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 March 31, 2002
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
5/th/ 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 May 9, 2002, 40,318,332 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 March 31, 2002 and
December 31, 2001 ........................................................... 4
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 ............................................... 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 ............................................... 6
Notes to Consolidated Condensed Financial Statements ........................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 25
Item 2. Changes in Securities and Use of Proceeds ................................... 25
Item 3. Defaults upon Senior Securities ............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders ......................... 25
Item 5. Other Information ........................................................... 25
Item 6. Exhibits and Reports on Form 8-K ............................................ 26
Signatures .................................................................. 26
Exhibit Index ............................................................... 27
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
I-MANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2002 2001
------ ------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 41,138 $ 36,015
Restricted cash 17,000 -
Accounts receivable, net of allowance 15,317 13,412
Prepaid expenses and other current assets 972 692
--------- ---------
Total current assets 74,427 50,119
Property and Equipment, net 4,558 4,709
Other Assets 2,301 2,329
Goodwill and Other Purchased Intangibles 45,637 34,814
--------- ---------
Total assets $ 126,923 $ 91,971
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,373 $ 2,207
Accrued expenses 9,004 7,082
Deferred revenue 7,277 7,206
--------- ---------
Total current liabilities 18,654 16,495
Capital Lease Obligations, net of current portion 78 105
Deferred Rent 72 115
Commitments and Contingencies
Series A Redeemable Convertible Preferred Stock 17,000 -
--------- ---------
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 - 40,265,374 and 37,200,988 shares
at March 31, 2001 and December 31, 2001, respectively 4 4
Additional paid-in capital 144,030 125,224
Deferred stock-based compensation (82) (94)
Stock subscription payable 4 1,168
Accumulated other comprehensive income (loss) 14 (5)
Accumulated deficit (52,851) (51,041)
--------- ---------
Total stockholders' equity 91,119 75,256
--------- ---------
Total liabilities and stockholders' equity $ 126,923 $ 91,971
========= =========
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
ended March 31,
2002 2001
---- ----
Net Revenues:
Product $ 8,525 $ 8,481
Services 6,490 7,330
--------- ---------
Total net revenues 15,015 15,811
Cost of revenues 3,547 4,902
--------- ---------
Gross profit 11,468 10,909
Operating expenses:
Sales and marketing 5,286 5,142
Research and development 3,957 3,497
General and administrative 1,436 1,966
Depreciation 591 1,366
Amortization of goodwill and other intangible assets 1,043 847
In-process research and development 1,000 -
--------- ---------
Total operating expenses 13,313 12,818
--------- ---------
Loss from operations (1,845) (1,909)
Other income, net 35 620
--------- ---------
Net loss $ (1,810) $ (1,289)
========= =========
Basic and diluted net loss per common share $ (0.05) $ (0.04)
========= =========
Weighted average shares outstanding 37,984 33,095
========= =========
The accompanying notes are an integral part of these financial statements
5
I-MANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
---------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net loss $ (1,810) $ (1,289)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization 1,620 2,188
In-process research and development 1,000 --
Amortization of deferred stock-based compensation 12 25
Deferred rent (44) --
Changes in current assets and liabilities net of acquisitions:
Accounts receivable (1,855) (489)
Prepaid expense and other current assets (241) (390)
Accounts payable 166 (861)
Accrued expenses (1,333) 752
Deferred revenue 34 669
-------- --------
Net cash provided by (used in) operating activities (2,451) 605
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (227) (963)
Additional cash paid to acquire Chi-Cor Information Management, Inc. -- (766)
Cash paid to acquire Vintage Software, Inc. -- (731)
Cash paid to acquire Intersoft International, Inc. -- (591)
Additional cash paid to acquire BCL Vision, Ltd. (40) --
Cash paid to acquire Net Return, LLC (634) --
Cash paid to acquire Menerva Technologies, Inc. (331) --
(Increase) decrease in other assets 31 (133)
-------- --------
Net cash used in investing activities (1,201) (3,184)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from private placement sale of common stock 7,437 --
Payments on capital lease obligations (27) (12)
Proceeds from exercise of stock options 1,346 581
-------- --------
Net cash provided by financing activities 8,756 569
-------- --------
Effect of foreign exchange rate changes 19 --
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 5,123 (2,010)
Cash and Cash Equivalents, beginning of period 36,015 50,639
-------- --------
Cash and Cash Equivalents, end of period $ 41,138 $ 48,629
======== ========
6
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 12 $ 7
======== ========
Supplemental Disclosure of Noncash Activities:
Issuance of redeemable convertible preferred stock, proceeds held in
escrow pending conversion $ 17,000 $ --
======== ========
As of March, 2001, the Company recorded additional costs related to its
acquisition of Chi-Cor Information Management, Inc. as follows:
Fair value of additional assets acquired $ -- $ (1,453)
Additional cash paid -- 766
Additional common stock issued -- 677
-------- --------
Additional liabilities assumed $ -- $ (10)
======== ========
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 $ (4) $ (3,242)
Cash paid for acquisition -- 591
Common stock issued 4 2,240
-------- --------
Liabilities assumed $ -- $ (411)
======== ========
As of March 31, 2002, the Company incurred additional costs related to its
Acquisition of BCL Vision, Ltd. as follows:
Fair value of assets acquired $ (40) $ --
Cash paid for acquisition 40 --
-------- --------
Liabilities assumed $ -- $ --
======== ========
On March 12, 2002, the Company acquired NetReturn LLC as follows:
Fair value of assets acquired $ (3,420) $ --
Cash paid for acquisition 634 --
Common stock issued 2,750 --
-------- --------
Liabilities assumed $ (36) $ --
======== ========
On March 28, 2002, the Company acquired Menerva Technologies, Inc. as follows:
Fair value of assets acquired $ (9,691) $ --
Cash paid for acquisition 331 --
Cash to be paid for acquisition subsequent to March 31, 2002 2,484 --
Common stock and options issued 6,105 --
-------- --------
Liabilities assumed $ (771) $ --
======== ========
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, 2001 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, 2001 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 ended March 31, 2002 may not be indicative of
the results that may be expected for the year ending December 31, 2002, 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 numbers of common equivalent shares excluded
from the diluted loss per share calculation were 3,342,445 and 3,336,022 for the
three months ended March 31, 2002 and 2001, respectively.
