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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ___________________
Commission file number: 000-30883
I-MANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0524931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
537 Congress Street
5/th/ Floor
Portland, Maine 04101-3353
(Address of principal executive offices)
(207) 774-3244
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
-----
On August 9, 2002, 40,345,007 shares of the registrant's common stock, $.0001
par value, were issued and outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the information set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"--Certain Factors That May Affect Future Operating Results" as well as in the
Form 10-Q generally. The Company uses words such as "believes," "intends,"
"expects," "anticipates," "plans," "estimates," "should," "may," "will,"
"scheduled" and similar expressions to identify forward-looking statements. The
Company uses these words to describe its present belief about future events
relating to, among other things, its expected marketing plans, future hiring,
expenditures and sources of revenue. This Form 10-Q may also contain third party
estimates regarding the size and growth of our market, which also are
forward-looking statements. Our forward-looking statements apply only as of the
date of this Form 10-Q. The Company's actual results could differ materially
from those anticipated in the forward-looking statements for many reasons,
including the risks described elsewhere in the Form 10-Q.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. The Company is under
no duty to update any of the forward-looking statements after the date of this
Form 10-Q to conform these statements to actual results or to changes in our
expectations, other than as required by law.
2
I-MANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 .......................................................... 4
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 2002 and 2001 .................................... 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 ............................................... 6
Notes to Condensed Consolidated Financial Statements ....................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................... 26
Item 2. Changes in Securities and Use of Proceeds .................................. 26
Item 3. Defaults upon Senior Securities ............................................ 26
Item 4. Submission of Matters to a Vote of Security Holders ........................ 26
Item 5. Other Information .......................................................... 26
Item 6. Exhibits and Reports on Form 8-K ........................................... 26
Signatures ................................................................. 27
Exhibit Index .............................................................. 28
3
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
I-MANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share-related information)
June 30, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 37,293 $ 36,015
Restricted cash 17,000 -
Accounts receivable, net of allowance 14,359 13,412
Prepaid expenses and other current assets 1,767 692
--------- ---------
Total current assets 70,419 50,119
Property and equipment, net 4,273 4,709
Other assets 1,523 1,496
Goodwill and other purchased intangibles, net 44,239 34,814
--------- ---------
Total $ 120,454 $ 91,138
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,517 $ 2,207
Accrued expenses 5,550 7,082
Deferred revenue 6,778 6,373
--------- ---------
Total current liabilities 14,845 15,662
Capital lease obligations, net of current portion 62 105
Deferred Rent 75 115
--------- ---------
Total liabilities 14,982 15,882
--------- ---------
Series A redeemable convertible preferred stock 17,000 -
--------- ---------
Stockholders' equity:
Undesignated preferred stock, $.01 par value
Authorized - 5,000,000 shares
Issued and outstanding - none - -
Common stock, $.0001 par value - -
Authorized - 100,000,000 shares
Issued and outstanding - 40,340,114 and 37,200,988 shares
at June 30, 2002 and December 31, 2001, respectively 4 4
Additional paid-in capital 144,317 125,224
Deferred stock-based compensation (70) (94)
Stock subscription payable 4 1,168
Accumulated other comprehensive income (loss) 3 (5)
Accumulated deficit (55,786) (51,041)
--------- ---------
Total stockholders' equity 88,472 75,256
--------- ---------
Total $ 120,454 $ 91,138
========= =========
See notes to condensed consolidated financial statements.
4
I-MANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three months Six months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Revenues:
Product $ 8,064 $ 5,858 $ 16,589 $ 14,339
Services 6,489 7,773 12,979 15,103
--------- --------- --------- ---------
Total net revenues 14,553 13,631 29,568 29,442
Cost of revenues 4,111 4,731 7,658 9,633
--------- --------- --------- ---------
Gross profit 10,442 8,900 21,910 19,809
Operating expenses:
Sales and marketing 5,339 6,587 10,625 11,729
Research and development 4,568 3,790 8,525 7,287
General and administrative 1,617 2,184 3,053 4,150
Depreciation 593 1,414 1,184 2,780
Amortization of goodwill and other intangible assets 1,340 1,722 2,383 2,569
In-process research and development - 1,000 1,000 1,000
--------- --------- --------- ---------
Total operating expenses 13,457 16,697 26,770 29,515
--------- --------- --------- ---------
Loss from operations (3,015) (7,797) (4,860) (9,706)
Other income, net 80 392 115 1,012
--------- --------- --------- ---------
Net loss $ (2,935) $ (7,405) $ (4,745) $ (8,694)
========= ========= ========= =========
Basic and diluted net loss per common share $ (0.07) $ (0.22) $ (0.12) $ (0.26)
========= ========= ========= =========
Weighted average shares outstanding 40,307 34,285 39,152 33,693
========= ========= ========= =========
See notes to condensed consolidated financial statements
5
I-MANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
-------------------------
2002 2001
----- ----
Cash flows from operating activities:
Net loss $ (4,745) $ (8,694)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 3,543 5,313
In-process research and development 1,000 1,000
Amortization of deferred stock-based compensation 24 36
Marketing expense related to issuance of warrant - 800
Deferred rent (40) -
Changes in current assets and liabilities net of acquisitions:
Accounts receivable (948) 2,920
Prepaid expense and other current assets (1,021) (403)
Accounts payable 310 (1,575)
Accrued expenses (2,274) 240
Deferred revenue 318 (1,153)
-------- ---------
Net cash used in operating activities (3,833) (1,516)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (520) (1,390)
Additional cash paid to acquire Chi-Cor Information Management, Inc. - (1,078)
Cash paid to acquire Vintage Software, Inc. - (731)
Cash paid to acquire Intersoft International, Inc. - (591)
Cash paid to acquire BCL Vision, Ltd. (66) (4,463)
Cash paid to acquire Net Return, LLC (634) -
Cash paid to acquire Menerva Technologies, Inc. (2,764) -
Decrease (increase) in other assets 10 (1,645)
-------- ---------
Net cash used in investing activities (3,974) (9,898)
-------- ---------
Cash flows from financing activities:
Net proceeds from private placement sale of common stock 7,413 -
Payments on capital lease obligations (43) (25)
Proceeds from exercise of stock options 1,639 2,123
Proceeds from Employee Stock Purchase Plan 68 108
-------- ---------
Net cash provided by financing activities 9,077 2,206
-------- ---------
Effect of foreign exchange rate changes 8 (3)
-------- ---------
Net increase (decrease) in cash and cash equivalents 1,278 (9,211)
Cash and cash equivalents, beginning of period 36,015 50,639
-------- ---------
Cash and cash equivalents, end of period $ 37,293 $ 41,428
======== =========
(continued)
6
I-MANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 26 $ 12
======== ========
Supplemental Disclosure of Noncash Activities:
Issuance of redeemable convertible preferred stock, proceeds held in
escrow pending conversion $ 17,000 $ --
======== ========
Issuance of warrant to purchase common stock $ -- $ 800
======== ========
See notes to condensed consolidated financial statements.
7
I-MANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America pursuant to the rules and regulations
of the Securities and Exchange Commission for reporting on Form 10-Q. It is
recommended that these condensed consolidated financial statements be read in
conjunction with the financial statements and the related notes of I-many, Inc.
(the "Company") for the year ended December 31, 2001 as reported in the
Company's Annual Report on Form 10-K filed with the SEC. In the opinion of
management, all adjustments (consisting of normal, recurring adjustments)
considered necessary for the fair presentation of these interim financial
statements have been included. The condensed consolidated balance sheet
presented as of December 31, 2001 has been derived from the financial statements
that have been audited by Arthur Andersen LLP, the Company's former independent
public accountant, not contained herein. The results of operations for the three
months and six months ended June 30, 2002 may not be indicative of the results
that may be expected for the year ending December 31, 2002, or for any other
period.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
We recognize revenue in accordance with Statement of Position (SOP) No.
