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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 000-30883
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I-MANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0524931
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
537 CONGRESS STREET 04101-3353
5TH FLOOR (Zip Code)
PORTLAND, MAINE
(Address of principal executive offices)
(207) 774-3244
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.0001 par value
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2001, 33,242,266 shares of the registrant's common stock,
$.0001 par value, were issued and outstanding. The aggregate market value of the
common stock held by non-affiliates of the registrant (based on the closing
price for the common stock in the Nasdaq National Market on March 15, 2001) was
approximately $360 million.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2001 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 2000.
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I-MANY, INC.
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
ITEM PAGE NO.
- ---- --------
PART I
1. Business.................................................... 2
2. Properties.................................................. 14
3. Legal Proceedings........................................... 15
4. Submission of Matters to a Vote of Security Holders......... 15
4A. Executive Officers of the Registrant........................ 15
PART II
5. Market for Registrant's Common Equity and Related 16
Stockholder Matters.......................................
6. Selected Consolidated Financial Data........................ 16
7. Management's Discussion and Analysis of Financial Condition 18
and Results of Operations.................................
7A. Quantitative and Qualitative Disclosures About Market 29
Risk......................................................
8. Financial Statements and Supplementary Data................. 30
9. Changes in and Disagreements with Accountants on Accounting 56
and
Financial Disclosure......................................
PART III
10. Directors and Executive Officers of the Registrant.......... 56
11. Executive Compensation...................................... 56
12. Security Ownership of Certain Beneficial Owners and 56
Management................................................
13. Certain Relationships and Related Transactions.............. 56
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 56
8-K.......................................................
SIGNATURES.................................................. 58
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PART I
ITEM 1. BUSINESS
The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statement. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed elsewhere in this report in the section entitled "Certain Factors That
May Affect Future Results" and the risks discussed in our other Securities and
Exchange Commission ("SEC") filings including our prospectus dated July 13, 2000
by the SEC and in our Form 10-Q for the quarter ended September 30, 2000 filed
with the SEC on November 14, 2000.
OVERVIEW
We provide software and Internet-based solutions and related professional
services that allow our clients to more effectively manage their
business-to-business relationships. Our clients include supply chain
participants in different vertical markets who engage in business-to-business
commerce, such as manufacturers, distributors, demand aggregators, retailers,
public and private business-to-business ecommerce exchanges and purchasers. Our
proprietary applications are designed to help our clients:
- Identify potential business relationship partners and assess the financial
impact of potential new business relationships;
- Manage business relationships among supply chain participants, including
by allowing them to:
- Negotiate and structure business relationships, such as purchase
contracts that contain complex pricing provisions including special
promotions, rebates and chargebacks, and that incorporate data such as
purchase volume and increases in manufacturers' market share;
- Track the achievement of goals under such business relationships and
establish amounts to be paid or rebated between supply chain partners;
and
- Evaluate the effect of particular contract provisions and special
promotions upon profitability and market share.
- Resolve existing or potential disputes among supply chain participants
regarding:
- Contract terms and conditions, achievement of performance based
incentives, including pricing and eligibility for favorable contract
terms and other incentives; and
- Non-contract issues such as the actual quantity, quality and condition
of purchased goods when received.
Our applications facilitate the resolution of disputes among supply chain
participants by automating the process of retrieving and isolating transaction
data and making the data accessible to all parties to the relationship.
Our products and services were originally developed to manage complex
contract purchasing relationships in the healthcare industry. To date, the
majority of our sales have been to parties involved in the purchase, sale and
distribution of healthcare supplies and pharmaceutical products, including
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manufacturers, purchasers, group purchasing organizations and distributors. Our
products are currently used by more than 150 clients, including eight of the
largest ten and 16 of the largest 20, pharmaceutical manufacturers, ranked
according to annual revenues. Our healthcare industry clients include Bayer,
Boehringer Ingelheim, Premier, Inc. and Glaxo Wellcome. One of these three
clients, Premier, Inc., accounted for more than 10% of our revenues in 2000.
We are seeking to expand our products and services to new vertical markets,
particularly the consumer packaged goods and foodservice industries. We are also
targeting customers in the electronics, bulk chemicals, building products and
agricultural-chemical industries, although we have not yet recognized revenues
from sales in these industries. In 1999 and 2000, approximately 5% and 4%,
respectively, of our revenues were generated by sales to a single customer in
the beverage distribution industry.
We deliver our products through a variety of means, including software
licensed for installation on our clients' computer systems, software licensed on
an application service provider basis which we host on our servers, our
proprietary imany.com portal, which serves as an Internet-based marketplace
through which we can offer a range of web-based services, and the licensing of
technology to enable our clients to establish their own public portals and
exchanges. We believe that our Internet technology will enable our clients and
their customers to access historical sales volume and pricing data on a
real-time basis, permitting them to make timely and informed decisions about the
effectiveness of their purchasing contracts and the eligibility of purchasers
for rebates, chargebacks and other pricing incentives.
BUSINESS DEVELOPMENTS
On July 13, 2000, we completed an initial public offering of our common
stock. Net proceeds from the offering and subsequent over-allotment exercise
were $70.7 million. On November 16, 2000, we acquired all the outstanding
capital stock of Chi-Cor Information Management, Inc., a leading provider of
trade funds and deduction management systems. On January 25, 2001, we acquired
all of the outstanding capital stock of Vintage Software, Inc., which markets a
competing product to mid-market pharmaceutical companies. On March 2, 2001, we
acquired all of the outstanding capital stock of Intersoft International, Inc.,
which markets software to companies and brokers in the food service industry.
In 2000, we expanded our efforts to market our products and services to new
vertical markets. For example:
- In May 2000, we entered into a strategic relationship with The Procter &
Gamble Company, pursuant to which Procter & Gamble has designated us as
their exclusive provider of purchase contract management software for
their commercial products group, which includes food service, office
coffee service, vending and janitorial/sanitation products. Procter &
Gamble has agreed to promote our products to other participants in the
commercial products market. As part of our agreement with Procter &
Gamble, we granted them warrants to purchase our stock.
- Our acquisition of Chi-Cor Information Management, Inc. in November 2000
has provided us with accepted products and expertise in the market for
collaborative trade funds and deductions management. Chi-Cor's products
include the Trade Funds Management System-TM-, Deductions Management
System-TM- and SettleLink,net-SM-, the first Internet-based exchange for
collaborative trade funds and deductions management. Chi-Cor has customers
in a variety of vertical markets, including the consumer packaged goods,
chemicals, electronics, building products, pharmaceuticals and apparel
makers.
- In October 2000, we signed an agreement with Distribution Market
Advantage, Inc., a leading sales and marketing company in the foodservice
industry, pursuant to which we agreed to
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develop a contract portal to enable key participants in the supply chain
to more easily manage their contracts and trade programs as they buy, sell
and distribute foodservice products. In addition, we signed an agreement
in October 2000 with the Hale Group, a leading foodservice industry
strategy consulting firm, which will help us determine market needs and
how to approach the industry with its foodservice contract and program
management solutions. Also, our March 2001 acquisition of Intersoft
International, Inc. has provided us with additional market expertise and a
suite of products for foodservice brokers.
INDUSTRY BACKGROUND
While existing e-commerce solution providers have focused on automating
various aspects of the purchasing process, including developing inventory and
supply chain management software and establishing connectivity between
purchasers and sellers of goods, we believe that existing solutions are limited
in their ability to manage relationships among supply chain participants. In
particular, supply chain participants frequently use complex purchasing
contracts to facilitate the purchasing of goods and services. These complex
contracts are agreements among supply chain participants, such as manufacturers,
distributors, demand aggregators such as buying groups and the end users of
goods and services. These contracts allow purchasers to receive lower prices,
discounts, volume rebates, training, maintenance and other non-price incentives
based upon multiple factors, including:
- total volume of products purchased;
- overall sales of particular products;
- duration of the contract;
- number of parties to the contract;
- number of products covered by the contract; and
- the purchaser's demographic characteristics.
We believe that business-to-business relationships will increasingly be
characterized by complex contractual relationships that provide for price and
non-price incentives based on diverse factors rather than purchasing based
solely on purchase orders.
The task of administering these contracts, which often includes manual data
entry and the use of existing enterprise resource planning software, is highly
labor intensive, costly and often yields unreliable results. Existing legacy
software products, including enterprise resource planning solutions, are often
difficult to implement and maintain. Often, these systems do not have the
functionality, flexibility, ease of modification, and interoperability with
diverse data formats required to address a wide variety of contracts and to
respond to frequent changes in these contracts. In addition, users of these
systems often find it difficult to configure the systems rapidly enough to
permit their use during the negotiation of a contract. Finally, existing systems
often lack the ease of use and universal access available from modern Internet
applications.
In addition, we believe that due to the high initial cost of software
licenses for existing enterprise resource planning software, many manufacturers
avoid the use of contract purchasing altogether, placing them at a disadvantage
relative to their competitors.
THE BUSINESS-TO-BUSINESS MARKETPLACE
We believe that the growth of business-to-business e-commerce will be
characterized by the increasing use of contract purchasing agreements between
supply chain participants. In the consumer goods, food products, healthcare and
other industries where complex purchase contracts are used, the process of
determining the availability of incentives under these contracts is done often
using paper-
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based or legacy computer systems which are unsuitable for managing the volume
and complexity of purchasing. In addition, these industries employ pricing
mechanisms such as chargebacks and rebates to adjust amounts paid by the
purchaser. Administering these chargebacks and rebates results in high
administrative costs and disputes involving substantial amounts of money.
SUPPLY CHAIN PARTICIPANTS. The business-to-business supply chain includes
the following participants:
- MANUFACTURERS of products that use business-to-business relationships,
including contracts, to establish favorable prices, assure a reliable
channel of distribution and offer incentives to achieve their marketing
goals;
- DISTRIBUTORS that purchase goods for resale according to the terms of the
contracts negotiated between manufacturers and demand aggregators.
- DEMAND AGGREGATORS AND OTHER INTERMEDIARIES representing groups of
purchasers. Demand aggregators, such as group purchasing organizations in
the healthcare industry and buying cooperatives in the consumer products
and food service industries, aggregate their members' demand for products
to obtain favorable pricing terms for them. Demand aggregators typically
receive monthly fees from their members or receive a percentage of all
transactions negotiated on their constituents' behalf;
- PURCHASERS and retailers of products under contracts negotiated on their
behalf by demand aggregators or other intermediaries; and
- BUSINESS-TO-BUSINESS E-COMMERCE EXCHANGES that allow supply chain
participants to establish business relationships using the Internet.
COMPLEXITY OF CONTRACT PURCHASING. In the healthcare, consumer goods, food
products and other industries, purchasing contracts typically contain pricing
incentives designed to meet the particular goals of manufacturers and
purchasers. The price of any particular product purchased under a typical
contract may vary substantially, depending upon, among other things, external
factors, such as a manufacturer's market share and the purchaser's demographic
characteristics, and highly specific factors such as the number of units of a
particular product consumed during a specified time period.
Contracts are often negotiated on behalf of a large number of purchasers and
include pricing incentives, which often result in different prices for otherwise
similarly-situated purchasers, based on the purchasers' achievement of, or
failure to achieve, certain volume-related goals under the contract.
While many purchase contract variations exist, there are two fundamental
types of pricing incentives in the purchase contract environment: chargebacks
and rebates. Chargebacks are generally used in connection with contracts between
manufacturers and demand aggregators. Eligible members of a demand aggregator,
such as a group purchasing organization or buying cooperative, order products
either directly from the manufacturer or, more commonly, through a large
distributor. When a product is ordered through a distributor, the distributor
must sell the item at the price which is negotiated between the manufacturer and
the demand aggregator. Often, the distributor is asked by the manufacturer to
sell to the member at a price which is lower than the price the distributor paid
the manufacturer. In these cases, the distributor attempts to verify the
eligibility of the member to receive the lower contract price and if the
purchaser is eligible, the distributor seeks to recoup, or chargeback, from the
manufacturer, the difference between the distributor's cost and the lower
contract price. Given the large volume of purchases under these contracts,
constantly changing membership in demand aggregators, complicated eligibility
requirements and disparate information systems involved, it is not uncommon for
manufacturers, purchasers, demand aggregators, and distributors to calculate
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significantly different chargebacks, resulting in disputes among the parties. A
chargeback is also known as a "deviated billing" in other industries.
The second type of pricing incentive is a rebate. Typically, rebate
provisions entitle a purchaser to a return of a portion of the purchase price
based on the volume of product purchased. Rebate provisions are common in
contracts between manufacturers and large volume purchasers. Manufacturers
generally adopt this kind of agreement in order to further their marketing
objectives. For example, manufacturers often pay rebates based on increases in
their market share. In order to determine the applicability of that kind of
provision, the parties must refer to external market share data. As with
chargeback contracts, the complicated task of administering rebate-based
contracts often results in high administrative costs and disputes involving
substantial amounts of money.
ADMINISTRATIVE DEMANDS OF CONTRACT PURCHASING. As a result of the
intricacies of contract purchasing, the administration of purchase contracts is
difficult and expensive. Among other things, each participant in the supply
chain must be able to:
- monitor the impact of different pricing strategies;
- process enormous volumes of data related to invoices, inventory, shipments
and market share;
- validate purchasers' eligibility for agreed-upon rebates and distributors'
eligibility for chargebacks; and
- integrate pricing, inventory, market share and other data relevant to the
contract with existing enterprise resource planning and other management
systems.
THE I-MANY SOLUTION
We provide software and Internet-based solutions and related professional
services that allow our clients to manage complex contract purchasing
arrangements.
Key components of our solution include:
COMPLETE OFFERING OF CONTRACT MANAGEMENT CAPABILITIES. Our solutions
provide our clients with the broad range of features they need to efficiently
negotiate, manage and analyze their purchase contracts, including:
- Internet capabilities, including our Internet portal, which enable
manufacturers to promote their products, allow purchasers to become
knowledgeable about their product options and facilitate the matching of
manufacturers with demand aggregators, purchasers and distributors for the
negotiation of contracts;
- Comprehensive software which provides real-time access to relevant
contract data, thereby enabling users to better understand the impact of
contract terms and their purchase decisions; and
- Sophisticated analysis tools which enable contracting parties to see the
effects of their special promotions.
By providing this broad functionality, we eliminate the need for the users
of our solutions to combine often incompatible software from multiple vendors,
thereby decreasing costs and implementation time and enhancing reliability.
FLEXIBLE PRODUCT OFFERINGS. We deliver our products through a variety of
means, including software licensed for installation on our clients' computer
systems, software licensed on an application service provider basis which we
host on our servers in return for a subscription fee, our proprietary imany.com
portal which serves as an Internet-based marketplace through which we can
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offer a range of web-based services, and the licensing of technology to enable
our clients to establish their own private or public portals and exchanges. We
have designed these product offerings to provide our clients with significant
flexibility in the manner in which they can establish our products for use, and
in their payment options. For example, through imany.com, we offer a
comprehensive web-hosted contract management service. We provide our solutions
on an application service provider basis, for which we charge our clients a
subscription fee. Manufacturers, purchasers, demand aggregators and distributors
can access key contract data, such as quantities purchased and the contract
pricing structure, in real-time using standard Internet browsers, for which we
may be paid administrative fees for establishing the contracts and a
subscription fee for access to our software. In addition, we are offering to
license our proprietary technology to other business-to-business exchanges to
enable contract purchasing and contract relationship management through their
websites. To date, revenues derived from hosting, web-based offerings and
licensing of technology have not been significant.
ENHANCED TRANSACTIONAL EFFICIENCY. Our solutions help reduce transaction
costs and increase the efficiency and reliability of the purchasing process. By
using our solutions:
- manufacturers may accurately evaluate the effectiveness of their pricing
initiatives on a real-time basis;
- distributors may calculate and process chargebacks more quickly, improving
their cash flow;
- purchasers may evaluate their eligibility for rebate programs; and
- intermediaries can more readily obtain product and pricing information
from participating manufacturers, thereby enabling them to negotiate
contracts on behalf of their members more efficiently.
This increased efficiency enables all parties to increase the quality of the
purchasing process and redeploy personnel and other resources currently
allocated to contract administration. In addition, by simplifying and
accelerating the processing of chargeback and rebate transactions, our solutions
promote more predictable cash flow and proper accounting treatment.
BROADER ACCESS TO THE BENEFITS OF CONTRACT PURCHASING. Our subscription-
based pricing model permits smaller manufacturers and distributors to enjoy the
benefits of contract-based pricing without large up-front cash outlays for
license fees. Because we offer centralized data storage on our servers, our
clients do not need to purchase expensive, maintenance-intensive servers and
data storage equipment or to hire additional staff to maintain that equipment.
