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 September 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 November 7, 2001, 36,937,089 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 September 30, 2001 and
December 31, 2000.............................................. 4
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2001 and 2000.................. 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000.............................. 6
Notes to Consolidated Condensed Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations .................................... 13
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)
September 30, December 31,
2001 2000
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 37,908 $ 50,639
Accounts receivable, net of allowance 13,373 14,526
Prepaid expenses and other current assets 999 459
--------- --------
Total current assets 52,280 65,624
Property and Equipment, net 5,088 8,625
Other Assets 2,476 1,059
Goodwill and Other Purchased Intangibles 34,575 10,080
--------- --------
Total assets $ 94,419 $ 85,388
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,925 $ 3,644
Accrued expenses 6,970 4,598
Deferred revenue 7,444 8,270
--------- --------
Total current liabilities 17,339 16,512
--------- --------
Capital Lease Obligations, net of current portion 138 115
--------- --------
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 - 36,918,759 and 32,940,767 shares
at September 30, 2001 and December 31, 2000, respectively 4 3
Additional paid-in capital 123,635 98,746
Deferred stock-based compensation (105) (154)
Stock subscription receivable 1 --
Foreign currency translation account (3) --
Accumulated deficit (46,590) (29,834)
--------- --------
Total stockholders' equity 76,942 68,761
--------- --------
Total liabilities and stockholders' equity $ 94,419 $ 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 Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net Revenues:
Product $ 7,627 $ 4,658 $ 21,966 $ 9,164
Services 6,152 4,757 20,151 14,892
------- ------- -------- --------
Total net revenues 13,779 9,415 42,117 24,056
Cost of revenues 3,433 3,953 11,962 11,787
------- ------- -------- --------
Gross profit 10,346 5,462 30,155 12,269
Operating expenses:
Sales and marketing 4,684 4,347 16,413 16,547
Research and development 3,871 2,723 11,158 9,976
General and administrative 1,776 1,373 5,926 3,331
Depreciation 584 1,254 3,362 2,846
Amortization of goodwill and other purchased
intangible assets 2,028 -- 4,599 --
In-process research and development 2,700 -- 3,700 --
Restructuring and other charges 3,045 -- 3,045 --
------- ------- -------- --------
Total operating expenses 18,688 9,697 48,203 32,700
------- ------- -------- --------
Loss from operations (8,342) (4,235) (18,048) (20,431)
Other income, net 281 675 1,293 829
------- ------- -------- --------
Net loss (8,061) (3,560) (16,755) (19,602)
Accretion of dividends on redeemable convertible
preferred stock -- 34 -- 544
------- ------- -------- --------
Net loss applicable to common stockholders $(8,061) $(3,594) $(16,755) $(20,146)
======= ======= ======== ========
Basic and diluted net loss per common share $ (0.23) $ (0.12) $ (0.49) $ (1.09)
======= ======= ======== ========
Weighted average shares outstanding 35,815 28,966 34,400 18,539
======= ======= ======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements
5
I-MANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net loss $(16,755) $(19,602)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 7,912 2,769
In-process research and development 3,700 --
Restructuring and other charges 2,385 --
Amortization of deferred stock-based compensation 48 78
Marketing expense related to issuance of warrant 800 2,620
Interest expense related to issuance of warrant -- 48
Compensation expense related to acceleration of stock option vesting 24 --
Changes in current assets and liabilities:
Accounts receivable 2,217 (1,480)
Prepaid expense and other current assets (348) 185
Accounts payable (837) (571)
Accrued expenses 1,065 434
Deferred revenue (1,599) (667)
-------- --------
Net cash used in operating activities (1,388) (16,186)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (1,610) (7,542)
Additional cash paid to acquire Chi-Cor Information Management, Inc. (1,979) --
Cash paid to acquire Vintage Software, Inc. (731) --
Cash paid to acquire Intersoft International, Inc. (591) --
Cash paid to acquire BCL Vision, Ltd. (4,539) --
Cash paid to acquire Provato, Inc. (3,382) --
Increase in other assets (1,160) (991)
-------- --------
Net cash used in investing activities (13,992) (8,533)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from initial public offering and over-allotment exercise -- 70,709
Proceeds from exercise of common stock warrants -- 150
Payments on capital lease obligations (42) (30)
Proceeds from exercise of stock options 2,586 334
