10-Q 1 a2049270z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ___________________ Commission file number: 000-30883 I-MANY, INC. (Exact name of registrant as specified in its charter) Delaware 01-0524931 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 537 Congress Street 5th Floor Portland, Maine 04101-3353 (Address of principal executive offices) (207) 774-3244 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ On May 11, 2001, 34,428,299 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, our expected marketing plans, future hiring, expenditures and sources of revenue. This Form 10-Q may also contain third party estimates regarding the size and growth of our market which also are forward-looking statements. Our forward-looking statements apply only as of the date of this Form 10-Q. The Company's actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described above and elsewhere in the Form 10-Q. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company is under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, other than as required by law. I-MANY, INC. FORM 10-Q TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000..............................................4 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000..................................5 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000..................................6 Notes to Consolidated Condensed Financial Statements...........8 Item 2. Management's Discussion and Analysis of Financial Condition...12 Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk....20 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................21 Item 2. Changes in Securities and Use of Proceeds.....................21 Item 3. Defaults upon Senior Securities...............................21 Item 4. Submission of Matters to a Vote of Security Holders...........21 Item 5. Other Information.............................................21 Item 6. Exhibits and Reports of Form 8-K..............................21 Signatures....................................................22 Exhibit Index.................................................23
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS I-MANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 2001 2000 ---- ---- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 48,629 $ 50,639 Accounts receivable, net of allowance 11,358 10,051 Unbilled receivables 3,851 4,475 Prepaid expenses and other current assets 849 459 --------- --------- Total current assets 64,687 65,624 Property and Equipment, net 8,272 8,625 Other Assets 1,192 1,059 Goodwill and Other Purchased Intangibles 14,877 10,080 --------- --------- Total assets $ 89,028 $ 85,388 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,800 $ 3,644 Accrued expenses 5,476 4,598 Current portion of deferred service revenue 7,388 7,050 Unearned product revenue 1,867 1,220 --------- --------- Total current liabilities 17,531 16,512 --------- --------- Capital Lease Obligations, net of current portion 102 115 --------- --------- Commitments and Contingencies Stockholders' Equity: Undesignated preferred stock, $.01 par value Authorized - 5,000,000 shares Issued and outstanding - 0 shares - - Common stock, $.0001 par value - - Authorized - 100,000,000 shares Issued and outstanding - 33,352,906 and 32,940,767 shares at March 31, 2001 and December 31, 2000, respectively 3 3 Additional paid-in capital 101,878 98,746 Deferred stock-based compensation (129) (154) Stock subscription receivable 766 - Accumulated deficit (31,123) (29,834) --------- --------- Total stockholders' equity 71,395 68,761 --------- --------- Total liabilities and stockholders' equity $ 89,028 $ 85,388 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 I-MANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
Three months ended March 31, 2001 2000 ---- ---- Net Revenues: Product $ 8,481 $ 1,546 Services 6,784 5,243 --------- --------- Total net revenues 15,265 6,789 Cost of revenues 4,356 3,244 --------- --------- Gross profit 10,909 3,545 Operating expenses: Sales and marketing 5,142 4,391 Research and development 3,497 3,712 General and administrative 1,966 832 Depreciation 1,366 451 Amortization of goodwill and other purchased intangible assets 847 - --------- --------- Total operating expenses 12,818 9,386 --------- --------- Loss from operations (1,909) (5,841) Other income, net 620 139 --------- --------- Loss before income taxes (1,289) (5,702) Provision for income taxes - - --------- --------- Net loss (1,289) (5,702) Accretion of dividends on redeemable convertible Preferred stock - 253 --------- --------- Net loss applicable to common stockholders $ (1,289) $ (5,955) ========= ========= Basic and diluted net loss per common share $ (0.04) $ (0.47) ========= ========= Weighted average shares outstanding 33,095 12,569 ========= =========
The accompanying notes are an integral part of these consolidated financial statements 5 I-MANY, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ----------------------------- 2001 2000 ------- ------- Cash Flows from Operating Activities: Net loss $ (1,289) $ (5,702) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 2,188 435 Amortization of deferred stock-based compensation 25 16 Changes in current assets and liabilities: Accounts receivable (1,243) 1,428 Unbilled receivables 754 (2,789) Prepaid expense and other current assets (380) (33) Prepaid and refundable income taxes (10) 192 Accounts payable (861) 3,116 Accrued expenses 752 (507) Deferred service revenue 22 333 Unearned product revenue 647 (234) -------- -------- Net cash provided by (used in) operating activities 605 (3,745) -------- -------- Cash Flows from Investing Activities: Purchases of property and equipment, net (963) (4,492) Additional cash paid to acquire Chi-Cor Information Management, Inc. (766) - Cash paid to acquire Vintage Software, Inc. (731) - Cash paid to acquire Intersoft International, Inc. (591) - (Increase) decrease in other assets (133) (621) -------- -------- Net cash used in investing activities (3,184) (5,113) -------- -------- Cash Flows from Financing Activities: Proceeds from exercise of common stock warrants - 150 Payments on capital lease obligations (12) (8) Proceeds from exercise of stock options 581 181 Bank overdraft - 1,293 -------- -------- Net cash provided by financing activities 569 1,616 -------- -------- Net Decrease in Cash and Cash Equivalents (2,010) (7,242) Cash and Cash Equivalents, beginning of period 50,639 15,322 -------- -------- Cash and Cash Equivalents, end of period $ 48,629 $ 8,080 ======== ======== 6 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 7 $ 1 ======== ======== Cash refunded during the period for income taxes $ - $ (188) ======== ======== Supplemental Disclosure of Noncash Activities: Accretion of dividends on Series C preferred stock $ - $ 252 ======== ======== As of March 31, 2001, the Company recorded additional purchase price related to its acquisition of Chi-Cor Information Management, Inc. on November 16, 2000, as follows: Fair value of additional assets acquired $ (1,453) $ - Additional cash paid 766 - Additional common stock to be issued 677 - -------- -------- Additional liabilities assumed $ (10) $ - ======== ======== On January 25, 2001, the Company acquired Vintage Software, Inc. as follows: Fair value of assets acquired $ (1,168) $ - Cash paid for acquisition 731 - Common stock issued 400 - -------- -------- Liabilities assumed $ (37) $ - ======== ======== On March 2, 2001, the Company acquired Intersoft International, Inc. as follows: Fair value of assets acquired $ (3,242) $ - Cash paid for acquisition 591 - Common stock issued 2,240 - -------- -------- Liabilities assumed $ (411) $ - ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 I-MANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the financial statements and related notes of I-Many, Inc. (the "Company") for the year ended December 31, 2000 as reported in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The consolidated balance sheet presented as of December 31, 2000 has been derived from the financial statements that have been audited by the Company's independent public accountants. The results of operations for the three months ended March 31, 2001 may not be indicative of the results that may be expected for the year ending December 31, 2001, or for any other period. NOTE 2. NET LOSS PER SHARE Basic net loss per share was determined by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share was the same as basic net loss per share for all periods presented since the effect of any potentially dilutive security was excluded, as they are anti-dilutive as a result of the Company's net losses. The total numbers of common equivalent shares excluded from the diluted loss per share calculation were 3,336,022 and 12,954,540 for the three months ended March 31, 2001 and 2000, respectively. NOTE 3. INITIAL PUBLIC OFFERING On July 13, 2000, the Company completed an initial public offering of 7,500,000 shares of common stock at a per share price of $9.00. Subsequently on August 9, 2000, our underwriters exercised an option to purchase an additional 1,125,000 shares of common stock at a per share price of $9.00 to cover over-allotments. Net proceeds from the offering and subsequent option exercise were approximately $70.7 million. Pursuant to the Company's initial public offering, all outstanding shares of preferred stock were converted into approximately 9,170,000 shares of common stock. NOTE 4. SIGNIFICANT CUSTOMERS The Company had one customer whose revenues individually represented 14% and 37% of total net revenues for the three month periods ended March 31, 2001 and 2000, respectively. NOTE 5 ACQUISITIONS CHI-COR INFORMATION MANAGEMENT, INC. On November 16, 2000, the Company acquired in a merger transaction all of the outstanding capital stock of Chi-Cor Information Management, Inc. (ChiCor) for an initial purchase price of $13.5 million, which consisted of cash of $5.7 million, a portion of which was used to pay off ChiCor's outstanding bank loan of $754,000, 251,601 shares of Company common stock with a fair value at the date of closing of $4.9 million, assumed liabilities of $2.5 million and transaction costs of $458,000. In addition, upon achievement of certain quarterly revenue and income milestones through December 31, 2001, the ChiCor shareholders are entitled to additional 8 consideration of up to $6.9 million, one-half of which is payable in cash and the balance payable in the form of Company stock. The acquisition was accounted for as a purchase business combination in accordance with Accounting Principles Board (APB) Opinion No. 16, BUSINESS Combinations. The Company has consolidated the operations of ChiCor beginning on the date of acquisition. The Company retained an independent appraiser for the purpose of allocating the initial consideration of $13.5 million to the tangible and intangible assets acquired and the liabilities assumed. Based on the revenue and income levels realized by ChiCor during the three month period ended March 31, 2001, the ChiCor shareholders will receive additional consideration of $1.6 million to be paid in cash and stock no later than May 15, 2001. At March 31, 2001, the one-half stock portion of this amount was recorded as Stock Subscription Receivable and the cash portion was recorded in Accrued Expenses, with the entire amount treated as additional purchase price and recorded as goodwill. Any additional consideration paid to the ChiCor shareholders as a result of future quarterly earnouts will likewise be treated as additional purchase price and recorded as goodwill. VINTAGE SOFTWARE, INC. On January 25, 2001, the Company acquired all of the outstanding capital stock of Vintage Software, Inc. (Vintage), a software company which marketed a competing product to the Company's CARS software suite of products to mid-market pharmaceutical companies. The aggregate purchase price of $1.1 million included cash of $433,000, 34,096 shares of Company common stock with a fair value of $400,000, $200,000 in earnout bonuses, and transaction costs of $98,000. The acquisition was accounted for as a purchase business combination in accordance with APB Opinion No. 16, BUSINESS COMBINATIONS and the Company has consolidated the operations of Vintage beginning on the date of acquisition. No proforma information for the period ended March 31, 2001 has been presented