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN ARRANGEMENTS. In multiple-element arrangements, we
allocate the total fee to professional services, training and maintenance and
support services based on the fair value of those elements, which is defined as
the price charged when those elements are sold separately. The residual amount
is then allocated to the software license fee. We recognize software license
fees upon execution of a signed license agreement and delivery of the software
to customers, 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, we recognize the license fee on a
percentage-of-completion basis, reporting the fee as product revenues. If an
acceptance period is required, revenues are deferred until customer acceptance.
We provide for sales returns at the time of revenue recognition based on
historical experience. To date, such returns have not been significant.
Service revenues include professional services, training and
maintenance and support services. Professional service revenues are recognized
as the services are performed for time and materials contracts and using the
percentage-of-completion method for fixed fee contracts. If conditions for
acceptance exist, professional service revenues are recognized upon customer
acceptance. For fixed fee professional service contracts, we provide for
anticipated losses in the period in which the loss is probable and can be
reasonably estimated. Training revenues are recognized as the services are
provided. Included in training revenues are registration fees received from
participants in our off-site User Training Conference. Maintenance and customer
support fees are recognized ratably over the term of the maintenance contract,
which is generally twelve months. When maintenance and support is included in
the total license fee, we allocate a portion of the total fee to maintenance and
support based upon the price paid by the customer to purchase maintenance and
support in the second year.
Payments received from customers at the inception of a maintenance
period are treated as deferred service revenues and recognized ratably over the
maintenance period. Payments received from customers in advance of product
shipment or revenue recognition are treated as deferred product revenues and
recognized when the product is shipped to the customer or when otherwise earned.
Substantially all of the amounts included in cost of revenues represent direct
8
costs related to the delivery of professional services, training and maintenance
and customer support.
NOTE 3. RECLASSIFICATIONS
Certain prior year account balances have been reclassified to be
consistent with the current year's presentation.
NOTE 4. NET LOSS PER SHARE
Basic net loss per share was determined by dividing the net loss
applicable to common stockholders by the weighted-average number of shares of
common stock outstanding during the period. Diluted net loss per share was the
same as basic net loss per share for all periods presented since the effect of
any potentially dilutive securities was excluded, as they are anti-dilutive as a
result of the Company's net losses. The total numbers of common equivalent
shares excluded from the diluted loss per share calculation were 1,872,332 and
3,106,997 for the three months ended June 30, 2002 and 2001, respectively, and
2,603,328 and 3,212,947 for the six months ended June 30, 2002 and 2001,
respectively.
NOTE 5. NEW ACCOUNTING STANDARDS
Effective in January 2002, in accordance with Emerging Issues Task
Force Issue No. 01-14, the Company accounts for reimbursements of out-of-pocket
expenses related to its professional services business as revenue. These amounts
were previously reported as reductions to cost of revenues in the Company's
financial statements. For comparative purposes, the Company has reclassified
out-of-pocket reimbursement amounts as revenue in its 2001 financial statements.
The effects of these reclassifications are increases in service revenues of
$558,000 and $1.1 million for the three months and six months ended June 30,
2001, respectively. In the three months and six months ended June 30, 2002,
reimbursements of out-of-pocket expenses amounted to $346,000 and $621,000,
respectively.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations be accounted
for using the purchase method. Under SFAS No. 142, goodwill and certain
intangible assets with indefinite useful lives will no longer be amortized.
Instead, these assets will be reviewed for impairment on an annual basis. The
Company has completed its transitional tests required by the standard and no
impairment was evident.
As of December 31, 2001, the net carrying value of the Company's
goodwill totaled $21.7 million. Amortization expense totaled approximately $7.2
million for the year ended December 31, 2001. No amortization expense was
recorded for the three and six months ended June 30, 2002 as a result of the
Company's adoption of SFAS No. 142. Amortization of goodwill for the three and
six months ended June 30, 2001 amounted to $1.3 million and $1.8 million,
respectively.
The Company has adopted SFAS No. 144, "Accounting for the Impairment or
disposal of Long-Lived Assets." SFAS No. 144 provides guidance on recognizing
and measuring impairment for certain long-lived assets. Management is currently
evaluating the impact this statement will have on the Company's financial
statements.
NOTE 6. PRIVATE PLACEMENT
On February 20, 2002, the Company completed a private placement of its
common stock and preferred stock, issuing 1,100,413 shares of its common stock
and the warrants described below at a total price of $7.27 per common share
issued and 1,700 shares of redeemable convertible preferred stock at a purchase
price of $10,000 per share. The Company received proceeds of approximately $7.4
million, net of commissions and other fees, from the sale of the common stock.
The proceeds of $17.0 million related to the issuance of preferred stock were
being held in escrow pending conversion or redemption of the shares of preferred
stock. The $17.0 million in preferred stock proceeds is recorded as restricted
cash on the Company's condensed consolidated balance sheet at June 30, 2002. On
9
July 2, 2002, the Company redeemed all 1,700 outstanding shares of the
redeemable convertible preferred stock at a price equal to the original $17.0
million purchase price, plus all interest accrued.
The warrants issued by the Company to the common stock investors
consist of a warrant exercisable for 180 days after the closing to purchase up
to an additional 165,062 shares at an exercise price of $7.27 per share, and a
seven-year warrant to purchase up to an additional 165,062 shares at an exercise
price of $7.50 per share.
NOTE 7. SIGNIFICANT CUSTOMERS
The Company had certain customers whose accounts receivable balances
individually represented a significant percentage of total receivables at period
end, as follows:
June 30,
2002 2001
---- ----
Customer A * 14%
Customer B 11% *
The Company had certain customers whose revenues individually
represented a significant percentage of total net revenues, as follows:
Three months Six months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Customer A * 12% * 13%
Customer B 10% * * *
NOTE 8. ACQUISITIONS
CHI-COR INFORMATION MANAGEMENT, INC.
On November 16, 2000, the Company acquired in a merger transaction all
of the outstanding capital stock of Chi-Cor Information Management, Inc.
("Chicor") for an initial purchase price of $13.5 million, which consisted of
cash of $5.7 million, a portion of which was used to pay off a $754,000
outstanding bank loan, 239,621 shares of Company common stock with a fair value
at the date of closing of $4.9 million, assumed liabilities of $2.5 million and
transaction costs of $458,000. In addition, based upon achievement against
certain quarterly revenue and income milestones through December 31, 2001, the
ChiCor shareholders received additional consideration of $3.5 million,
consisting of $2.3 million in cash and 117,781 shares of Company common stock
with a fair value as measured at the respective quarter ends of $1.2 million.
The Company has consolidated the operations of ChiCor beginning on the date of
acquisition. The Company retained an independent appraiser for the purpose of
allocating the initial consideration of $13.5 million to the tangible and
intangible assets acquired and liabilities assumed. The portion of the purchase
price allocated to in-process research and development, totaling $2.4 million,
was based on a risk-adjusted cash flow appraisal method and represents projects
that had not yet reached technological feasibility and had no alternative future
use. This portion of the purchase price was expensed upon consummation of the
ChiCor acquisition. The entire $3.5 million in additional consideration was
treated as additional purchase price and recorded as goodwill. Effective
December 31, 2001, no additional consideration can be earned by the ChiCor
shareholders.
VINTAGE SOFTWARE, INC.
On January 25, 2001, the Company acquired all of the outstanding
capital stock of Vintage Software, Inc. ("Vintage"), a software company, which
marketed
10
a competing product to the Company's CARS software suite of products to
mid-market pharmaceutical companies. The aggregate purchase price of $1.1
million included $433,000 of cash, 34,096 shares of Company common stock with a
fair value of $400,000, earnout bonuses paid of $200,000, and transaction costs
of $98,000. The Company has consolidated the operations of Vintage beginning on
the date of acquisition.