Proceeds from Employee Stock Purchase Plan 108 --
Bank overdraft -- (229)
-------- --------
Net cash provided by financing activities 2,652 70,934
-------- --------
Effect of foreign exchange rate changes (3) --
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (12,731) 46,215
Cash and Cash Equivalents, beginning of period 50,639 15,322
-------- --------
Cash and Cash Equivalents, end of period $ 37,908 $ 61,537
======== ========
6
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 43 $ 44
======== ========
Supplemental Disclosure of Noncash Activities:
Conversion of preferred stock to common stock $ -- $ 13,060
======== ========
Accretion of dividends on Series C preferred stock $ -- $ 544
======== ========
Property and equipment acquired under capital lease $ -- $ 173
======== ========
Issuance of common stock pursuant to cashless exercise of warrant $ 100 $ --
======== ========
Issuance of warrants to purchase common stock $ 800 $ 3,868
======== ========
As of September 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 $ (2,634) $ --
Additional cash paid 1,979 --
Additional common stock to be issued 555 --
-------- --------
Additional liabilities assumed $ (100) $ --
======== ========
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 $ (3,313) $ --
Cash paid for acquisition 591 --
Common stock issued 2,311 --
-------- --------
Liabilities assumed $ (411) $ --
======== ========
On April 9, 2001, the Company acquired BCL Vision, Ltd. as follows:
Fair value of assets acquired $(12,119) $ --
Cash paid for acquisition 4,539 --
Common stock issued 6,900 --
-------- --------
Liabilities assumed $ (680) $ --
======== ========
On August 16, 2001, the Company acquired Provato, Inc. as follows:
Fair value of assets acquired $(15,713) $ --
Cash paid for acquisition 3,382 --
Common stock and warrant issued 11,207 --
-------- --------
Liabilities assumed $ (1,124) $ --
======== ========
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 nine months ended September 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 1,342,717 and
4,910,570 for the three months ended September 30, 2001 and 2000, respectively,
and 2,588,597 and 10,181,393 for the nine months ended September 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 Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Customer A 18% 37% 15% 32%
Customer B * 13% * 10%
* 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 at a derived per share value of $19.65. 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 September 30, 2001, June 30, 2001 and March 31, 2001
and the closing price of I-many stock on those respective dates, the ChiCor
shareholders were entitled to receive additional consideration valued at
$409,000, $713,000 and $1.3 million, respectively. The earnout amounts for the
first two quarters of 2001 were paid in cash and stock prior to September 30,
2001. The additional consideration for the three-month period ended September
30, 2001 will be paid in cash and stock no later than November 15, 2001. At
September 30, 2001, the stock portion of this consideration with a market value
of $43,000 was recorded as Stock Subscription Receivable and the $366,000 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 earnout amounts realized during
the three-month period ended December 31, 2001 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
pro forma information for the periods ended September 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 $3.2 million included cash of $500,000, 115,733 shares of
Company common stock with a fair value of $2.2 million, assumed liabilities of
$411,000 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 pro forma
9
information for the periods ended September 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 periods ended September 30, 2001 and June 30, 2001, the Intersoft
shareholders were entitled to receive additional consideration of $33,000 and
$39,000, respectively, to be paid in stock within 45 days of the period then
ended. The consideration amount payable at September 30, 2001 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 $12.1 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 $680,000 and transaction costs of $500,000. 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 consideration of approximately $12.1
million to the tangible and intangible assets acquired. Based on this appraisal,
$952,000 was allocated to tangible assets and $10.2 was allocated to goodwill
and other intangible assets. The portion of the purchase price allocated to
in-process research and development, totaling $1.0 million, was based on a
risk-adjusted cash flow appraisal method and represents projects that had not
yet reached technological feasibility and had no alternative future use. This
portion of the purchase price was expensed upon consummation of the BCL
acquisition.
