<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 15, 1997
IMNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-26306 39-1730068
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
3015 Windward Plaza, Windward Fairways II, Alpharetta, Georgia 30202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(770) 521-5600
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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ITEM 5. OTHER EVENTS.
On September 30, 1996, IMNET Systems, Inc. and subsidiaries (the
Company) consummated the acquisition of Hunter International, Inc. ("Hunter") in
a transaction accounted for as a pooling-of-interests. The Company has
undertaken to file a Form S-3 to register shares of its Common Stock owned by
several stockholders. In accordance with SEC requirements, the Company is
providing selected financial data, management's discussion and analysis of
financial condition and results of operations, and consolidated financial
statements which give effect to the acquisition of Hunter. These consolidated
financial statements supersede the historical consolidated financial statements
of IMNET Systems, Inc. and subsidiaries included in its annual report on Form
10-K.
The financial information referenced above is set forth as summarized
in the following index:
Financial Information:
<TABLE>
<S> <C>
Selected Financial Data.....................................................SF-A
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................SMD&A
Consolidated Financial Statements............................................SF
</TABLE>
-2-
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
Exhibit
Number Description
11.1 Computation of Per Share Earnings
23.1 Consent of KPMG Peat Marwick LLP
99.1 Selected Financial Data
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.3 Consolidated Financial Statements
-3-
<PAGE> 4
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 hereunto duly authorized.
IMNET SYSTEMS, INC.
Dated: May 15, 1997 By: /s/ Raymond L. Brown
------------------------------------------------
Raymond L. Brown
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT 11.1
IMNET SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
The following computations set forth the calculations of primary and
fully diluted earnings per share for the twelve months ended June 30, 1996,
1995, and 1994.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss ................................. $(6,027,165) $(6,027,165) $(4,079,598) $(4,079,598) $(5,376,374) $(5,376,374)
=========== =========== =========== =========== =========== ===========
Weighted average outstanding
common shares ......................... 8,779,356 8,779,356 2,881,704 2,881,704 2,772,054 2,772,054
Increase due to assumed issuance
of shares related to outstanding
stock options using the treasury
stock method .......................... -- -- 113,156 113,156 121,978 121,978
Increase due to assumed exercise
of stock warrants using the
treasury stock method ................. -- -- 18,334 18,334 18,334 18,334
Increase due to assumed
conversion to common stock
of convertible preferred shares
and accrued dividends ................. -- -- 2,317,127 2,317,127 975,474 975,474
----------- ----------- ----------- ----------- ----------- -----------
Adjusted weighted average
outstanding common shares
and common share
equivalents ........................... 8,779,356 8,779,356 5,330,321 5,330,321 3,887,840 3,887,840
=========== =========== =========== =========== =========== ===========
Net loss per common share and
common share equivalent ............... $ (0.69) $ (0.69) $ (0.77) $ (0.77) $ (1.38) $ (1.38)
=========== =========== =========== =========== =========== ===========
</TABLE>
Note: Net loss per common share and common share equivalent has been computed
based upon the weighted average number of common shares and common share
equivalents outstanding during each period. Common share equivalents recognize
the dilutive effects of the conversion of preferred stock and accrued dividends
to common stock prior to their conversion and of outstanding options and
warrants to acquire common stock. The Company has used the initial public
offering price of $12.00 per common share for all periods prior to the
completion of the offering for purposes of computing the potential dilutive
effects of common share equivalents. Pursuant to the rules of the Securities and
Exchange Commission, common and common equivalent shares issued in the 12 months
prior to the Company's initial public offering have been included in the
computation of common and common equivalent shares as if they were outstanding
for all periods prior to the Company's initial public offering, including loss
years where the impact of the incremental shares is antidilutive. All other
common stock equivalents including the effect of outstanding options after the
Company's initial public offering have been excluded from the computations
because their impact on the Company's net loss per share is antidilutive.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IMNET Systems, Inc.:
We consent to the incorporation by reference in the Form S-8
Registration Statements of IMNET Systems, Inc. (nos. 333-19395, 333-19397,
333-19429) of our report dated February 27, 1997, relating to the consolidated
balance sheets of IMNET Systems, Inc. and subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1996, and the related schedule, which report appears in the current report