BUSINESS STRATEGY
Our objective is to become the leading provider of business-to-business
solutions that enable our clients to effectively manage their supply chain
relationships. To achieve this objective, we are pursuing the following
strategies:
TARGET NEW VERTICAL MARKETS. We believe that the purchase contracting
practices in many other industries are similar to those in the healthcare
market. Other industries with similar practices include food and beverage,
building products, electronics, agricultural/chemical products and retail. We
believe that our solutions are readily adaptable to these additional markets.
For example, in May 2000, we entered into a strategic relationship with
Procter & Gamble to introduce our solutions to the commercial products market,
and we believe our acquisition of Chi-Cor Information Management, Inc. provides
us with opportunities in the consumer packaged goods, chemicals, electronics,
building products, pharmaceuticals and apparel markets. We are exploring
additional markets, and, if appropriate, expect to develop the necessary
industry expertise to support our entry into such markets.
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BUILD UPON OUR STRENGTH IN THE HEALTHCARE MARKET. We provide contract
management solutions and services to many of the largest pharmaceutical
manufacturers and other healthcare companies. As a result of our experience in
this market, we have acquired extensive industry knowledge of and experience
with contracting practices and the relationships among healthcare industry
participants. We believe that we have a reputation as a quality provider of
complex contract management services and that we will be able to build upon that
reputation and our extensive industry knowledge to offer additional services to
our existing client base, and to attract new clients in the healthcare industry
as well as other industries.
PROMOTE OUR INTERNET TECHNOLOGY FOR BUSINESS-TO-BUSINESS E-COMMERCE. We
intend to promote and license our technology infrastructure to other
business-to-business exchanges to enable contract purchasing through their
websites. This will enable us to expand our client base to include clients in
markets with which we are currently not well acquainted.
CONTINUE TO LEVERAGE OUR PROPRIETARY INTERNET PORTAL, I-MANY.COM, TO DELIVER
A WIDE RANGE OF WEB-BASED SERVICES DESIGNED TO HELP COMPANIES MANAGE THEIR
SUPPLY CHAIN RELATIONSHIPS. We are extending the services offered to our
customers through I-many.com as a portal to facilitate the creation, management
and analysis of business-to-business supply chain relationships. We launched the
portal in February 2000 primarily as a marketplace for trading partners in the
healthcare industry. We are broadening the scope of imany.com to enhance its
applicability to all industries where contract- and program-based sales are the
norm, and we are seeking to increase the number of manufacturers that list their
product offerings through imany.com and attract additional supply chain
participants. As of December 31, 2000, over 50 manufacturers have signed
contracts to list their product offerings through imany.com.
INCREASE SALES AND SUPPORT EFFORTS. We intend to increase significantly our
direct sales and support forces to facilitate our growth. We are seeking to
promote the awareness of the I-many brand through an aggressive advertising and
marketing campaign, including participation in trade shows and the placement of
advertisements in key industry publications.
MAINTAIN A TECHNOLOGICAL LEADERSHIP POSITION. We seek constant feedback
from our clients to understand their needs during both the implementation and
post-implementation stages. Following implementation, we meet with our clients
to identify their needs. The feedback from these focus groups serves as a basis
for product upgrades. We believe that, by closely partnering with and listening
to our clients, we will continue to develop our products so that they deliver
the highest value.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to
pursue a selective acquisition strategy as opportunities arise to complement our
product offerings, extend our service capabilities and expand the features on
our website. In addition, we intend to enter into strategic relationships as
opportunities arise, to help us develop and market our products and services
more effectively. We completed our acquisitions of Chi-Cor Information
Management, Inc. in November 2000, Vintage Software, Inc. in January 2001 and
Intersoft International, Inc. in March 2001.
PRODUCTS AND SERVICES
PRODUCTS
The components and features of our products are designed to address
particular business areas, which in combination we refer to as "Trade
Relationship Management." To date, substantially all of our revenues have been
derived from the sale of software licenses to healthcare manufacturers and from
the provision of related professional services, representing 95% of our revenues
in 1999 and 97% of our revenues in 2000. Our license fees are based on a number
of factors, including the nature and number of modules being licensed, the
number of users and the size of the client. In 2000, our clients paid us license
fees ranging from approximately $13,000 to approximately $2,400,000.
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Our products give demand aggregators and manufacturers access, through our
software, to product data provided by manufacturers and to product and pricing
offerings. Thus, through our products, the data that affect the pricing and
other terms in these complex purchasing contracts are available to the parties
before they negotiate. Because this contract information is at their disposal,
the demand aggregators are better able to negotiate on behalf of, and receive
more favorable terms for, their members. The demand aggregators, however, do not
share information about one member's individual contracts with other members. In
addition, our products enable the respective parties to the contracts to monitor
sales under the contract for purposes of qualifying the purchasing parties for
rebates and chargebacks and calculating the rebate or chargeback. This process
of automating the paper trail can save contracting parties significant time and
money.
The following is a list of our principal contract management and trade
relationship management software products:
CONTRACT ADMINISTRATION AND REPORTING SYSTEM, OR CARS/IS is a suite of
software products that enables businesses to model the terms of their purchasing
contracts, process data to determine pricing and evaluate contract performance,
and manage the overall adjudication of rebates and chargebacks due under the
contracts. CARS/IS allows users to manage a wide variety of contract pricing
mechanisms, including rebates, chargebacks, and promotions. CARS/IS is used by
16 of the largest 20 pharmaceutical manufacturers, ranked according to annual
revenues.
CARS/MEDICAID is a healthcare-specific, ready-to-install software solution
that automates the management and clerical tasks of the federally-mandated
Medicaid Drug Rebate Law. The system processes data and calculates rebates and
payments for both federal and state rebate programs. CARS/ Medicaid provides the
capability to track and resolve disputes, and is designed to assist users to
comply with applicable federal and state government regulations.
CARS/ANALYTICS provides sophisticated analyses and reporting across a
spectrum of sales and contract management processes. CARS/Analytics uses the
information generated by CARS/IS and third party information sources through a
specific data application in CARS/IS to generate analyses and reports which are
designed to enable users to determine the estimated profitability of contract
business strategies and to examine key contract and sales performance
measurements and trends.
ENTERPRISE PROMOTIONS MANAGER is a solution for the management and
reporting of critical and complex trade promotion and sales management
activities in consumer goods industries. We are also in the process of building
additional modules and products for the consumer goods market, including a
module which will facilitate the management and reconciliation of advances and
accruals, as well as an analytical product designed to quickly create reports on
key performance drivers such as trade promotion effectiveness, customer
profitability and brand performance.
DEDUCTION MANAGEMENT SYSTEM (DMS) enables supply chain partners across
industry and geographical boundaries, including in the healthcare and consumer
products goods markets, to manage deductions reflected in their
business-to-business invoices, including those arising as a result of wrong
prices, wrong quantities, wrong products, damaged goods, promotional discount or
otherwise. DMS monitors chargebacks, write-offs, offsets to credit/promotions,
and split deductions.
TRADE FUNDS MANAGEMENT SYSTEM (TFMS) is a sophisticated, Internet-based
solution designed to empower sales and marketing departments, along with remote
sales agents, to create, distribute, manage, monitor, and track simultaneous
campaigns and promotions across products, categories, accounts, and regions--all
via the Internet. By utilizing TFMS, updates are immediate, trade deal changes
are live, brokers enter commitments on-line, and deductions can be cleared
immediately. Key features of TFMS include account planning and forecasting; deal
management and analysis; promotional planning and lift analysis;
product/customer reporting; Internet communications to control
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budgeting, allocations, commitments, and settlement; and Internet-based
triggering of payments via accounts payable request, credit memo, or deduction.
SETTLELINK.NET enables all supply chain participants to proactively and
collaboratively identify and resolve settlement issues via the Internet. By
enabling trading partners to collaborate over the Internet, Settlelink.Net
reduces the time and costs involved in matching invoices and payments,
promotions and deductions, rebates, claims and other exceptions. Settlelink.Net
enables trading partners to link trade promotions to deductions, manage returns
and unsaleables information, use collaborative action profiles to resolve
deductions, and generate reports to analyze customer performance.
PROFESSIONAL SERVICES
Our professional services group provides implementation and deployment
services, training and customer support and consulting services. At
December 31, 2000 this group comprised 109 I-many employees and is augmented by
outside consultants whom we have trained.
CONSULTING SERVICES. We work with our clients before, during and after
installation of our solution to optimize the functionality of the system. These
services include project planning and management, business process analysis,
integration with clients' enterprise resource planning systems and quality
assurance. Our goal is to empower our clients with the knowledge and confidence
to independently operate, refine and develop their systems.
DEPLOYMENT SERVICES. Our deployment services include pre-installation
planning, on-site installation, upgrade services, system testing, database
administration support and professional service support.
EDUCATIONAL SERVICES. We offer training programs and business analysis
services for those persons within the client organization responsible for
utilizing our solutions, such as contract administrators. In addition, we offer
user group meetings to enable customers to learn about product directions and
influence our future products.
CUSTOMER SUPPORT. We offer comprehensive maintenance and support services,
including 24 hours a day, 7 days a week customer service, documentation updates
and new software releases.
LICENSES OF OUR INTERNET TECHNOLOGY
We are exploring opportunities to license the technology underlying our
I-many.com portal to other Internet-based business-to-business exchanges in
order to enable us to reach new markets. To date, we have not recognized
revenues from such licenses.
CUSTOMERS
Our primary market has been enterprises within the healthcare industry. We
have approximately 150 clients, approximately one-half of which are
pharmaceutical and/or medical products companies. We also have recently sold our
solutions to other participants in the healthcare purchasing process, including
a major group purchasing organization, wholesale distributors, and managed care
organizations.
Moreover, we have sold our products to a beverage manufacturer and a
manufacturer of consumer products. And through our acquisition of Chi-Cor
Information Management, Inc., we added clients from a variety of industry
segments. During 1999, approximately 11% of our revenue was derived from a
single client, Pfizer, Inc. and during 2000, one customer, Premier, accounted
for approximately 29% of our revenues. Other than the foregoing, none of our
clients accounted for more than 10% of our revenues in 1998, 1999 or 2000.
10
Our clients include the following:
MANUFACTURERS
3M Pharmaceuticals, a division of Minnesota
Mining and Manufacturing Co.
Alcon Laboratories, Inc.
Allergan Inc.
Alpharma, Inc.
Altana Inc.
Bausch & Lomb Pharmaceutical, a division of
Bausch & Lomb Inc.
Baxter Healthcare Corporation
Bayer Corporation
Ben Venue Pharmaceuticals
Boehringer Ingelheim Corporation
Centocor, Inc.
DuPont Pharmaceuticals Company
Dura Pharmaceuticals, Inc.
Faulding Inc.
Galderma Laboratories, Inc.
Genentech, Inc.
Glaxo Wellcome Inc.
Halsey Drug Company, Inc.
Immunex Corporation
King Pharmaceutical
Knoll Pharmaceutical Company
Mallinckrodt, Inc.
Mylan Pharmaceuticals, Inc.
Novartis Opthalmics
Novo Nordisk Pharmaceuticals, Inc.
Nycomed-Amersham, Inc.
PepsiCo., Inc.
Pharmacia Corporation
The Procter & Gamble Company
Purdue Pharma, L.P.
Roche Laboratories Inc.
Sanofi Synthelabo, Inc.
Sepracor Inc.
Solvay Pharmaceuticals, Inc.
Takeda Pharmaceuticals North America
UCB Pharma, Inc.
Whitehall-Robins Healthcare, a division of
American Home Products
Wyeth-Ayerst Pharmaceuticals
Zenith-Goldline Pharmaceuticals
DISTRIBUTORS, PURCHASERS AND GROUP PURCHASING ORGANIZATIONS
Abbott Laboratories, Inc.
Bergen Brunswig Corporation
California Physician Services, d/b/a/ Blue Shield of California
TDI Managed Care Services, Inc., d/b/a/ Eckerd Health Services
Integrated Pharmaceutical Services
New Health Exchange
Premier, Inc.
Customers of our Chi-Cor operation include the following:
11
Anchor Food Products, Inc.
Barilla America, Inc.
Baumer Foods, Inc.
Beatrice Group, Inc.
Boca Burger, Inc.
Charles D. Owen Manufacturing Co.
C.H. Guenther & Son, Inc.
Chinin USA
Cobra Electronics Corporation
Cole Haan
Cooper Lighting
Daisy Brand, Inc.
Del Monte Foods, USA
Estee Lauder
Eastman Chemical
Frederick Goldman, Inc.
Furman Foods, Inc
H.J. Heinz
Hershey
Keebler Foods Company, Inc.
Heyman Corporation
Humphreys Inc.
ICON Health & Fitness, Inc.
Inverness Medical, Inc.
Irving Tissue
Kikkoman International Inc.
Kiss Products, Inc.
Land O'Lakes, Inc.
Lenox, Inc.
Lipton
Liz Claiborne
Malt-O-Meal Company
Newman's Own, Inc.
Novopharm USA
NuTone Inc.
Ocean Spray Cranberries
Olympus America Inc.--
Consumer Products Group
Potlatch Corporation
Southern Wine & Spirits of America
STA-RITE Industries, Inc.
The Campbell Group
The Dial Corporation
The Eureka Company
The Turkey Store Company
Tone Brothers, Inc.
Tree Top, Inc.
U.S. Gypsum
WestFarm Foods
WestPoint Stevens Inc.
SALES AND MARKETING
We market our software and services primarily through a direct sales force.
As of December 31, 2000, our sales force consisted of a total of 50 employees,
including 24 national account executives and 26 sales support employees. We
intend to continue to increase substantially the size of our sales force as we
seek to expand the market for our products and services. In addition, we are
seeking to enhance the productivity of our direct sales force by hiring
additional support personnel. Competition for qualified sales personnel is
intense and there can be no assurance that we will be able to attract such
personnel. If we are unable to hire additional qualified sales personnel on a
timely basis, our business, operating results and financial condition could be
materially and adversely affected.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Since our inception, we have made substantial investments in product
development. We believe that our future financial performance depends on our
ability to maintain and enhance our current products and develop new products.
Our research and development expenses were approximately $2.3 million in 1998,
$8.2 million in 1999, and $12.8 million in 2000.
As of December 31, 2000, we employed 101 people in our product development
organization who are responsible for the design, development and release of our
products. The group is organized into four disciplines: development, quality
assurance, documentation and project management. Members from each discipline,
along with a product marketing manager from our marketing department, form
separate product teams to work closely with our sales, marketing, services,
client and prospects organizations to better understand market needs and user
requirements. Each product team also hosts
12
a series of user focus groups and attends our yearly user conference. When
appropriate, we also utilize third parties to expand the capacity and technical
expertise of our internal product development organization. Periodically, we
have licensed third-party technology. We believe this approach shortens our time
to market without compromising our competitive position or product quality, and
we plan to continue to draw on third-party resources as needed in the future.
COMPETITION
The contract management software market is subject to rapid change.
Competitors vary in size and in the scope and breadth of the products and
services offered. We encounter competition primarily from internal information
systems departments of potential or current customers that develop custom
software, software companies that target the contract management markets,
professional services organizations and Internet-based merchants offering
healthcare products through on-line catalogs.
Similarly, the market for the Internet-based solutions we offer is subject
to rapid change and competition. We may encounter competition from the operators
of Internet portals now in existence or from buying and selling consortiums that
develop their own web-based exchanges, including buyers and sellers of
healthcare products.
We believe that the principal competitive factors affecting our market
include product reputation, functionality, ease-of-use, ability to integrate
with other products and technologies, quality, performance, price, customer
service and support and the vendors' reputation. Although we believe that our
products currently compete favorably with regard to such factors, we cannot
assure you that we can maintain our competitive position against current and
potential competitors. Increased competition may result in price reductions,
less beneficial contract terms, reduced gross margins and loss of market share,
any of which could materially and adversely affect our business, operating
results and financial condition.