NOTE 3. RECLASSIFICATION OF PRIOR YEAR ACCOUNT BALANCES
Effective in January 2002, in accordance with Issue No. 01-14, INCOME
STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR "OUT-OF-POCKET"
EXPENSES INCURRED, as promulgated by the Emerging Issues Task Force (EITF) of
the Financial Accounting Standards Board (FASB), the Company accounts for
reimbursements of out-of-pocket expenses related to its professional services
business as revenue. Previously, these amounts were classified as reductions to
cost of revenues in the Company's financial statements. For comparative
purposes, the company has reclassified out-of-pocket reimbursement amounts as
revenue in its 2001 financial statements. The effect of this reclassification is
an increase in net revenues of $546,000 for the three-month period ended March
31, 2001. In the three-month period ended March 31, 2002, reimbursements of
out-of-pocket expenses amounted to $275,000.
NOTE 4. PRIVATE PLACEMENT
On February 20, 2002, the Company completed a private placement of its
common stock and preferred stock, issuing 1,100,413 shares of its common stock
and the warrants described below at a total price of $7.27 per share and 1,700
shares of redeemable convertible preferred stock at a purchase price of $10,000
per share. The preferred stock has no dividends or coupon, no liquidation
preference, no voting rights and no financial covenants. The Company received
proceeds of approximately $7.4 million, net of commissions and other fees, from
the sale of the common stock. The proceeds of $17.0 million related to the
issuance of preferred stock are being held in escrow pending conversion or
redemption of the shares of preferred stock.
8
The preferred stock is convertible into common stock at a price equal to
the higher of (i) a floor price set by the Company, currently set at $7.00 per
share, and (ii) a conversion price equal to the greater of $8.72 per share (but
see below) or 80% of the average price of the Company's stock, measured over a
20-day period following the effectiveness of a registration statement. However,
the conversion price of the preferred stock will not exceed 93% of the average
price of the Company's stock, measured over the same 20-day period following the
effectiveness of a registration statement. Also, the Company has the right to
establish a new floor price above $7.00. In the event that the preferred stock
is not converted into common stock by the date set for conversion, expected to
be on or about August 2, 2002, the shares of preferred stock will be redeemed
and the proceeds held in escrow, plus interest, will be refunded to the
investors.
As the initial, active conversion price of $7.00 per share is greater that
the fair value of the underlying securities as the date of issuance, the Company
concluded that, upon issuance, there was no beneficial conversion feature as
defined in EITF Issue No. 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS.
However, as noted above, the conversion price is contingently adjustable and
therefore may require beneficial conversion feature accounting in a future
period, depending on whether or not the conversion price is adjusted and, if so,
whether or not the new conversion price creates a beneficial conversion feature,
pursuant to EITF Issues No. 98-5 and 00-27, APPLICATION OF EITF NO. 98-5 TO
CERTAIN CONVERTIBLE INSTRUMENTS. In the event that such accounting is required,
the Company would be required to compute the intrinsic value of the beneficial
conversion feature and to amortize such amount as a preferred stock dividend
over the remaining redemption period of the preferred stock. The effect of such
accounting would be to reduce earnings available for common stockholders.
The warrants issued by the Company to the common stock investors consist of
a warrant exercisable for 180 days after the closing to purchase up to an
additional 165,062 shares at an exercise price of $7.27 per share, and a
seven-year warrant to purchase up to an additional 165,062 shares at an exercise
price of $7.50 per share. If and only if the preferred stock is converted into
common stock, the Company will grant a seven-year common stock warrant to the
preferred stock investors to purchase up to a number of additional shares equal
to 15% of the shares of common stock received on conversion, at an exercise
price equal to 120% of the conversion price.