Form 8-K of IMNET Systems, Inc. dated May 15,1997.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
May 15, 1997
<PAGE> 1
EXHIBIT 99.1
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 8-K. The selected financial data presented below
under " Statement of Operations Data" and "Balance Sheet Data" as of and for the
four fiscal years ended June 30, are derived from the consolidated financial
statements of IMNET Systems, Inc. and subsidiaries. The consolidated financial
statements as of June 30, 1996 and 1995, and for the three-year period ended
June 30, 1996, and the independent auditors' report thereon, are included as a
part of this Form 8-K. The Selected Financial Data is qualified by, and should
be read in conjunction with, such consolidated financial statements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
System sales .......................................... $ 24,532 $ 8,881 $ 4,551 $ 2,599
Maintenance and professional services ................. 4,848 2,393 1,790 1,230
-------- -------- -------- --------
Total revenues ................................... 29,380 11,274 6,341 3,829
-------- -------- -------- --------
Operating expenses:
Cost of system sales .................................. 6,458 4,644 3,253 1,781
Cost of maintenance and professional services ......... 2,705 1,637 1,155 900
Sales and marketing ................................... 9,752 4,433 3,527 1,838
Research and development .............................. 3,915 2,343 1,881 830
General and administrative ............................ 4,145 2,430 1,930 1,309
Non-recurring charges ................................. 10,370 -- -- --
-------- -------- -------- --------
Total operating expenses ......................... 37,345 15,487 11,746 6,658
-------- -------- -------- --------
Operating loss ................................... (7,965) (4,213) (5,405) (2,829)
Interest income, net .................................... 1,938 134 29 37
-------- -------- -------- --------
Loss before income taxes ......................... (6,027) (4,079) (5,376) (2,792)
Income taxes ............................................ -- -- -- --
-------- -------- -------- --------
Net loss ......................................... $ (6,027) $ (4,079) $ (5,376) $ (2,792)
======== ======== ======== ========
Net loss per common share and common share
equivalent ............................................ $ (0.69) $ (0.77) $ (1.38) $ (0.95)
======== ======== ======== ========
Weighted average outstanding common shares
and common share equivalents .......................... 8,779 5,330 3,888 2,931
======== ======== ======== ========
<CAPTION>
JUNE 30,
--------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ............................... $ 16,895 $ 1,857 $ 2,634 $ 773
Working capital ......................................... 50,786 4,873 3,276 1,100
Total assets ............................................ 69,536 11,303 9,405 7,863
Total stockholders' equity .............................. 60,823 8,071 6,552 4,706
</TABLE>
Note: The selected financial data gives retroactive recognition to the
acquisition of Hunter, which has been accounted for as a pooling of
interests.
SF-A
<PAGE> 1
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
IMNET develops, markets, installs and services electronic information
and document management systems to meet the needs of the healthcare industry and
other document-intensive businesses. The Company, which was incorporated on May
15, 1992, acquired the electronic imaging assets of IMGE, Inc. ("IMGE") on
October 5, 1992 (the "1992 Acquisition"). From May 15, 1992 through October 5,
1992, the Company's activities consisted primarily of efforts to raise funds and
to negotiate the 1992 Acquisition. IMNET's products include proprietary and
third party software and hardware components which are integrated to create
electronic information and document management systems. IMNET supports its
customers through a broad range of customization, systems integration,
installation, training and maintenance services.
The Company's revenues are derived primarily from the sale and support
of components of the IMNET Electronic Information Warehouse: the IMNET Image
Engine, the IMNET Workflow Engine, the IMNET Electronic Patient Record System
(EPRS), IMNET MedVision, IMNET LaserArc and the IMNET MegaSAR Microfilm Jukebox.
Revenues from system sales consist of IMNET and third party hardware and
software license fees. Sources of maintenance and professional services revenues
include services for installation, project management, custom programming and
training, as well as maintenance and service contracts for software and certain
hardware support. IMNET systems are sold directly to end-users as well as
through third party distribution partners. Although the Company's relationships
with the HCIS Distribution Partners are relatively new, the Company expects that
sales to and through its HCIS Distribution Partners and other distribution
partners will increase.
Revenues from sales to the healthcare industry increased to 70% of
total revenues in fiscal 1996 from 53% of total revenues in fiscal 1995. The
Company anticipates that sales to the healthcare industry will continue to
increase as a percentage of total annual revenues, although such sales may
fluctuate from quarter to quarter. Revenues from sales outside of the United
States declined to 8% of total revenues in fiscal 1996 from 15% in fiscal 1995.