Many of our competitors and potential competitors have greater resources
than we do, and may be able to respond more quickly and efficiently to new or
emerging technologies, programming languages or standards, or to changes in
customer requirements or preferences. Many of our competitors can devote greater
managerial or financial resources than we can to develop, promote and distribute
contract management software products and provide related consulting, training
and support services. We cannot assure you that our current or future
competitors will not develop products or services which may be superior in one
or more respects to ours or which may gain greater market acceptance. Some of
our competitors have established or may establish cooperative arrangements or
strategic alliances among themselves or with third parties, thus enhancing their
abilities to compete with us. It is likely that new competitors will emerge and
rapidly acquire market share. We cannot assure you that we will be able to
compete successfully against current or future competitors or that the
competitive pressures faced by us will not materially and adversely affect our
business, operating results and financial condition. See "Certain Factors That
May Affect Future Results--We have many competitors and potential competitors
and we may not be able to compete effectively."
13
INTELLECTUAL PROPERTY AND LICENSES
We rely primarily on a combination of copyright, trademark and trade secrets
laws, as well as confidentiality agreements to protect our proprietary rights.
In addition, we have filed applications for patent protection with respect to
certain aspects of our products. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain the use of information that we regard as proprietary. In addition, the
laws of some foreign countries do not protect our proprietary rights to as great
an extent as do the laws of the United States. We cannot assure investors that
our means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology.
We are not aware that any of our products infringe the proprietary rights of
third parties. We cannot assure investors, however, that third parties will not
claim infringement by us with respect to current or future products. We expect
that software product developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
From time to time, we license software from third parties for use with our
products. We believe that no such license agreement to which we are presently a
party is material and that if any such license agreement were to terminate for
any reason, we would be able to obtain a license or otherwise acquire other
comparable technology or software on terms and on a timetable that would not be
materially adverse to us.
EMPLOYEES
As of December 31, 2000, we had a total of 348 employees, of whom 181 were
based in Portland, Maine, 67 were based at our sales and marketing headquarters
in Edison, New Jersey, 34 were based at our Chi-Cor subsidiary in Chicago,
Illinois, and 66 worked at remote locations. Of the total, 118 were in
operations and development, 83 were in sales and marketing, 109 were in
professional services, and 38 were in administration and finance. Our future
performance depends in significant part upon the continued service of our key
technical, sales and marketing and senior management personnel and our
continuing ability to attract and retain highly qualified technical, sales and
marketing and managerial personnel. Competition for such personnel is intense
and we cannot assure you that we will be successful in attracting or retaining
such personnel in the future. None of our employees is represented by a labor
union or is subject to a collective bargaining agreement. We have not
experienced any work stoppages and consider our relations with our employees to
be good. See "Certain Factors That May Affect Future Results--We rely
significantly on certain key individuals and our business will suffer if we are
unable to retain them."
ITEM 2. PROPERTIES
Our development, customer support, administrative and operating offices are
located in approximately 56,000 square feet of leased office space located in
Portland, Maine under leases expiring in 2003. We also lease approximately
17,000 square feet of office space for executive, sales, marketing and
consulting personnel in Edison, New Jersey under leases expiring in 2003 and
2009. Pursuant to our Chi-Cor acquisition, we lease approximately 12,000 square
feet of office space in Chicago, Illinois under a lease expiring in 2009.
14
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending litigation or other legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of I-many and other key employees and their ages as
of December 31, 2000 are as follows:
NAME AGE POSITION(S)
- ---- -------- -----------
A. Leigh Powell............. 39 President, Chief Executive Officer
Philip M. St. Germain....... 64 Chief Financial Officer, Treasurer
Terrence M. Nicholson....... 44 Chief Operating Officer
Timothy P. Curran........... 33 Executive Vice President
Steven I. Hirschfeld........ 37 Vice President, Sales
Thomas Mucher............... 42 Vice President, Professional Services
A. LEIGH POWELL has served as our president and chief executive officer
since July 1999. From February 1998 to July 1999, Mr. Powell served as our vice
president of marketing and as our chief operating officer. From January 1997 to
February 1998, he served as vice president of business alliances for Think
Systems/I2 Technologies, a supply-chain software company. From January 1996 to
January 1997, Mr. Powell worked as a vice president for American Software, a
supply-chain software company. From March 1985 to December 1995, Mr. Powell
worked as a business consultant for Andersen Consulting, a management consulting
firm. Mr. Powell received his M.B.A. and B.S. from Virginia Polytechnic
Institute and State University.
PHILIP M. ST. GERMAIN has served as our chief financial officer since
September 1997, and as a director since July 1999. From 1986 until joining
I-many, Mr. St. Germain worked as an independent consultant for, and provided
financial management services to, early stage high technology companies.
Mr. St. Germain received a J.D. from Boston College Law School and a B.A. from
Boston College.
TERRENCE M. NICHOLSON has served as our chief operating officer since
August 1999. From February 1996 to August 1999, Mr. Nicholson served as director
of information technology at Mallinckrodt, Inc, a manufacturer of medical
devices. From February 1995 to February 1996, Mr. Nicholson served as program
executive of NCR Corp., a manufacturer of automated teller machines, in their
data warehousing systems division. Mr. Nicholson received a M.S.C.E. from
Rensselaer Polytechnic Institute and a B.S.E.E. from the University of Notre
Dame.
TIMOTHY P. CURRAN has served as executive vice president of corporate
development since July 1999. From June 1998 to July 1999, Mr. Curran served as
director, sales and marketing for our vertical markets line of business. From
March 1997 to May 1998, Mr. Curran served as manager, internal consulting at
EMC(2) Corporation, a manufacturer of computer storage devices. Prior to
March 1997, Mr. Curran was employed for eight years with Andersen Consulting, a
management consulting firm, beginning as a staff consultant in Andersen's
systems development practice and ending as a senior manager focusing on business
process re-engineering and management consulting. Mr. Curran received an M.B.A.
from the University of Chicago and a B.S. in chemical engineering from Case
Western Reserve University.
STEVEN I. HIRSCHFELD has served as our vice president, sales since January
1999. From July 1994 to January 1999, Mr. Hirschfeld held various positions with
Janis Group, Inc., a company that
15
distributes enterprise resource planning software, including general manager of
several business units. He received his B.S. in Business Administration and
Marketing from the University of Delaware.
THOMAS MUCHER has served as our vice president, professional services since
February 1998. From December 1996 to February 1998, he served as vice president,
professional services with AnswerSoft, Inc., a help-desk software company. From
June 1994 to December 1996, he served as director, professional services and
later as vice president, professional services for North America with Tivoli
Systems Inc., a provider of products and services for information technology
security and data storage. Mr. Mucher received an AAS certificate in Electronic
Engineering Technology from Control Data Corporation, Institute for Computer
Studies.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"IMNY." Our initial public offering of stock was July 13, 2000 at $9.00 per
share. The price range per share reflected in the table below, is the highest
and lowest sale price for our stock as reported by the Nasdaq National Market
during each quarter the stock has been publicly traded. Our present policy is to
retain earnings, if any, to finance future growth. We have never paid cash
dividends and have no present intention to pay cash dividends. In addition, our
existing line of credit agreement currently prohibits the payment of dividends.
On February 28, 2001, the Company had 195 holders of record of its common stock.
PRICE RANGE OF
COMMON STOCK
-------------------
2000 FISCAL YEAR HIGH LOW
- ---------------- -------- --------
Third Quarter (July 13, 2000 through September 30, 2000).... $22.00 $7.75
Fourth Quarter.............................................. $27.38 $8.00
During the quarter ended December 31, 2000, in connection with the
acquisition of Chi-Cor Information Management, Inc., we issued an aggregate of
approximately 251,601 shares of our common stock to former stockholders of
Chi-Cor, 85,139 shares of which are held in escrow. 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.
On January 4, 2000, Bayview Ventures exercised warrants to purchase 148,812
common shares at $.067 per share. On January 10, 2000, Goulder Investments
exercised warrants to purchase 74,375 common shares at $.067 per share. These
securities were offered and sold in reliance upon exemptions 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
During the quarter ended December 31, 2000, we issued an aggregate of
684,441 shares of our common stock upon the exercise of outstanding options and
warrants to purchase our common stock.
ITEM 6. SELECTED CONSOLIDATED CONDENSED FINANCIAL DATA
The selected condensed financial data presented below as of and for each of
the years in the five-year period ended December 31, 2000 are derived from our
financial statements. The financial statements as of and for each of the years
in the four-year period ended December 31, 2000 have been audited by Arthur
Andersen LLP, independent public accountants. The financial statements as of and
for the year ended December 31, 1996 are unaudited, but have been prepared on
substantially the same basis as the audited financial statements and include, in
the opinion of our management, all
16
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. Historical results are
not necessarily indicative of future results. The following selected financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
notes to those statements and other financial information included elsewhere in
this prospectus.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product...................................... $ 2,101 $ 5,043 $ 8,526 $ 9,228 $ 15,608
Service...................................... 1,252 2,471 5,016 10,183 20,859
------- ------- ------- ------- --------
Total net revenues......................... 3,353 7,514 13,542 19,411 36,467
Cost of revenues............................... 1,040 2,249 2,062 5,354 15,911
------- ------- ------- ------- --------
Gross profit............................... 2,313 5,265 11,480 14,057 20,556
Operating expenses:
Sales and marketing........................ 448 1,223 3,676 6,613 21,610
Research and development................... 1,325 1,523 2,339 8,222 12,836
General and administrative................. 479 1,302 3,379 3,556 4,943
Depreciation and amortization.............. 85 161 366 751 4,386
In-process research and development........ -- -- -- -- 2,400
------- ------- ------- ------- --------
Total operating expenses................. 2,337 4,209 9,760 19,142 46,175
------- ------- ------- ------- --------
Income (loss) from operations.................. (24) 1,056 1,720 (5,085) (25,619)
Other income (expense), net.................... (428) (733) (129) 146 1,444
Provision for (benefit from) income taxes...... -- -- (320) 281 --
------- ------- ------- ------- --------
Net income (loss).......................... $ (452) $ 323 $ 1,911 $(5,220) $(24,175)
======= ======= ======= ======= ========
Net income (loss) per share:
Basic...................................... $ (0.04) $ 0.03 $ 0.19 $ (0.46) $ (1.12)
======= ======= ======= ======= ========
Diluted.................................... $ (0.04) $ 0.03 $ 0.11 $ (0.46) $ (1.12)
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic...................................... 10,500 9,785 10,192 11,433 22,048
======= ======= ======= ======= ========
Diluted.................................... 10,500 13,422 18,317 11,433 22,048
======= ======= ======= ======= ========
AS OF DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 282 $ 1,872 $ 5,129 $15,322 $ 50,639
Working capital (deficit)...................... (2,499) (736) 4,518 8,633 49,112
Total assets................................... 2,281 4,705 11,609 27,182 85,388
Debt, including current portion................ 2,800 5,869 75 41 173
Redeemable convertible preferred stock......... -- -- -- 12,492 --
Total stockholders' equity (deficit)........... (4,791) (6,335) 5,331 197 68,761
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and related
notes. In addition to historical information, the following discussion and other
parts of this report contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
by such forward-looking statements due to various factors, including, but not
limited to, those set forth under "Certain Factors That May Affect Our Future
Operating Results" and elsewhere in this report.
OVERVIEW
We provide software and Internet-based solutions and related professional
services that allow our clients to more effectively manage their
business-to-business relationships. Prior to February 2000, our business model
was focused principally upon licensing software products and providing related
services to entities which maintain and manage the data necessary for contract
management within their own information systems. Our Contract Administration and
Reporting System, or CARS, software suite is used by 8 of the largest 10 and 16
of the largest 20 pharmaceutical manufacturers, ranked according to annual
revenues. In February 2000, we launched our proprietary Internet portal,
imany.com, which is a website created and owned exclusively by us, as a
marketplace for trading partners in the healthcare industry. Following the
introduction of imany.com, we have broadened its scope to enhance its
applicability to all industries where contract-based and program-based sales are
the norm. Currently, we can deliver our products through a variety of means,
including software licensed for installation on our clients' computer systems,
software licensed on an application service provider basis which we host on our
servers, our proprietary imany.com portal and the licensing of technology to
enable our clients to establish their own private or public portals and
exchanges. To date, substantially all of our product revenue has been generated
through the licensing of software for installation on our clients' computer
systems.
We have generated revenues from both products and services. Historically,
product revenues have principally consisted of software license fees generated
from our CARS software suite, which accounted for 47.5% of net revenues in 1999
and 42.8% of net revenues in 2000. Service revenues include maintenance and
support fees directly related to our CARS software suite and professional
service fees derived from consulting, installation, business analysis and
training services related to our software products. Service revenues accounted
for 52.5% of net revenues in 1999 and 57.2% of net revenues in 2000. In 1999,
one customer, Pfizer, Inc., accounted for approximately 10% of our net revenues,
and in 2000, one customer, Premier, Inc., accounted for approximately 29% of our
net revenues.
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 from 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
18
maintenance and support based upon the price paid by the client to purchase
maintenance and support in the second year.
In the latter part of 1999, we started offering our clients an option to
enter into an enterprise agreement that includes the software license,
maintenance and support and a fixed number of days of professional services.
Clients opting for this enterprise agreement enter into a three-year, fixed-fee,
all-inclusive agreement payable in three equal annual installments commencing
upon the execution of the agreement. Due to the extended payment terms, we
recognize the software license and maintenance components ratably over the term
of the enterprise agreement and recognize the professional service component as
the related services are performed, provided that the aggregate revenue
recognized under the enterprise agreement does not exceed the total cash
received. During the year ended December 31, 1999, we entered into two
enterprise agreements totaling $2.9 million. Of that amount, we recognized
$200,000 in net revenues during 1999 and $918,000 during 2000. We did not enter
into any new enterprise agreements during 2000.
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 have increased significantly since 1997, from $4.2 million for the year
ended December 31, 1997 to $46.2 million in 2000. These increases are due
primarily to additions to our staff, as we have expanded all aspects of our
operations. We have grown from 46 employees as of December 31, 1996 to 348
employees as of December 31, 2000.
RECENT EVENTS
On May 1, 2000, in connection with the establishment of a Strategic
Relationship Agreement with The Procter & Gamble Company (P&G), we issued a
fully-exercisable warrant to purchase up to 875,000 shares of our common stock
at an exercise price of $9.00 per share. This warrant is exercisable for a
two-year period. During the second quarter of 2000, we recognized a non-cash
expense of $2.6 million for the warrant, equal to the value of the warrant,
calculated using the Black-Scholes option pricing model, less the amount billed
to P&G under the Agreement for licensed software. In addition, we agreed to
grant P&G a warrant to purchase up to 125,000 additional shares of common stock
upon the achievement of milestones set forth in the Agreement. This additional
warrant, if granted, will expire two years after issuance and will be
exercisable at the fair market value per share of our common stock at the date
of grant.
On July 13, 2000, we 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, the underwriters exercised an option to purchase an additional 1,125,000
shares of common stock to cover over-allotments. Net proceeds from the offering
and subsequent option exercise were approximately $70.7 million. In connection
with our initial public offering, all outstanding shares of preferred stock were
converted into approximately 9,170,000 shares of common stock.
On November 16, 2000, we acquired all the outstanding capital stock of
Chi-Cor Information Management, Inc. for a purchase price of up to
$15.7 million. The initial consideration of approximately $11.1 million
consisted of $5.7 million of cash, a portion of which was used to pay off
Chi-Cor's outstanding bank loan of $754,000, 251,601 shares of common stock
valued at $4.9 million, and transaction costs of $450,000. In addition, upon
achievement of certain revenue and income milestones through December 31, 2001,
the Chi-Cor shareholders are entitled to additional consideration of up to
$4.6 million, one-half of which is payable in cash and the balance payable in
the form of common stock.