INTERSOFT INTERNATIONAL, INC.
On March 2, 2001, the Company acquired all of the outstanding capital
stock of Intersoft International, Inc. ("Intersoft"), a supplier of sales and
marketing automation products for the foodservice broker industry. The initial
purchase price of $3.2 million included $500,000 of cash, 115,732 shares of
Company common stock with a fair value of $2.2 million, assumed liabilities of
$411,000 and transaction costs of $99,000. In addition, based upon achievement
against certain quarterly revenue and income milestones through December 31,
2001, the Intersoft shareholders received additional consideration of $80,000,
consisting of 4,618 shares of Company common stock. Based upon revenue
achievement for the three-month period ended March 31, 2002, the Intersoft
shareholders are entitled to additional consideration in the amount of $4,000,
which is reported as Stock Subscription Payable and treated as additional
purchase price and recorded as goodwill. Effective March 31, 2002, no additional
consideration can be earned by the Intersoft shareholders. The Company has
consolidated the operations of Intersoft beginning on the date of acquisition.
BCL VISION LTD.
On April 9, 2001, the Company acquired all of the outstanding capital
stock of BCL Vision Ltd. ("BCL"), a provider of collection and dispute
management software and services based in London, United Kingdom. The initial
purchase price of $12.1 million consisted of cash of $4.0 million, 685,084
shares of Company common stock with a fair value of $6.9 million, assumed
liabilities of $680,000 and transaction costs of $500,000. The Company has
consolidated the operations of BCL beginning on the date of acquisition. The
Company retained an independent appraiser for the purpose of allocating the
consideration of approximately $12.1 million to the tangible and intangible
assets acquired. Based on this appraisal, $952,000 was allocated to tangible
assets and $10.2 was allocated to goodwill and other intangible assets. The
portion of the purchase price allocated to in-process research and development,
totaling $1.0 million, was based on a risk-adjusted cash flow appraisal method
and represents projects that had not yet reached technological feasibility and
had no alternative future use. This portion of the purchase price was expensed
upon consummation of the BCL acquisition.
PROVATO, INC.
On August 16, 2001, the Company acquired in a merger transaction all of
the outstanding capital stock of Provato, Inc. ("Provato"). The purchase price
of $16.0 million consisted of 1,975,739 shares of the Company's common stock
valued at approximately $11.2 million, a fully-vested warrant to purchase 4,546
shares of the Company's stock valued at approximately $25,000, the assumption of
approximately $1.3 million of liabilities, and $1.7 million in convertible notes
issued by the Company to Provato during the two month period immediately
preceding the merger. In connection with the acquisition, the Company incurred
transaction costs of $1.8 million, which included approximately $1.2 million of
Provato's merger-related costs. The Company has consolidated the operations of
Provato beginning on the date of acquisition. The Company retained an
independent appraiser for the purpose of allocating the merger consideration of
$16.0 million to the tangible and intangible assets acquired. Based on this
appraisal, $870,000 was allocated to tangible assets and $12.4 was allocated to
goodwill and other intangible assets. The portion of the purchase price
allocated to in-process research and development, totaling $2.7 million, was
11
based on a risk-adjusted cash flow appraisal method and represents projects that
had not yet reached technological feasibility and had no alternative future use.
This portion of the purchase price was expensed upon consummation of the Provato
acquisition.
NETRETURN LLC
On March 12, 2002, the Company acquired substantially all the assets of
NetReturn, LLC ("NetReturn"), a Connecticut limited liability company located in
Fairfield, Connecticut, for a purchase price of up to $5.4 million. The primary
asset acquired was NetReturn's library of software applications and tools. The
initial consideration of approximately $3.4 million consisted of $500,000 of
cash, 429,017 shares of the Company's common stock with a fair value at the time
of acquisition of $2.8 million and estimated transaction costs of $134,000. In
addition, upon achievement of certain revenue milestones through March 31, 2003,
the NetReturn shareholders are entitled to additional consideration of up to
$2.0 million, payable in cash or stock at the Company's election. The Company
has consolidated the operating results of NetReturn beginning on the date of
acquisition.
MENERVA TECHNOLOGIES, INC.
On March 28, 2002, the Company acquired all of the outstanding capital
stock of Menerva Technologies, Inc. ("Menerva"), a Delaware corporation located
in Redwood City, California, which markets buy-side contract software solutions,
for a purchase price of up to $12.7 million. The initial consideration of
approximately $9.7 million consisted of cash of $2.4 million, 982,191 shares of
the Company's common stock with a fair value at the time of acquisition of $6.0
million, the assumption of fully-vested stock options to purchase an aggregate
of 25,743 shares of Company stock valued at approximately $143,000, assumed
liabilities of $792,000 and estimated transaction costs of $410,000. In
addition, upon achievement of certain revenue milestones through March 31, 2003,
the former Menerva shareholders are entitled to additional consideration of up
to $3.0 million, payable in cash or stock at the Company's election. The Company
has consolidated the operating results of Menerva beginning on the date of
acquisition.
The portion of the purchase price allocated to in-process research and
development, totaling $1.0 million, was expensed upon consummation of the
Menerva acquisition. This allocation was attributable to one in-process research
and development project, which consisted of significant new features and
functionality to an existing software product. Menerva had achieved significant
technological milestones on the project as of the acquisition date, but the
project had not reached technological feasibility.
The value of the purchased in-process research and development was
computed using a discount rate of 30% on the projected incremental revenue
stream of the product enhancements, net of anticipated costs and expenses. The
discounted cash flows were based on management's forecast of future revenue,
costs of revenue and operating expenses related to the products and technologies
purchased from Menerva. The determined value was then adjusted to reflect only
the value creation efforts of Menerva prior to the close of the acquisition. At
the time of the acquisition, the project was approximately 60% complete. The
project's development was subsequently completed in May 2002.
PRO FORMA INFORMATION
The following unaudited pro forma information summarizes the effect of
each of the aforementioned acquisitions as if the acquisitions had occurred as
of January 1, 2001. Pro forma revenues for 2001 include approximately $1.3
million of work-for-hire consulting services performed by an acquired company
that were discontinued at the time of the acquisition. 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 consummated the acquisitions on January 1,
2001, nor is it necessarily indicative of future results of operations of the
combined enterprises. Pro forma results are in thousands of dollars, except per
share data:
Six Months Ended
June 30,
----------------
2001 2002
---- ----
(Unaudited)
Pro forma revenues ............................... $ 32,144 $29,726
Pro form net loss ................................ $(22,692) $(5,591)
Pro forma net loss per share ..................... $ (0.64) $ (0.14)
NOTE 9. STRATEGIC RELATIONSHIP AGREEMENTS
PROCTER & GAMBLE COMPANY
In May 2000, the Company entered into a Strategic Relationship
Agreement (the "P&G Agreement") with the Procter & Gamble Company ("P&G"),
pursuant to which P&G designated the Company for a period of at least three
years as its exclusive provider of purchase contract management software for its
commercial products group. In addition, P&G agreed to provide the Company with
certain strategic marketing and business development services over the term of
the P&G Agreement. P&G also entered into an agreement to license certain
software and technology from the Company.
As consideration for entering into the P&G Agreement, the Company will
pay P&G a royalty of up to 10% of the revenue generated from the commercial
products market, as defined. To date, no such royalties have been earned or
paid. In addition, the Company granted to P&G a fully exercisable warrant to
purchase 875,000 shares of the Company's common stock. The warrant did not
require any future product purchases or performance of any kind. The warrant,
which was exercisable for a period of two years at an exercise price of $9.00
per share, was converted into 561,960 shares of common stock via a cashless
exercise during 2000. In addition, the Company agreed to grant P&G warrants to
purchase up to 125,000 additional shares of common stock, exercisable at the
then current fair market value per share, upon the achievement of milestones set
forth in the Agreement, as defined. To date, none of these milestones have been
achieved and no additional warrants have been granted.
