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. Research and
development expenses increased by $249,000, or 7%, to $3.8 million for the
quarter ended June 30, 2001, from $3.5 million for the quarter ended June 30,
2000. This increase in research and development expenses is attributable to
higher salary costs related to an increase in the number of research and
development personnel from 86 at June 30, 2000 to 128 at June 30, 2001,
partially offset by significant reductions in subcontractor costs. In the
quarter ended June 30, 2000, subcontractor costs associated principally with the
development of our Internet portal amounting to $1.8 million were expensed as
incurred, as compared to $401,000 in subcontractor costs incurred in the quarter
ended June 30, 2001. As a percentage of total net revenues, research and
development expense decreased to 29.0% for the quarter ended June 30, 2001, from
45.1% for the quarter ended June 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for senior executives and personnel in
our administrative, finance and human resources departments, and legal,
accounting and other professional service fees. General and administrative
expenses increased by $1.1 million, or 94%, to $2.2 million in the second
quarter of 2001 from $1.1 million in the second quarter of 2000. As a percentage
of total net revenues, general and administrative expenses increased to 16.7%
for the quarter ended June 30, 2001, from 14.3% for the quarter ended June 30,
2000. The increase in general and administrative expenses both in dollars and as
a percentage of total net revenues is primarily attributable to an increase in
headcount from 32 at June 30, 2000 to 41 at June 30, 2001, higher legal fees,
and to the costs associated with being a publicly-held company.
DEPRECIATION. Depreciation includes amortization of capitalized
internal-use software development costs related to the company's Internet
portal. Depreciation expense increased by $273,000, or 24%, from $1.1 million in
the second quarter of 2000 to $1.4 million in the second quarter of 2001. This
increase is a result of additions of computer hardware and software related to
growth in heacount and for our web-based initiatives and for amortization of
incremental capitalized internal-use software development costs, which consist
entirely of subcontractor costs. In the quarter ended June 30, 2001, the
amortization expense related to capitalized internal-use software development
costs amounted to $834,000, as compared to $728,000 of amortization in the
quarter ended June 30, 2000.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS.
Amortization of purchased intangibles, related to our acquisitions of ChiCor in
November 2000, Vintage in January 2001, Intersoft in March 2001 and BCL Vision
in April 2001, amounted to $1.7 million in the quarter ended June 30, 2001.
There was no amortization of purchased intangibles in the quarter ended June 30,
2000. Based on new accounting pronouncements, the Company will stop amortizing
goodwill in the first quarter of 2002.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition
of BCL Vision, Ltd., we allocated $1.0 million of the purchase price to
in-process research and development. This allocation was based on an independent
appraisal conducted for the purpose of allocating the initial consideration to
the tangible and intangible assets acquired and liabilities assumed in the BCL
Vision acquisition.
OTHER INCOME, NET. Other income, net increased by $377,000 from $15,000
in the quarter ended June 30, 2000, to $392,000 in the quarter ended June 30,
2001. This increase is the result of interest earned on higher average cash
balances due to the net cash proceeds from our initial public offering.
16
PROVISION FOR INCOME TAXES. We incurred operating losses for all
quarters in 2000 and the first two quarters of 2001 and have consequently
recorded a valuation allowance for the full amount of our net deferred tax
asset, which consists principally of our net operating loss carryforwards, as
the future realization of the tax benefit is uncertain. No provision for income
taxes has been recorded in the three month periods ended June 30, 2001 and June
30, 2000.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
NET REVENUES
Net revenues increased by $13.7 million, or 94%, to $28.3 million for
the six months ended June 30, 2001 from $14.6 million for the six months ended
June 30, 2000. Product revenues increased by $9.8 million, or 218%, to $14.3
million for the six months ended June 30, 2001, from $4.5 million for the six
months ended June 30, 2000. This increase is attributable to a significant
increase in the number of software licenses sold, due in part to the
contribution of the ChiCor subsidiary subsequent to its acquisition in November
2000.
As a percentage of total net revenues, product revenues increased to
50.6% for the six months ended June 30, 2001, from 30.8% for the six months
ended June 30, 2000. This increase in product revenues as a percentage of total
net revenues is attributable to the expansion of our software licensing
activity, as compared to the more modest growth rate of our professional
services business. Service revenues increased by $3.9 million, or 38%, to $14.0
million for the six months ended June 30, 2001, from $10.1 million for the six
months ended June 30, 2000.
COST OF REVENUES
Cost of revenues increased by $695,000, or 9%, to $8.5 million for the
six months ended June 30, 2001, from $7.8 million for the six months ended June
30, 2000. This increase is due primarily to the increased number of employees in
our professional services group, partially offset by a decrease in subcontractor
consulting costs from $3.6 million in the six months ended June 30, 2000 to $1.9
million in the six months ended June 30, 2001.