NOTE 5. SIGNIFICANT CUSTOMERS
The Company had one customer whose revenues individually represented 14% of
total net revenues for the three-month period ended March 31, 2001. None of the
Company's customers individually generated revenues comprising at least 10% of
total net revenues during the three-month period ended March 31, 2002.
NOTE 6. 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 a $754,000 outstanding bank
loan, 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, based upon achievement of certain quarterly
revenue and income milestones through December 31, 2001, the ChiCor shareholders
received additional consideration of $3.5 million, consisting of $2.3 million in
cash and 117,781 shares of Company common stock with a fair value as measured at
the respective quarter ends of $1.2 million. 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 liabilities assumed. The portion of the purchase price allocated to
in-process research and development, totaling $2.4 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 ChiCor
acquisition. The entire $3.5 million in additional consideration was treated as
additional purchase price and recorded as goodwill.
9
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 $433,000 of cash, 34,096 shares of Company common stock with a
fair value of $400,000, earnout bonuses of $200,000, 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 period ended March 31, 2002 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 $500,000 of cash, 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, based upon achievement
of certain quarterly revenue and income milestones through March 31, 2002, the
Intersoft shareholders were entitled to receive additional consideration of
$84,000, consisting of 5,373 shares of Company common stock. The consideration
amount payable at March 31, 2002 of $4,000, for the three-month period then
ended, was recorded as Stock Subscription Payable and treated as additional
purchase price and recorded as goodwill. 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 information for the period
ended March 31, 2002 has been presented as this purchase was not material.
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. 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
10
of $16.0 million consisted of 1,975,739 shares of the Company's common stock
valued at approximately $11.2 million, a fully-vested warrant to purchase 4,546
shares of the Company's stock valued at approximately $25,000, the assumption of
approximately $1.3 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 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 Statement of Financial Accounting
Standards (SFAS) No. 141, 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 $16.0 million to the tangible and intangible assets
acquired. Based on this appraisal, $870,000 was allocated to tangible assets and
$12.4 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.
NETRETURN LLC
On March 12, 2002, the Company acquired substantially all the assets of
NetReturn, LLC ("NetReturn"), a Connecticut limited liability company located in
Fairfield, Connecticut, for a purchase price of up to $5.4 million. The primary
asset acquired was NetReturn's library of software applications and tools. The
initial consideration of approximately $3.4 million consisted of $500,000 of
cash, 429,017 shares of the Company's common stock with a fair value at the time
of acquisition of $2.8 million and estimated transaction costs of $134,000. In
addition, upon achievement of certain revenue milestones through March 31, 2003,
the NetReturn shareholders are entitled to additional consideration of up to
$2.0 million, payable in cash or stock at the Company's election. The
acquisition was accounted for as a purchase business combination in accordance
with SFAS No. 141, BUSINESS COMBINATIONS. The Company has consolidated the
operating results of NetReturn beginning on the date of acquisition. No pro
forma information for the periods ended March 31, 2002 has been presented as
this purchase was not material.
MENERVA TECHNOLOGIES, INC.
On March 28, 2002, the Company acquired all of the outstanding capital
stock of Menerva Technologies ("Menerva"), a Delaware corporation located in
Redwood City, California which markets buy-side contract software solutions, for
a purchase price of up to $12.7 million. The initial consideration of
approximately $9.7 million consisted of cash of $2.5 million, 982,191 shares of
the Company's common stock with a fair value at the time of acquisition of $6.0
million, the assumption of fully-vested stock options to purchase an aggregate
of 25,743 shares of Company stock valued at approximately $143,000, assumed
liabilities of $772,000 and estimated transaction costs of $340,000. In
addition, upon achievement of certain revenue milestones through March 31, 2003,
the former Menerva shareholders are entitled to additional consideration of up
to $3.0 million, payable in cash or stock at the Company's election. The
acquisition was accounted for as a purchase business combination in accordance
with SFAS No. 141, BUSINESS COMBINATIONS. The Company has consolidated the
operating results of NetReturn beginning on the date of acquisition.
NOTE 7. 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
designated the Company for a period of at least three years as their exclusive
provider of purchase contract management software for their
11
commercial products group. In addition, P&G 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 did not require any
future product purchases or performance of any kind. 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 $1.2 million 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. Since future revenue will be generated from referrals
and not directly from P&G, the Company will treat the fair value of future
warrants issued as sales and marketing expense. In essence, the value of any
such warrants will be a sales commission.
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. The warrant does not require any future product
purchases or performance of any kind. Since Accenture is an integration provider
for the Company's products and not a customer, the full fair value of the
warrant issued to Accenture was recorded as sales and marketing expense.