19
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the periods
indicated expressed as a percentage of total net revenues for each period
indicated. The historical results are not necessarily indicative of the results
to be expected for any future period.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Net revenues:
Product.......................................... 62.7% 67.1% 63.0% 47.5% 42.8%
Service.......................................... 37.3 32.9 37.0 52.5 57.2
----- ----- ----- ----- -----
Total net revenues............................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues................................... 31.0 29.9 15.2 27.6 43.6
----- ----- ----- ----- -----
Gross profit................................... 69.0 70.1 84.8 72.4 56.4
Operating expenses:
Sales and marketing.............................. 13.4 16.3 27.1 34.1 59.2
Research and development......................... 39.5 20.3 17.3 42.4 35.2
General and administrative....................... 14.3 17.3 25.0 18.3 13.6
Depreciation and amortization.................... 2.5 2.1 2.7 3.9 12.0
In process research and development.............. 0.0 0.0 0.0 0.0 6.6
----- ----- ----- ----- -----
Total operating expenses....................... 69.7 56.0 72.1 98.7 126.6
----- ----- ----- ----- -----
Income (loss) from operations.................... (0.7) 14.1 12.7 (26.3) (70.2)
Other income (expense):
Interest income (expense), net................... (12.4) (8.9) (0.6) 0.9 4.5
Other expense, net............................... (0.3) (0.9) (0.3) (0.1) (0.6)
----- ----- ----- ----- -----
Total other income (expense)................... (12.7) (9.8) (0.9) 0.8 3.9
----- ----- ----- ----- -----
Income (loss) before income taxes.............. (13.4) 4.3 11.8 (25.5) (66.3)
Provision for (benefit from) income taxes.......... 0.0 0.0 (2.4) 1.4 0.0
----- ----- ----- ----- -----
Net income (loss).............................. (13.4)% 4.3% 14.2% (26.9)% (66.3)%
===== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET REVENUES. Net revenues increased by $17.1 million, or 88%, to
$36.5 million for the year ended December 31, 2000 from $19.4 million for the
year ended December 31, 1999. Product revenues increased by $6.4 million, or
69%, to $15.6 million for the year ended December 31, 2000 from $9.2 million for
the year ended December 31, 1999. This increase in product revenues is
attributable to an increase in the average size of licenses sold, partially
offset by a decrease in the number of software licenses sold. As a percentage of
net revenues, product revenues decreased to 42.8% for the year ended
December 31, 2000 from 47.5% for the year ended December 31, 1999.
Service revenues increased by $10.7 million, or 105%, to $20.9 million for
the year ended December 31, 2000 from $10.2 million for the year ended
December 31, 1999. As a percentage of net revenues, service revenues increased
to 57.2% for the year ended December 31, 2000 from 52.5% for the year ended
December 31, 1999. This increase in service revenues both in dollars and as a
percentage of net revenues is attributable to the increase in software licenses
for which maintenance and support fees are being earned, and to an overall
increase in professional services, including implementation, business analysis
and training.
20
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 licensed integrated technology. Historically, cost of product
revenues has not been a significant component of total cost of revenues. Cost of
revenues increased by $10.5 million, or 197%, to $15.9 million for the year
ended December 31, 2000 from $5.4 million for the year ended December 31, 1999.
This increase is due to the increased number of employees in our professional
services group, which increased from 37 employees at December 31, 1999 to 81
employees at December 31, 2000, as well as increased costs related to
subcontractor consultants working on our professional service engagements, which
increased from $1.5 million in the year ended December 31, 1999 to $6.4 million
in the year ended December 31, 2000. As a percentage of net revenues, cost of
revenues increased to 43.6% for the year ended December 31, 2000 from 27.6% for
the year ended December 31, 1999. This increase in cost of revenues as a
percentage of net revenues is attributable to the increased level of service
revenues, which typically generate lower margins than product revenues, and an
increase in the personnel, both internal and subcontracted, within our
professional services organization.
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,
advertising and public relations expenses, and, in 2000, the value of warrants
granted to Procter & Gamble for certain sales and marketing-related services.
Sales and marketing expenses increased by $15.0 million, or 227%, to
$21.6 million for the year ended December 31, 2000, from $6.6 million for the
year ended December 31, 1999. Excluding the one-time, non-cash charge of
$2.6 million related to the value associated with the common stock warrant
granted to Procter & Gamble, sales and marketing expenses increased by
$12.4 million, or 187%, to $19.0 million for the year ended December 30, 2000.
As a percentage of net revenues, sales and marketing expenses, excluding the
warrant charge, increased to 52.1% for the year ended December 31, 2000 from
34.1% for the year ended December 31, 1999. This increase in sales and marketing
expense both in dollars and as a percentage of net revenues is primarily the
result of advertising, marketing and promotional materials related to our
web-based initiatives, an increase in the number of sales and marketing
personnel, which increased from 33 at December 31, 1999 to 85 at December 31,
2000, and increased participation at trade shows.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of payroll and related costs for development personnel and external
consulting costs associated with the development of our products and services.
Research and development expenses increased by $4.6 million, or 56%, to
$12.8 million for the year ended December 31, 2000 from $8.2 million for the
year ended December 31, 1999. This increase is primarily due to an increase in
research and development personnel, which increased from 66 employees at
December 31, 1999 to 100 employees at December 31, 2000, and associated
recruiting and training costs incurred to develop new software products within
the CARS software suite. Additionally, subcontractor costs associated with the
development of our Internet portal increased to $8.0 million in the year ended
December 31, 2000 from $3.0 million in the year ended December 31, 1999.
Internal-use software development costs incurred to build our Internet portal
were accounted for in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under this Statement of Position, costs incurred during the
preliminary project stage are expensed as incurred, and costs incurred during
the application development stage are capitalized. Of this $8.0 million incurred
in the year ended December 31, 2000, $3.4 million was expensed as incurred. As a
percentage of net revenues, research and development expenses decreased to 35.2%
for the year ended December 30, 2000 from 42.4% for the year ended December 31,
1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for all senior executives and personnel
in our administrative, finance and
21
human resources departments, and legal, accounting and other professional
service fees. General and administrative expenses increased by $1.4 million, or
39%, to $4.9 million for the year ended December 31, 2000 from $3.6 million for
the year ended December 31, 1999. As a percentage of net revenues, general and
administrative expenses decreased to 13.6% for the year ended December 31, 2000
from 18.3% for the year ended December 31, 1999. The increase in general and
administrative expenses in dollars is primarily related to the addition of
administrative, finance and human resources employees to support our increased
sales, marketing and development activities, and to increased costs associated
with being a publicly-held company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $3.6 million, or 484%, to $4.4 million for the year ended
December 31, 2000 from $751,000 for the year ended December 31, 1999. This
increase is a result of additions of computer hardware and computer software
related to our increased personnel as well as the amortization of capitalized
website development costs and acquisition-related intangible assets. For the
year ended December 30, 2000, the amortization expense related to capitalized
software development costs amounted to $2.6 million. There was no amortization
of capitalized software development costs in the year ended December 31, 1999.
Also, amortization of intangibles related to the November 2000 acquisition of
Chi-Cor amounted to $335,000 in the year ended December 31, 2000.
IN PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
Chi-Cor, we allocated $2.4 million of the purchase price to in-process research
and development. This allocation was based on an independent appraisal conducted
for the purpose of allocating the initial consideration to the tangible and
intangible assets acquired and liabilities assumed in the Chi-Cor acquisition.
OTHER INCOME, NET. Other income, net increased by $1.3 million to
$1.4 million for the year ended December 31, 2000 from $146,000 for the year
ended December 31, 1999. This increase is primarily the result of an increase in
interest income from higher cash balances in the period following the initial
public offering of our stock in July 2000.
PROVISION FOR INCOME TAXES. We have incurred operating losses for all
quarters in 1999 and 2000 and have consequently recorded a valuation allowance
for the full amount of our net deferred tax asset, as the future realization of
the tax benefit is uncertain. No provision for income taxes has been recorded in
the year ended December 31, 2000. The tax provision of $281,000 in the year
ended December 31, 1999 represents the reversal of a deferred tax asset
previously recorded in 1998.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Net revenues increased by $5.9 million, or 43.3%, to
$19.4 million for the year ended December 31, 1999 from $13.5 million for the
year ended December 31, 1998. This increase in net revenues is principally a
result of the increase in service revenues, including consulting services
performed during the year.
Product revenues increased by $700,000, or 8.2%, to $9.2 million for the
year ended December 31, 1999 from $8.5 million for the year ended December 31,
1998. This increase is attributable to an increase in the number of software
licenses sold. As a percentage of net revenues, product revenues decreased to
47.5% for the year ended December 31, 1999 from 63.0% for the year ended
December 31, 1998. This decrease in product revenues as a percentage of net
revenues is mainly attributable to the expansion of our professional services
business.
Service revenues increased by $5.2 million, or 103.0%, to $10.2 million for
the year ended December 31, 1999 from $5.0 million for the year ended
December 31, 1998. As a percentage of net revenues, service revenues increased
to 52.5% for the year ended December 31, 1999 from 37.0% for the year ended
December 31, 1998. This increase in service revenues both in dollars and as a
22
percentage of net revenues is attributable to an increase in the number of
employees in our professional services group in response to the growing demand
on the part of our clients for more services related to the implementation of
our CARS software suite. Prior to 1999, most of our clients who purchased our
CARS software solutions relied on third party integrators.
COST OF REVENUES. Historically, cost of product revenues has not been a
significant component of total cost of revenues. Cost of revenues increased by
$3.3 million, or 159.6%, to $5.4 million for the year ended December 31, 1999
from $2.1 million for the year ended December 31, 1998. This increase is due to
the increased number of employees in our professional services group, which
increased from 20 employees at December 31, 1998 to 37 employees at
December 31, 1999, as well as increased costs related to subcontract consultants
working on our professional service engagements, which increased from $167,000
in 1998 to $1.5 million in 1999. As a percentage of net revenues, cost of
revenues increased to 27.6% for the year ended December 31, 1999 from 15.2% for
the year ended December 31, 1998. This increase in cost of revenues as a
percentage of net revenues is attributable to the increased level of service
revenues, which typically generate lower margins than product revenues, and an
increase in the personnel within our professional services organization.
SALES AND MARKETING. Sales and marketing expenses increased by
$2.9 million, or 79.9%, to $6.6 million for the year ended December 31, 1999
from $3.7 million for the year ended December 31, 1998. As a percentage of net
revenues, sales and marketing expenses increased to 34.1% for the year ended
December 31, 1999 from 27.1% for the year ended December 31, 1998. This increase
in sales and marketing expense both in dollars and as a percentage of net
revenues is primarily a result of our efforts to build our internal sales force
in anticipation of the imany.com site launch and in support of our CARS software
suite. The increase in sales and marketing expenses is also attributable to an
increase in commission expense as a result of the increase in net revenues. The
number of employees in our sales and marketing departments increased from 15 at
December 31, 1998, to 33 at December 31, 1999. Our commission expense, which is
a function of revenue, increased from $572,000 in 1998 to $1.5 million in 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$5.9 million, or 251.5%, to $8.2 million for the year ended December 31, 1999
from $2.3 million for the year ended December 31, 1998. As a percentage of net
revenues, research and development expenses increased to 42.4% for the year
ended December 31, 1999 from 17.3% for the year ended December 31, 1998. This
increase in both dollars and as a percentage of net revenues is primarily due to
an increase in research and development personnel and external consulting costs
incurred to build imany.com and new software products within the CARS software
suite. The number of employees in our research and development group increased
from 53 at December 31, 1998 to 66 at December 31, 1999, and our external
consulting costs incurred to build imany.com and new software products within
the CARS software suite increased from $0 in 1998 to $1.6 million in 1999.
During the year ended December 31, 1999, we incurred approximately $3.0 million
of software development costs related to building imany.com, of which
approximately $2.0 million was capitalized and the remainder was charged to
research and development expense.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $200,000, or 5.2%, to $3.6 million for the year ended December 31, 1999 from
$3.4 million for the year ended December 31, 1998. As a percentage of net
revenues, general and administrative expenses decreased to 18.3% for the year
ended December 31, 1999 from 25.0% for the year ended December 31, 1998. The
increase in general and administrative expenses in dollars is primarily related
to increased costs associated with legal and accounting professional fees and
additional administrative personnel to support our increased sales, marketing
and development activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $400,000, or 105.2%, to $800,000 for the year ended December 31,
1999 from $400,000 for the year
23
ended December 31, 1998. This increase is a result of significant additions of
computer hardware and computer software related to our increased personnel and
our Internet initiatives.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased by
$276,000, or 214.0% to other income, net of $147,000 for the year ended
December 31, 1999 from an expense of $129,000 for the year ended December 31,
1998. This increase is primarily the result of interest earned in 1999 on higher
average cash balances combined with a decrease in interest expense as a result
of reduced borrowings in 1999.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. During the year ended
December 31, 1999, we recorded a provision for income taxes of $300,000,
compared to a benefit from income taxes of $300,000 for the year ended
December 31, 1998. Upon our inception, we elected to be treated as an S
corporation for income tax purposes. Since income taxes related to the income of
S corporations are the responsibility of the individual stockholders, no
provision for income taxes was recorded for the period during which we were an S
corporation. On April 2, 1998, we re-incorporated as a Subchapter C corporation
and our S corporation status was terminated. On that date, we recorded a
deferred tax asset, and a corresponding tax benefit, for certain future tax
deductions for which it was deemed more likely than not that the asset would be
realized due to actual and expected future taxable income. Due to the incurrence
of a net loss in 1999, the deferred tax asset was deemed to not be recoverable
and, therefore, was expensed, resulting in a provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
On July 13, 2000, we completed our initial public offering and issued
7,500,000 shares of our common stock at an 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 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 December 31, 2000, we had cash and cash equivalents of $50.6 million and
a net working capital surplus of $49.1 million. At December 31, 2000, we had no
long-term or short-term debt, other than obligations under capital lease
financings. During the three-month period ended September 30, 2000, we used a
portion of our initial public offering proceeds to pay off the balance of
$2.3 million owed on our revolving line-of-credit agreement with Silicon Valley
Bank.
Net cash used in operating activities for the year ended December 31, 2000
was $20.1 million, as compared to net cash provided by operating activities of
$1.2 million in 1999. For the year ended December 31, 2000, net cash used in
operating activities consisted primarily of our net loss of $24.2 million, as
adjusted for depreciation, amortization and acquisition-related non-cash charges
totaling $6.7 million and $2.7 million in non-cash charges related to issuance
of warrants, an increase in accounts receivable of $4.9 million and a $823,000
decrease in unearned product revenue.
Net cash used in investing activities for the year ended December 31, 2000
was $15.6 million, as compared to net cash used in investing activities of
$3.8 million in 1999. For the year ended December 31, 2000, net cash used in
investing activities consisted primarily of the initial cash consideration and
transaction costs totaling $6.2 million related to the acquisition of Chi-Cor,
purchases of property and equipment of $8.4 million, which included
approximately $4.7 million of capitalized software development costs, and an
increase in other assets of $1.0 million. Net cash used in investing activities
in 1999 consisted of purchases of property and equipment of $3.8 million,
including approximately $2.0 million of capitalized software development costs.
24
Net cash provided by financing activities for the year ended December 31,
2000 was $71.1 million and consisted primarily of proceeds from the initial
public offering. Net cash provided by financing activities for the year ended
December 31, 1999 was $12.8 million and consisted primarily of net proceeds of
$12.5 million from the private placement of Series C redeemable convertible
preferred stock.
At December 31, 2000, we had approximately $27.7 million of net operating
loss carryforwards to offset future taxable income. Due to the uncertainty
related to the realization of such benefits, we have placed a full valuation
allowance against this otherwise recognizable deferred tax asset.
We currently anticipate our $50.6 million balance in cash and cash
equivalents will be sufficient to meet our anticipated needs for working
capital, capital expenditures, and possible 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. Any
projections of future long-term cash needs and cash flows are subject to
substantial uncertainty. If our available funds and cash generated from
operations are insufficient to satisfy our long term liquidity needs, we may
seek to sell additional equity or debt securities to raise funds, and those
securities may have rights, preferences or privileges senior to those of the
rights of our common stock. In connection with such a sale of stock, our
stockholders may experience dilution. In addition, we cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Form 10-K, the following factors
could cause actual results to differ materially from those indicated by
forward-looking statements made in this Annual Report on Form 10-K and presented
elsewhere by management from time to time.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN 1999 AND 2000, AND OUR RETURN TO
PROFITABILITY IS UNCERTAIN
We incurred net losses of approximately $5.2 million in the year ended
December 31, 1999 and $24.2 million in the year ended December 31, 2000, and we
had an accumulated deficit at December 31, 2000 of $29.8 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. Although we have been profitable in
certain years, and although our revenues have grown, our business model is
evolving, and we cannot assure investors that we will achieve sufficient
revenues to become profitable in the future. If our revenue grows more slowly
than we anticipate or if our operating expenses either increase more than we
expect or cannot be reduced in light of lower than expected revenue, we may not
be profitable.
OUR INTERNET INITIATIVES REPRESENT A NEW BUSINESS MODEL FOR US AND WE CANNOT BE
CERTAIN THAT THESE INITIATIVES WILL GENERATE SIGNIFICANT REVENUES
We launched our Internet initiative and began to market our Internet
technology in February 2000. Until that time, our business model was focused
principally upon the licensing of software products for a one-time license fee
and providing related services to entities which maintain and manage the data
necessary for contract management within their own information systems. Our
Internet initiatives represent an extension of our existing business model for
both us and our clients, and we cannot be certain that our clients will accept
our business model and the manner in which we expect to charge for our products
and services. In addition, our recent focus on our Internet initiatives has
required, and will continue to require, a significant commitment of resources,
including the attention of management
25
and significant cash expenditures. If we cannot generate revenue on the basis we
anticipate, we may not be profitable in the future.