PROVATO, INC.
On August 16, 2001, the Company acquired in a merger transaction all of
the outstanding capital stock of Provato, Inc. ("Provato"). The purchase price
of $15.7 million consisted of 1,975,739 shares of the Company's common stock
valued at approximately $11.2 million, a warrant to purchase 4,546 shares of the
Company's stock valued at approximately $25,000, the assumption of approximately
$1.1 million of liabilities, and $1.7 million in convertible notes issued by the
Company to Provato during the two month period immediately preceding the merger.
In connection with the acquisition, the Company has incurred transaction costs
of $1.8 million, which included approximately $1.2 million of Provato's
merger-related costs. 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 Provato beginning on the date of
acquisition. The Company retained an independent appraiser for the purpose of
allocating the merger consideration of $15.7 million to the tangible and
intangible assets acquired. Based on this appraisal, $906,000 was allocated to
tangible assets and $12.1 was allocated to goodwill and other intangible assets.
The portion of the purchase price allocated to in-process research and
development, totaling $2.7 million, was based on a risk-adjusted cash flow
appraisal method and represents projects that had not yet reached technological
feasibility and had no alternative future use. This portion of the purchase
price was expensed upon consummation of the Provato acquisition.
10
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 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. To date, no such warrants have been earned or paid.
NOTE 7. RESTRUCTURING AND OTHER CHARGES
In the quarter ended September 30, 2001, the Company recorded a $3.0
million charge in connection with a restructuring of the Company's operations
and the abandonment of its proprietary internet portal. Included in the $3.0
million charge is $2.4 million, which is the net carrying value of the Company's
internet portal, $540,000 in severance pay, and $108,000 in facility lease
costs. In abandoning its internet portal, the Company has ceased all support of
the portal site, discontinued all related development, and eliminated or
reassigned all personnel previously
11
assigned to the project. The balance of the severance and related charges were
incurred in association with the Company's decision to restructure certain of
its operations in order to improve workforce efficiencies.
NOTE 8. 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
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.
In August 2001, the FASB issued SFAS no. 144, "Accounting for the
Impairment or Disposal of Long-Lived Asssets". This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This statement
provides guidance on recognizing and measuring impairment for long-lived assets
excluding certain long-lived assets, such as goodwill, non-amortized intangible
assets and deferred tax assets. This statement is effective for the Company in
the first quarter of its fiscal year ending December 2002. 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 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 10 largest and
16 of the 20 largest 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,
and software licensed on an application service provider basis which we host on
our servers.
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 38.1% of
net revenues in the nine months ended September 30, 2000 and 52.2% of net
revenues for the nine months ended September 30, 2001. Service revenues include
maintenance and support fees directly related to our licensed software products,
professional service fees derived from consulting, installation, business
analysis and training services related to our software products, and hosting
fees. Service revenues accounted for 61.9% of net revenues in the nine months
ended September 30, 2000 and 47.8% of net revenues for the nine months ended
September 30, 2001.
Software licenses are attributable to the addition of new customers,
and the expansion of existing customer relationships through licenses
covering additional users, licenses of additional software products and
license renewals. 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
$36.9 million for the nine months ended September 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 370 employees at September 30, 2001.
RECENT EVENTS
On August 16, 2001 we acquired in a merger transaction all of the
outstanding capital stock of Provato, Inc. for a purchase price of $15.7
million. The merger consideration consisted of 1,975,739 shares of the Company's
common stock with a fair value at the time of acquisition of $11.2 million, a
warrant to purchase 4,546 shares of the Company's stock valued at $25,000, $1.7
million in convertible notes issued by the Company to Provato during the two
month period immediately preceding the merger, assumed liabilities of $1.1
million and transaction costs of $1.8 million. This acquisition was recorded in
the quarter ended September 30, 2001 and the Provato operating results from the
date of acquisition are included in the September 30, 2001 financial statements.