as this purchase was not material. INTERSOFT INTERNATIONAL, INC. On March 2, 2001, the Company acquired all of the outstanding capital stock of Intersoft International, Inc. (Intersoft), a supplier of sales and marketing automation products for the foodservice broker industry. The initial purchase price of $2.8 million included cash of $500,000, 115,733 shares of Company common stock with a fair value of $2.2 million and transaction costs of $99,000. In addition, upon achievement of certain quarterly revenue and income milestones through March 31, 2002, the Intersoft shareholders are entitled to additional consideration of up to $1.25 million, payable in the form of Company stock. The acquisition was accounted for as a purchase business combination in accordance with APB Opinion No. 16, BUSINESS COMBINATIONS and the Company has consolidated the operations of Intersoft beginning on the date of acquisition. Any additional consideration paid to the Intersoft shareholders as a result of future quarterly earnouts will be treated as additional purchase price and recorded as goodwill. No proforma information for the period ended March 31, 2001 has been presented as this purchase was not material. BCL VISION LTD. On April 9, 2001, the Company acquired all of the outstanding capital stock of BCL Vision Ltd. (BCL), a provider of collection and dispute management software and services based in London, United Kingdom. The initial purchase price of $12.0 million consists of cash of $4.0 million, 690,000 shares of Company common stock with a fair value of $6.9 million, assumed liabilities of approximately $800,000 and estimated transaction costs of $300,000. In addition, upon achievement of a certain revenue milestone through June 30, 2001, the BCL shareholders are entitled to additional consideration of up to $1.0 million, payable in the form of Company stock. The acquisition will be accounted for as a purchase business combination in accordance with APB Opinion No. 16, BUSINESS COMBINATIONS and the Company will consolidate the operations of BCL beginning on the date of acquisition. The Company has retained an independent appraiser for the purpose of allocating the 9 initial consideration of approximately $12.0 million to the tangible and intangible assets acquired and the liabilities assumed. Any additional consideration paid to the BCL shareholders as a result of the future earnout will be treated as additional purchase price and recorded as goodwill. PROVATO, INC. On April 18, 2001, the Company entered into an agreement to acquire all the outstanding capital stock of Provato, Inc. In connection with the merger, the Company has agreed to issue up to 3,158,016 shares of the Company's common stock to the shareholders of Provato. The Company will assume Provato's liabilities of approximately $1.0 million and expects to incur transaction costs of approximately $300,000. Using the closing price of the Company's stock at May 11, 2001 of $16.06 per share, the purchase price of the merger transaction would be valued at up to $52.0 million. The acquisition will be accounted for as a purchase business combination in accordance with Accounting Principles Board (APB) Opinion No. 16, BUSINESS COMBINATIONS and the Company will consolidate the operations of Provato beginning on the date of acquisition. The Company has retained an independent appraiser for the purpose of allocating the value of the merger consideration to the tangible and intangible assets acquired and the liabilities assumed. The Company expects this transaction to be closed around June 30, 2001. NOTE 6. STRATEGIC RELATIONSHIP AGREEMENTS PROCTER & GAMBLE COMPANY In May 2000, the Company entered into a Strategic Relationship Agreement (the Agreement) with the Procter & Gamble Company (P&G), pursuant to which P&G has designated the Company for a period of at least three years as their exclusive provider of purchase contract management software for their commercial products group. In addition, P&G has agreed to provide the Company with certain strategic marketing and business development services over the term of the Agreement. P&G also entered into an agreement to license certain software and technology from the Company. As consideration for entering into the Agreement, the Company will pay P&G a royalty of up to 10% of the revenue generated from the commercial products market, as defined. To date, no such royalties have been earned or paid. In addition, the Company granted to P&G a fully exercisable warrant to purchase 875,000 shares of the Company's common stock. The warrant, which was exercisable for a period of two years at an exercise price of $9.00 per share, was converted into 561,960 shares of common stock via a cashless exercise during 2000. In addition, the Company agreed to grant P&G warrants to purchase up to 125,000 additional shares of common stock, exercisable at the then current fair market value per share, upon the achievement of milestones set forth in the Agreement, as defined. Using the Black-Scholes option pricing model and based upon an exercise price of $9.00 per share and a volatility factor of 85%, the Company has calculated the fair value of the fully exercisable warrant to purchase 875,000 shares of common stock as approximately $3,820,000. In accordance with Emerging Issues Task Force Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, this amount was recorded by the Company in May of 2000 as, first, a reduction of the revenue derived from the license agreement with P&G, and, second, a component of sales and marketing expense. The Company will calculate and record the fair value of the warrants to purchase up to 125,000 additional shares of common stock as P&G provides the services set forth in the Agreement. ACCENTURE In April 2001, the Company entered into a Marketing Alliance Agreement (the Agreement) with Accenture LLP, pursuant to which Accenture has designated the Company for a period of at least one year as their preferred provider of automated contract management solutions. In addition, Accenture has agreed to provide the Company with 10 certain strategic marketing and business development services at no charge over the term of the Agreement. As consideration for entering