The Company recognizes revenues derived from system sales to end-user
customers, including 90% of software license fees and 100% of hardware revenues,
upon the factory acceptance by the customer and delivery of the configured
system. The Company defers recognition of 10% of the software license fees until
completion of certain insignificant vendor obligations primarily related to the
site acceptance by the customer. Revenues derived from system sales to
distribution partners are recognized upon delivery if the contract is between
the Company and the distribution partner, the payment terms are fixed with all
amounts due within twelve months, there are no other significant obligations to
be performed by the Company and provided that the distribution partner meets the
Company's criteria with respect to sell-through and credit risk. Revenues
derived from system sales to distribution partners in which the contract is
between the Company and the customer (the end-user) of the distribution partner
are recognized in accordance with the Company's revenue recognition policy for
end-user customers described above.
Revenue recognition for system sales to end-users that have been
delivered and accepted by the customer with contractual payment terms that
extend beyond one year is determined by the Company based upon the Company's
historical experience with the customer, the customer's credit worthiness, and
an assessment of the enforceability of the contract. All revenues recognized
related to contracts with payments due in more than one year are discounted.
SMDA-1
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Revenues from professional services, which may include preparation of
functional specifications, customization and programming, systems integration,
and training, among others, are recognized as the services are performed.
Revenues derived from maintenance and support contracts are recognized ratably
over the terms of the related contracts.
Deferred revenues represent either billings rendered to or payments
received from customers for systems prior to factory acceptance and delivery to
the customer and maintenance and support services billed in advance.
At June 30, 1996, the Company had approximately $24.2 million of signed
sales contracts for systems and services which had not yet been delivered. The
amount of signed sales contracts for systems and services which have not been
delivered includes contracts for software license fees, hardware sales and
services that may include cancellation provisions that do not pertain to IMNET's
performance, and contracts that are expected to result in revenues over periods
of as much as five years. Any significant or ongoing failure to achieve signed
contracts and subsequent customer acceptance after expending time, effort and
funds could have a material adverse effect on the Company's business. Because
the Company adjusts the timing of an installation to accommodate customers'
needs, and because a typical installation requires two to 12 months to complete,
the Company is unable to predict accurately the number of signed sales contracts
it expects to fill and consequently the amount of revenues it expects to achieve
in any particular period.
The Company capitalizes a portion of its computer software development
costs. These costs relate primarily to the development of new products and
enhancements to existing products to accommodate new markets or platforms using
existing technologies and programming methods. Amortization of computer software
development costs is provided by the Company on individual products or
enhancements and begins when the product or enhancement is available for use by
customers. Amortization is recorded using the greater of: (1) the amount
computed using the ratio of current product revenue to the total of current and
anticipated product revenue or (2) the amount determined using the straight-line
method over the estimated useful life of the software, not to exceed three
years. Amortization of computer software development costs is included in cost
of system sales in the accompanying consolidated statements of operations.
HUNTER ACQUISITION
On September 30, 1996, the Company completed the acquisition of Hunter
International, Inc., a provider of electronic report management and distribution
software solutions to the healthcare and other industries, by issuing 429,292
shares of IMNET Common Stock for all of the outstanding common stock of Hunter.
The merger has been accounted for as a pooling of interests and, as a result,
the Company's accompanying consolidated financial statements for all periods
prior to the merger have been restated to include the financial position and
results of operations of Hunter.
1996 ACQUISITIONS
On November 3, 1995, the Company acquired Evergreen Technologies, Inc.
("Evergreen") by merger for aggregate consideration consisting of $1.28 million
in cash and 82,353 shares of IMNET Common Stock having a market value as of such
date of approximately $2.3 million. In connection with the Evergreen
acquisition, the Company allocated and expensed in the three months ended
December 31, 1995, approximately $2.9 million to in-process research and
development and allocated approximately $648,000 to intangible assets, including
goodwill and acquired technology, which are being amortized on a
SMDA-2
<PAGE> 3
straight-line basis over the estimated useful lives of such assets of 7 and 5
years, respectively. Additionally, on December 14, 1995 the Company acquired
Quesix Software, Incorporated ("Quesix") by merger. The aggregate consideration
for the acquisition of Quesix was $4.2 million in cash. In connection with the
Quesix acquisition, the Company allocated and expensed in the three months ended
December 31, 1995, approximately $2.8 million to in-process research and
development, and allocated approximately $1.4 million to goodwill to be
amortized on a straight-line basis over an estimated useful life of 7 years. The
Company had previously marketed a version of Quesix's EPRS product pursuant to a
distribution agreement. The in-process research and development expensed at the
acquisition dates had not reached technological feasibility and had no
alternative use for the Company.