In the quarter ended September 30, 2001, we recorded a $3.0 million
charge in connection with a restructuring of our operations and the abandonment
of our proprietary internet portal. The $3.0 million charge consisted of $2.4
million, which was the net carrying value of the internet portal, $540,000 in
severance pay, and $108,000 in facility closing costs. As part of its
restructuring and efforts to improve workforce efficiencies, the Company reduced
its workforce by 79 employees during the third quarter of 2001.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
NET REVENUES
Net revenues increased by $4.4 million, or 46%, to $13.8 million for
the quarter ended September 30, 2001 from $9.4 million for the quarter ended
September 30, 2000. Product revenues increased by $3.0 million, or 64%, to $7.6
million for the quarter ended September 30, 2001, from $4.7 million for the
quarter ended September 30, 2000. This increase is primarily attributable to
increases in both the number of software licenses sold and the average size of
the licenses.
As a percentage of total net revenues, product revenues increased to
55.4% for the quarter ended September 30, 2001, from 50.4% for the quarter ended
September 30, 2000. This increase in product revenues as a percentage of total
net revenues is attributable to our software licensing activity during the
quarter, as compared to the more modest growth of our professional services
business. Service revenues increased by $1.4 million, or 29%, to $6.2 million
for the quarter ended September 30, 2001, from $4.8 million for the quarter
ended September 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
14
$520,000, or 13%, to $3.4 million for the quarter ended September 30, 2001, from
$4.0 million for the quarter ended September 30, 2000. This decrease is due
primarily to the reduction in subcontractor consulting costs from $1.4 million
in the third quarter of 2000 to $400,000 in the third 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 90 at
September 30, 2000 to 102 at September 30, 2001.
As a percentage of total net revenues, cost of revenues decreased to
24.9% for the quarter ended September 30, 2001, from 42.0% for the quarter ended
September 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 generate lower margins
than product revenues) and a decrease in subcontractor costs.
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. Sales and marketing expense increased
by $337,000, or 8%, to $4.7 million in the three months ended September 30, 2001
from $4.3 million in the three months ended September 30, 2000. This increase in
sales and marketing expense is primarily the result of an increase in headcount
levels from 68 at September 30, 2000 to 92 at September 30, 2001, partially
offset by significant reductions in spending for advertising, marketing and
promotional materials and decreases in travel expenses. As a percentage of total
net revenues, sales and marketing expense decreased to 34.0% for the quarter
ended September 30, 2001 from 46.2% for the quarter ended September 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 $1.1 million, or 42%, to $3.9 million for the
quarter ended September 30, 2001, from $2.7 million for the quarter ended
September 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 90 at September 30, 2000 to 142 at
September 30, 2001, partially offset by a decrease in subcontractor costs. As a
percentage of total net revenues, research and development expense decreased
slightly to 28.1% for the quarter ended September 30, 2001, from 28.9% for the
quarter ended September 30, 2000.
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
$403,000, or 29%, to $1.8 million in the third quarter of 2001 from $1.4 million
in the third quarter of 2000. As a percentage of total net revenues, general and
administrative expenses decreased to 12.9% for the quarter ended September 30,
2001, from 14.6% for the quarter ended September 30, 2000. The increase in
general and administrative expenses is primarily attributable to an increase in
salary costs, higher professional services fees, and to other costs associated
with being a publicly-held company.
DEPRECIATION. From March 2000 to June 2001, depreciation included
amortization of capitalized internal-use software development costs related to
the company's Internet portal. Excluding amortization related to the Internet
portal, which we wrote down to zero during the third quarter of 2001,
depreciation expense increased by $212,000, or 57%, from $372,000 in the third
quarter of 2000 to $584,000 in the third quarter of 2001. This increase is a
result of additions of computer hardware and software related to growth in
headcount and other infrastructure expenditures.
15
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS.
Amortization of goodwill and other purchased intangibles, related to our
acquisitions of ChiCor in November 2000, Vintage in January 2001, Intersoft in
March 2001, BCL Vision in April 2001 and Provato in August 2001, amounted to
$2.0 million in the quarter ended September 30, 2001. There was no amortization
of goodwill and other purchased intangibles in the quarter ended September 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 Provato, Inc., we allocated $2.7 million of the purchase price to in-process
research and development, which was immediately expensed as it had no future
alternative use. This allocation was based on an independent appraisal conducted
for the purpose of allocating the initial consideration to the tangible and
intangible assets acquired in the Provato acquisition.