12
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 warrant to purchase 875,000 shares of common stock as
approximately $3.8 million. $1.2 million of this amount was recorded as a
reduction of the revenue derived from the license agreement with P&G, and the
remaining $2.6 million was recorded as sales and marketing expense. The Company
will calculate and record the fair value of any future warrants to purchase
additional shares of common stock as P&G provides the services set forth in the
Agreement. Since any future revenue would be generated from customers referred
by P&G and not directly from P&G, the Company will treat the fair value of
future warrants issued as sales and marketing expense. In essence, the value of
any such warrants will be a sales commission.
ACCENTURE
In April 2001, the Company entered into a Marketing Alliance Agreement
(the "Accenture Agreement") with Accenture LLP, pursuant to which Accenture
designated the Company for a period of at least three years as their preferred
provider of automated contract management solutions. In addition, Accenture
agreed to provide the Company with certain strategic marketing and business
development services at no charge over the term of the Accenture Agreement.
As consideration for entering into the Accenture Agreement, the Company
has designated Accenture as its preferred business integration provider for the
Company's CARS suite of products. In addition, the Company granted to Accenture
a fully exercisable warrant to purchase 124,856 shares of the Company's common
stock. The warrant is exercisable for a period of three years at an exercise
price of $9.725 per share. The warrant does not require any future product
purchases or performance of any kind. Since Accenture is an integration provider
for the Company's products and not a customer, the full fair value of the
warrant issued to Accenture was recorded as sales and marketing expense.
Accenture is a sales agent, not a principal as defined in EITF No. 99-19. In
addition, the Company has agreed to grant Accenture additional future warrants,
each with a value equal to 10% of any revenues generated from certain future
software licenses to Accenture's clients and prospects. Since any future revenue
would be generated from customers referred by Accenture and not directly from
Accenture, the Company will treat the fair value of future warrants issued as
sales and marketing expense. In essence, the value of any such warrants will be
a sales commission. To date, no such warrants have been earned or paid.
NOTE 10. RESTRUCTURING AND OTHER CHARGES
In the quarter ended September 30, 2001, the Company recorded a $3.0
million charge in connection with a restructuring of the Company's operations
and the abandonment of its proprietary internet portal. Included in the $3.0
million charge is $2.4 million, which was the net carrying value of the
Company's internet portal, $540,000 in severance pay, and $108,000 in facility
lease costs. In abandoning its internet portal, the Company ceased all support
of the portal site, discontinued all related development, and eliminated or
reassigned all personnel previously assigned to the project. The balance of the
severance and related charges were incurred in association with the Company's
decision to restructure certain of its operations in order to improve workforce
efficiencies.
In the quarter ended December 31, 2001, the Company recorded $1.7
million in charges in connection with the closing of its Oakland, California
office and a write-down in value of certain intangible assets. Included in the
$1.7 million charge is $368,000 in severance costs, $445,000 in facility lease
and related costs, and an $895,000 write-down of the carrying value of goodwill
related to the Intersoft acquisition.
As of June 30, 2002, $246,000 in charges related to restructurings in
2001 is accrued and unpaid, consisting of facility lease and related costs.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes for the year ended December 31, 2001, included in our annual
report on Form 10-K filed with the SEC. In addition to historical information,
the following discussion and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated by such forward-looking statements due to
various factors, including, but not limited to, those set forth under "Certain
Factors That May Affect Our Future Operating Results" and elsewhere in this
report.
OVERVIEW
We provide software and related services that allow our clients to more
effectively manage their business-to-business relationships through the entirety
of the contract management lifecycle. Our products and services were originally
developed to manage complex contract purchasing relationships in the healthcare
industry. Our Contract Administration and Reporting System, or CARS, software
suite is used by 8 of the 10 largest and 15 of the 20 largest pharmaceutical
manufacturers, ranked according to 2000 annual healthcare revenues. We are
seeking to expand our products and services to both new vertical markets,
particularly the consumer packaged goods and foodservice industries, and to
procurement side contracting. Our acquisitions of Chi-Cor Information
Management, Inc. ("ChiCor") in November 2000 and Intersoft International, Inc.
("Intersoft") in March 2001 have provided us with accepted products, customers
and expertise in the consumer products and foodservice vertical markets. Also,
our acquisition of BCL Vision Ltd. ("BCL") (renamed I-many International
Limited) in April 2001 has expanded our portfolio of software solutions, which
we can market to customers within our currently-targeted and other vertical
markets. Under the rules of purchase accounting, the acquired companies'
revenues and results of operations have been included together with those of the
Company from the actual dates of the acquisitions and materially affect the
period-to-period comparisons of the Company's historical results of operations.
In the first quarter of 2002, we introduced I-many/ContractSphere,
which is planned to provide a wide range of contract management capabilities
with both buy- and sell-side contract management functions from contract
planning, negotiation and creation to accurate and timely transaction
compliance, settlement and analytics. We envision that all contracts in an
enterprise will eventually be seamlessly managed by a single, integrated
enterprise contract management solution utilizing a central contract repository
and uniform contract business process to provide companies with consistent and
accurate access to the value of its contracts, which are otherwise often locked
in filing cabinets.
We have generated revenues from both products and services. Product
revenues, which had been principally comprised of software license fees
generated from our CARS software suite and now also includes deductions, trade
promotions, collections and disputes management and government pricing
compliance software acquired through our various acquisitions, accounted for
48.7% of net revenues in the six months ended June 30, 2001 and 56.1% of net
revenues in the six months ended June 30, 2002. Service revenues include
maintenance and support fees directly related to our licensed software products,
professional service fees derived from consulting, installation, business
analysis and training services related to our software products and hosting
fees. Service revenues accounted for 51.3% of net revenues in the six months
ended June 30, 2001 and 43.9% of net revenues in the six months ended June 30,
2002.
After being profitable in both 1997 and 1998, we increased our spending
significantly during 1999 and the first half of 2000, principally to increase
the size of our sales and marketing workforce and for development and marketing
expenses related to the development of our web-based initiatives. Our operating
expenses (excluding acquisition-related amortization and write-offs and
14
restructuring charges) have increased significantly since 1997, from $4.2
million for the 12 months ended December 31, 1997 to $48.1 million for the 12
months ended December 31, 2001 and $23.4 million for the six months ended June
30, 2002. These increases are primarily due to additions to our staff, including
through acquisitions, as we have expanded all aspects of our operations. We have
grown from 67 employees as of December 31, 1997 to 359 employees at June 30,
2002.
CRITICAL ACCOUNTING POLICIES
We generate revenues from licensing our software and providing
professional services, training and maintenance and support services. Software
license revenues are attributable to the addition of new customers, and the
expansion of existing customer relationships through licenses covering
additional users, licenses of additional software products and license renewals.
We recognize revenue in accordance with Statement of Position (SOP) No.
97-2, SOFTWARE REVENUE RECOGNITION and SOP 98-9, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN ARRANGEMENTS. In multiple-element arrangements, we
allocate the total fee to professional services, training and maintenance and
support services based on the fair value of those elements, which is defined as
the price charged when those elements are sold separately. The residual amount
is then allocated to the software license fee.
We recognize software license fees upon execution of a signed license
agreement and delivery of the software to customers, 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, we recognize
the license fee on a percentage-of-completion basis, reporting the fee as
product revenues. If an acceptance period is required, revenues are deferred
until customer acceptance. We provide for sales returns at the time of revenue
recognition based on historical experience. To date, such returns have not been
significant.