The Company pursued the acquisitions discussed above to enhance the
capabilities and applications of the IMNET Electronic Information Warehouse. The
acquisition of Hunter and its LaserArc product line provides the Company with
electronic report management and distribution solutions. The acquisition of
Evergreen and its radiological imaging product line, MedVision, provided the
Company with the technology to expand and improve the radiological information
storage, retrieval and display capabilities of the IMNET Electronic Information
Warehouse. Further, the acquisition of Quesix and the EPRS allowed the Company
to control future development and distribution of the EPRS, a patient record
document management application software product.
BUSINESS ALLIANCE WITH HBOC
In March 1996, the Company signed agreements with HBO & Company
("HBOC") to distribute IMNET's products on a private label basis. Under the
terms of the agreements, HBOC will market the IMNET Electronic Information
Warehouse, which is to be integrated with HBOC's clinical and information
solutions, and HBOC will not market competing products. The Company supports
HBOC's First Perspective product line customers. The First Perspective product
line, prior to the distribution agreement, competed with the IMNET Electronic
Information Warehouse. The distribution agreement provides that HBOC will offer
its First Perspective product line customers the opportunity to convert to the
IMNET Electronic Information Warehouse and that the cost for such conversion,
estimated by the Company to be approximately $3.0 million, will be assumed by
the Company. As of September 25, 1996, three customers had elected to convert.
Under the terms of the distribution agreement, the Company will pay HBOC an
aggregate of $3.0 million over a twelve month period in exchange for the
seven-year exclusive distribution rights. Quarterly payments of $600,000 were
made to HBOC in the Company's third and fourth quarter of fiscal 1996.
The Company recorded a non-recurring charge of $4.6 million to the
Company's consolidated statement of operations and capitalized an additional
$1.4 million of intangible assets related to the Company's valuation of the
expected gross margin on maintenance revenues from the support of the First
Perspective customers in the three months ended March 31, 1996. The Company has
classified the remaining obligation to HBOC of $1.8 million in cash payments and
$2.8 million of conversion costs, net of costs incurred, in accrued expenses in
the accompanying June 30, 1996 consolidated balance sheet.
GRANT OF MANUFACTURING RIGHTS FOR THE COMPANY'S MEGASAR MICROFILM JUKEBOX
On June 30, 1996, the Company granted to SoftNet Systems, Inc.
("SoftNet") worldwide, exclusive manufacturing rights and new non-exclusive,
non-healthcare distribution rights for the MegaSAR Microfilm Jukebox and its
associated technology. The terms of the transaction also included $1.0 million
of nonrefundable software license fees related to the MegaSAR product. The
Company will continue to
SMDA-3
<PAGE> 4
sell the MegaSAR manufactured by SoftNet and provide maintenance and support for
its existing MegaSAR customers.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for each fiscal period indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales .......................................... 83.5% 78.8% 71.8%
Maintenance and professional services ................. 16.5 21.2 28.2
----- ----- -----
Total revenues ................................. 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Cost of system sales .................................. 22.0 41.2 51.3
Cost of maintenance and professional services ......... 9.2 14.5 18.2
Sales and marketing ................................... 33.2 39.3 55.6
Research and development .............................. 13.3 20.8 29.7
General and administrative ............................ 14.1 21.6 30.4
Non-recurring charges ................................. 35.3 -- --
----- ----- -----
Total operating expenses ....................... 127.1 137.4 185.2
----- ----- -----
Operating loss .......................................... (27.1) (37.4) (85.2)
----- ----- -----
Interest income, net .................................... 6.6 1.2 0.4
----- ----- -----
Net loss ................................................ (20.5)% (36.2)% (84.8)%
===== ===== =====
</TABLE>
Note: The financial information gives retroactive recognition to the
acquisition of Hunter, which has been accounted for as a pooling of
interests.