into the Agreement, the Company has designated Accenture as its preferred business integration provider for the Company's CARS suite of products. In addition, the Company granted to Accenture a fully exercisable warrant to purchase 124,856 shares of the Company's common stock. The warrant is exercisable for a period of three years at an exercise price of $9.725 per share. In addition, the Company has agreed to grant Accenture additional future warrants, each with a value equal to 10% of any revenues generated from certain future software licenses to Accenture's clients and prospects. NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material impact on its financial statements. In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB OPINION NO. 25. The Interpretation clarifies the application of APB No. 25 in certain situations, as defined. The Interpretation is effective July 1, 2000, but covers certain events occurring during the period after December 15, 1998, but before the effective date. To the extent that events covered by this interpretation occur during the period after December 15, 1998, but before the effective date, the effects of applying this Interpretation would be recognized on a prospective basis from the effective date. Accordingly, upon initial application of the final Interpretation, (a) no adjustments would be made to the financial statements for periods before the effective date, and (b) no expense would be recognized for any additional compensation cost measured that is attributable to periods before the effective date. The Company expects that the adoption of this Interpretation would not have any effect on its financial statements. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes. In addition to historical information, the following discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated by such forward-looking statements due to various factors, including, but not limited to, those set forth under "Certain Factors That May Affect Our Future Operating Results" and elsewhere in this report. OVERVIEW We provide software and Internet-based solutions and related professional services that allow our clients to more effectively manage their business-to-business relationships. Our products and services were originally developed to manage complex contract purchasing relationships in the healthcare industry. Our Contract Administration and Reporting System, or CARS, software suite is used by 8 of the largest 10 and 16 of the largest 20 pharmaceutical manufacturers, ranked according to annual revenues. We are seeking to expand our products and services to new vertical markets, particularly the consumer packaged goods and foodservice industries. Our acquisitions of Chi-Cor Information Management, Inc. (ChiCor) in November 2000 and Intersoft International, Inc. (Intersoft) in March 2001 have provided us with accepted products, customers and expertise in these new vertical markets. Currently, we can deliver our products through a variety of means, including software licensed for installation on our clients' computer systems, software licensed on an application service provider basis which we host on our servers, our proprietary imany.com portal and the licensing of technology to enable our clients to establish their own private or public portals and exchanges. We have generated revenues from both products and services. Product revenues, which have been principally comprised of software license fees generated from our CARS software suite, accounted for 22.8% of net revenues in the three months ended March 31, 2000 and 55.6% of net revenues for the three months ended March 31, 2001. Service revenues include maintenance and support fees directly related principally 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 77.2% of net revenues in the three months ended March 31, 2000 and 44.4% of net revenues for the three months ended March 31, 2001. Historically, software license agreements have been for a three-year period. We generally recognize software license fees upon execution of a signed license agreement and delivery of the software, provided that there are no significant post-delivery obligations, the payment is fixed or determinable, and collection is probable. In cases where significant post-delivery obligations exist, such as customization or enhancements to the core software, we recognize the entire fee on a percentage-of-completion basis, and include the entire fee in product revenues. We provide an allowance for sales returns at the time of revenue recognition based on historical experience. To date, such returns have not been significant. We recognize revenue from professional services as the services are performed for time and materials contracts and we use the percentage-of-completion method for fixed fee contracts. However, if customer acceptance is required, we recognize revenue for professional services upon client acceptance. We recognize training revenues as the services are provided. We recognize maintenance and client support fees ratably over the term of the maintenance contract on a straight-line basis. When maintenance and support is included in the total license fee, we allocate a portion of the total fee to maintenance and support based upon the price paid by the client to purchase maintenance and support in the second year. 12 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 12 months ended December 31, 1997 to $46.2 million for the 12 months ended December 31, 2000 and $12.8 million for the three months ended March 31, 2001. These increases are primarily due to additions to our staff, including through acquisitions, as we have expanded all aspects of our operations. We have grown from 46 employees as of December 31, 1996 to 393 employees at March 31, 2001. RECENT EVENTS On November 16, 2000, we acquired all the outstanding capital stock of ChiCor in a merger transaction for a purchase price of up to $20.3 million. The initial consideration of $13.5 million consisted of $5.7 million of cash, a portion of which was used to pay off ChiCor's outstanding bank loan of $754,000, 251,601 shares of Company common stock with a fair value of $4.9 million, assumed liabilities of $2.5 million and transaction