Service revenues include professional services, training and
maintenance and support services. Professional service revenues are recognized
as the services are performed for time and materials contracts and using the
percentage-of-completion method for fixed fee contracts. If conditions for
acceptance exist, professional service revenues are recognized upon customer
acceptance. For fixed fee professional service contracts, we provide for
anticipated losses in the period in which the loss is probable 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.
Included in training revenues are registration fees received from participants
in our offsite User Training Conference. Maintenance and customer support fees
are recognized ratably over the term of the maintenance contract, which is
generally twelve months. When maintenance and support is included in the total
license fee, we allocate a portion of the total fee to maintenance and support
based upon the price paid by the customer to purchase maintenance and support in
the second year.
Payments received from customers at the inception of a maintenance
period are treated as deferred service revenues and recognized ratably over the
maintenance period. Payments received from customers in advance of product
shipment or revenue recognition are treated as deferred product revenues and
recognized when the product is shipped to the customer or when otherwise earned.
Substantially all of the amounts included in cost of revenues represent direct
costs related to the delivery of professional services, training and maintenance
and customer support. To date, cost of product revenues have not been
significant.
15
RECENT EVENTS
On June 28, 2002, we agreed to accelerate the redemption of all of the
1,700 outstanding shares of our Series A Convertible Preferred Stock ("Preferred
Shares") from the two entities that held the Preferred Shares. The preferred
shares were redeemed on July 2, 2002. In consideration for the redemption of the
Preferred Shares, we paid the holders of the Preferred Shares $17.1 million,
consisting of the original $17.0 million purchase price for the Preferred Shares
and $106,000 of interest accrued on the $17.0 million purchase price while held
in an escrow account since February 19, 2002.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
NET REVENUES
Net revenues increased by $922,000, or 6.8%, to $14.6 million for the
quarter ended June 30, 2002 from $13.6 million for the quarter ended June 30,
16
2001. Product revenues increased by $2.2 million, or 37.7%, to $8.1 million for
the quarter ended June 30, 2002 as compared to the same period last year. This
increase resulted primarily from the introduction of new products in 2002.
Moreover, in total, the average size of license contracts increased while the
number of license contracts sold increased slightly. Revenues derived from
the life sciences segment accounted for 79% of total net revenues in the second
quarter of 2002 as compared to 74% of total net revenues in the second quarter
of 2001.
As a percentage of total net revenues, product revenues increased to
55.4% for the quarter ended June 30, 2002, from 43.0% for the quarter ended June
30, 2001. Service revenues decreased by $1.3 million, or 16.5%, to $6.5 million
for the quarter ended June 30, 2002, from $7.8 million for the quarter ended
June 30, 2001. This reduction reflects decreases in professional services,
primarily due to a year-to-year reduction in revenues from one specific
consulting engagement, and maintenance and support fees.
COST OF REVENUES
Cost of revenues consists primarily of payroll and related costs and
subcontractor costs for providing professional services and maintenance and
support services, and to a lesser extent, amounts due to third parties for
royalties related to integrated technology. Historically, cost of product
revenues has not been a significant component of total cost of revenues. Cost of
revenues decreased by $620,000, or 13.1%, to $4.1 million for the quarter ended
June 30, 2002, from $4.7 million for the quarter ended June 30, 2001. This
decrease is due primarily to the reduction in subcontractor consulting costs
from $780,000 in the second quarter of 2001 to $225,000 in the second quarter of
2002. Most of this decrease in subcontractor consulting costs was related to one
specific consulting engagement as discussed in "Net Revenues" above.
As a percentage of total net revenues, cost of revenues decreased to
28.2% for the quarter ended June 30, 2002, from 34.7% for the quarter ended June
30, 2001. This decrease in cost of revenues as a percentage of total net
revenues is attributable to the decrease in subcontractor costs discussed above
and to the smaller level of service revenues as a percent of total revenues
(service revenues typically generating lower margins than product revenues).
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
payroll and related benefits for sales and marketing personnel, commissions for
sales personnel, travel costs, recruiting fees, expenses for trade shows and
advertising and public relations expenses. Also, sales and marketing expenses
included a one-time, non-cash charge of $800,000 in the quarter ended June 30,
2001 related to the value associated with the granting of a common stock warrant
to Accenture. Excluding the warrant charge, sales and marketing expense
decreased by $448,000, or 7.7%, to $5.3 million in the three months ended June
30, 2002 from $5.8 million in the three months ended June 30, 2001. This
decrease in sales and marketing expense is primarily the result of a $933,000
reduction in spending for advertising, marketing and promotional activities,
partially offset by an increase in salary and fringe benefit costs. As a
percentage of total net revenues, sales and marketing expense excluding the
non-cash warrant charge decreased to 36.7% for the quarter ended June 30, 2002
from 42.5% for the quarter ended June 30, 2001.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of payroll and related costs for development personnel and external
consulting costs associated with the development of our products and services.
Research and development costs, including the costs of developing computer
software, are charged to operations as they are incurred. Research and
development expenses increased by $778,000, or 20.5%, to $4.6 million for the
quarter ended June 30, 2002, from $3.8 million for the quarter ended June 30,
17
2001. This increase in research and development expenses is principally
attributable to $629,000 in higher salary and fringe benefit costs,
approximately one-half of which is the direct result of engineers hired pursuant
to our recent acquisitions of NetReturn and Menerva. As a percentage of total
net revenues, research and development expense increased to 31.4% for the
quarter ended June 30, 2002, from 27.8% for the quarter ended June 30, 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for personnel in our administrative,
finance and human resources departments, and legal, accounting and other
professional service fees. General and administrative expenses decreased by
$567,000, or 26.0%, to $1.6 million in the second quarter of 2002 from $2.2
million in the second quarter of 2001. The decrease in general and
administrative expenses is primarily attributable to reductions in salary and
benefit costs, legal fees and travel expenses. As a percentage of total net
revenues, general and administrative expenses decreased to 11.1% for the quarter
ended June 30, 2002, from 16.0% for the quarter ended June 30, 2001.
DEPRECIATION. Depreciation for the quarter ended June 30, 2001 included
amortization of capitalized internal-use software development costs related to
the Company's Internet portal. Excluding amortization related to the Internet
portal, the value of which was written off during the third quarter of 2001,
depreciation expense increased by $13,000, or 2.2%, from $580,000 in the second
quarter of 2001 to $593,000 in the second quarter of 2002. This increase is a
result of additions of computer hardware and software related to infrastructure
expenditures.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. The
Company did not record any amortization of goodwill during the three and six
months ended June 30, 2002 as a result of our adoption of SFAS No. 142 on
January 1, 2002. Amortization expense totaling $1.3 million in the quarter ended
June 30, 2002 represents the amortization of other purchased intangibles with
determinable useful lives. Excluding the effect of the amortization of goodwill,
amortization expense increased by $871,000, or 185.7%, from $469,000 in the
three months ended June 30, 2001. This increase in amortization of other
purchased intangible assets is attributable to the consummation of additional
acquisitions during the third quarter of 2001 and first quarter of 2002.
Amortization of goodwill for the three months ended June 30, 2001 amounted to
$1.3 million.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition
of BCL Vision Ltd. in the quarter ended June 30, 2001, we allocated $1.0 million
of the purchase price to in-process research and development, which was
immediately expensed as it had no future alternative use. This allocation was
based on an independent appraisal conducted for the purpose of allocating the
initial consideration to the tangible and intangible assets acquired in the BCL
acquisition. There were no acquisitions during the quarter ended June 30, 2002.
OTHER INCOME, NET
Other income, net decreased by $312,000, or 79.6%, from $392,000 in the
quarter ended June 30, 2001, to $80,000 in the quarter ended June 30, 2002. This
decrease is primarily the result of reduced interest yields, lower average cash
balances during the quarter and a significant increase in state franchise tax
payments.