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, we may experience an unplanned shortfall in revenues
during that quarter. This may cause our operating results to be below the
expectations of public market analysts or investors, which could cause the value
of our common stock to decline.
OUR METHOD OF ACCOUNTING FOR THE COSTS WE INCURRED IN CONNECTION WITH THE
DEVELOPMENT OF OUR INTERNET PORTAL IS BASED ON OUR BUSINESS MODEL, AND IN THE
EVENT OUR BUSINESS MODEL CHANGES, WE MAY BE REQUIRED TO INCUR A CHARGE AGAINST
EARNINGS
In accordance with generally accepted accounting principles, we have
capitalized certain of our costs related to the development of imany.com, our
proprietary Internet portal, and we are amortizing the capitalized costs over an
estimated useful life of 24 months. In the event that our business model changes
such that our portal is no longer deemed to have sufficient value to justify the
then carrying value of the capitalized costs, we would be required to write off
all, or a portion of, these capitalized costs. In such an event, our results of
operations for the period in which we take such a charge could be materially
adversely affected.
WE HAVE TWO MANAGEMENT LOCATIONS, AND AS WE CONTINUE TO GROW, WE MAY EXPERIENCE
DIFFICULTIES IN OPERATING FROM THESE TWO FACILITIES
Certain members of our management team are based at our corporate
headquarters located in Portland, Maine, and other members of our management
team are based at our sales office in Edison, New Jersey. In addition, as a
result of our acquisitions, we have added facilities. As we grow, the geographic
distance between these offices could make it more difficult for our management
and other employees to communicate effectively 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 the
number of our employees increased from 67 as of December 31, 1997 to 348 as of
December 31, 2000. To accommodate this growth, we must implement new or upgraded
operating and financial systems, procedures and controls. We may not succeed in
these efforts. Our failure to expand and integrate 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,
26
particularly employees with technical, marketing and sales backgrounds. Because
these individuals are in high demand, we may not be able to attract the staff we
need to accommodate our expansion.
WE ARE HIGHLY DEPENDENT UPON THE HEALTHCARE INDUSTRY, AND FACTORS WHICH
ADVERSELY AFFECT THAT MARKET COULD ALSO ADVERSELY AFFECT US
Most of our revenue to date has come from pharmaceutical companies and a
limited number of other clients in the healthcare industry, and our future
growth depends, in large part, upon increased sales to the healthcare market. In
2000, one customer, Premier, Inc. accounted for approximately 29% of our total
revenues. As a result, demand for our solutions could be affected by any factors
which could adversely affect the demand for healthcare products which are
purchased and sold pursuant to contracts managed through our solutions. The
financial condition of our clients and their willingness to pay for our
solutions are affected by factors which may impact the purchase and sale of
healthcare products, including competitive pressures, decreasing operating
margins within the industry, currency fluctuations, active geographic expansion
and government regulation. The healthcare market is undergoing intense
consolidation. We cannot assure you that we will not experience declines in
revenue caused by mergers or consolidations among our clients and potential
clients.
OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET HAVE NOT YET
RESULTED IN SIGNIFICANT REVENUE, AND WE CANNOT BE SURE THAT OUR INITIATIVES IN
THESE OTHER MARKETS WILL BE SUCCESSFUL
As part of our growth strategy, we have begun initiatives to sell our
products and services in markets other than the healthcare market, including the
food and beverage, commercial products, building products, electronics,
agricultural/chemical, retail and other industries. While we believe that the
contractual purchase relationships between manufacturers and customers in these
markets have similar attributes to those in the healthcare 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 a
strategic relationship with Procter & Gamble, we do not yet know how rapidly or
successfully our purchase contract management software solutions will be
implemented in the commercial products industry. In connection with our efforts
in other industries, it will be necessary for us to hire additional personnel
with expertise in these other markets.
OUR BUSINESS MODEL INCLUDES HOSTING OUR SOFTWARE APPLICATIONS ON BEHALF OF OUR
CLIENTS AND MAINTAINING THEIR CRITICAL SALES DATA, AND IF OUR SYSTEMS FAIL OR
THE DATA IS LOST OR CORRUPTED, OUR CLIENTS MAY LOSE CONFIDENCE IN US
We offer to host our software products on our computers or on computers
hosted on our behalf for access by our clients and we offer to maintain certain
of our clients' critical sales data on our computers or on computers hosted on
our behalf. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins, human error, computer viruses, intentional acts of vandalism and
similar events could damage these systems and result in loss of customer data or
a loss in the ability of our clients to access the software we are hosting for
their use. Our clients would lose confidence in us and could stop doing business
with us if our systems were affected by any of these occurrences or if any
client data were lost. Our insurance policies may not adequately compensate us
for any losses that may occur due to any failures or interruptions in our
systems or loss of data.
THE POLITICAL, ECONOMIC OR REGULATORY HEALTHCARE ENVIRONMENT REGARDING THE
PURCHASING PRACTICES AND OPERATION OF HEALTHCARE ORGANIZATIONS COULD AFFECT THE
DEMAND FOR OUR SOLUTIONS OR OUR BUSINESS MODEL
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Factors such as changes in
reimbursement policies for healthcare expenses and
27
general economic conditions affect the purchasing practices and operations of
healthcare organizations. Changes in regulations or the issuance of
interpretations affecting the healthcare industry, such as any increased
regulation of the purchase and sale of our clients' products, could require us
to make unplanned enhancements of our solutions, or result in delays or
cancellations of orders or reduced demand for our solutions or affect our
ability to adopt our pricing model or otherwise implement our business strategy.
The federal and state governments have periodically considered and adopted
programs to reform or amend the U.S. healthcare system at both the federal and
state level. These programs have included laws and regulations which prohibit
payments for arranging for sales of government-reimbursed drugs and provisions
to increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry providers operate.
Although we have received legal advice regarding the pricing of our solutions
with respect to these laws, regulations and provisions, and believe we are
operating consistently with that advice, we would experience a decrease in our
anticipated revenues if we are required to modify our pricing model, or if our
clients express a reluctance to pay us in accordance with a given business model
without more legal certainty than we are able to give them.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING NEW TECHNOLOGIES OR BUSINESSES, AND THIS
COULD HINDER OUR EXPANSION EFFORTS
We intend in the future to consider additional acquisitions of or
investments in complementary businesses, products, services or technologies. We
cannot assure you that we will be able to identify appropriate acquisition or
investment candidates. Even if we do identify suitable candidates, we cannot
assure you that we will be able to make such acquisitions or investments on
commercially acceptable terms. Furthermore, we may incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
could be dilutive to our existing stockholders.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, WE MAY HAVE DIFFICULTY
INTEGRATING THOSE NEW TECHNOLOGIES OR BUSINESSES
We have acquired Chi-Cor Information Management, Inc., which is located in
Chicago, Illinois and Intersoft International, Inc., which is located in
Cleveland, Ohio. Any company that we acquire is likely to be distant from our
headquarters in Portland, Maine and will have a culture different from ours as
well as technologies, products and services that our employees will need to
understand and integrate with our own. We will have to assimilate those
employees, technologies and products and that effort is difficult,
time-consuming and may be unsuccessful. If we are not successful, our investment
in the acquired entity may be lost, and even if we are successful, the process
of integrating an acquired entity may divert our attention from our core
business.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY
BE ADVERSELY AFFECTED BY NON-CASH CHARGES
In November 2000, we acquired Chi-Cor Information Management, Inc. In
connection with the accounting for the acquisition of Chi-Cor, we recorded
approximately $10.4 million of intangible assets, the amortization of which will
adversely affect our results of operations in future periods. In addition, in
2000 we recorded a $2.4 million charge for the write-off of a portion of the
purchase price of Chi-Cor as in-process research and development. In
January 2001, we acquired Vintage Software, Inc. and in March 2001, we acquired
Intersoft International, Inc. In connection with these two acquisitions and any
future acquisitions, we expect to record significant amounts of intangible
assets, resulting in significant non-cash charges.
28
OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OPERATING RESULTS IF OUR REVENUES
ARE BELOW EXPECTATIONS WHICH COULD RESULT IN A DECLINE IN 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 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. In
addition, we encounter competition for our contracting portal from other
Internet-based exchanges, including exchanges established by manufacturers of
healthcare products. Our competitors vary in size and in the scope and breadth
of products and services offered. We anticipate increased competition for market
share and pressure to reduce prices and make sales concessions, which could
materially and adversely affect our revenues and margins.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Such competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees and strategic partners. We cannot assure you that our
competitors will not develop products or services that are equal or superior to
our solutions or that achieve greater market acceptance than our solutions. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. We cannot
assure you that we will be able to compete successfully or that competitive
pressures will not require us to make concessions that will adversely affect our
revenues and our margins, or reduce the demand for our products and services.
WE RELY SIGNIFICANTLY UPON CERTAIN KEY INDIVIDUALS AND OUR BUSINESS WILL SUFFER
IF WE ARE UNABLE TO RETAIN THEM
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of A.
Leigh Powell, our Chief Executive Officer, and other key employees. The loss of
the services of any key employee could have a material adverse effect on our
business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
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.
29
As of December 31, 2000, 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 December 31, 2000 amounted to
6.34 percent.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following table presents selected quarterly financial data for each of
the eight quarters in the two-year period ended December 31, 2000. The
information for each of these quarters is unaudited, but has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
report.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Total net revenues....... $4,316 $4,439 $5,271 $5,385 $6,789 $7,852 $9,415 $12,411
Gross profit............. 3,499 3,334 3,705 3,519 3,545 3,262 5,462 8,287
Net loss................. (58) (957) (1,316) (2,888) (5,702) (10,339) (3,560) 4,574)
Net loss per share....... (0.01) (0.09) (0.11) (0.25) (0.49) (0.76) (0.12) (0.14)
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
I-MANY, INC. AND SUBSIDIARY:
Report of Independent Public Accountants.................... 32
Consolidated Balance Sheet.................................. 33
Consolidated Statements of Operations....................... 34
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity...................................... 35
Consolidated Statements of Cash Flows....................... 36
Notes to Consolidated Financial Statements.................. 38
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
I-many, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of I-many, Inc.
and subsidiary (a Delaware corporation) as of December 31, 1999 and 2000 and the
related consolidated statements of operations, redeemable preferred stock and
stockholders' equity and cash flows for the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of I-many, Inc. and subsidiary
as of December 31, 1999 and 2000 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 7, 2001
(except for the matters discussed in
Note 12(b), as to which the date is March 2, 2001)
32
I-MANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 2000
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................. $15,322 $50,639
Accounts receivable, net (Note 11)........................ 4,500 10,051
Unbilled receivables...................................... 2,454 4,475
Prepaid expenses and other current assets................. 351 370
Prepaid and refundable income taxes....................... 481 89
------- -------
Total current assets................................ 23,108 65,624
Property and Equipment, net (Note 3)........................ 4,041 8,625
Other Assets................................................ 33 1,059
Goodwill and Other Purchased Intangibles, net (Note 3)...... -- 10,080
------- -------
Total assets........................................ $27,182 $85,388
======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,819 $ 3,644
Accrued expenses (Note 3)................................. 4,969 4,598
Deferred service revenue.................................. 4,649 7,050
Unearned product revenue.................................. 2,038 1,220
------- -------
Total current liabilities........................... 14,475 16,512
------- -------
Capital Lease Obligations, net of current portion........... 18 115
------- -------
Commitments (Note 9)
Series C Redeemable Convertible Preferred Stock (Note 6).... 12,492 --
------- -------
Stockholders' Equity:
Series A convertible preferred stock, $0.01 par value--
Authorized--2,100,000 shares
Issued and outstanding--2,023,550 and no shares at
December 31, 1999 and 2000, respectively............... 20 --
Series B convertible preferred stock, $0.01 par value--
Authorized--400,000 shares
Issued and outstanding--400,000 and no shares at
December 31, 1999 and 2000, respectively............... 4 --
Undesignated preferred stock, $0.01 par value--
Authorized--5,000,000 shares
Issued and outstanding--None............................ -- --
Common stock, $0.0001 par value
Authorized--100,000,000 shares
Issued and outstanding--12,283,885 and 32,940,767 shares
at December 31, 1999 and 2000, respectively............ 1 3
Additional paid-in capital................................ 5,522 98,746
Deferred stock-based compensation......................... (235) (154)
Accumulated deficit....................................... (5,115) (29,834)
------- -------
Total stockholders' equity.......................... 197 68,761
------- -------
Total liabilities, redeemable preferred stock and
stockholders' equity................................ $27,182 $85,388
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
33
I-MANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ----------- -----------
Net Revenues:
Product................................................... $ 8,526 $ 9,228 $ 15,608
Service................................................... 5,016 10,183 20,859
---------- ----------- -----------
Total net revenues...................................... 13,542 19,411 36,467
Cost of Revenues............................................ 2,062 5,354 15,911
---------- ----------- -----------
Gross profit............................................ 11,480 14,057 20,556
---------- ----------- -----------
Operating Expenses:
Sales and marketing....................................... 3,676 6,613 21,610
Research and development.................................. 2,339 8,222 12,836
General and administrative................................ 3,379 3,556 4,943
Depreciation and amortization............................. 366 751 4,386
In-process research and development....................... -- -- 2,400
---------- ----------- -----------
Total operating expenses................................ 9,760 19,142 46,175
---------- ----------- -----------
Income (loss) from operations........................... 1,720 (5,085) (25,619)
---------- ----------- -----------
Other Income (Expense):
Interest income........................................... 98 185 1,815
Interest expense.......................................... (185) (11) (292)
Other expense, net........................................ (42) (28) (79)
---------- ----------- -----------
Total other (expense) income............................ (129) 146 1,444
---------- ----------- -----------
Income (loss) before income taxes......................... 1,591 (4,939) (24,175)
Provision for (Benefit from) Income Taxes................... (321) 281 --
---------- ----------- -----------
Net income (loss)....................................... 1,912 (5,220) (24,175)
Accretion of dividends on redeemable convertible preferred
stock................................................... -- 3 544
---------- ----------- -----------
Net income (loss) applicable to common stockholders..... $ 1,912 $ (5,223) $ (24,719)
========== =========== ===========
Net Income (Loss) per Share:
Basic..................................................... $ 0.19 $ (0.46) $ (1.12)
========== =========== ===========
Diluted................................................... $ 0.11 $ (0.46) $ (1.12)
========== =========== ===========
Weighted Average Shares Outstanding:
Basic..................................................... 10,192,404 11,432,945 22,048,424
========== =========== ===========
Diluted................................................... 18,316,989 11,432,945 22,048,424
========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
34
I-MANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK
---------------------------------------------
SERIES C REDEEMABLE
PREFERRED STOCK SERIES A SERIES B COMMON
------------------------ ---------------------- -------------------- STOCK
REDEMPTION $0.01 PAR $0.01 PAR ----------
SHARES VALUE SHARES VALUE SHARES VALUE SHARES
---------- ----------- ---------- --------- -------- --------- ----------
Balance, December 31, 1997......... -- $ -- -- $ -- -- $ -- 10,807,375
Exercise of stock options........ -- -- -- -- -- -- 104,875
Issuance of restricted common
stock.......................... -- -- -- -- -- -- 774,750
Amortization of deferred
stock-based compensation....... -- -- -- -- -- -- --
Conversion of promissory notes
and accrued interest into
Series A preferred stock and
common stock................... -- -- 2,023,550 20 -- -- 223,200
Exercise of warrants to purchase
Series B preferred stock....... -- -- -- -- 400,000 4 --
Net issuance of common stock for
services....................... -- -- -- -- -- -- 36,250
Reclassification of accumulated
losses of S corporation........ -- -- -- -- -- -- --
Net income....................... -- -- -- -- -- -- --
---------- ----------- ---------- ------- -------- ------ ----------
Balance, December 31, 1998......... -- -- 2,023,550 20 400,000 4 11,946,450
Issuance of Series C redeemable
preferred stock, net of
issuance costs of $17.......... 1,244,325 12,489 -- -- -- -- --
Accretion of dividends on Series
C redeemable preferred stock... -- 3 -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 337,435
Deferred stock-based compensation
associated with the issuance of
stock options.................. -- -- -- -- -- -- --
Amortization of deferred
stock-based compensation....... -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
---------- ----------- ---------- ------- -------- ------ ----------
Balance, December 31, 1999......... 1,244,325 12,492 2,023,550 20 400,000 4 12,283,885
Exercise of stock options........ -- -- -- -- -- -- 1,821,192
Accretion of dividends on
Series C redeemable preferred
stock.......................... -- 544 -- -- -- -- --
Issuance of common stock in
initial public offering, net of
offering costs of $1,482....... -- -- -- -- -- -- 7,500,000
Conversion of preferred stock to
common stock................... (1,244,325) (13,036) (2,023,550) (20) (400,000) (4) 9,169,688