RESTRUCTURING AND OTHER CHARGES. In the quarter ended September 30,
2001, we recorded a $3.0 million charge in connection with a restructuring of
the Company's operations and the abandonment of its proprietary internet portal.
Included in the $3.0 million charge is $2.4 million, which is the net carrying
value of the internet portal, $540,000 in severance pay, and $108,000 in
facility lease costs.
OTHER INCOME, NET. Other income, net decreased by $394,000, or 58%,
from $675,000 in the quarter ended September 30, 2000, to $281,000 in the
quarter ended September 30, 2001. This decrease is primarily the result of
reduced interest yields and significantly lower average cash balances during the
quarter.
PROVISION FOR INCOME TAXES. We incurred operating losses for all
quarters in 2000 and the first three 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 or benefit
for income taxes has been recorded in the three month periods ended September
30, 2001 and 2000.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
NET REVENUES
Net revenues increased by $18.1 million, or 75%, to $42.1 million for
the nine months ended September 30, 2001 from $24.1 million for the nine months
ended September 30, 2000. Product revenues increased by $12.8 million, or 140%,
to $22.0 million for the nine months ended September 30, 2001, from $9.2 million
for the nine months ended September 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
52.2% for the nine months ended September 30, 2001, from 38.1% for the nine
months ended September 30, 2000. This increase in product revenues as a
percentage of total net revenues is attributable to our software licensing
activity during the period, as compared to the more modest growth of our
professional services business. Service revenues increased by $5.3 million, or
35%, to $20.2 million for the nine months ended September 30, 2001, from $14.9
million for the nine months ended September 30, 2000.
COST OF REVENUES
Cost of revenues increased by $175,000, or 1%, to $12.0 million for the
nine months ended September 30, 2001, from $11.8 million for the nine months
ended September 30, 2000. This increase is due primarily to the increased number
of employees in our professional services group, offset by a significant
decrease in subcontractor consulting costs from $5.0 million in the nine months
ended September 30, 2000 to $2.4 million in the nine months ended September 30,
2001.
16
As a percentage of total net revenues, cost of revenues decreased to
28.4% for the nine months ended September 30, 2001, from 49.0% for the nine
months ended September 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 generate
lower margins than product revenues) and a decrease in subcontractor costs.
OPERATING EXPENSES
SALES AND MARKETING. 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 & Gamble,
respectively. Excluding the charges related to the issuance of warrants, sales
and marketing expense increased by $1.7 million, or 12%, to $15.6 million in the
nine months ended September 30, 2001 from $13.9 million in the nine months ended
September 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, and decreases in travel expenses. As a percentage of
total net revenues, sales and marketing expense excluding non-cash warrant
charges decreased to 37.1% for the nine months ended September 30, 2001, from
57.9% for the nine months ended September 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
nine months ended September 30, 2001 increased by $1.2 million, or 12%, to $11.2
million in the nine months ended September 30, 2001 from $10.0 million in the
nine months ended September 30, 2000. The increase in research and development
expenses is primarily the result of an increase in the number of research and
development personnel, partially offset by a significant reduction in
subcontractor costs associated principally with the development of our Internet
portal incurred during the first half of 2000. In the nine months ended
September 30, 2000, subcontractor costs amounting to $4.3 million were expensed
as incurred, as compared to $900,000 in the nine months ended September 30,
2001. As a percentage of total net revenues, research and development expense
decreased to 26.5% for the nine months ended September 30, 2001, from 41.5% for
the nine months ended September 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $2.6 million, or 78%, to $5.9 million in the first three quarters
of 2001 from $3.3 million for the first three quarters of 2000. As a percentage
of total net revenues, general and administrative expenses increased slightly to
14.1% for the nine months ended September 30, 2001, from 13.8% for the nine
months ended September 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 professional services fees, and
to other costs associated with being a publicly-held company during the first
two quarters of 2001.