PROVISION FOR INCOME TAXES
We incurred operating losses for all quarters in 2001 and the first two
quarters of 2002 and have consequently recorded a valuation allowance for the
full amount of our net deferred tax asset, which consists principally of our net
operating loss carryforwards, as the future realization of the tax benefit is
uncertain. No provision or benefit for income taxes has been recorded in the
three month periods ended June 30, 2002 and 2001.
18
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
NET REVENUES
Net revenues increased slightly by $126,000, or less than 1%, to $29.6
million for the six months ended June 30, 2002 as compared with the same period
last year. Product revenues increased by $2.3 million, or 15.7%, to $16.6
million for the six months ended June 30, 2002, from $14.3 million for the six
months ended June 30, 2001. This increase resulted primarily from the
introduction of new products in 2002. Moreover, in total, the average size of
license contracts increased while the number of license contracts sold increased
slightly. Revenues derived from the life sciences segment accounted for 73%
of total net revenues in the first half of 2002 as compared to 77% of total net
revenues in the first half of 2001.
As a percentage of total net revenues, product revenues increased to
56.1% for the six months ended June 30, 2002, from 48.7% for the six months
ended June 30, 2001. Service revenues decreased by $2.1 million, or 14.1%, to
$13.0 million for the two quarters ended June 30, 2002, from $15.1 million for
the two quarters ended June 30, 2001. This reduction reflects decreases in
professional services, primarily due to a year-to-year reduction in revenues
from one specific consulting engagement, and maintenance and support fees.
COST OF REVENUES
Cost of revenues decreased by $2.0 million, or 20.5%, to $7.7 million
for the six months ended June 30, 2002, from $9.6 million for the six months
ended June 30, 2001. This decrease is due primarily to the reduction in
subcontractor consulting costs from $2.0 million in the first six months of 2001
to $436,000 in the first six months of 2002. Most of this decrease in
subcontractor consulting costs was related to one specific consulting engagement
as discussed in "Net Revenues" above.
As a percentage of total net revenues, cost of revenues decreased to
25.9% for the six months ended June 30, 2002, from 32.7% for the six months
ended June 30, 2001. This decrease in cost of revenues as a percentage of total
net revenues is attributable to the smaller level of service revenues as a
percent of total revenues, service revenues typically generating lower margins
than product revenues, and reduced reliance on subcontracted consultants in our
professional services operation.
OPERATING EXPENSES
SALES AND MARKETING. Excluding the warrant charges related to the
Accenture warrant issue in May 2001, sales and marketing expense decreased by
$304,000, or 2.8%, to $10.6 million in the six months ended June 30, 2002 from
$10.9 million in the six months ended June 30, 2001. This decrease in sales and
marketing expense is primarily the result of a $1.2 million reduction in
spending for advertising, marketing and promotional activities, partially offset
by an increase in salary and fringe benefit costs. As a percentage of total net
revenues, sales and marketing expense excluding the non-cash warrant charge
decreased to 35.9% for the period ended June 30, 2002 from 37.1% for the period
ended June 30, 2001.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended June 30, 2002 were $8.5 million, increasing by $1.2 million, or
17.0%, as compared to $7.3 million in the six months ended June 30, 2001. This
increase in spending is principally attributable to $938,000 in higher salary
and fringe benefit costs, approximately 40% of which is the direct result of
engineers hired pursuant to our recent acquisitions of NetReturn and Menerva. As
a percentage of total net revenues, research and development expense increased
to 28.8% for the period ended June 30, 2002, from 24.8% for the period ended
June 30, 2001.
19
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $1.1 million, or 26.4%, to $3.1 million in the first two quarters
of 2002 from $4.2 million for the first two quarters of 2001. The decrease in
general and administrative expenses is primarily attributable to reductions in
salary and benefit costs, as headcount was reduced from 41 at June 30, 2001 to
32 at June 30, 2002, legal fees and travel expenses. As a percentage of total
net revenues, general and administrative expenses decreased to 10.3% for the
period ended June 30, 2002, from 14.1% for the period ended June 30, 2001.
DEPRECIATION. From March 2000 to June 2001, depreciation included
amortization of capitalized internal-use software development costs related to
the company's Internet portal. Excluding amortization related to the Internet
portal, the value of which was written off during the third quarter of 2001,
depreciation expense increased by $72,000, or 6.5%, from $1.1 in the six months
ended June 30, 2001 to $1.2 million in the six months ended June 30, 2002. This
increase is a result of additions of computer hardware and software related to
infrastructure expenditures.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. The
Company did not record any amortization of goodwill during the six months ended
June 30, 2002 as a result of our adoption of SFAS No. 142 on January 1, 2002.
Amortization expense totaling $2.4 million in the six months ended June 30, 2002
represents the amortization of other purchased intangibles with determinable
useful lives. Excluding the effect of the amortization of goodwill, amortization
expense increased by $1.6 million, or 215.2%, from $756,000 in the six months
ended June 30, 2001. This increase in amortization of other purchased intangible
assets is attributable to the consummation of additional acquisitions during
2002 and 2001. Amortization of goodwill for the six months ended June 30, 2001
amounted to $1.8 million.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with each of the
acquisitions of Menerva Technologies, Inc. in March 2002 and BCL Vision, Ltd. in
April 2001, we allocated $1.0 million of the purchase price to in-process
research and development. These allocations were based on independent appraisals
conducted for the purpose of allocating the initial consideration to the
tangible and intangible assets acquired and liabilities assumed in the
respective acquisitions.
OTHER INCOME, NET
Other income, net decreased by $897,000, or 88.6%, from $1.0 million in
the six months ended June 30, 2001, to $115,000 in the six months ended June 30,
2002. This decrease is primarily the result of reduced interest yields, lower
average cash balances during the period and a significant increase in state
franchise tax payments.
PROVISION FOR INCOME TAXES
We incurred operating losses for all quarters in 2001 and the first two
quarters of 2002 and have consequently recorded a valuation allowance for the
full amount of our net deferred tax asset, which consists principally of our net
operating loss carryforwards, as the future realization of the tax benefit is
uncertain. No provision for income taxes has been recorded in the six months
ended June 30, 2002 and 2001.
20
LIQUIDITY AND CAPITAL RESOURCES
On February 20, 2002, we completed a private placement of common stock,
preferred stock and warrants, resulting in our receipt of $25 million in gross
proceeds. Of this amount, $17 million was held in an escrow account pending
conversion of the preferred stock into common stock. The $17 million in
preferred stock was redeemed on July 2, 2002. (See Note 6 to the condensed
consolidated financial statements.)
We are a minority investor in a private technology company and could be
required to invest up to an additional $1.4 million in this entity if, before
March 30, 2003, other investors agree to invest equal amounts on terms that are
the same as or less favorable than the terms offered to us, and our total
investment does not exceed 19.9% of the outstanding common stock of the private
issuer.
At June 30, 2002, we had cash and cash equivalents of $37.3 million and
net working capital - excluding our $17.0 million restricted cash balance - of
$38.6 million. Also on June 30, 2002, we had no long-term or short-term debt,
other than obligations under capital lease financings.
Net cash used in operating activities for the six months ended June 30,
2002 was $3.8 million, as compared to net cash used in operating activities of
$1.5 million in the six months ended June 30, 2001. For the six months ended
June 30, 2002, our net loss of $4.7 million was nearly offset by non-cash items
depreciation and amortization of $3.5 million and in-process research and
development of $1.0 million. Net cash used in operating activities consisted
primarily of a $2.3 million decrease in accrued expenses and increases of $1.0
million and $948,000 in prepaid expense and other current assets and accounts
receivable, respectively. The year-to-date decrease in accrued expenses from
December 31, 2002 is largely attributable to the following disbursements during
2002: $1.4 million in 2001 year end bonuses, $712,000 in earnout payments to the
former ChiCor shareholders, and $622,000 in payments against the 2001
restructuring accruals. For the six months ended June 30, 2001, net cash used in
operating activities consisted primarily of our net loss of $8.7 million, as
adjusted for depreciation and amortization of $5.3 million and in-process
research and development of $1.0 million. Also, a decrease in accounts
receivable of $2.9 million was largely offset by decreases of $1.6 million and
$1.2 million in accounts payable and deferred revenue, respectively. The
decrease in accounts receivable represented significantly improved collection
activity during the first half of 2001.