Comparison of Fiscal Years Ended June 30, 1996 and June 30, 1995
Revenues. The Company's total revenues were $29.4 million compared to
$11.3 million for fiscal 1995, an increase of $18.1 million, or 161%. The
Company's revenues derived from sales to domestic healthcare customers were
$20.5 million for fiscal 1996 compared to $6.1 million for fiscal 1995, an
increase of $14.4 million, or 236%. These increases were primarily due to the
grant of $5.7 million of enterprise-wide software licenses for the IMNET Image
Engine, IMNET Workflow Engine, IMNET EPRS and IMNET MedVision to McLaren
Regional Healthcare Center ("McLaren"), $2.9 million of software license revenue
from SoftNet, $2.4 million of software license revenue related to the Company's
business alliance with HBOC, and additional system sales to other customers. The
enterprise-wide software licenses granted to McLaren for the IMNET Image Engine
and IMNET Workflow Engine products provided for payment terms in the form of
quarterly installments of $266,667, which began in October, 1995 and will end in
July, 1998. The Company recorded $2.8 million in revenues from those software
licenses during fiscal 1996, which amount represented the present value,
discounted at the then applicable prime rate, of the future stream (those
payments due in more than 12 months) of quarterly installment payments under the
license agreement. The Company classified the discounted amounts due in more
than 12 months of $1.1 million as noncurrent trade accounts receivable in the
accompanying consolidated balance sheet. Total revenues derived from McLaren
were $6.5 million during fiscal 1996, representing approximately 22% of total
revenues in fiscal 1996.
SMDA-4
<PAGE> 5
Revenues from sales to domestic general business customers were $6.5
million in fiscal 1996 compared to $3.6 million in fiscal 1995, an increase of
$2.9 million, or 82%. Revenues from sales to international customers were $2.3
million in fiscal 1996 compared to $1.7 million in fiscal 1995, an increase of
$600,000, or 34%. In the future, the Company anticipates that revenues
attributable to sales outside the United States will decline as a percentage of
total revenues. The Company is currently pursuing existing opportunities
internationally, but has made a strategic decision to allocate its sales efforts
to the domestic healthcare market. Revenues from system sales increased to $24.5
million in fiscal 1996 from $8.9 million in fiscal 1995, an increase of $15.7
million, or 176%. Revenues from maintenance and professional services were $4.8
million in fiscal 1996 compared to $2.4 million in fiscal 1995, an increase of
$2.5 million, or 103%. This growth was primarily attributable to an increase in
professional services to healthcare customers and additional maintenance
contracts, resulting from a larger installed base.
The Company's product sales have been concentrated in a small number of
customers, and the Company has historically derived a substantial percentage of
its total revenues from a relatively small number of customers. Developments
adverse to the financial condition of any of these customers or the inability to
replace any such customer with significant new customers would have a material
adverse effect on the Company's business.
Cost of Revenues. The cost of system sales in fiscal 1996 was $6.5
million compared to $4.6 million in fiscal 1995, an increase of $1.8 million, or
39%. As a percentage of total revenues, the cost of system sales declined to 22%
in fiscal 1996 from 41% in fiscal 1995, due to increased revenue derived from
system sales and a higher software component in the system sales revenue mix. As
a percentage of system sales revenues, the cost of system sales decreased to 26%
in fiscal 1996 from 52% in fiscal 1995. The cost of system sales also reflected
amortization expenses in each period of $697,000 relating to technology acquired
in the 1992 Acquisition. The cost of maintenance and professional services was
$2.7 million in fiscal 1996 compared to $1.6 million in fiscal 1995, an increase
of $1.1 million, or 65%. As a percentage of total revenues, this amount
represented a reduction to 9% from 15%. The cost of maintenance and professional
services, as a percentage of maintenance and professional service revenues,
declined to 56% in fiscal 1996 from 68% in fiscal 1995. Management does not
expect the cost of system sales as a percentage of systems revenues to continue
to decrease, in part due to the particularly high margins associated with the
enterprise-wide site licenses granted in fiscal 1996 and with the MegaSAR
related software licenses to SoftNet.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits and administrative costs allocated to
the Company's sales and marketing personnel. Sales and marketing expenses
increased to $9.8 million in fiscal 1996 from $4.4 million in fiscal 1995, an
increase of $5.3 million, or 120%. The increase was primarily due to higher
sales commissions from increased system sales and higher sales salary expenses
associated with increases in the number of sales personnel. Expressed as a
percentage of total revenues, sales and marketing expenses were 33% in fiscal
1996 compared to 39% in fiscal 1995.