Exercise of underwriters'
overallotment.................. -- -- -- -- -- -- 1,125,000
Issuance of common stock pursuant
to ChiCor acquisition.......... -- -- -- -- -- -- 251,601
Amortization of deferred
stock-based compensation....... -- -- -- -- -- -- --
Issuance of common stock pursuant
to Employee Stock Purchase
Plan........................... -- -- -- -- -- -- 4,254
Value of warrants issued for
services....................... -- -- -- -- -- -- --
Exercise of warrants to purchase
common stock................... -- -- -- -- -- -- 785,147
Net loss......................... -- -- -- -- -- -- --
---------- ----------- ---------- ------- -------- ------ ----------
Balance, December 31, 2000......... -- $ -- -- $ -- -- $ -- 32,940,767
========== =========== ========== ======= ======== ====== ==========
SERIES B PREFERRED
STOCK
----------- ADDITIONAL WARRANTS DEFERRED TREASURY STOCK
$0.0001 PAR PAID-IN -------------------- STOCK-BASED -------------------------
VALUE CAPITAL NUMBER VALUE COMPENSATION SHARES COST
----------- ----------- -------- --------- ------------- ---------- ------------
Balance, December 31, 1997......... $ 1 $ 579 16,000 $ 564 $ -- 2,529,438 $ (3,000)
Exercise of stock options........ -- (547) -- -- -- (1,878,063) 2,212
Issuance of restricted common
stock.......................... -- 923 -- -- (75) (651,375) 788
Amortization of deferred
stock-based compensation....... -- -- -- -- 9 -- --
Conversion of promissory notes
and accrued interest into
Series A preferred stock and
common stock................... -- 5,998 -- -- -- -- --
Exercise of warrants to purchase
Series B preferred stock....... -- 2,560 (16,000) (564) -- -- --
Net issuance of common stock for
services....................... -- 58 -- -- -- -- --
Reclassification of accumulated
losses of S corporation........ -- (4,307) -- -- -- -- --
Net income....................... -- -- -- -- -- -- --
------ ----------- ------- --------- --------- ---------- ------------
Balance, December 31, 1998......... 1 5,264 -- -- (66) -- --
Issuance of Series C redeemable
preferred stock, net of
issuance costs of $17.......... -- -- -- -- -- -- --
Accretion of dividends on Series
C redeemable preferred stock... -- -- -- -- -- -- --
Exercise of stock options........ -- 70 -- -- -- -- --
Deferred stock-based compensation
associated with the issuance of
stock options.................. -- 188 -- -- (188) -- --
Amortization of deferred
stock-based compensation....... -- -- -- -- 19 -- --
Net loss......................... -- -- -- -- -- -- --
------ ----------- ------- --------- --------- ---------- ------------
Balance, December 31, 1999......... 1 5,522 -- -- (235) -- --
Exercise of stock options........ -- 455 -- -- -- -- --
Accretion of dividends on
Series C redeemable preferred
stock.......................... -- -- -- -- -- -- --
Issuance of common stock in
initial public offering, net of
offering costs of $1,482....... 1 61,292 -- -- -- -- --
Conversion of preferred stock to
common stock................... 1 13,059 -- -- -- -- --
Exercise of underwriters'
overallotment.................. -- 9,416 -- -- -- -- --
Issuance of common stock pursuant
to ChiCor acquisition.......... -- 4,944 -- -- -- -- --
Amortization of deferred
stock-based compensation....... -- -- -- -- 81 -- --
Issuance of common stock pursuant
to Employee Stock Purchase
Plan........................... -- 41 -- -- -- -- --
Value of warrants issued for
services....................... -- 3,868 -- -- -- -- --
Exercise of warrants to purchase
common stock................... -- 149 -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
------ ----------- ------- --------- --------- ---------- ------------
Balance, December 31, 2000......... $ 3 $ 98,746 -- $ -- $ (154) -- $ --
====== =========== ======= ========= ========= ========== ============
ACCUMULATED TOTAL
EARNINGS STOCKHOLDERS'
(DEFICIT) EQUITY
------------ ------------
Balance, December 31, 1997......... $ (4,477) $ (6,333)
Exercise of stock options........ (1,634) 31
Issuance of restricted common
stock.......................... -- 1,636
Amortization of deferred
stock-based compensation....... -- 9
Conversion of promissory notes
and accrued interest into
Series A preferred stock and
common stock................... -- 6,018
Exercise of warrants to purchase
Series B preferred stock....... -- 2,000
Net issuance of common stock for
services....................... -- 58
Reclassification of accumulated
losses of S corporation........ 4,307 --
Net income....................... 1,912 1,912
------------ -----------
Balance, December 31, 1998......... 108 5,331
Issuance of Series C redeemable
preferred stock, net of
issuance costs of $17.......... -- --
Accretion of dividends on Series
C redeemable preferred stock... (3) (3)
Exercise of stock options........ -- 70
Deferred stock-based compensation
associated with the issuance of
stock options.................. -- --
Amortization of deferred
stock-based compensation....... -- 19
Net loss......................... (5,220) (5,220)
------------ -----------
Balance, December 31, 1999......... (5,115) 197
Exercise of stock options........ -- 455
Accretion of dividends on
Series C redeemable preferred
stock.......................... (544) (544)
Issuance of common stock in
initial public offering, net of
offering costs of $1,482....... -- 61,293
Conversion of preferred stock to
common stock................... -- 13,036
Exercise of underwriters'
overallotment.................. -- 9,416
Issuance of common stock pursuant
to ChiCor acquisition.......... -- 4,944
Amortization of deferred
stock-based compensation....... -- 81
Issuance of common stock pursuant
to Employee Stock Purchase
Plan........................... -- 41
Value of warrants issued for
services....................... -- 3,868
Exercise of warrants to purchase
common stock................... -- 149
Net loss......................... (24,175) (24,175)
------------ -----------
Balance, December 31, 2000......... $ (29,834) $ 68,761
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
35
I-MANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 1,912 $ (5,220) $(24,175)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization........................... 357 732 4,302
In-process research and development..................... -- -- 2,400
Deferred income taxes................................... (407) 407 --
Amortization of debt discount........................... 98 -- --
Compensation expense related to common stock issued for
services............................................... 58 -- --
Amortization of deferred stock-based compensation....... 8 19 81
Deferred rent........................................... (9) (39) --
Noncash marketing expense related to issuance of
warrants............................................... -- -- 2,620
Noncash interest expense related to issuance of
warrants............................................... -- -- 48
Changes in operating assets and liabilities, net of
assets acquired--
Accounts receivable................................... (1,942) (2,032) (4,924)
Unbilled receivables.................................. (654) 51 (710)
Prepaid expenses and other current assets............. (37) (294) --
Prepaid and refundable income taxes................... -- (481) 392
Accounts payable...................................... 257 2,377 260
Accrued expenses...................................... 1,028 2,652 (524)
Deferred service revenue.............................. 1,114 1,639 847
Unearned product revenue.............................. (1,195) 1,390 (823)
-------- -------- --------
Net cash provided by (used in) operating
activities.......................................... 588 1,201 (20,206)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (939) (3,764) (8,379)
Cash paid to acquire Chi-Cor Information Management,
Inc..................................................... -- -- (6,155)
(Increase) decrease in other assets....................... (25) 2 (1,026)
-------- -------- --------
Net cash used in investing activities............... (964) (3,762) (15,560)
-------- -------- --------
Cash Flows from Financing Activities:
Net proceeds from initial public offering and exercise of
underwriters' over-allotment............................ -- -- 70,708
Net proceeds from sale of Series C redeemable convertible
preferred stock......................................... -- 12,489 --
Proceeds from sale of restricted common stock............. 1,636 -- --
Proceeds from exercise of Series B preferred stock
warrants................................................ 2,000 -- --
Proceeds from exercise of common stock warrants........... -- -- 149
Payments on capital lease obligations..................... (36) (34) (41)
Proceeds from exercise of stock options................... 33 70 455
Proceeds from Employee Stock Purchase Plan................ -- -- 41
Bank overdraft............................................ -- 229 (229)
-------- -------- --------
Net cash provided by financing activities........... 3,633 12,754 71,083
-------- -------- --------
Net Increase in Cash and Cash Equivalents................... 3,257 10,193 35,317
Cash and Cash Equivalents, beginning of year................ 1,872 5,129 15,322
-------- -------- --------
Cash and Cash Equivalents, end of year...................... $ 5,129 $ 15,322 $ 50,639
======== ======== ========
36
I-MANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest.................... $ 27 $ 11 $ 50
======== ======== ========
Cash paid (refunded) during the year for taxes............ $ -- $ 354 $ (253)
======== ======== ========
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Conversion of preferred stock to common stock............. $ -- $ -- $ 13,060
======== ======== ========
Accretion of dividends on Series C redeemable convertible
preferred stock......................................... $ -- $ 3 $ 544
======== ======== ========
Deferred stock-based compensation associated with the
issuance of stock options............................... $ -- $ 188 $ --
======== ======== ========
Conversion of promissory notes and accrued interest into
Series A preferred stock................................ $ 5,868 $ -- $ --
======== ======== ========
Conversion of promissory notes into common stock.......... $ 150 $ -- $ --
======== ======== ========
Issuance of common stock pursuant to cashless exercise of
warrants................................................ $ -- $ -- $ 7,875
======== ======== ========
Issuance of warrants to purchase common stock............. $ -- $ -- $ 3,868
======== ======== ========
Property and equipment acquired under capital lease
obligations............................................. $ -- $ -- $ 173
======== ======== ========
On November 16, 2000, the Company acquired Chi-Cor
Information Management, Inc., as follows:
Fair value of assets acquired........................... $ -- $ -- $(13,571)
Cash paid for acquisition............................... -- -- 6,155
Common stock issued..................................... -- -- 4,944
-------- -------- --------
Liabilities assumed..................................... $ -- $ -- $ (2,472)
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
37
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
I-many, Inc. (the Company), formerly SCC Technologies, Inc., provides
software and Internet-based solutions and related professional services that
allow clients to manage complex contract purchasing arrangements. Historically,
the Company's primary customer base has included parties involved in the sale
and distribution of pharmaceutical and other healthcare products, including
manufacturers, purchasers, groups of purchasers and distributors. The Company
was originally incorporated in 1989 in the Commonwealth of Massachusetts as a
Subchapter S corporation. On April 2, 1998, the Company reorganized and
reincorporated in the State of Delaware as a Subchapter C corporation.
In July 2000, the Company completed its initial public offering (IPO) and
issued 7,500,000 shares of common stock which resulted in total net proceeds to
the Company of approximately $61.3 million. In August 2000, the underwriters
exercised their overallotment option for an additional 1,125,000 shares of
common stock which resulted in total net proceeds to the Company of
approximately $9.4 million.
The Company purchased certain assets and assumed certain liabilities of
Chi-Cor Information Management, Inc. (ChiCor) on November 16, 2000. ChiCor
provides software used in the manufacturing and distribution industries for
trade promotions and deductions management. This acquisition has been accounted
for as a purchase transaction with the excess of the purchase price over the net
assets acquired allocated to goodwill (see Note 2).
The Company's consolidated financial statements reflect the application of
certain accounting policies, as described below and elsewhere in these notes to
consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(B) REVENUE RECOGNITION
The Company recognizes 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. The Company generates
revenues from licensing its software and providing professional services,
training and maintenance and support services. Historically, product revenues
have been principally comprised of software license fees generated from the
Company's Contract Administration and Reporting System, or CARS, software suite.
The Company sells software, professional services, training and maintenance
and support services. In multiple-element arrangements, the Company allocates
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.
The Company recognizes software license fees upon execution of a signed
license agreement and delivery of the software, provided 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, the Company
recognizes the entire fee on
38
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a percentage-of-completion basis, and includes the entire fee in product
revenues. During the years ended December 31, 1998, 1999 and 2000, revenues of
approximately $0, $0 and $2,425 resulted from fees earned under
percentage-of-completion arrangements. If an acceptance period is required,
revenues are recognized upon customer acceptance. The Company provides 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, the Company provides
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, the Company allocates 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.
In the latter part of 1999, the Company started offering its clients an
enterprise agreement that includes a software license, maintenance and support
and a fixed number of days of professional services. Clients opting for this
enterprise agreement will enter into a three-year, fixed-fee, all-inclusive
agreement payable in three equal annual installments commencing upon the
execution of the agreement. Due to the extended payment terms, the Company
recognizes the software license and maintenance and support component ratably
over the term of the enterprise agreement and recognizes the professional
service component as the related services are performed, provided that the
aggregate revenue recognized under the enterprise agreement does not exceed the
total cash received.
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 unearned product revenues and
recognized when the product is shipped to the customer or when 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.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
39
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value, and primarily consist of money
market funds and overnight investments that are readily convertible to cash.
(e) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization on its property and
equipment as well as goodwill and other purchased intangibles using the
straight-line method over the following estimated useful lives:
ESTIMATED USEFUL
DESCRIPTION LIVES
- ------------------------------------------------------------ ----------------
Computer software........................................... 2-3 years
Computer hardware........................................... 3 years
Furniture and equipment..................................... 5-7 years
Leasehold improvements...................................... 5 years
Goodwill.................................................... 4 years
Developed technology........................................ 4 years
Assembled workforce......................................... 2 years
(f) LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company reviews its long-lived assets for impairment as events and circumstances
indicate the carrying amount of an asset may not be recoverable. The Company
evaluates the realizability of its long-lived assets based on profitability and
cash flow expectations for the related asset. As a result of its review, the
Company does not believe that any impairment currently exists related to its
long-lived assets.
(g) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred. SFAS
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. As such, all software development costs
incurred to date have been expensed as incurred.
(h) COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
The Company accounts for internal-use software, in accordance with SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. In accordance with this statement, costs incurred during the preliminary
project stage and costs incurred for data conversion, training and
40
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
maintenance are expensed as incurred. Once the preliminary project stage is
completed, external direct costs incurred during the application development
stage are capitalized and amortized over the estimated useful life of the asset.
The Company incurred significant expenditures related to the design and
development of an Internet website that are accounted for under SOP 98-1. For
the year ended December 31, 1998, no internal-use software development costs
related to the website were incurred or capitalized. For the years ended
December 31, 1999 and 2000, the Company incurred approximately $2,978 and
$8,036, respectively, of internal-use software development costs related to the
website, of which a total of $6,670 was capitalized primarily related to costs
incurred with a third party; the remainder was charged to research and
development expense. The Company began amortizing capitalized website
development costs in February 2000, upon launch of the website, over its
estimated useful life of two years. Through December 31, 2000, the Company has
recorded approximately $2,606 of amortization expense. Capitalized internal-use
software development costs related to the website are included in computer
software as part of property and equipment.
(i) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet risk and
concentrations of credit risk. The Company does not have any significant
off-balance-sheet risk. Financial instruments that potentially expose the
Company to concentrations of credit risk consist of cash equivalents and
accounts receivable. Concentration of credit risk with respect to cash
equivalents is limited because the Company places its investments in
highly-rated financial institutions. Concentration of credit risk with respect
to accounts receivable is limited to certain customers to whom the Company makes
substantial sales. To reduce risk, the Company routinely assesses the financial
strength of its customers and, as a consequence, believes that its accounts
receivable credit risk exposure is limited. The Company maintains an allowance
for potential credit losses but historically has not experienced any significant
losses related to individual customers or groups of customers in any particular
industry or geographic area.
The Company had certain customers whose accounts receivable balances,
including unbilled receivables, individually represented a significant
percentage of total receivables at period-end, as follows:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Customer A.................................................. 27% *
Customer B.................................................. 13% *
Customer C.................................................. 13% *
Customer D.................................................. * 28%
Customer E.................................................. * 18%
Customer F.................................................. * 12%
41
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company had certain customers whose revenues individually represented a
significant percentage of total net revenues, as follows:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Customer D.................................................. * * 29%
Customer G.................................................. * 11% *
- ------------------------
* Was less than 10% of the Company's total
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including its
cash and cash equivalents, accounts receivable, accounts payable and capital
lease obligations approximate fair value due to the short-term nature of these
instruments.