costs of $458,000. As of March 31, 2001, the ChiCor shareholders had become entitled to additional consideration of $1.6 million, out of a total earnout potential of $1.7 million, based on the revenue and income levels realized by the ChiCor operation during the three month period ended March 31, 2001. In addition, upon achievement of certain additional quarterly revenue and income milestones through December 31, 2001, the ChiCor shareholders are entitled to additional consideration of up to $5.2 million, one-half of which is payable in cash and the balance payable in the form of Company stock. On January 25, 2001, we acquired all of the outstanding capital stock of Vintage Software, Inc. (Vintage) for a purchase price of $1.1 million, consisting of cash of $433,000, 34,096 shares of Company common stock with a fair value of $400,000, accrued earnout bonuses of $200,000 and transaction costs of $98,000. The results of Vintage are included since the date of acquisition in the accompanying March 31, 2001 financial statements. On March 2, 2001, we acquired all of the outstanding capital stock of Intersoft for a purchase price of up to $4.1 million. The initial consideration of $2.8 million consisted of cash of $500,000, 115,733 shares of Company common stock with a fair value of $2.2 million and transaction costs of $99,000. In addition, upon achievement of certain quarterly revenue and income milestones through March 31, 2002, the Intersoft shareholders are entitled to additional consideration of up to $1.25 million, payable in the form of Company stock. The results of Intersoft are included since the date of acquisition in the accompanying March 31, 2001 financial statements. On April 9, 2001, we acquired all of the outstanding capital stock of BCL Vision Ltd. (BCL) for a purchase price of up to $13.0 million. The initial consideration of $12.0 million consisted of cash of $4.0 million, 690,000 shares of Company common stock with a fair value of $6.9 million, assumed liabilities of approximately $800,000 and estimated transaction costs of $300,000. In addition, upon achievement of a certain revenue milestone through June 30, 2001, the BCL shareholders are entitled to additional consideration of up to $1.0 million, payable in the form of Company stock. This acquisition will be recorded in the quarter ended June 30, 2001, and the BCL operating results from the date of acquisition (4/9/2001) will be included in the June 30, 2001 financial statements. On April 11, 2001, in connection with the establishment of a Marketing Alliance Agreement (the Agreement) with Accenture LLP, we issued a fully exercisable warrant to purchase 124,856 shares of the Company's common stock. The warrant is exercisable for a period of three years at an exercise price of $9.725 per share. During the second quarter of 2001, we will record the financial statement impact of this warrant. In addition, the Company has agreed to grant Accenture additional future warrants, each with a value equal to 10% of the revenue generated from certain future software licenses to Accenture clients. On April 18, 2001, we signed an agreement to acquire Provato, Inc. in a merger transaction. In connection with the merger, we have agreed to issue up to 3,158,016 shares of the Company's common stock to the shareholders of Provato and will assume Provato's liabilities of approximately $1.0 million. We expect to incur transaction costs of approximately $300,000. Using the closing price of the Company's stock at May 11, 2001 13 of $16.06 per share, the purchase price of this merger transaction would be valued at up to $52.0 million. We expect this transaction will close around June 30, 2001. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 NET REVENUES Net revenues increased by $8.5 million, or 125%, to $15.3 million for the quarter ended March 31, 2001 from $6.8 million for the quarter ended March 31, 2000. Product revenues increased by $6.9 million, or 449%, to $8.5 million for the quarter ended March 31, 2001, from $1.5 million for the quarter ended March 31, 2000. This increase is attributable to a significant increase in the number of software licenses sold, due in part to the contribution of the ChiCor subsidiary subsequent to its acquisition in November 2000. As a percentage of total net revenues, product revenues increased to 55.6% for the quarter ended March 31, 2001, from 22.8% for the quarter ended March 31, 2000 and 51.9% for the quarter ended December 31, 2000. This increase in product revenues as a percentage of total net revenues is attributable to the significant expansion of our software licensing activity, as compared to the more modest growth rate of our professional services business. Service revenues increased by $1.5 million, or 29%, to $6.8 million for the quarter ended March 31, 2001, from $5.2 million for the quarter ended March 31, 2000. COST OF REVENUES Cost of revenues consists primarily of payroll and related costs and subcontractor costs for providing professional services and maintenance and support services, and to a lesser extent, amounts due to third parties for royalties related to integrated technology. Historically, cost of product revenues has not been a significant component of total cost of revenues. Cost of revenues increased by $1.1 million, or 34%, to $4.4 million for the quarter ended March 31, 2001, from $3.2 million for the quarter ended March 31, 2000. This increase is due primarily to the increased number of employees in our professional services group, which grew from 71 in the first quarter of 2000 to 110 in the first quarter of 2001, partially offset by a decrease in subcontractor consulting costs from $1.4 million in the first quarter of 2000 to $1.2 million in the first quarter of 2001. As a percentage of total net revenues, cost of revenues decreased to 28.5% for the quarter ended March 31, 2001, from 47.8% for the quarter ended March 31, 2000 and 33.2% for the quarter ended December 31, 2000. This decrease in cost of revenues as a percentage of total net revenues is attributable to the smaller level of service revenues as a percent of total revenues. Service revenues typically generate lower margins than product revenues. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses consist primarily of payroll and related benefits for sales and marketing personnel, commissions for sales personnel, travel costs, recruiting fees, expenses for trade shows and advertising and public relations expenses. Sales and marketing expense increased by $751,000, or 17%, to $5.1 million in the three months ended March 31, 2001 from $4.4 million in the three months ended March 31, 2000. This increase in sales and marketing expense is primarily the result of an increase in headcount levels from 52 at March 31, 2000 to 109 at March 31, 2001 and significantly higher commission costs attributable to the increase in product revenues, partially offset by significant reductions in spending for advertising, marketing and promotional materials related to our web-based initiatives, and decreases in travel expenses. As a percentage of total net revenues, sales and marketing expense decreased to 33.7% for the quarter ended March 31, 2001, 14 from 64.7% for the quarter ended March 31, 2000 and 40.8% for the quarter ended December 31, 2000. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of payroll and related costs for development personnel and external consulting costs associated with the development of our products and services. Research and development costs, including the costs of developing computer software, are charged to operations as they are incurred. Research and development expenses decreased by $215,000, or 5%, to $3.5 million for the quarter ended March 31, 2001, from $3.7 million for the quarter ended March 31, 2000. This decrease in research and development expenses is attributable to significant subcontractor costs associated principally with the development of our Internet portal incurred during the first half of 2000. In the quarter ended March 31, 2000, subcontractor costs amounting to $2.4 million were expensed as incurred, as compared to $280,000 in the quarter ended March 31, 2001. The decrease in subcontractor costs was partially offset by an increase in salary costs related to an increase in the number of research and development personnel from 67 at March 31, 2000 to 133 at March 31, 2001. As a percentage of total net revenues, research and development expense decreased to 22.9% for the quarter ended March 31, 2001, from 54.7% for the quarter ended March 31, 2000 and 23.0% for the quarter ended December 31, 2000. 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 human resources departments, and legal, accounting and other professional service fees. General and administrative expenses increased by $1.1 million, or 136%, to $2.0 million for the first quarter of 2001 from $832,000 for the first quarter of 2000. As a percentage of total net revenues, general and administrative expenses increased to 12.9% for the quarter ended March 31, 2001, from 12.3% for the quarter ended March 31, 2000. The increase in general and administrative expenses both in dollars and as a percentage of total net revenues is primarily attributable to an increase in headcount from 30 at March 31, 2000 to 41 at March 31, 2001, higher legal fees, and to the costs associated with being a publicly-held company. DEPRECIATION. Depreciation includes amortization of capitalized internal- use software development costs related to the company's Internet portal. Depreciation expense increased by $915,000, or 203%, from $451,000 in the first quarter of 2000 to $1.4 million in the first quarter of 2001. This increase is a result of significant additions of computer hardware and software for our web-based initiatives and amortization of capitalized internal-use software development costs, which consist entirely of subcontractor costs. In the quarter ended March 31, 2001, the amortization expense related to capitalized internal-use software development costs amounted to $834,000, as compared to $207,000 of amortization in the quarter ended March 31, 2000. AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. Amortization of purchased intangibles, related to our acquisitions of ChiCor in November 2000, Vintage in January 2001 and Intersoft in March 2001, amounted to $847,000 in the quarter ended March 31, 2001. There was no amortization of purchased intangibles in the quarter ended March 31, 2000. OTHER INCOME, NET. Other income, net increased by $481,000, or 346%, from $139,000 in the quarter ended March 31, 2000, to $620,000 in the quarter ended March 31, 2001. This increase is the result of interest earned on higher average cash balances due to the net cash proceeds from our initial public offering. PROVISION FOR INCOME TAXES. We have incurred operating losses for all quarters in 2000 and the first quarter of 2001 and have consequently recorded a valuation allowance for the full amount of our net deferred tax asset, which consists principally of our net operating loss carryforwards, as the future realization of the tax benefit is uncertain. No provision for income taxes has been recorded in the quarters ended March 31, 2001 and March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES 15 On July 13, 2000, we issued 7,500,000 shares of our common stock at an initial public offering price of $9.00 per share. On August 9, 2000 our underwriters exercised a 30-day option to purchase an additional 1,125,000 shares of common stock to cover over-allotments. Net cash proceeds to us from the initial public offering and subsequent overallotment option exercise were approximately $70.7 million. From inception until our initial public offering, our capital and liquidity needs have been met, in large part, with the net proceeds from the private placement of debt and equity securities, cash flows generated from operations and through equipment lease financings. At March 31, 2001, we had cash and cash equivalents of $48.6 million and a net working capital surplus of $47.2 million. On March 31, 2001, we had no long-term or short-term debt, other than obligations under capital lease financings. On April 9, 2001, we acquired BCL Vision Ltd. for a purchase price of up to $13.0 million, including $4.0 million of cash, common stock valued at $6.9 million, $800,000 of assumed liabilities, $300,000 of transaction costs, and up to $1.0 million to be paid, subject