Research and Development. Research and development expenditures consist
primarily of personnel costs of research and development staff, the facilities,
computing, benefits and other administrative costs allocated to such personnel
and IMNET MegaSAR Microfilm Jukebox hardware prototype expenses. Research and
development expenses increased to $3.9 million in fiscal 1996 from $2.3 million
in fiscal 1995, an increase of $1.6 million, or 67%. The increase was primarily
attributable to an increase in the number of research and development personnel
and associated costs, partially offset by the capitalization of $1.3 million in
computer software development costs related to new products and
SMDA-5
<PAGE> 6
enhancements expected to be released over the next nine months. The $1.3 million
of capitalized computer software development costs represented 32% of the
Company's total research and development expenditures in fiscal 1996. Management
believes that the capitalization rate will continue in fiscal 1997 due to the
scheduled release of new software products. As a percentage of total revenues,
research and development expenses decreased to 13% from 21% in fiscal 1996 as
compared to fiscal 1995.
General and Administrative. General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations of the Company. General and administrative expenses
increased to $4.1 million in fiscal 1996 from $2.4 million in fiscal 1995, an
increase of $1.7 million, or 71%. This increase was primarily attributable to
increases in salaries and associated costs, additional costs associated with
being a public company, an increase in facilities expenses to support staffing
additions, increases for employment fees and relocation expenses, and an
increase in depreciation expense associated with equipment to support increased
staffing. General and administrative expenses as a percentage of total revenues
decreased to 14% in fiscal 1996 from 22% in fiscal 1995.
Non-recurring Charges. See "-- 1996 Acquisitions" and "-- Business
Alliance with HBOC" above for information concerning these charges.
Net Loss. The Company's net loss for fiscal 1996 was $6.0 million, or
$0.69 per share, compared to a net loss of $4.1 million, or $0.77 per share, in
fiscal 1995. Exclusive of the $5.7 million ($0.65 per share) in non-recurring
charges related to in-process research and development associated with the
Company's acquisitions of Evergreen and Quesix completed during the second
quarter of fiscal 1996 and a $4.6 million ($0.52 per share) non-recurring charge
related to the Company's business alliance with HBOC incurred in the third
quarter of fiscal 1996, the Company recorded net income of $4.3 million, or
$0.49 per share, for fiscal 1996. The improvement in the Company's results,
exclusive of the non-recurring charges, was due to the significant growth in
revenues, partially offset by increases in operating expenses necessary to
support the Company's continuing growth, and interest income of approximately
$1.9 million earned on the net proceeds of the Company's initial and secondary
public offerings.
Comparison of Fiscal Years Ended June 30, 1995 and June 30, 1994
Revenues. The Company's total revenues were $11.3 million for fiscal
1995 compared to $6.3 million for fiscal 1994, an increase of $4.9 million, or
78%. The Company's revenues derived from sales to healthcare customers were $6.0
million for fiscal 1995 compared to $3.4 million for fiscal 1994, an increase of
$2.6 million, or 79%. The Company's revenues derived from sales to general
business customers were $5.3 million for fiscal 1995 compared to $3.0 million
for fiscal 1994, an increase of $2.3 million, or 80%. System sales increased to
$8.9 million for fiscal 1995 from $4.6 million for fiscal 1994, an increase of
$4.3 million, or 95%. This increase was attributable to higher system sales in
all sectors. The increase in international system sales during fiscal 1995 was
primarily attributable to sales in France through the Company's French
distribution partners. Revenues from maintenance and professional services were
$2.4 million for fiscal 1995 compared to $1.8 million for fiscal 1994, an
increase of $604,000, or 34%. This increase was primarily attributable to
increased professional services in the healthcare market in fiscal 1995 and new
customers requesting hardware and software maintenance support.
Cost of Revenues. The cost of system sales was $4.6 million in fiscal
1995 compared to $3.3 million in fiscal 1994, an increase of $1.4 million, or
43%. As a percentage of total revenues, cost of system sales declined to 41% in
fiscal 1995 from 51% in fiscal 1994, reflecting system sales having a
SMDA-6
<PAGE> 7
higher component of software fees. The percentage can vary significantly
depending on the mix of products sold or licensed. The cost of system sales for
each period included amortization expenses of $697,000 relating to technology
acquired in the 1992 Acquisition. Cost of maintenance and professional services
increased to $1.6 million for fiscal 1995 from $1.2 million in fiscal 1994, an
increase of $482,000, or 42%. The cost of maintenance and professional services
decreased to 15% of total revenues in fiscal 1995 from 18% in fiscal 1994. This
decrease was due to lower services and maintenance overhead costs as a
percentage of revenues.