Net cash used in investing activities was $4.0 million for the six
months ended June 30, 2002 and $9.9 million for the six months ended June 30,
2001. Net cash used in investing activities for the six months ended June 30,
2002 consisted of $520,000 in purchases of property and equipment and $3.4
million related to the acquisitions of NetReturn and Menerva. Net cash used in
investing activities for the six months ended June 30, 2001 primarily reflects
$1.4 million in purchases of property and equipment, and $6.9 million related to
the acquisitions of ChiCor, Vintage, Intersoft and BCL Vision, and a $1.6
million investment in Tibersoft Corporation, a privately-held provider of
business-to-business network trading solutions for the food service industry.
The $870,000 decrease in purchases of property and equipment for the period
ended June 30, 2002 relative to the period ended June 30, 2001 reflects the
reduction in our headcount over the past 12 months.
Net cash provided by financing activities was $9.0 million for the six
months ended June 30, 2002, consisting primarily of net proceeds of $7.4 million
from a private placement sale of common stock and additionally from $1.6 million
of stock option exercises. Net cash provided by financing activities was $2.2
million for the six months ended June 30, 2001, consisting principally of
proceeds from stock option exercises.
We currently anticipate that our cash and cash equivalents of $37.3
million will be sufficient to meet our anticipated needs for working capital,
capital expenditures, and acquisitions for at least the next 12 months. Our
future long-term capital needs will depend significantly on the rate of growth
21
of our business, acquisitions, the timing of expanded product and service
offerings and the success of these offerings once they are launched.
Accordingly, any projections of future long-term cash needs and cash flows are
subject to substantial uncertainty. If our current balance of cash and cash
equivalents is insufficient to satisfy our long-term liquidity needs, we may
seek to sell additional equity or debt securities to raise funds, and those
securities may have rights, preferences or privileges senior to those of the
rights of our common stock. In connection with such a sale of stock, our
stockholders may experience dilution. In addition, we cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.
CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
In addition to other information in this Form 10-Q, the following
factors could cause actual results to differ materially from those indicated by
forward-looking statements made in this Form 10-Q and presented elsewhere by
management from time to time.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN RECENT YEARS AND OUR RETURN TO
PROFITABILITY IS UNCERTAIN
We incurred net losses of $24.2 million in the year ended December 31,
2000, $21.2 million in the year ended December 31, 2001 and $4.7 million in the
six months ended June 30, 2002, and we had an accumulated deficit at June 30,
2002 of $55.8 million. In these periods of net losses, our expenses exceeded our
revenues generally due to increases in research and development expenses, sales
and marketing expenses, and non-cash expenses related to acquisitions. We expect
to continue spending significantly, principally for sales, marketing and
development expenses, and therefore we will need to grow our revenues
significantly before we reach profitability. In addition, our second quarter
results in both 2002 and 2001 were impacted by a number of factors that deferred
purchases from us, and we cannot assure you that we will not be affected by
these factors in future periods. Although we have been profitable in certain
years, we cannot assure you that we will achieve sufficient revenues to become
profitable in the future. If our revenue grows more slowly than we anticipate or
if our operating expenses either increase more than we expect or cannot be
reduced in light of lower than expected revenue, we may not be profitable.
IT IS DIFFICULT FOR US TO PREDICT WHEN OR IF SALES WILL OCCUR AND WE OFTEN INCUR
SIGNIFICANT SELLING EXPENSES IN ADVANCE OF OUR RECOGNITION OF ANY RELATED
REVENUE
Our clients view the purchase of our software applications and related
professional services as a significant and strategic decision. As a result,
clients carefully evaluate our software products and services. The length of
this evaluation process is affected by factors such as the client's need to
rapidly implement a solution and whether the client is new or is extending an
existing implementation. The license of our software products may also be
subject to delays if the client has lengthy internal budgeting, approval and
evaluation processes which are quite common in the context of introducing large
enterprise-wide tools. We may incur significant selling and marketing expenses
during a client's evaluation period, including the costs of developing a full
proposal and completing a rapid proof of concept or custom demonstration, before
the client places an order with us. Clients may also initially purchase a
limited number of licenses before expanding their implementations. Larger
clients may purchase our software products as part of multiple simultaneous
purchasing decisions, which may result in additional unplanned administrative
processing and other delays in the recognition of our license revenues. If
revenues forecasted from a significant client for a particular quarter are not
realized or are delayed, as occurred in our second quarter of both 2002 and
2001, we may experience an unplanned shortfall in revenues during that quarter.
This may cause our operating results to be below the expectations of public
market analysts or investors, which could cause the value of our common stock to
decline.
22
WE HAVE TWO MANAGEMENT LOCATIONS AND OTHER FACILITIES AND AS WE CONTINUE TO GROW
WE MAY EXPERIENCE DIFFICULTIES IN OPERATING FROM THESE FACILITIES
Certain members of our management team are based at our corporate
headquarters located in Portland, Maine, and other members of our management
team are based at our sales office in Edison, New Jersey. In addition, as a
result of our acquisitions, we have added additional facilities, including
offices in Chicago, Illinois, Fairfield, Connecticut, Redwood City, California
and London, United Kingdom. The geographic distance between these offices could
make it difficult for our management and other employees to effectively
communicate with each other and, as a result, could place a significant strain
on our managerial, operational and financial resources. Our total revenue
increased from $7.5 million in the year ended December 31, 1997 to $57.8 million
in the year ended December 31, 2001, and the number of our employees increased
from 67 as of December 31, 1997 to 359 as of June 30, 2002. If we continue to
grow, we will need to recruit, train and retain a significant number of
employees, particularly employees with technical, marketing and sales
backgrounds. Because these individuals are in high demand, we may not be able to
attract the staff we need to accommodate our expansion.
WE ARE HIGHLY DEPENDENT UPON THE HEALTHCARE INDUSTRY, AND FACTORS THAT ADVERSELY
AFFECT THAT MARKET COULD ALSO ADVERSELY AFFECT US
Most of our revenue to date has come from pharmaceutical companies and
a limited number of other clients in the healthcare industry, and our future
growth depends, in large part, upon increased sales to the healthcare market. As
a result, demand for our solutions could be affected by any factors that could
adversely affect the demand for healthcare products, which are purchased and
sold pursuant to contracts managed through our solutions. The financial
condition of our clients and their willingness to pay for our solutions are
affected by factors that may impact the purchase and sale of healthcare
products, including competitive pressures, decreasing operating margins within
the industry, currency fluctuations, active geographic expansion and government
regulation. The healthcare market is undergoing intense consolidation. We cannot
assure you that we will not experience declines in revenue caused by mergers or
consolidations among our clients and potential clients.
OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET MAY DIVERT
RESOURCES AND MANAGEMENT ATTENTION AWAY FROM OUR CORE COMPETENCIES
In connection with our efforts to expand into other markets, it may be
necessary for us to hire additional personnel with expertise in these other
industries. We may also have to divert funds, talent, management attention and
other resources toward markets that have not traditionally been the primary
source of our revenues. The risks of such diversification include the
possibility that we will not be successful in generating the revenue we expect
from these markets and the possible detrimental effect of diverting resources
from our traditional markets.