Accenture is a sales agent, not a principal as defined in EITF 99-19. 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. Since future revenue
will be generated from referrals and not directly from Accenture, the Company
will treat the fair value of future warrants issued as sales and marketing
expense. In essence, the value of such warrants will be a sales commission. To
date, no such warrants have been earned or paid.
NOTE 8. 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 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.
In the quarter ended December 31, 2001, the Company recorded $1.7 million
in charges in connection with the closing of its Oakland, California office and
a write-down in value of certain intangible assets. Included in the $1.7 million
charge is $368,000 in severance costs, $445,000 in facility lease and related
12
costs, and a write-down $895,000 of the carrying value of goodwill related to
the Intersoft acquisition.
As of March 31, 2002, $458,000 in restructuring charges is accrued and
unpaid, consisting of $27,000 in severance costs and $431,000 in facility lease
and related costs.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
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 became 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.
As of December 31, 2001, goodwill totaled $21.7 million. The Company did
not recognize an impairment charge upon adoption of SFAS No. 142. The impact of
the cessation of goodwill amortization will be significant to the Company's
financial statements, the estimated impact being a $7.2 million reduction in
amortization in the year ended December 31, 2002 when compared to what would
have been amortized under the previous accounting standard.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. 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.
13
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 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 15
of the 20 largest pharmaceutical manufacturers, ranked according to 2000 annual
healthcare 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. Also, our acquisition of BCL Vision Ltd. (BCL) (renamed I-many
International Limited) in April 2001 has expanded our portfolio of software
solutions, which we can market to customers within our currently-targeted and
other vertical markets. Under the rules of purchase accounting, the acquired
companies' revenues and results of operations have been included together with
those of the Company from the actual dates of the acquisitions and materially
affect the period-to-period comparisons of the Company's historical results of
operations.
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 includes deductions, trade
promotions, and collections and disputes management software pursuant to our
various acquisitions, accounted for 53.6% of net revenues in the three months
ended March 31, 2001 and 56.8% of net revenues in the three months ended March
31, 2002. 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 46.4% of net
revenues in the three months ended March 31, 2001 and 43.2% of net revenues in
the three months ended March 31, 2002.
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 $48.1 million for the 12 months ended December 31, 2001 and
$11.3 million for the three months ended March 31, 2002. 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 67 employees as
of December 31, 1997 to 371 employees at March 31, 2002.
CRITICAL ACCOUNTING POLICIES
Software license revenues 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. We recognize revenue in accordance with Statement of Position (SOP)
No. 97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, SOFTWARE REVENUE
RECOGNITION, with Respect to Certain Arrangements. We generate revenues from
licensing our software and providing professional services, training and
maintenance and support services.
We sell software, professional services, training and maintenance and
support services. In multiple-element arrangements, we allocate the total fee to
professional services, training and maintenance and support services based on
the fair value of those elements, which is defined as the price charged when
those elements are sold separately. The residual amount is then allocated to the
software license fee.
We recognize software license fees upon execution of a signed license
agreement and delivery of the software, provided there are no significant
14
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. If an acceptance period is required, revenues are recognized upon
customer acceptance. We provide for sales returns at the time of revenue
recognition based on historical experience. To date, such returns have not been
significant.
Service revenues include professional services, training and maintenance
and support services. Professional service revenues are recognized as the
services are performed for time and materials contracts and using the
percentage-of-completion method for fixed fee contracts. If conditions for
acceptance exist, professional service revenues are recognized upon customer
acceptance. For fixed fee professional service contracts, we provide for
anticipated losses in the period in which the loss becomes known and can be
reasonably estimated. To date, losses incurred on fixed fee contracts have not
been significant. Training revenues are recognized as the services are provided.
Maintenance and customer support fees are recognized ratably over the term of
the maintenance contract, which is generally twelve months. 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 customer to
purchase maintenance and support in the second year.
Payments received from customers at the inception of a maintenance period
are treated as deferred service revenues and recognized ratably over the
maintenance period. Payments received from customers in advance of product
shipment or revenue recognition are treated as deferred product revenues and
recognized when the product is shipped to the customer or when otherwise earned.
Substantially all of the amounts included in cost of revenues represent direct
costs related to the delivery of professional services, training and maintenance
and customer support. To date, cost of product revenues have not been
significant.
Effective on January 1, 2002, we assigned all of our goodwill to our
various reporting units and discontinued amortizing goodwill, in accordance with
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill will be tested for
impairment using a two-step approach. The first step is to compare the fair
value of a reporting unit to its carrying amount, including goodwill. If the
fair value of the reporting unit is greater than its carrying amount, goodwill
is not considered impaired and the second step is not required. If the fair
value of the reporting unit is less than its carrying amount, the second step of
the impairment test measures the amount of the impairment loss, if any. The
second step of the impairment test is to compare the implied fair value of
goodwill to its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, an impairment loss is recognized equal to that excess. The
implied fair value of goodwill is calculated in the same manner that goodwill is
calculated in a business combination, whereby the fair value of the reporting
unit is allocated to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the
purchase price. The excess "purchase price" over the amounts assigned to assets
and liabilities would be the implied fair value of goodwill. This allocation is
performed only for purposes of testing goodwill for impairment and does not
require us to record the "step-up" in net assets or any unrecognized intangible
assets. Goodwill will be tested for impairment at least annually, or on an
interim basis if an event occurs or circumstances change that would
more-likely-than-not reduce the fair value of a reporting unit below its
carrying value.