DEPRECIATION. From March 2000 to June 2001, depreciation included
amortization of capitalized internal-use software development costs related to
the company's Internet portal. Depreciation expense increased by $516,000, or
18%, from $2.8 million in the first nine months of 2000 to $3.4 million in the
first nine months of 2001. This increase is the result of additions of computer
hardware and software for our web-based initiatives, headcount growth and other
infrastructure expenditures. In the nine months ended September 30, 2001, the
amortization expense related to capitalized internal-use software development
costs amounted to $1.7 million, as compared to $1.8 million of amortization in
the nine months ended September 30, 2000.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS.
Amortization of goodwill and other purchased intangibles related to our recent
acquisitions amounted to $4.6 million in the nine months ended September 30,
2001. There was no amortization of goodwill and other purchased intangibles in
the nine months ended September 30, 2000.
17
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
acquisitions of BCL Vision, Ltd. and Provato, Inc., we allocated a total $3.7
million of the purchase prices to in-process research and development, which was
immediately expensed as it had no future alternative use. These allocations were
based on independent appraisals conducted for the purpose of allocating the
initial consideration to the tangible and intangible assets acquired in the
respective acquisitions.
RESTRUCTURING AND OTHER CHARGES. In the quarter ended September 30,
2001, we recorded a $3.0 million charge in connection with a restructuring of
the Company's operations and the abandonment of its proprietary internet portal.
Included in the $3.0 million charge is $2.4 million, which is the net carrying
value of the internet portal, $540,000 in severance pay, and $108,000 in
facility lease costs.
OTHER INCOME, NET. Other income, net increased by $464,000, or 56%,
from $829,000 in the nine months ended September 30, 2000, to $1.3 million in
the nine months ended September 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, which occurred in July 2000.
PROVISION FOR INCOME TAXES. We incurred operating losses for all
quarters in 2000 and the first three 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 or benefit
for income taxes has been recorded in the nine months ended September 30, 2001
and 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 were 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 September 30, 2001, we had cash and cash equivalents of $37.9
million and a net working capital of $34.9 million. Also on September 30, 2001,
we had no long-term or short-term debt, other than obligations under capital
lease financings.
On August 16, 2001, we acquired Provato, Inc. for a purchase price of
$15.7 million, including $1.7 million in the form of convertible notes issued by
us to Provato during the two month period immediately preceding the merger,
common stock and a warrant valued at $11.2 million at the time of closing, $1.1
million of assumed liabilities, and $1.8 million of transaction costs. We used
existing cash resources to fund the convertible notes portion of the purchase
price and the merger transaction costs.
Net cash used in operating activities for the nine months ended
September 30, 2001 was $1.4 million, as compared to net cash used in operating
activities of $16.2 million in the nine months ended September 30, 2000. For the
nine months ended September 30, 2001, net cash used in operating activities
consisted primarily of our net loss of $16.8 million, as adjusted for non-cash
items - depreciation and amortization, in-process research and development,
asset write-down and warrant charges - totaling $14.8 million, and a $1.6
million decrease in deferred revenue, partially offset by a $2.2 million
decrease in accounts receivable. Net cash used in operating activities for the
nine months ended September 30, 2000 consisted principally of our net loss of
$19.6 million, as adjusted for depreciation and
18
amortization and a non-cash warrant charge, which together totaled $5.4 million,
and a $1.5 million increase in accounts receivable.
Net cash used in investing activities was $14.0 million for the nine
months ended September 30, 2001 and $8.5 million for the nine months ended
September 30, 2000. Net cash used in investing activities for the nine months
ended September 30, 2001 consisted of $1.6 million in purchases of property
and equipment, $10.8 million related to the acquisitions of ChiCor, Vintage,
Intersoft, BCL Vision and Provoto, and a $1.6 million investment in preferred
stock of 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 nine months ended September 30,
2000 consisted primarily of purchases of property and equipment, including
$4.7 million of capitalized internal-use software development costs related
to out Internet portal.