WE MAY NOT BE SUCCESSFUL IN ACQUIRING NEW TECHNOLOGIES OR BUSINESSES AND THIS
COULD HINDER OUR EXPANSION EFFORTS
We intend in the future to consider additional acquisitions of or new
investments in complementary businesses, products, services or technologies. We
cannot assure you that we will be able to identify appropriate acquisition or
investment candidates. Even if we do identify suitable candidates, we cannot
assure you that we will be able to make such acquisitions or investments on
commercially acceptable terms. Furthermore, we may incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
could be dilutive to our existing stockholders and the issuance of debt could
limit our available cash and accordingly restrict our activities.
23
WE HAVE MADE SEVERAL ACQUISITIONS AND MAY MAKE ADDITIONAL ACQUISITIONS AND WE
MAY HAVE DIFFICULTY INTEGRATING THEM
We have acquired ChiCor, Intersoft, BCL Vision Ltd. (now I-many
International Limited), Provato, NetReturn and Menerva, each of which are or
were located in cities very distant from our management locations in Portland,
Maine and Edison, New Jersey, and we are likely to make additional acquisitions.
Any other company that we acquire is likely to be distant from our headquarters
in Portland, Maine and will have a culture different from ours as well as
technologies, products and services that our employees will need to understand
and integrate with our own. We are continuing to assimilate the employees,
technologies and products of the companies that we have acquired and will need
do the same with any new companies we may acquire, and that effort is difficult,
time-consuming and may be unsuccessful. If we are not successful, our investment
in the acquired entity may be lost, and even if we are successful, the process
of integrating an acquired entity may divert our attention from our core
business.
IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY
BE ADVERSELY AFFECTED
In connection with our acquisitions, we have recorded substantial
goodwill and other intangible assets. In addition, we recorded charges for
write-offs of a portion of the purchase prices of acquired companies as
in-process research and development. Although the amortization of goodwill has
been discontinued pursuant to the recent issuance of Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, the carrying
value of any intangible assets will need to be reviewed for impairment on a
periodic basis. We cannot assure you that future write-downs of any such assets
will not affect future operating results.
OUR FIXED COSTS HAVE LED, AND MAY CONTINUE TO LEAD, TO FLUCTUATIONS IN OPERATING
RESULTS WHICH HAS RESULTED, AND COULD IN THE FUTURE RESULT, IN A DECLINE OF OUR
STOCK PRICE
A significant percentage of our expenses, particularly personnel costs
and rent, are fixed costs and are based in part on expectations of future
revenues. We may be unable to reduce spending in a timely manner to compensate
for any significant fluctuations in revenues. Accordingly, shortfalls in
revenues, as we experienced in the second quarters of fiscal 2002 and 2001, may
cause significant variations in operating results in any quarter. If our
quarterly results do not meet the expectations of market analysts or investors,
our stock price is likely to decline.
WE HAVE MANY COMPETITORS AND POTENTIAL COMPETITORS AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY
The market for our products and services is competitive and subject to
rapid change. We encounter significant competition for the sale of our contract
management software from the internal information systems departments of
existing and potential clients, software companies that target the contract
management markets, and professional services organizations. Our competitors
vary in size and in the scope and breadth of products and services offered. We
anticipate increased competition for market share and pressure to reduce prices
and make sales concessions, which could materially and adversely affect our
revenues and margins.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Such competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees and strategic partners. We cannot assure you that our
competitors will not develop products or services that are equal or superior to
our solutions or that achieve greater market acceptance than our solutions. In
addition, current and potential competitors have established or
24
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 CANNOT BE SURE THAT OUR INITIATIVES TO TARGET MARKETS OTHER THAN THE
HEALTHCARE MARKET FOR OUR CARS PRODUCTS WILL BE SUCCESSFUL
As part of our growth strategy, we have acquired companies that target
markets other than the healthcare market and have undertaken initiatives to sell
our CARS software suite of products and services in markets other than the
healthcare market, including the consumer packaged goods, foodservice and other
industries. While we believe that the contractual purchase relationships between
manufacturers and customers in these markets have similar attributes to those in
the healthcare market, we cannot assure you that our assumptions are correct or
that we will be successful in adapting our technology to these other markets.
Although we have entered into strategic relationships with Procter & Gamble and
Accenture, we do not yet know how rapidly or successfully our purchase contract
management software solutions will be implemented in the commercial products and
other industries.
WE RELY SIGNIFICANTLY UPON CERTAIN KEY INDIVIDUALS AND OUR BUSINESS WILL SUFFER
IF WE ARE UNABLE TO RETAIN THEM
We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of A.
Leigh Powell, our Chief Executive Officer, and other key employees. The loss of
the services of any key employee could have a material adverse effect on our
business, financial condition and results of operations.
CURRENT ECONOMIC CONDITIONS MAY WEAKEN OUR SALES
The current downturn and uncertainty in general economic and market
conditions may have negatively affected and could continue to negatively affect
demand for our products and services. If the current economic downturn continues
or worsens, our business, financial condition and results of operations could be
harmed. In addition, current world economic and political conditions, including
the effects of the September 11, 2001 terrorist attacks and the resulting
military conflict, may reduce the willingness of our customers and prospective
customers to commit funds to purchase our products and services. The resulting
loss or delay in our sales could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The primary
objective of the Company's investment activities is to preserve principal while
maximizing yields without assuming significant risk. This is accomplished by
investing in widely diversified investments, consisting primarily of short-term,
investment-grade securities. Due to the nature of our investments, we believe
there is no material risk exposure.
As of June 30, 2002, the Company's cash and cash equivalents consisted
entirely of money market investments with maturities under 30 days and
non-interest bearing checking accounts. The weighted average interest rate yield
for all cash and cash equivalents at June 30, 2002 amounted to 1.74 percent.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Modification of Constituent Instruments
On July 2, 2002, the Company redeemed all of its issued and outstanding
shares of redeemable convertible preferred stock. Accordingly, no shares of
preferred stock are outstanding.
(b) Change in Rights
None
(c) Changes in Securities
None
(d) Use of Proceeds
The Company has continued to use the proceeds of its initial public
offering in the manner and for the purposes described elsewhere in this Report
on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 30, 2002. The
stockholders of the Company elected members of the Board of Directors.
--------------------------------------------------------------------------------------------
NUMBER OF SHARES OF COMMON STOCK
---------------------------------------------------------------
FOR AGAINST BROKER NON-VOTES
ABSTAINED
--------------------------------------------------------------------------------------------
William F. Doyle 29,260,136 560,917 - -
--------------------------------------------------------------------------------------------
Murray B. Low 29,259,995 561,058 - -
--------------------------------------------------------------------------------------------
Karl E. Newkirk 29,517,595 303,458 - -
--------------------------------------------------------------------------------------------
A. Leigh Powell 28,316,192 1,504,861 - -
--------------------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the Exhibit Index are filed herewith.
(b) On May 21, 2002, we filed a current report of Form 8-K pursuant to
Items 4 and 7 thereof, reporting the dismissal of Arthur Andersen
LLP as I-many's independent auditors.
(c) On May 23, 2002, we filed a current report of Form 8-K pursuant to
Item 4 thereof, reporting the appointment of Deloitte & Touche LLP
as I-many's independent auditors.
(d) On July 11, 2002, we filed a current report of Form 8-K pursuant
to Items 2 and 7 thereof, reporting the agreement to accelerate
the redemption of all of the 1,700 outstanding shares of our
Series A Convertible Preferred Stock.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
I-MANY, INC
Date: August 13, 2002 By: /s/ Kevin F. Collins
---------------------------------
Kevin F. Collins
Chief Financial Officer and Treasurer
/s/ Kevin F. Collins
---------------------------------
Kevin F. Collins
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
10.1 Amendment dated April 19, 2002 to the Employment
Agreement of Terrence M. Nicholson
99.1 Certification Pursuant to 18 U.S.C. Section 1350
28