Identified intangible assets (excluding goodwill) will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
Identified intangible assets with indefinite useful lives will not be amortized
until their lives are determined to be definite. These assets will be tested for
impairment annually and on an interim basis if an event or circumstance occurs
between annual tests indicating that the assets might be impaired. The
impairment test will consist of comparing the fair value of the identified
intangible asset to its carrying amount. If the fair value is less than the
carrying amount, an impairment loss will be recognized in an amount equal to
that difference.
In accordance with EITF Issue No. 01-14, INCOME STATEMENT CHARACTERIZATION
OF REIMBURSEMENTS RECEIVED FOR "OUT-OF-POCKET" EXPENSES INCURRED, we classify
reimbursements received from customers for out-of-pocket expenses as revenue in
the income statement. Examples of such out-of-pocket expenses include, but are
not limited to, expenses related to airfare, mileage, hotel stays, out-of-town
meals, photocopies, and telecommunications and facsimile charges. This Issue
became applicable beginning January 1, 2002. Prior to this Issue, we classified
reimbursements received from customers as reductions of expenses incurred.
Accordingly, comparative financial statements for prior periods have been
reclassified to comply with the guidance in this Issue.
15
RECENT EVENTS
On February 20, 2002, we completed a private placement with investors (the
"Purchasers"), pursuant to the terms of a Securities Purchase Agreement among us
and the Purchasers (the "Purchase Agreement"). The private placement was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Regulation D and Section 4(2) of such Act. The terms of this private placement
were reported on a Form 8-K, which we filed with the Securities and Exchange
Commission on February 28, 2002.
At the closing, we issued 1,100,413 shares of common stock at a purchase
price of $7.27 per share, aggregating $8,000,000, and 1,700 shares of a newly
designated series of preferred stock, at a purchase price of $10,000 per share.
The preferred stock has no dividends or coupon, no liquidation preference, no
voting rights and no financial covenants.
The preferred stock will be convertible into common stock at a price equal
to the higher of $7.00 or 93% of the average price of our stock measured over a
period following the effectiveness of the registration statement covering the
resale of the shares, which we will file with the Securities and Exchange
Commission on or before March 29, 2002. We have the right to establish a new
floor for the conversion price, which will serve as the minimum conversion
price. Subject to the establishment of a new floor price, the conversion price
of the preferred stock also will not exceed $8.72 or 80% of the average price of
our common stock measured over a period following the effectiveness of the
registration statement, whichever is greater.
The shares of preferred stock may be converted into common stock at the
option of the holder during the five trading-day period commencing on the later
16
to occur of 110 business days after the closing date and 30 trading days after
the effective date of the registration statement covering the resale of the
shares. We may require the conversion of such shares into common stock during
the same five-day period if the floor price established by us is less than the
applicable conversion price. In the event that the preferred stock is not
converted into common stock by the date set for conversion, the shares of
preferred stock will be redeemed by us. Pending conversion or redemption of the
shares of preferred stock, the proceeds from the sale of the preferred stock are
being held in escrow.
In addition, we granted the investors certain common stock purchase
warrants, consisting of (i) warrants exercisable for 180 days after the closing
to purchase up to an additional aggregate of 165,062 shares of common stock at
an exercise price of $7.27 per share; (ii) seven-year warrants to purchase up to
an additional aggregate of 165,062 shares of common stock at an exercise price
of $7.50 per share; and (iii) seven-year warrants to purchase a number of
additional shares of common stock equal to 15% of the shares of common stock
received on conversion of the preferred stock, at an exercise price equal to
120% of the conversion price. The exercise price of the seven-year warrants is
subject to downward adjustment on a "weighted average" basis in the event we
issue additional shares of common stock, or instruments convertible or
exercisable for common stock, at an effective price less than the then
applicable exercise price. This adjustment does not apply, however, to the
issuance of common stock or such instruments in underwritten public offerings,
strategic transactions or pursuant to equity incentive plans. The warrants
described in clause (iii) of this paragraph will become void if we redeem the
preferred stock.
On March 12, 2002, we acquired substantially all the assets of NetReturn,
LLC, a Connecticut limited liability company located in Fairfield, Connecticut,
for a purchase price of up to $5.4 million. The primary asset acquired was
NetReturn's library of software applications and tools. The initial
consideration of approximately $3.4 million consisted of $500,000 of cash,
429,017 shares of the Company's common stock with a fair value at the time of
acquisition of $2.8 million and estimated transaction costs of $134,000. In
addition, upon achievement of certain revenue milestones through March 31, 2003,
the NetReturn shareholders are entitled to additional consideration of up to
$2.0 million, payable in cash or stock at our election.