(K) NET INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic and diluted net
income (loss) per share is computed by dividing the net income (loss) available
to common stockholders for the period by the weighted average basic and diluted
number of shares of common stock outstanding during the period. The calculation
of basic weighted average shares outstanding excludes unvested restricted common
stock (see Note 7(b)) that is subject to repurchase by the Company. For periods
in which a net loss has been incurred, the calculation of diluted net loss per
share excludes potential common stock, as their effect is antidilutive.
Potential common stock includes (i) incremental shares of common stock issuable
upon the exercise of outstanding stock options and warrants calculated using the
treasury stock method; (ii) shares of common stock issuable upon the exchange or
conversion of preferred stock and convertible debt calculated using the
as-if-converted method; and (iii) unvested restricted common stock subject to
repurchase by the Company. In accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 98, EARNINGS PER SHARE IN AN INITIAL
PUBLIC OFFERING, the Company determined that there were no nominal issuances of
common stock prior to the Company's initial public offering (IPO).
42
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation between the shares used to compute basic and diluted net
income (loss) per share is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Weighted average common shares outstanding............... 11,011,984 12,137,097 22,119,569
Less--Weighted average unvested common shares
outstanding............................................ 819,580 704,152 71,145
---------- ---------- ----------
Basic weighted average shares outstanding................ 10,192,404 11,432,945 22,048,424
Add--Incremental effect of the following:
Unvested restricted common stock....................... 819,580 -- --
Convertible preferred stock............................ 1,555,766 -- --
Convertible debt....................................... 3,613,482 -- --
Stock options.......................................... 2,083,889 -- --
Stock warrants......................................... 51,868 -- --
---------- ---------- ----------
Diluted weighted average shares outstanding.............. 18,316,989 11,432,945 22,048,424
========== ========== ==========
The calculation of diluted net income (loss) per share excludes the
following potential shares of common stock as their effect on net income (loss)
per share is anti-dilutive:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Unvested restricted common stock............................ -- 704,152 71,145
Convertible preferred stock................................. -- 6,067,421 4,885,489
Stock options............................................... 1,819,563 2,543,594 3,250,329
Stock warrants.............................................. -- 164,780 103,287
--------- --------- ---------
1,819,563 9,479,947 8,310,250
========= ========= =========
In computing diluted net income per share for the year ended December 31,
1998, approximately $60 has been added back to net income applicable to common
stockholders related to interest expense on convertible debt that is assumed to
have been converted to common stock.
(L) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 and 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 is not expected to have a material impact on the Company's
consolidated financial statements or results of operation.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION
NO. 25. This interpretation clarifies the application of APB Opinion No. 25 in
certain situations, as defined. The interpretation is effective July 1, 2000,
but covers certain events occurring during the period after December 15, 1998
but before
43
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the effective date. The adoption of this interpretation did not have any effect
on the Company's consolidated financial statements or results of operation.
(M) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. For the years ended December 31, 1998, 1999 and 2000, the
Company had no items of other comprehensive income (loss); therefore,
comprehensive income (loss) for all periods presented is the same as reported
net income (loss).
(N) RECLASSIFICATIONS
Certain prior year account balances have been reclassified to be consistent
with the current year's presentation.
(2) CHICOR ACQUISITION
On November 16, 2000, the Company acquired all of the outstanding capital
stock of 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, 251,601 shares of Company common stock with a
fair value of $4.9 million, assumed liabilities of $2.5 million and transaction
costs of $458. In addition, upon the achievement of certain revenue and income
milestones through December 31, 2001, the ChiCor shareholders are entitled to
additional consideration of up to $4.6 million, payable in the form of cash and
Company common stock. The acquisition was accounted for as a purchase business
combination in accordance with Accounting Principles Board (APB) Opinion
No. 16, ACCOUNTING FOR 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
to the tangible and intangible assets acquired and liabilities assumed and
determining the estimated economic lives over which the intangible assets should
be amortized. The Company is amortizing goodwill over 4 years, developed
technology over 4 years and assembled workforce over 2 years. 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.
44
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) CHICOR ACQUISITION (CONTINUED)
The following is a summary of the allocation of the initial consideration in
the acquisition of ChiCor:
Current assets.............................................. $ 756
Developed technology........................................ 3,200
Assembled workforce......................................... 300
In-process research and development......................... 2,400
Goodwill.................................................... 6,915
-------
Total initial consideration............................. $13,571
=======
(a) UNAUDITED PRO FORMA INFORMATION
The following unaudited pro forma information summarizes the effect of the
ChiCor acquisition as if the acquisition had occurred as of January 1, 1999.
This pro forma information is presented for informational purposes only. It is
based on historical information and does not purport to represent the actual
results that may have occurred had the Company acquired ChiCor on January 1,
1999, nor is it necessarily indicative of future results of operations of the
combined enterprises.
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
---------- ----------
(UNAUDITED)
Pro forma revenues.......................................... $ 21,087 $ 38,932
Pro forma net loss.......................................... $(10,694) $(28,086)
Pro forma net loss per share................................ $ (0.92) $ (1.26)
The pro forma results of operations excludes the one-time in-process
research and development expense of $2.4 million for the years ended
December 31, 1999 and 2000.
(3) DETAILS OF FINANCIAL STATEMENT COMPONENTS
DECEMBER 31,
-------------------
1999 2000
-------- --------
Property and Equipment:
Computer software......................................... $2,706 $8,208
Computer hardware......................................... 2,103 3,948
Furniture and equipment................................... 465 1,415
Leasehold improvements.................................... -- 254
------ ------
5,274 13,825
Less--Accumulated depreciation and amortization........... 1,233 5,200
------ ------
$4,041 $8,625
====== ======
45
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) DETAILS OF FINANCIAL STATEMENT COMPONENTS (CONTINUED)
Included in furniture and equipment are assets with a value of $57 and $307
as of December 31, 1999 and 2000, respectively, pursuant to capital lease
arrangements.
DECEMBER 31,
-------------------
1999 2000
-------- --------
Goodwill and Other Purchased Intangibles:
Goodwill.................................................. $ -- $ 6,915
Developed technology...................................... -- 3,200
Assembled workforce....................................... -- 300
------- -------
-- 10,415
Less--Accumulated amortization............................ -- 335
------- -------
$ -- $10,080
======= =======
DECEMBER 31,
-------------------
1999 2000
-------- --------
Accrued Expenses:
Accrued software development costs........................ $1,375 $ --
Accrued payroll and benefits.............................. 1,302 2,402
Accrued commissions....................................... 811 1,075
Accrued consulting and professional fees.................. 983 637
Accrued other............................................. 246 425
Current portion of capital lease obligations.............. 23 59
Bank overdraft............................................ 229 --
------ ------
$4,969 $4,598
====== ======
(4) STRATEGIC RELATIONSHIP AGREEMENT
In May 2000, the Company entered into a Strategic Relationship Agreement
(the Agreement) with The Procter & Gamble Company (P&G), pursuant to which P&G
has designated the Company for a period of at least three years as their
exclusive provider of purchase contract management software for P&G's 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 derived 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 common stock as more fully described in Note 7(f).
(5) LINE-OF-CREDIT AGREEMENT
In April 2000, the Company entered into a revolving line-of-credit agreement
with a bank whereby the Company could borrow up to $3.0 million, limited to 80%
of eligible accounts receivable, as
46
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(5) LINE-OF-CREDIT AGREEMENT (CONTINUED)
defined in the agreement. Borrowings under the line-of-credit agreement bore
interest at the bank's prime rate plus 2.0% per annum and were secured by
substantially all assets of the Company. Subsequent to the IPO in July 2000, the
Company used a portion of the IPO proceeds to repay all amounts then outstanding
under the line of credit and terminated the agreement. As consideration for
entering into the line-of-credit agreement, the Company issued to the bank a
warrant to purchase 11,111 shares of the Company's common stock as more fully
described in Note 7(f).
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to its IPO, the Company had authorized 1,250,000 shares of redeemable
convertible preferred stock, all of which were designated Series C redeemable
convertible preferred stock (the Series C). On December 30, 1999, the Company
sold 1,244,325 shares of the Series C for aggregate proceeds of approximately
$12.5 million. The Series C held certain rights and preferences, including a
cumulative 8% dividend, voting rights, a liquidation preference of $10.05 per
share plus accrued dividends, redemption rights, and the option to convert each
share of Series C into 2.5 shares of voting common stock. In July 2000, upon the
effectiveness of the Company's IPO described in Note 7(a), each share of
Series C then outstanding was converted into 2.5 shares of voting common stock,
or an aggregate of 3,110,813 shares. At December 31, 2000, no shares of
Series C preferred stock remain authorized or outstanding.
(7) STOCKHOLDERS' EQUITY
(a) INITIAL PUBLIC OFFERING
In July 2000, the Company completed an IPO of 7,500,000 shares of common
stock at a per share price of $9.00. The Company received proceeds of
approximately $61.3 million, net of underwriting discounts, commissions and
offering expenses of approximately $6.2 million. In August 2000, the
underwriters exercised their overallotment option for an additional 1,125,000
shares of common stock, for which the Company received net proceeds of
approximately $9.4 million, net of underwriting discounts and commissions. Upon
the effectiveness of the IPO all shares of Series A, Series B and Series C
convertible preferred stock were converted into an aggregate of
9,169,688 shares of common stock. At December 31, 2000, no shares of Series A,
Series B or Series C preferred stock remain authorized or outstanding.
(b) COMMON STOCK
Upon its re-incorporation in March 1998, the Company effected a 25-for-1
stock split. In March 2000, the Company approved a 2.5-for-1 stock split, which
was effected as a stock dividend on July 11, 2000. All share and per share
amounts in the accompanying consolidated financial statements and notes have
been retroactively adjusted in all periods presented to reflect these stock
splits. In March 2000, the Board voted to amend the Company's authorized capital
stock to include 105,000,000 shares of capital stock, of which
100,000,000 shares are designated as common stock, $0.0001 par value per share,
and 5,000,000 shares are undesignated preferred stock, $0.01 par value per
share. At December 31, 2000, the Company had reserved 8,287,301 shares of common
stock for issuance upon the exercise of stock options and warrants.
47
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, the Company sold at fair market value 1,238,625 shares of
restricted common stock to an officer of the Company. The restricted common
stock vested over four years. Upon the termination of this officer in 1999, all
unvested shares became fully vested in accordance with the terms of the original
restricted stock purchase agreement. During 1998, the Company sold at less than
fair market value 187,500 shares of restricted common stock to a director of the
Company, for which the Company recorded deferred compensation of $75 to be
amortized over the four-year vesting period of the restricted stock. These
shares became fully vested upon the effectiveness of the Company's IPO.
During 1999, the Company granted 187,500 options to purchase common stock at
less than fair market value to a director of the Company, for which the Company
recorded deferred stock-based compensation of $188 that is being amortized over
the four year vesting period of the options.
(c) CONVERTIBLE PREFERRED STOCK
Prior to its IPO, the Company had authorized 2,500,000 shares of convertible
preferred stock with a par value of $.01 per share, of which 2,100,000 shares
were designated Series A convertible preferred stock (the Series A) and 400,000
shares were designated Series B convertible preferred stock (the Series B)
(collectively, the Convertible Preferred Stock). The Convertible Preferred Stock
held certain rights and preferences, including dividends, voting rights,
liquidation rights and the option to convert each share of Convertible Preferred
Stock into 2.5 shares of voting common stock. In July 2000, upon the
effectiveness of the Company's IPO described in Note 7(a), each share of
Convertible Preferred Stock then outstanding was converted into 2.5 shares of
voting common stock, or an aggregate of 6,058,875 shares of common stock. At
December 31, 2000, no shares of Series A or Series B Convertible Preferred Stock
remain authorized or outstanding.
The Company's Bylaws provide for and the Board of Directors and stockholders
authorized 5,000,000 shares of $0.01 par value undesignated preferred stock. The
Board of Directors has the authority to issue such shares in one or more series
and to fix the relative rights, preferences, privileges and restrictions without
vote or action by the stockholders. The Board of Directors has no present plans
to issue any shares of preferred stock.
(d) STOCK INCENTIVE PLANS
In May 1994, the Company adopted the 1994 Stock Plan (the 1994 Plan), for
which 4,375,000 shares of common stock were reserved. Under the terms of the
1994 Plan, the Company could grant nonqualified or incentive stock options, make
awards of stock or authorize stock purchases by directors, officers, employees
or consultants of the Company. The exercise price for option grants was to be
determined by the Board of Directors but in no event would the exercise price be
less than (i) the fair market value of the common stock in the case of incentive
stock options, or (ii) the lesser of (a) the book value per share of the Company
or (b) 10% of the fair market value of the common stock, in the case of
nonqualified stock options. Option grants under the 1994 Plan generally vest
over a period of five years and terminate 10 years from the date of grant. The
Board of Directors terminated the 1994 Plan in March 2000.
In April 1997, the Company adopted the 1997 Stock Option/Stock Issuance Plan
(the 1997 Plan), for which 6,250,000 shares of common stock were reserved. Under
the terms of the 1997 Plan, the Company could grant nonqualified or incentive
stock options, make awards of stock or authorize stock
48
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
purchases by directors, officers, employees or consultants of the Company. The
exercise price for option grants was to be determined by the Board of Directors
but in no event would the exercise price be less than (i) the fair market value
of the common stock in the case of incentive stock options, or (ii) the lesser
of (a) the book value per share of the Company or (b) 30% of the fair market
value of the common stock in the case of nonqualified stock options. Option
grants under the 1997 Plan generally vest over a period of four to five years,
as determined by the Board of Directors, and expire 10 years from the date of
grant. The Board of Directors terminated the 1997 Plan in March 2000.
In March 2000, the Company adopted the 2000 Stock Incentive Plan and the
2000 Non-Employee Director Stock Option Plan. The 2000 Stock Incentive Plan
provides for the grant of up to 2,500,000 shares of common stock in the form of
incentive stock options, nonqualified stock options, restricted stock awards and
other stock-based awards. All of the Company's officers, employees, directors,
consultants and advisors are eligible to receive awards under the 2000 Stock
Incentive Plan. The 2000 Non-Employee Director Stock Option Plan provides for
the grant of up to 562,500 shares of common stock in the form of nonqualified
stock options to directors who are not employees. Each non-employee director
will initially be granted an option to purchase 62,500 shares of common stock;
in addition, each non-employee director will receive an option to purchase
25,000 shares of common stock on the date of each annual meeting of
stockholders.
At December 31, 2000, options to purchase 1,307,960 and 437,500 common
shares were available for future grants under the 2000 Stock Incentive Plan and
the 2000 Non-Employee Director Stock Option Plan, respectively.