Net cash provided by financing activities was $2.7 million for the nine
months ended September 30, 2001, primarily from proceeds from stock option
exercises. Net cash provided by financing activities was $70.9 million for the
nine months ended September 30, 2000, consisting principally of $70.7 million in
net proceeds from our initial public offering and over-allotment exercise.
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 the impact of future
acquisitions, if any. 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.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN 1999 AND 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 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 $16.8
million in the nine months ended September 30, 2001, and we had an accumulated
deficit at September 30, 2001 of $46.6 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, our second quarter 2001 results were impacted by a
number of factors that deferred purchases from us, and we cannot assure you that
we will not be affected by these factors in future periods. 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
19
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.
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
offices in Chicago, Illinois and London, United Kingdom. The geographic distance
between these offices could make it 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 $36.5 million in the year ended December 31, 2000, and to
$42.1 million in the nine months ended September 30, 2001, and the number of our
employees increased from 67 as of December 31, 1997 to 370 as of September 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 THAT 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 nine months of 2001, one customer accounted for approximately 15
percent of our total revenues. As a result, demand for our solutions could be
affected by any factors that 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 that 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.
20
OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET FOR OUR CARS
PRODUCTS 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 that 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 relationships 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 or
terrorism 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.
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 and the issuance of debt could
limit our available cash and accordingly restrict our activities.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, WE MAY HAVE DIFFICULTY
INTEGRATING THOSE NEW TECHNOLOGIES OR BUSINESSES
We have acquired ChiCor, Intersoft, BCL Vision Ltd. and Provato, which
are located in Chicago, Illinois, Cleveland, Ohio, London, U.K. and Oakland,
California, respectively. 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
21
In connection with our acquisitions of ChiCor, Vintage, Intersoft, BCL
Vision and Provato, we have recorded $25.8 million of goodwill and $13.8 million
in other intangible assets. In addition, we recorded a total of $3.7 million in
charges during the second and third quarters of 2001 for write-offs of a portion
of the purchase prices of BCL Vision and Provato as in-process research and
development. 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 clients, software companies that target the contract
management markets, professional services organizations and Internet-based
merchants offering healthcare and other products through online catalogs. 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.
22
CURRENT ECONOMIC CONDITIONS MAY WEAKEN OUR SALES
Current world economic and political conditions, including the effects
of the September 11, 2001 terrorist attacks and the resulting military conflict,
may reduce the willingness of our customers and prospective customers to commit
funds to purchase our products and services. The resulting loss or delay in our
sales 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 September 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 September 30, 2001 amounted to 3.21
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 August 16, 2001, the Company issued 1,975,739 shares of its
unregistered common stock and a warrant to purchase an additional 4,546 shares
of common stock pursuant to its acquisition of Provato, Inc. These shares are
exempt from registration under Rule 506 under the Securities Act of 1933.
On August 10, 2001, the Company issued 1,999 shares of its unregistered
common stock as additional consideration pursuant to its March 2001 acquisition
of Intersoft International, Inc. On August 13, 2001 and September 13, 2001, the
Company issued 16,509 shares and 4,970 shares, respectively, of its unregistered
common stock as additional consideration pursuant to its November 2000
acquisition of Chi-Cor Information Management, Inc. 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
None
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 August 30, 2001, we filed a current report on Form 8-K
pursuant to Items 2 and 7 thereof, reporting the acquisition of
Provato, Inc.
(c) On October 30, 2001, we filed a current report of Form 8-K/A
pursuant to Items 2 and 7 thereof, reporting the audited
financial statements and pro forma financial information for the
acquisition of 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: November 15, 2001 By: /s/ Kevin F. Collins
---------------------------------
Kevin F. Collins
Chief Financial Officer and Treasurer
/s/ Kevin F. Collins
-------------------------------------
Kevin F. Collins
Chief Financial Officer
November 15, 2001
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Employment Agreement, dated as of July 1, 2001, between
Registrant and Terrence M. Nicholson
10.2 Employment Agreement, dated as of July 1, 2001, between
Registrant and Timothy P. Curran
10.3 Employment Agreement, dated as of July 1, 2001, between
Registrant and Kevin Collins