On March 28, 2002, we acquired all of the outstanding capital stock of
Menerva Technologies, Inc., a Delaware corporation located in Redwood City,
California, which markets buy-side contract software solutions, for a purchase
price of up to $12.7 million. The initial consideration of approximately $9.7
million consisted of cash of $2.5 million, 982,191 shares of the Company's
common stock with a fair value at the time of acquisition of $6.0 million, the
assumption of stock options to purchase an aggregate of 25,743 shares of Company
stock valued at approximately $143,000, assumed liabilities of $772,000 and
estimated transaction costs of $340,000. In addition, upon achievement of
certain revenue milestones through March 31, 2003, the Menerva shareholders are
entitled to additional consideration of up to $3.0 million, payable in cash or
stock at our election.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
NET REVENUES
Net revenues decreased by $796,000, or 5%, to $15.0 million for the quarter
ended March 31, 2002 from $15.8 million for the quarter ended March 31, 2001.
Product revenues increased slightly by $44,000, or 1%, to $8.5 million for the
quarter ended March 31, 2002. Both the number and average size of license deals
sold were approximately the same in both quarters, and the distribution of
product revenues by reportable segment was substantially unchanged as well.
Approximately one-third of the decrease in net revenues was attributable to a
reduction in reimbursable out-of-pocket expenses, which decreased from $546,000
in the quarter ended March 31, 2001 to $275,000 in the quarter ended March 31,
2002.
17
As a percentage of total net revenues, product revenues increased to 56.8%
for the quarter ended March 31, 2002, from 53.6% for the quarter ended March 31,
2001. This increase in product revenues as a percentage of total net revenues is
entirely attributable to a reduction in service revenues, which decreased by
$840,000, or 11%, to $6.5 million for the quarter ended March 31, 2002, from
$7.3 million for the quarter ended March 31, 2001. More than 85% of this
decrease is due to a contraction of our professional services business. The
decrease in professional services revenue is largely attributable to a reduction
in revenues of approximately $1.3 million in one specific consulting engagement
from the quarter ended March 31, 2001 to the quarter ended March 31, 2002.
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 $1.4 million, or 28%, to $3.5 million for the quarter
ended March 31, 2002, from $4.9 million for the quarter ended March 31, 2002.
This decrease is due primarily to the reduction in subcontractor consulting
costs from $1.2 million in the first quarter of 2001 to $211,000 in the first
quarter of 2002. Most of this decrease in subcontractor consulting costs was
related to one specific consulting engagement as discussed in "--Net Revenues"
above.
As a percentage of total net revenues, cost of revenues decreased to 23.6%
for the quarter ended March 31, 2002, from 31.0% for the quarter ended March 31,
2001. This decrease in cost of revenues as a percentage of total net revenues is
attributable to the decrease in subcontractor costs discussed above and to the
smaller level of service revenues as a percent of total revenues (service
revenues typically generating lower margins than product revenues).
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 $144,000, or 3%, to $5.3 million in the three months ended March 31, 2002
from $5.1 million in the three months ended March 31, 2001. This increase in
sales and marketing expense is primarily the result of an increase in salary and
fringe benefit costs, partially offset by reductions in spending for
advertising, marketing and promotional materials. As a percentage of total net
revenues, sales and marketing expense increased to 35.2% for the quarter ended
March 31, 2002 from 32.5% for the quarter ended March 31, 2001.
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 $460,000, or 13%, to $4.0 million for the
quarter ended March 31, 2002, from $3.5 million for the quarter ended March 31,
2001. This increase in research and development expenses is attributable to
higher salary costs and increased spending for external consulting services. As
a percentage of total net revenues, research and development expense increased
to 26.4% for the quarter ended March 31, 2002, from 22.1% for the quarter ended
March 31, 2001.
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. For the quarter ended March 31, 2001, general and
administrative expenses also included payroll and related costs for the senior
executives in Sales and Operations. General and administrative expenses
decreased by $530,000, or 27%, to $1.4 million in the first quarter of 2002 from
$2.0 million in the first quarter of 2001. As a percentage of total net
revenues, general and administrative expenses decreased to 9.6% for the quarter
ended March 31, 2002, from 12.4% for the quarter ended March 31, 2001. The
18
decrease in general and administrative expenses is primarily attributable to
reductions in salary and benefit costs, travel and legal expenses.
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, the value of which was written off during the third quarter of 2001,
depreciation expense increased by $59,000, or 11%, from $532,000 in the first
quarter of 2001 to $591,000 in the first quarter of 2002. This increase is a
result of additions of computer hardware and software related to infrastructure
expenditures.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS.