As a percentage of total net revenues, cost of revenues decreased to
30.1% for the six months ended June 30, 2001, from 53.5% for the six months
ended June 30, 2000. This decrease in cost of revenues as a percentage of total
net revenues is attributable to the smaller level of service revenues as a
percent of total revenues, service revenues typically generating lower margins
than product revenues, and reduced reliance on subcontracted consultants in our
professional services operation.
OPERATING EXPENSES
SALES AND MARKETING. Excluding the warrant charges related to the
Accenture and Procter & Gamble warrants issued in May 2001 and May 2000
respectively, sales and marketing expense increased by $1.3 million, or 14%, to
$10.9 million in the six months ended June 30, 2001 from $9.6 million in the six
months ended June 30, 2000. This increase in sales and marketing expense is
primarily the result of an increase in headcount levels and significantly higher
commission costs attributable to the increase in product revenues, partially
offset by significant reductions in spending for advertising, marketing and
promotional materials related to our web-based initiatives, and decreases in
travel expenses. As a percentage of total net revenues, sales and marketing
expense excluding non-cash warrant charges decreased to 38.6% for the six months
ended June 30, 2001, from 65.4% for the six months ended June 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended June 30, 2001 were virtually unchanged from spending levels in the
six months ended June 30, 2000, increasing by only $34,000, or less than 1%, to
$7.3 million. The small increase in research and development expenses is the net
result of a large increase in salary costs related to an increase in the number
of research and development personnel offset by a significant reduction in
subcontractor costs associated principally with the development of our Internet
portal incurred during the
17
first half of 2000. In the six months ended June 30, 2000, subcontractor costs
amounting to $4.2 million were expensed as incurred, as compared to $697,000 in
the six months ended June 30, 2001. As a percentage of total net revenues,
research and development expense decreased to 25.7% for the six months ended
June 30, 2001, from 49.5% for the six months ended June 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $2.2 million, or 112%, to $4.2 million in the first two quarters of
2001 from $2.0 million for the first two quarters of 2000. As a percentage of
total net revenues, general and administrative expenses increased to 14.6% for
the six months ended June 30, 2001, from 13.4% for the six months ended June 30,
2000. The increase in general and administrative expenses both in dollars and as
a percentage of total net revenues is primarily attributable to an increase in
headcount, higher legal fees, and to the costs associated with being a
publicly-held company.
DEPRECIATION. Depreciation includes amortization of capitalized
internal-use software development costs related to the company's Internet
portal. Depreciation expense increased by $1.2 million, or 75%, from $1.6
million in the six months of 2000 to $2.8 million in the first six months of
2001. This increase is a result of significant additions of computer hardware
and software for our web-based initiatives and for amortization of capitalized
internal-use software development costs, which consist entirely of subcontractor
costs. In the six months ended June 30, 2001, the amortization expense related
to capitalized internal-use software development costs amounted to $1.7 million,
as compared to $968,000 of amortization in the six months ended June 30, 2000.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS.
Amortization of purchased intangibles related to our recent acquisitions
amounted to $2.6 million in the six months ended June 30, 2001. There was no
amortization of purchased intangibles in the six months ended June 30, 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition
of BCL Vision, Ltd., we allocated $1.0 million of the purchase price to
in-process research and development. This allocation was based on an independent
appraisal conducted for the purpose of allocating the initial consideration to
the tangible and intangible assets acquired and liabilities assumed in the BCL
Vision acquisition.
OTHER INCOME, NET. Other income, net increased by $858,000, or 557%,
from $154,000 in the six months ended June 30, 2000, to $1.0 million in the six
months ended June 30, 2001. This increase is the result of interest earned on
higher average cash balances due to the net cash proceeds from our initial
public offering.
PROVISION FOR INCOME TAXES. We incurred operating losses for all
quarters in 2000 and the first two quarters of 2001 and have consequently
recorded a valuation allowance for the full amount of our net deferred tax
asset, which consists principally of our net operating loss carryforwards, 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, 2001 and June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
On July 13, 2000, we issued 7,500,000 shares of our common stock at an
initial public offering price of $9.00 per share. On August 9, 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 overallotment 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.
18
At June 30, 2001, we had cash and cash equivalents of $41.4 million and
a net working capital surplus of $39.8 million. On June 30, 2001, we had no
long-term or short-term debt, other than obligations under capital lease
financings.
On April 9, 2001, we acquired BCL Vision Ltd. for a purchase price of
up to $13.0 million, including $4.0 million of cash, common stock valued at $6.9
million at the time of closing, $679,000 of assumed liabilities, and $424,000 of
transaction costs. At closing, we used existing cash resources to pay the cash
portion of the purchase price.