to the satisfaction of certain performance criteria during 2001, in stock. At closing, we used existing cash resources to pay the cash portion of the purchase price. Net cash provided by operating activities for the three months ended March 31, 2001 was $605,000, as compared to net cash used in operating activities of $3.7 million in the three months ended March 31, 2000. For the three months ended March 31, 2001, net cash provided by operating activities consisted primarily of our net loss of $1.3 million, as adjusted for depreciation and amortization of $2.2 million. Increases in accounts receivable of $1.2 million and $380,000 in prepaid expense, and a $861,000 decrease in accounts payable were largely offset by a $754,000 decrease in unbilled receivables and increases of $752,000 and $647,000 in accrued expenses and unearned product revenue, respectively. Net cash used in operating activities for the three months ended March 31, 2000 consisted principally of our net loss of $5.7 million and a $2.8 million increase in unbilled receivables, partially offset by a $1.4 million decrease in accounts receivable and a $3.1 million increase in accounts payable. Net cash used in investing activities was $3.2 million for the three months ended March 31, 2001 and $5.1 for the three months ended March 31, 2000. Net cash used in investing activities for the three months ended March 31, 2001 primarily reflects $963,000 in purchases of property and equipment and $2.1 million related to the acquisitions of ChiCor, Vintage and Intersoft. Net cash used in investing activities for the three months ended March 31, 2000 consisted primarily of purchases of property and equipment, including $3.3 million of capitalized internal-use software development costs. Net cash provided by financing activities was $569,000 for the three months ended March 31, 2001, primarily from proceeds from stock option exercises. Net cash provided by financing activities was $1.6 million for the three months ended March 31, 2000, consisting of a $1.3 million bank overdraft and $331,000 in exercises of warrants and options. We currently anticipate that our $44.6 million balance in cash and cash equivalents, net of the $4.0 million in cash paid on April 9, 2001 for the acquisition of BCL Vision Ltd., will be sufficient to meet our anticipated needs for working capital, capital expenditures, and acquisitions for at least the next 12 months. Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of expanded product and service offerings and the success of these offerings once they are launched. 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 16 stock. In connection with such a sale of stock, our stockholders may experience dilution. In addition, we cannot be certain that additional financing will be available to us on favorable terms when required, or at all. CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS In addition to other information in this Form 10-Q, the following factors could cause actual results to differ materially from those indicated by forward-looking statements made in this Form 10-Q and presented elsewhere by management from time to time. WE HAVE INCURRED SUBSTANTIAL LOSSES IN 1999 AND 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 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 March 31, 2001 of $31.1 million. Even though our net loss narrowed significantly in the quarter ended March 31, 2001 to $1.3 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, our business model is evolving and 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, 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 twenty-four 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. 17 WE HAVE TWO MANAGEMENT LOCATIONS AND OTHER FACILITIES AND AS WE CONTINUE TO GROW WE MAY EXPERIENCE DIFFICULTIES IN OPERATING FROM THESE FACILITIES Certain members of our management team are based at our corporate headquarters located in Portland, Maine, and other members of our management team are based at our sales office in Edison, New Jersey. In addition, as a result of our acquisitions, we have added additional facilities, including an office in London, United Kingdom. As we grow, the geographic distance between these offices could make it more difficult for our management and other employees to effectively communicate with each other and, as a result, could place a significant strain on our managerial, operational and financial resources. Our total revenue increased from $7.5 million in the year ended December 31, 1997 to $36.5 million in the year ended December 31, 2000, and to $15.3 million in the quarter ended March 31, 2001, and the number of our employees increased from 67 as of December 31, 1997 to 393 as of March 31, 2001. 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 these systems in an efficient manner could prevent us from successfully implementing our business model. If we continue to grow, we will need to recruit, train and retain a significant number of employees, particularly employees with technical, marketing and sales backgrounds. Because these individuals are in high demand, we may not be able to attract the staff we need to accommodate our expansion. WE ARE HIGHLY DEPENDENT UPON THE HEALTHCARE INDUSTRY AND FACTORS WHICH ADVERSELY AFFECT THAT MARKET COULD ALSO ADVERSELY AFFECT US Most of our revenue to date has come from pharmaceutical companies and a limited number of other clients in the healthcare industry, and our future growth depends, in large part, upon increased sales to the healthcare market. In the first three months of 2001, one customer, Premier, Inc., accounted for approximately 14 percent of our total revenues. As a result, demand for our solutions could be affected by any factors which could adversely affect the demand for healthcare products which are purchased and sold pursuant to contracts managed through our solutions. The financial condition of our clients and their willingness to pay for our solutions are affected by factors which may impact the purchase and sale of healthcare products, including competitive pressures, decreasing operating margins within the industry, currency fluctuations, active geographic expansion and government regulation. The