Amortization of other purchased intangibles related to our acquisitions amounted
to $1.0 million in the quarter ended March 31, 2002, which represents an
increase of $196,000 over the amortization of goodwill and other purchased
intangibles of $847,000 in the quarter ended March 31, 2001. Excluding the
$560,000 of amortization of goodwill incurred in the quarter ended March 31,
2001, amortization expense increased by $756,000, or 163%, from $287,000 in the
quarter ended March 31, 2001. This increase is attributable to the consummation
of additional acquisitions during the second and third quarters of 2001. Based
on new accounting pronouncements, the Company has stopped amortizing goodwill in
the first quarter of 2002.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
Menerva Technologies, Inc., we allocated $1.0 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 Menerva acquisition.
OTHER INCOME, NET. Other income, net decreased by $585,000, or 94%, from
$620,000 in the quarter ended March 31, 2001, to $35,000 in the quarter ended
March 31, 2002. This decrease is primarily the result of reduced interest
yields, lower average cash balances during the quarter and a significant
increase in state franchise tax payments.
PROVISION FOR INCOME TAXES. We incurred operating losses for all quarters
in 2001 and the first quarter of 2002 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 March 31, 2002 and 2001.
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.
On February 20, 2002, we completed a private placement of common stock,
preferred stock and warrants, resulting in our receipt of $25 million in gross
proceeds. Of this amount, $17 million is being held in an escrow account pending
conversion of the preferred stock into common stock. In the event that the
preferred stock is not so converted, we will redeem it for an aggregate
redemption price equal to $17 million. See "--Recent Events" above.
19
At March 31, 2002, we had cash and cash equivalents of $41.1 million and
net working capital - excluding our $17.0 million restricted cash balance - of
$38.8 million. Also on March 31, 2002, we had no long-term or short-term debt,
other than obligations under capital lease financings.
On March 12, 2002, we acquired substantially all the assets of NetReturn,
LLC for a purchase price of up to $5.4 million, including $500,000 of cash,
common stock valued at $2.8 million at the time of closing, $134,000 of
estimated transaction costs and up to $2.0 million to be paid, subject to the
achievement of certain revenue milestones through March 31, 2003, in cash or
Company stock at our election. We used existing cash resources to pay the cash
portion of the purchase price and the transaction costs.
On March 28, 2002, we acquired Menerva Technologies, Inc. for a purchase
price of up to $12.7 million, including $2.5 million of cash to be paid
subsequent to March 31, 2002, common stock and options valued at $6.1 million at
the time of closing, $772,000 of assumed liabilities, $340,000 of estimated
transaction costs and up to $3.0 million to be paid, subject to the achievement
of certain revenue milestones through March 31, 2003, in cash or Company stock
at our election. We will use existing cash resources to pay the cash portion of
the purchase price and the merger transaction costs.
Net cash used in operating activities for the three months ended March 31,
2002 was $2.5 million, as compared to net cash provided by operating activities
of $605,000 in the three months ended March 31, 2001. For the three months ended
March 31, 2002, net cash used in operating activities consisted primarily of a
$1.9 million increase in accounts receivable and a $1.3 million decrease in
accrued expenses, partially offset by a $810,000 increase in cash resulting from
our net loss of $1.8 million, as adjusted for depreciation and
acquisition-related non-cash charges totaling $2.6 million. For the three months
ended March 31, 2001, net cash provided by operating activities consisted
primarily of our net loss of $1.3 million, as adjusted for depreciation and
amortization of $2.2 million. For the three months ended March 31, 2001,
increases in accounts receivable of $489,000 and $390,000 in prepaid expense,
and a $861,000 decrease in accounts payable, were largely offset by increases of
$752,000 and $669,000 in accrued expenses and deferred revenue, respectively.
Net cash used in investing activities was $1.2 million for the three months
ended March 31, 2002 and $3.2 million for the three months ended March 31, 2001.
Net cash used in investing activities for the three months ended March 31, 2002
consisted of $227,000 in purchases of property and equipment and $965,000
related to the acquisitions of NetReturn and Menerva. Net cash used in investing
activities for the three months ended March 31, 2001 primarily reflects $963,000
in purchases of property and equipment and $2.1 million related to the
acquisitions of ChiCor, Vintage and Intersoft.
Net cash provided by financing activities was $8.8 million for the three
months ended March 31, 2002, primarily from net proceeds of $7.4 million from a
private placement sale of common stock and additionally from $1.3 million of
stock option exercises. Net cash provided by financing activities was $569,000
for the three months ended March 31, 2001, consisting principally of proceeds
from stock option exercises. The private placement also included the sale of
preferred stock for aggregate proceeds of $17.0 million. The proceeds are being
held in escrow pending conversion or redemption of the preferred stock, which is
expected to take place in the quarter ended September 30, 2002. If the preferred
stock is redeemed, we will use the amount held in escrow to pay the redemption
price.
We currently anticipate that our cash and cash equivalents of $41.1 million
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, acquisitions, the timing of expanded product and service offerings and
the success of these offerings once they are launched. Accordingly, 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.