49
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity under all of the
Company's stock incentive plans:
WEIGHTED
RANGE OF AVERAGE
NUMBER OF EXERCISE EXERCISE
SHARES PRICES PRICE
---------- --------------------- --------
Balance, December 31, 1997............................. 4,077,313 $ 0.002--0.016 $0.008
Granted.............................................. 1,819,563 1.200--1.516 1.248
Exercised............................................ (1,982,938) 0.002--1.200 0.016
Canceled............................................. (803,750) 0.016--1.200 0.872
---------- --------------------- ------
Balance, December 31, 1998............................. 3,110,188 0.016--1.516 0.504
Granted.............................................. 3,153,188 1.516--3.800 2.704
Exercised............................................ (337,435) 0.016--1.200 0.208
Canceled............................................. (370,078) 0.016--1.516 1.412
---------- --------------------- ------
Balance, December 31, 1999............................. 5,555,863 0.016--3.800 1.712
Granted.............................................. 1,886,777 4.200--18.500 12.453
Exercised............................................ (1,821,192) 0.016--3.000 0.249
Canceled............................................. (336,464) 1.200--11.750 5.548
---------- --------------------- ------
Balance, December 31, 2000............................. 5,284,984 $ 0.016--18.500 $5.731
========== ===================== ======
Exercisable, December 31, 1998......................... 1,648,500 $ 0.016--1.516 $0.048
========== ===================== ======
Exercisable, December 31, 1999......................... 1,698,020 $ 0.016--3.800 $0.156
========== ===================== ======
Exercisable, December 31, 2000......................... 977,661 $ 0.016--15.250 $3.215
========== ===================== ======
Additional information regarding options outstanding and exercisable as of
December 31, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE PRICE CONTRACTUAL OPTIONS EXERCISE PRICE
PRICES OUTSTANDING PER SHARE LIFE EXERCISABLE PER SHARE
- ---------------------- ----------- -------------- ----------- ----------- --------------
$ 0.016 50,435 $ 0.016 5.70 37,778 $ 0.016
1.200-- 1.516 1,374,935 1.381 7.74 362,189 1.373
2.800-- 4.200 2,484,574 3.300 8.69 505,192 3.151
10.000--11.750 549,190 11.411 9.50 10,000 10.000
15.250--18.500 825,850 16.855 9.85 62,502 15.250
--------- ------- ---- ------- -------
5,284,984 $ 5.730 8.68 977,661 $ 3.215
========= ======= ==== ======= =======
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its stock compensation plans. In cases where
options are granted or stock is issued at a price below fair market value, the
Company calculates compensation expense as the difference between the fair
market value, as determined by the Board of Directors or as listed on a public
exchange, and
50
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
the exercise or issuance price. The Company recognizes compensation expense over
the vesting term of the related option or common share. Had compensation expense
for stock options been determined based on the fair value method of accounting
proscribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income (loss) would have been decreased (increased) to the pro
forma amounts indicated below.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Net income (loss)--
As reported............................................... $1,912 $(5,220) $(24,175)
Pro forma................................................. 1,910 (5,378) (25,838)
Basic net income (loss) per share--
As reported............................................... $ 0.19 $ (0.46) $ (1.12)
Pro forma................................................. 0.19 (0.47) (1.20)
Diluted net income (loss) per share--
As reported............................................... $ 0.11 $ (0.46) $ (1.12)
Pro forma................................................. 0.11 (0.47) (1.20)
The Company's calculations of the fair value of stock options were made
using the Black-Scholes option pricing model with the following assumptions and
resulted in the following weighted average fair value of options granted during
the period:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
-------- -------- ---------
Risk-free interest rates.................................... 6% 6% 6%
Dividend yield.............................................. -- -- --
Volatility.................................................. -- -- 85%
Expected term............................................... 7 years 7 years 7 years
Weighted average fair value of options granted during the
period.................................................... $0.43 $0.95 $8.69
(e) EMPLOYEE STOCK PURCHASE PLAN
In March 2000, the Company adopted the 2000 Employee Stock Purchase Plan.
The 2000 Employee Stock Purchase Plan authorizes the issuance of up to 1,250,000
shares of common stock to participating employees at 85% of the closing price of
the common stock on the first day or last day of each offering period, whichever
is lower. In December 2000, 4,254 shares of common stock were issued to
participating employees at a per share price of $9.67.
(f) WARRANTS
At December 31, 1999 and 2000, the Company had warrants outstanding at
exercise prices ranging from $0.67 to $9.00, as described below.
In May 1997, the Company issued warrants to purchase 223,187 shares of
common stock at an exercise price of $0.67 per share to investors in connection
with a private placement of the Company's convertible promissory notes. The
Company had 223,187 warrants outstanding at December 31, 1998 and 1999. In
January 2000, the warrant holders exercised all warrants then outstanding for
total proceeds to the Company of approximately $150.
51
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) STOCKHOLDERS' EQUITY (CONTINUED)
In September 1997, the Company issued 400,000 warrants to purchase Series B
preferred stock at an exercise price of $5.00 per share in conjunction with a
private placement of the Company's convertible promissory notes. In
December 1998, the warrant holders exercised all Series B preferred stock
warrants then outstanding for total proceeds to the Company of $2,000.
In April 2000, the Company issued warrants to purchase 11,111 shares of
common stock as consideration for entering into a line-of-credit agreement with
a bank, as more fully described in Note 5. The warrant is exercisable through
July 2002 and has an exercise price of $9.00 per share. The Company has
calculated the fair value of this warrant as $48, which has been recorded as
interest expense in the accompanying consolidated financial statements.
In May 2000, the Company granted to P&G a fully exercisable warrant to
purchase 875,000 shares of common stock as consideration for entering into a
strategic relationship agreement (the Agreement), as more fully described in
Note 4. 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. To date, no
such milestones have been achieved.
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 calculated
the fair value of the fully exercisable warrant to purchase 875,000 shares of
common stock as approximately $3.8 million. 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 the second quarter 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 for
$2.6 million. The Company will calculate and record the fair value of the
warrants to purchase up to 125,000 additional shares of common stock as sales
and marketing expense as P&G provides the services set forth in the Agreement.
(8) INCOME TAXES
At its inception, the Company elected to be treated as a Subchapter S
corporation for income tax purposes. Since income taxes related to the income of
Subchapter S corporations are the responsibility of the individual stockholders,
no provision for income taxes was recorded in the accompanying financial
statements for the period from January 1, 1998 through April 2, 1998. On
April 2, 1998, the Company re-incorporated as a Subchapter C corporation and the
Company's Subchapter S corporation status was terminated. On that date, the
accumulated losses incurred during the period in which the Company was a
Subchapter S corporation were reclassified to additional paid-in capital. The
Company's results of operations were taxed as a Subchapter C corporation for the
period from April 3 through December 31, 1998, for which period a benefit for
income taxes was recorded in the accompanying financial statements related to
recording a deferred tax asset for certain future tax deductions for which it
was deemed at the time more likely than not that the assets would be realized,
due to actual and expected taxable income. Due to a change in the Company's
profitability in 1999, the deferred tax asset was deemed not to be recoverable
and, therefore, was expensed in the 1999 tax provision.
52
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
For the period from January 1, 1998 through April 2, 1998, a pro forma
income tax adjustment is required to adjust the Company's net income as if the
Company were a Subchapter C corporation for all periods presented. However, the
Company generated sufficient losses from operations in the years ended
December 31, 1995 and 1996 to offset such taxable income. Therefore, no pro
forma income tax adjustment has been presented.
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, a deferred tax
asset or liability is recorded for all temporary differences between book and
tax reporting of assets and liabilities. A deferred tax valuation allowance is
required if it is more likely than not that all or a portion of any deferred tax
assets will not be realized. At December 31, 2000, the Company has available net
operating losses (NOL's) of approximately $27,660 that are available to offset
future taxable income through 2020. If substantial changes in the Company's
ownership should occur, as defined by Section 382 of the Internal Revenue Code,
there could be annual limitations on the amount of carryforwards which can be
realized in future periods. Due to the uncertainty surrounding the Company's
ability to realize these NOL's and the Company's other deferred tax assets, a
full valuation allowance has been placed against the otherwise recognizable net
deferred tax asset.
The components of the (benefit from) provision for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current--
Federal................................................... $ 67 $ (94) $ --
State..................................................... 19 (32) --
----- ----- -----
86 (126) --
----- ----- -----
Deferred--
Federal................................................... (315) 305 --
State..................................................... (92) 102 --
----- ----- -----
(407) 407 --
----- ----- -----
Total (benefit) provision............................... $(321) $ 281 $ --
===== ===== =====
The approximate income tax effect of each type of temporary difference and
carryforwards is as follows:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Net operating loss carryforwards............................ $ 2,538 $ 12,052
Cash to accrual adjustment.................................. 305 203
Nondeductible reserves and accruals......................... 337 333
Capitalized software development costs...................... (799) (1,591)
Nondeductible amortization of purchased intangibles......... -- (1,400)
Less--Valuation allowance................................... (2,381) (9,597)
------- --------
Net deferred tax asset.................................. $ -- $ --
======= ========
53
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the effective rate is as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
Federal statutory rate...................................... 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit......................... 6.3 (8.0) (6.1)
Nondeductible amortization.................................. -- -- 0.6
In-process research and development......................... -- -- 4.0
Increase in valuation allowance............................. -- 48.2 35.6
Income allocable to Subchapter S corporation................ (10.6) -- --
Conversion from Subchapter S to Subchapter C corporation.... (48.4) -- --
Other....................................................... (1.4) (0.5) (0.1)
------ ------ -----
Effective rate.......................................... (20.1)% 5.7% --%
====== ====== =====
(9) COMMITMENTS
The Company leases its facilities under operating lease agreements and
certain of its equipment under noncancelable capital and operating lease
agreements through 2009. The current portion of capital lease obligations is
included in accrued expenses in the Company's consolidated balance sheet. Future
minimum lease commitments under all noncancelable leases at December 31, 2000
are approximately as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
Year ending December 31,
2001........................................................ $1,198 $ 70
2002........................................................ 1,240 63
2003........................................................ 1,139 56
2004........................................................ 428 29
2005........................................................ 432 --
Thereafter.................................................. 1,678 --
------ ----
Total minimum lease payments.............................. $6,115 218
======
Less--Amount representing interest.......................... 44
----
Present value of minimum lease payments................... 174
Less--Current portion of capital lease obligations.......... 59
----
Capital lease obligations, net of current portion......... $115
====
Total rent expense was approximately $278, $409 and $829 for the years ended
December 31, 1998, 1999 and 2000, respectively.
(10) SEGMENT DISCLOSURE
The Company measures operating results as a single reportable segment, which
provides multiple products and services that allow manufacturers, purchasers and
intermediaries to manage their complex
54
I-MANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) SEGMENT DISCLOSURE (CONTINUED)
contracts for the purchase and sale of goods. To date, all of the Company's
revenues have been derived from customers located within the United States and
all of the Company's assets and operations are located within the United States.
(11) VALUATION AND QUALIFYING ACCOUNTS
A rollforward of the Company's allowance for doubtful accounts is as
follows:
Balance at December 31, 1998................................ $ 100
Additions................................................. 662
Write-offs................................................ (212)
-----
Balance at December 31, 1999................................ 550
Additions................................................. 420
Write-offs................................................ (134)
-----
Balance at December 31, 2000................................ $ 836
=====
(12) SUBSEQUENT ACQUISITIONS
(a) ACQUISITION OF 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 markets a
competing product to the Company's CARS software suite of products to mid-market
pharmaceutical companies. The aggregate purchase price of $933 included cash of
$433, and 34,096 shares of Company common stock, valued at $11.73 per share
totaling $400, and transaction costs of approximately $100. The acquisition will
be accounted for as a purchase business combination in accordance with APB
Opinion No. 16, ACCOUNTING FOR BUSINESS COMBINATIONS. The Company will
consolidate the operating results of Vintage beginning on the date of
acquisition.
(b) ACQUISITION OF INTERSOFT INTERNATIONAL, INC.
In March 2001, the Company acquired all of the outstanding capital stock of
Intersoft International, Inc. (Intersoft) which markets software to companies
and brokers in the food service industry. The aggregate purchase price of $1,589
included cash of $500, 51,134 shares of Company common stock, valued at $19.35
per share totaling $989, and transaction costs of approximately $100. The
acquisition will be accounted for as a purchase business combination in
accordance with APB Opinion No. 16, ACCOUNTING FOR BUSINESS COMBINATIONS. The
Company will consolidate the operating results of Intersoft beginning on the
date of acquisition.
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information set forth in the section entitled "Election of
Directors" in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year ended December 31, 2000 (the
"2001 Proxy Statement"), which is incorporated herein by reference, and the
information set forth in the section entitled "Executive Officers of the
Registrant" in Part I, Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation and Related Information" in the 2001 Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Stock Ownership of
Certain Beneficial Owners and Management" in the 2001 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships
and Related Transactions" in the 2001 Proxy Statement, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
1. Consolidated Financial Statements
The consolidated financial statements listed below together with the report
thereon of the independent auditors dated February 7, 2001 are included in this
report for Item 8 and are incorporated herein by reference.
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000
Notes to Consolidated Financial Statements
2. Exhibits Required to be filed by Item 601 of Regulation S-K
56
The information called for by this paragraph is contained in the Exhibit
Index of this report which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The following reports were filed during the last quarter of the period
covered by this report:
Current report on Form 8-K, filed with the SEC on November 8, 2000
Current report on Form 8-K, filed with the SEC on November 29, 2000
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned thereunto duly authorized.
I-MANY, INC.
By: /s/ A. LEIGH POWELL
-----------------------------------------
A. Leigh Powell
Chief Executive Officer & Director Date:
March 30, 2001
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature apears
below constitutes and appoints A. Leigh Powell and Philip M. St. Germain, and
each of them, his true and lawful attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with Exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
10-K has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------------- --------------------------- ------------------
/s/ A.LEIGH POWELL Chief Executive Officer &
------------------------------------------- Director (Principal March 30, 2000
A.Leigh Powell Executive Officer)
Chief Financial Officer,
/s/ PHILIP M. ST.GERMAIN Treasurer & Director
------------------------------------------- (Principal Accounting March 30, 2000
Philip M. St.Germain Officer)
/s/ ROGER D. GUERIN
------------------------------------------- Corporate Controller March 30, 2000
Roger D. Guerin
/s/ WILLIAM F. DOYLE
------------------------------------------- Chairman of the Board March 30, 2000
William F. Doyle
/s/ JEFFREY HORING
------------------------------------------- Director March 30, 2000
Jeffrey Horing
/s/ MURRAY B. LOW
------------------------------------------- Director March 30, 2000
Murray B. Low
/s/ E. DAVID HETZ
------------------------------------------- Director March 30, 2000
E. David Hetz
58
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1* Certificate of Incorporation of the Registrant, as amended
3.2* Form of Amended and Restated Certificate of Incorporation
3.3* Bylaws
3.4* Form of Amended and Restated Bylaws
4.1* Specimen certificate for shares of common stock
4.2* Description of capital stock (contained in the Certificate
of Incorporation filed as Exhibit 3.1
10.1* 1994 Stock Plan
10.2* 1997 Stock Option/Incentive Plan
10.3* 2000 Stock Incentive Plan
10.4* 2000 Non-Employee Director Stock Option Plan
10.5* Amended and Restated Registration Rights Agreement, dated
December 30, 1999 by and among Registrant and the
stockholders named therein
10.6* Amended and Restated Stockholders' Agreement, dated December
30, 1999 by and among Registrant and the stockholders named
therein
10.7* Form of sublease agreement, dated February 11, 2000, between
PXRE Corp and Registrant regarding premises at 399 Thornall
Street, Edison, New Jersey
10.8* Lease agreement, dated September 30, 1998, between
Registrant and Metro Four Associates Limited Partnership
regarding premises at 379 Thornall Street, Suite 406,
Edison, New Jersey
10.9* Lease agreement, dated September 25, 1997, between
Registrant and Hega Realty Trust regarding premises at 537
Congress St., Portland, Maine
10.10* Lease agreement, dated May 24, 1996, between Registrant and
Hega Realty regarding premises at 537 Congress St., Suites
500, 501 and 504, Portland, Maine
10.11* First Amendment, dated February 8, 1999, to lease agreement,
dated May 24, 1996, for premises at 537 Congress St., Suites
500, 501 and 504, Portland, Maine
10.12* Second Amendment, dated May 27, 1999, to lease agreement,
dated May 24, 1996, for premises at 537 Congress St., Suites
500, 501 and 504, Portland, Maine
10.13* Third Amendment, dated March 13, 2000, to lease agreement,
dated May 24, 1996, for premises at 537 Congress St., Suites
500, 501 and 504, Portland, Maine
10.14* Fourth Amendment, dated April 5, 2000, to lease agreement,
dated May 24, 1996, for premises at 537 Congress St., Suites
500, 501 and 504, Portland, Maine
10.15* Employment letter, dated July 27, 1999, between Registrant
and A. Leigh Powell
10.16* Employment agreement, dated December 23, 1997, between
Registrant and Philip St. Germain
10.17* Employment letter, dated December 26, 1998 between
Registrant and Steven I. Hirschfeld
10.18* Employment letter, dated January 6, 1998, between Registrant
and Thomas Mucher
10.19* Employment letter, dated July 23, 1999, between Registrant
and Terry Nicholson
10.20* Employment agreement, dated April 27, 1998, between
Registrant and Gerald O'Connell
10.21* Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.22* Master Services Agreement, dated November 15, 1999, between
Registrant and Sapient Corporation
10.23* Strategic Relationship Agreement with The Procter and Gamble
Company, dated May 1, 2000
10.24* Warrant issued to The Procter and Gamble Company, dated May
1, 2000
10.25** Agreement and Plan of Merger and Reorganization, dated as of
November 3, 2000, by and among the Registrant, Cimian
Corporation, Chi-Cor Information Management, Inc. and
certain stockholders
59
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23 Consent of Arthur Andersen LLP
24 Power of Attorney of Directors (Included in Signatures Page)
- ------------------------
* Incorporated by reference to the same numbered exhibits filed with the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-32346) originally filed with the SEC on March 13, 2000
** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000
60