healthcare market is undergoing intense consolidation. We cannot assure you that we will not experience declines in revenue caused by mergers or consolidations among our clients and potential clients. OUR EFFORTS TO TARGET MARKETS OTHER THAN THE HEALTHCARE MARKET HAVE NOT YET RESULTED IN SIGNIFICANT REVENUE, AND WE CANNOT BE SURE THAT OUR INITIATIVES IN THESE OTHER MARKETS WILL BE SUCCESSFUL As part of our growth strategy, we have begun initiatives to sell our CARS software suite of products and services in markets other than the healthcare market, including the consumer packaged goods, foodservice and other industries. While we believe that the contractual purchase relationships between manufacturers and customers in these markets have similar attributes to those in the healthcare market, we cannot assure you that our assumptions are correct or that we will be successful in adapting our technology to these other markets. Although we have entered into 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 may be necessary for us to hire additional personnel with expertise in these other markets. OUR BUSINESS MODEL INCLUDES HOSTING OUR SOFTWARE APPLICATIONS ON BEHALF OF OUR CLIENTS AND MAINTAINING THEIR CRITICAL SALES DATA, AND IF OUR SYSTEMS FAIL OR THE DATA IS LOST OR CORRUPTED, OUR CLIENTS MAY LOSE CONFIDENCE IN US 18 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. WE MAY NOT BE SUCCESSFUL IN ACQUIRING NEW TECHNOLOGIES OR BUSINESSES AND THIS COULD HINDER OUR EXPANSION EFFORTS We intend in the future to consider additional acquisitions of or new investments in complementary businesses, products, services or technologies. We cannot assure you that we will be able to identify appropriate acquisition or investment candidates. Even if we do identify suitable candidates, we cannot assure you that we will be able to make such acquisitions or investments on commercially acceptable terms. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders. IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, WE MAY HAVE DIFFICULTY INTEGRATING THOSE NEW TECHNOLOGIES OR BUSINESSES We have acquired ChiCor, Intersoft and BCL Vision Ltd., which are located in Chicago, Illinois, Cleveland, Ohio and London, U.K., respectively. Any other company that we acquire is likely to be distant from our headquarters in Portland, Maine and will have a culture different from ours as well as technologies, products and services that our employees will need to understand and integrate with our own. We will have to assimilate those employees, technologies and products and that effort is difficult, time-consuming and may be unsuccessful. If we are not successful, our investment in the acquired entity may be lost, and even if we are successful, the process of integrating an acquired entity may divert our attention from our core business. IF WE DO ACQUIRE NEW TECHNOLOGIES OR BUSINESSES, OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED In connection with our acquisitions of ChiCor, Vintage and Intersoft, we have recorded $18.6 million of intangible assets, the amortization of which will adversely affect our results of operations in future periods. In addition, we recorded a $2.4 million charge during the fourth quarter of 2000 for a write-off of the purchase price of ChiCor as in-process research and development. We expect to record a significant amount of intangibles assets and a write-off of in-process research and development in connection with our April 9, 2001 acquisition of BCL Vision Ltd., and with respect to any future acquisition. OUR FIXED COSTS MAY LEAD TO FLUCTUATIONS IN OPERATING RESULTS IF OUR REVENUES ARE BELOW EXPECTATIONS WHICH COULD 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 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 19 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without assuming significant risk. This is accomplished by investing in widely diversified investments, consisting primarily of short-term, investment-grade securities. Due to the nature of our investments, we believe there is no material risk exposure. As of March 31, 2001, the Company's cash and cash equivalents consisted entirely of money market investments with maturities under 30 days and non-interest bearing checking accounts. The weighted average interest rate yield for all cash and cash equivalents at March 31, 2001 amounted to 5.16 percent. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Modification of Constituent Instruments None (b) Change in Rights None (c) Changes in Securities On January 25, 2001, the Company issued 34,096 shares of its unregistered common stock pursuant to its acquisition of Vintage Software, Inc. On March 2, 2001, the Company issued 115,733 shares of its unregistered common stock pursuant to its acquisition of Intersoft International, Inc. On April 9, 2001, the Company issued 690,000 shares of its unregistered common stock pursuant to its acquisition of BCL Vision, Ltd. These shares were issued pursuant to an exemption from the Securities Act registration requirements set forth in Rule 506 under the Securities Act and, in the alternative, under Section 4(2) of the Securities Act. (d) Use of Proceeds The Company has continued to use the proceeds of its initial public offering in the manner and for the purposes described elsewhere in this Report on Form 10-Q. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed on the Exhibit Index are filed herewith. (b) We did not file a current report on Form 8-K during the quarter ended March 31, 2001. On April 24, 2001, we filed a current report on Form 8-K pursuant to Items 2 and 5 thereof, reporting the acquisition of BCL Vision, Ltd. and the agreement to acquire Provato, Inc. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. I-MANY, INC Date: May 15, 2001 By: /s/ Philip M. St. Germain --------------------------------- Philip M. St. Germain Chief Financial Officer and Treasurer /s/ Philip M. St. Germain --------------------------------- Philip M. St. Germain Chief Financial Officer May 15, 2001 22 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Employment Agreement, dated October 13, 2000, between Registrant and A. Leigh Powell
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