20
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 RECENT YEARS AND OUR RETURN TO
PROFITABILITY IS UNCERTAIN
We incurred net losses of $24.2 million in the year ended December 31,
2000, $21.2 million in the year ended December 31, 2001 and $1.8 million in the
three months ended March 31, 2002, and we had an accumulated deficit at March
31, 2002 of $52.9 million. In these periods of net losses, our expenses exceeded
our revenues generally due to increases in research and development expenses,
sales and marketing expenses, and non-cash expenses related to acquisitions. 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
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, Fairfield, Connecticut, Redwood City, California
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 $57.8
21
million in the year ended December 31, 2001, and the number of our employees
increased from 67 as of December 31, 1997 to 371 as of March 31, 2002. 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. 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.
OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET MAY DIVERT
RESOURCES AND MANAGEMENT ATTENTION AWAY FROM OUR CORE COMPETENCIES
In connection with our efforts to expand into other markets, it may be
necessary for us to hire additional personnel with expertise in these other
industries. We may also have to divert funds, talent, management attention and
other resources toward markets that have not traditionally been the primary
source of our revenues. The risks of such diversification include the
possibility that we will not be successful in generating the revenue we expect
from these markets and the possible detrimental effect of diverting resources
from our traditional markets.
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.
WE HAVE MADE SEVERAL ACQUISITIONS AND MAY MAKE ADDITIONAL ACQUISITIONS AND WE
MAY HAVE DIFFICULTY INTEGRATING THEM
We have acquired ChiCor, Intersoft, BCL Vision Ltd. (now I-many
International Limited), Provato, NetReturn and Menerva, each of which are or
were located in cities very distant from our management locations in Portland,
Maine and Edison, New Jersey, and we are likely to make additional acquisitions.
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 are continuing to assimilate the employees,
technologies and products of the companies that we have acquired and will need
do the same with any new companies we may acquire, 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.
22
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY
BE ADVERSELY AFFECTED
In connection with our acquisitions, we have recorded substantial goodwill
and other intangible assets. In addition, we recorded charges for write-offs of
a portion of the purchase prices of acquired companies as in-process research
and development. Although the amortization of goodwill has been 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, and professional services organizations. 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.
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
23
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.
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.
CURRENT ECONOMIC CONDITIONS MAY WEAKEN OUR SALES
The current downturn and uncertainty in general economic and market
conditions may have negatively affected and could continue to negatively affect
demand for our products and services. If the current economic downturn continues
or worsens, our business, financial condition and results of operations could be
harmed. In addition, 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 DISCLOSURES 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 March 31, 2002, 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 March 31, 2002 amounted to 1.90 percent.
24
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 February 20, 2002, the Company completed a private placement with
investors, pursuant to which it issued 1,100,413 shares of its unregistered
common stock and 1,700 shares of preferred stock. The private placement was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Regulation D and Section 4(2) of such Act. The Company received proceeds of
approximately $7.4 million, net of commissions and other fees, from the sale of
common stock, and $17.0 million from the issuance of the preferred stock. The
proceeds related to the issuance of the preferred stock are being held in escrow
pending conversion or redemption of the shares of preferred stock.
On March 12, 2002, the Company issued 429,017 shares of its unregistered
common stock pursuant to its acquisition of substantially all the assets of
NetReturn LLC. These shares were issued pursuant to an exemption from
registration under Rule 506 under the Securities Act of 1933.
On March 28, 2002, the Company issued 982,191 shares of its unregistered
common stock and assumed options to purchase an additional 25,743 shares of its
common stock pursuant to its acquisition of Menerva Technologies, Inc. These
shares were issued pursuant to an exemption from registration under Rule 506
under the Securities Act of 1933.
During the quarter ended March 31, 2002, the Company issued 37,118 shares
of its unregistered common stock as additional consideration pursuant to its
acquisitions of ChiCor Information Management, Inc. and Intersoft International,
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 of 1933.
(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
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Exhibit Index are filed herewith.
(b) On February 28, 2002, we filed a current report on Form 8-K
pursuant to Items 5 and 7 thereof, reporting the completion of
a private placement of our common stock and preferred stock.
(c) On April 8, 2002, we filed a current report of Form 8-K pursuant
to Items 2 and 7 thereof, reporting the acquisition of Menerva
Technologies, Inc.
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: May 15, 2002 By: /s/ Kevin F. Collins
-------------------------------
Kevin F. Collins
Chief Financial Officer and Treasurer
/s/ Kevin F. Collins
---------------------------------
Kevin F. Collins
Chief Financial Officer
26
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 + Agreement and Plan of Merger dated as of
March 26, 2002, by and among I-many, Inc.,
IMA Delaware Corp., and Menerva
Technologies, Inc.
10.1 Amendment dated April 19, 2002 to the
Employment Agreement of Timothy P. Curran
___________________________
+ Incorporated by reference to the Registrant's Form 8-K filed on
April 8, 2002.
27