Net cash used in operating activities for the six months ended June 30,
2001 was $1.5 million, as compared to net cash used in operating activities of
$8.5 million in the six months ended June 30, 2000. For the six months ended
June 30, 2001, net cash used in operating activities consisted primarily of our
net loss of $8.7 million, as adjusted for non-cash items depreciation and
amortization, in-process research and development and a non-cash warrant charge
totaling $7.1 million. A $2.9 million decrease in accounts receivable was offset
by a $393,000 increase in prepaid expense and decreases of $1.6 million and $1.0
million in accounts payable and deferred service revenue, respectively. Net cash
used in operating activities for the six months ended June 30, 2000 consisted
principally of our net loss of $16.0 million, as adjusted for depreciation and
amortization and a non-cash warrant charge totaling $4.2 million, partially
offset by a $4.6 million increase in accounts payable.
Net cash used in investing activities was $9.9 million for the six
months ended June 30, 2001 and $8.1 million for the six months ended June 30,
2000. Net cash used in investing activities for the six months ended June 30,
2001 primarily reflects $1.4 million in purchases of property and equipment,
$6.9 million related to the acquisitions of ChiCor, Vintage, Intersoft and BCL
Vision, and a $1.6 million investment in Tibersoft Corporation, a privately-held
provider of business-to-business network trading solutions for the foodservice
industry. Net cash used in investing activities for the six months ended June
30, 2000 consisted primarily of purchases of property and equipment, including
$4.6 million of capitalized internal-use software development costs.
Net cash provided by financing activities was $2.2 million for the six
months ended June 30, 2001, primarily from proceeds from stock option exercises.
Net cash provided by financing activities was $1.7 million for the six months
ended June 30, 2000, consisting principally of $1.6 million in proceeds from a
bank line of credit.
We currently anticipate that our cash and cash equivalents will be
sufficient to meet our anticipated needs for working capital, capital
expenditures, and acquisitions 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, and future acquisitions. Any
projections of future long-term cash needs and cash flows are subject to
substantial uncertainty. If our current balance of cash and cash equivalents is
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.
CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
In addition to other information in this Form 10-Q, the following
factors could cause actual results to differ materially from those indicated by
forward-looking statements made in this Form 10-Q and presented elsewhere by
management from time to time.
19
WE HAVE INCURRED SUBSTANTIAL LOSSES IN 1999 AND 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 2001 AND OUR RETURN TO PROFITABILITY IS UNCERTAIN
We incurred net losses of approximately $5.2 million in the year ended
December 31, 1999, $24.2 million in the year ended December 31, 2000 and $8.7
million in the six months ended June 30, 2001, and we had an accumulated deficit
at June 30, 2001 of $38.5 million. We expect to continue spending significantly,
principally for sales, marketing and development expenses, and therefore we will
need to grow our revenues significantly before we reach profitability. In
addition, as we announced in our July 2, 2001 press release, our second quarter
results were impacted by a number of factors that deferred purchases from us,
and we cannot assure you that we will not continue to be affected by these
factors. Although we have been profitable in certain years, 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.
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 ANY 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 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, as occurred in our second quarter 2001, 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.
OUR METHOD OF ACCOUNTING FOR THE COSTS WE INCURRED IN CONNECTION WITH THE
DEVELOPMENT OF OUR INTERNET PORTAL IS BASED ON OUR BUSINESS MODEL, AND WE MAY
INCUR A CHARGE AGAINST EARNINGS
In accordance with generally accepted accounting principles, we have
capitalized certain of our costs related to the development of imany.com, our
proprietary Internet portal, and we are amortizing the capitalized costs over an
estimated useful life of twenty-four months. From time to time, we evaluate the
value to us of the portal, and in the event that we determine that our portal no
longer has sufficient value to justify the then carrying value of the
capitalized costs, we would be required to write off all, or a portion of, these
capitalized costs. In such an event, our results of operations for the period in
which we take such a charge could be materially adversely affected. We are
considering writing off all or substantially all of the capitalized costs in the
third quarter of 2001.
WE HAVE TWO MANAGEMENT LOCATIONS AND OTHER FACILITIES AND AS WE CONTINUE TO GROW
WE MAY EXPERIENCE DIFFICULTIES IN OPERATING FROM THESE 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. In addition, as a
result of our acquisitions, we have added additional facilities, including an
office in London, United Kingdom. As we grow, the geographic distance between
these offices could make it more difficult
20
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 $36.5 million in the year ended
December 31, 2000, and to $28.3 million in the six months ended June 30, 2001,
and the number of our employees increased from 67 as of December 31, 1997 to 402
as of June 30, 2001. To accommodate this growth, we are implementing new and
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
Most 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. In
the first six months of 2001, one customer, Premier, Inc., accounted for
approximately 13 percent of our total revenues. 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 acquired companies which target
markets other than the healthcare market and have begun initiatives to sell our
CARS software suite of products and services in markets other than the
healthcare market, including the consumer packaged goods, foodservice 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 market, 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 entered into strategic relationship with Procter & Gamble and
Accenture, we do not yet know how rapidly or successfully our purchase contract
management software solutions will be implemented in the commercial products and
other industries. In connection with our efforts in other industries, it may 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
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
21
not adequately compensate us for any losses that may occur due to any failures
or interruptions in our systems or loss of data.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING NEW TECHNOLOGIES OR BUSINESSES AND THIS
COULD HINDER OUR EXPANSION EFFORTS
We intend in the future to consider additional acquisitions of or new
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
We have acquired ChiCor, Intersoft and BCL Vision Ltd., which are
located in Chicago, Illinois, Cleveland, Ohio and London, U.K., respectively,
and have entered into an agreement to acquire Provato, Inc. based in Oakland,
California. Any other 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.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY
BE ADVERSELY AFFECTED
In connection with our acquisitions of ChiCor, Vintage, Intersoft and
BCL Vision, we have recorded $26.8 million of intangible assets. In addition, we
recorded a $1.0 million charge during the second quarter of 2001 for a write-off
of a portion of the purchase price of BCL Vision as in-process research and
development. We expect to record a significant amount of goodwill and other
intangibles assets, and a write-off of in-process research and development in
connection with our planned acquisition of Provato, Inc., and with respect to
any future acquisition. Although the amortization of goodwill will be
discontinued pursuant to the recent issuance of Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, the carrying
value of any intangible assets will need to be reviewed for impairment on a
periodic basis. We cannot assure you that future write-downs of any such assets
will not affect future operating results.
OUR FIXED COSTS HAVE LED, AND MAY CONTINUE TO LEAD, TO FLUCTUATIONS IN OPERATING
RESULTS WHICH HAS RESULTED, AND COULD IN THE FUTURE 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 manner to compensate
for any significant fluctuations in revenues. Accordingly, shortfalls in
revenues, as we experienced in the second quarter of fiscal 2001, 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
22
clients, software companies that target the contract management markets,
professional services organizations and Internet-based merchants offering
healthcare and other 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.
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, 2001, the Company's cash and cash equivalents consisted
entirely of money market investments with maturities under 30 days and
non-interest bearing checking accounts. The weighted average interest rate yield
for all cash and cash equivalents at June 30, 2001 amounted to 3.75 percent.
23
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 April 9, 2001, the Company issued 690,000 shares of its unregistered
common stock pursuant to its acquisition of BCL Vision, Ltd. On May 10, 2001,
the Company issued 41,494 shares of its unregistered common stock as additional
consideration pursuant to its November 2000 acquisition of Chi-Cor Information
Management, Inc. On April 11, 2001, the Company issued a fully-exercisable
warrant to purchase up to 124,856 shares of our common stock in connection with
the establishment of a Marketing Alliance Agreement with Accenture. The warrant
is exercisable for a period of three years and the exercise price is $9.725 per
share. These shares were issued pursuant to an exemption from the Securities Act
registration requirements set forth in Rule 506 under the Securities Act and, in
the alternative, under Section 4(2) of the Securities Act.
(d) Use of Proceeds
The Company has continued to use the proceeds of its initial public
offering in the manner and for the purposes described elsewhere in this Report
on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on June 7,
2001. The stockholders of the Company elected members of the Board of Directors,
approved the 2001 Stock Incentive Plan and ratified the selection of Arthur
Andersen LLP as the Company's accountants for 2001.
NUMBER OF SHARES OF COMMON STOCK
----------------------------------------------------
BROKER
FOR AGAINST ABSTAINED NON-VOTES
---------- --------- --------- ---------
A. Leigh Powell 26,584,959 1,298,952 - -
William Doyle 26,295,534 1,588,377 - -
Philip M. St. Germain 25,114,143 2,769,768 - -
Jeffrey Horing 27,829,439 54,472 - -
E. David Hetz 27,695,919 187,992 - -
Murray B. Low 27,829,439 54,472 - -
Approval of 2001 Stock
Incentive Plan 17,201,113 7,416,856 2,449 3,263,493
Ratification of selection
of Arthur Andersen LLP 27,741,278 142,327 306 -
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) On April 24, 2001, we filed a current report on Form 8-K pursuant
to Items 2 and 5 thereof, reporting the acquisition of BCL Vision, Ltd. and the
agreement to acquire Provato, Inc.
24
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 14, 2001 By: /s/ Philip M. St. Germain
-------------------------------------
Philip M. St. Germain
Chief Financial Officer and Treasurer
/s/ Philip M. St. Germain
-------------------------------------
Philip M. St. Germain
Chief Financial Officer
August 14, 2001
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Warrant issued to Accenture LLP, dated April 11, 2001
26