Sales and Marketing. Sales and marketing expenses increased to $4.4
million in fiscal 1995 from $3.5 million in fiscal 1994, an increase of
$907,000, or 26%. This increase was primarily attributable to increased staffing
and marketing activities. Sales and marketing expenses as a percentage of total
revenues declined to 39% in fiscal 1995 from 56% in fiscal 1994 primarily
because of revenue growth.
Research and Development. Research and development expenses increased
to $2.3 million in fiscal 1995 from $1.9 million in fiscal 1994, an increase of
$461,000, or 25%. This increase was primarily attributable to additional
staffing to support software and hardware development activities. As a
percentage of total revenues, research and development expenses decreased to 21%
from 30%.
General and Administrative. General and administrative expenses
increased to $2.4 million in fiscal 1995 from $1.9 million in fiscal 1994, an
increase of $499,000, or 26%. This increase was primarily attributable to an
increase of $306,000 in facilities expenses to support staffing additions and an
increase of $177,000 in bad debts, reflecting a charge related to an
international customer that went into receivership in the first quarter of
fiscal 1995. General and administrative expenses as a percentage of total
revenues decreased to 22% in fiscal 1995 from 30% in fiscal 1994.
Net Loss. The Company's net loss for fiscal 1995 decreased to $4.1
million, or $0.77 per share, from $5.4 million, or $1.38 per share, in fiscal
1994, a decrease of 24%.
SMDA-7
<PAGE> 8
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial data for the
fiscal years ended June 30, 1996 and June 30, 1995. This quarterly information
is unaudited, has been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of the Company's management, reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
------------------------------------------- --------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales ..................... $ 9,635 $ 5,544 $ 5,585 $ 3,768 $ 4,036 $ 1,057 $ 2,717 $ 1,071
Maintenance and professional
services ...................... 1,996 1,442 744 666 749 652 602 390
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues ................ 11,631 6,986 6,329 4,434 4,785 1,709 3,319 1,461
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of system sales ............. 2,832 1,637 1,358 631 1,998 783 1,169 694
Cost of maintenance and
professional services ......... 916 753 555 481 430 489 416 302
Sales and marketing .............. 2,869 2,474 2,351 2,058 1,601 1,044 809 979
Research and development ......... 1,275 1,085 934 621 668 543 533 599
General and administrative ....... 912 1,001 1,427 805 656 611 674 489
Non-recurring charges ............ -- 4,630 5,740 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses ...... 8,804 11,580 12,365 4,596 5,353 3,470 3,601 3,063
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ............. 2,827 (4,594) (6,036) (162) (568) (1,761) (282) (1,602)
-------- -------- -------- -------- -------- -------- -------- --------
Other interest, net ................. 558 469 493 418 96 12 4 22
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ................... $ 3,385 $ (4,125) $ (5,543) $ 256 $ (472) $ (1,749) $ (278) $ (1,580)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Note: The quarterly data shown above gives retroactive recognition to the
acquisition of Hunter, which has been accounted for as a pooling of
interests.
The Company has experienced significant quarterly fluctuations in
operating results which may continue in future periods. The Company's revenues
from system sales have varied significantly from quarter to quarter as a result
of the volume and timing of system sales and customer acceptance and delivery.
Professional services revenues have also fluctuated from quarter to quarter as a
result of the timing of the installation of software and hardware, project
management and customized programming. Revenues from maintenance services have
not fluctuated significantly from quarter to quarter and have been increasing as
the number of the Company's customers increases. Since a significant percentage
of the Company's expenses are fixed, quarterly operating results will vary with
the timing and fluctuation of total revenues.
SMDA-8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1992, the Company has funded its operations,
working capital needs and capital expenditures primarily from revenues and sales
of equity securities. The Company was initially capitalized primarily by three
investment companies. Subsequently, the Company completed four private
placements in which new investors purchased Company securities. In July 1995,
the Company received approximately $37.5 million net of underwriter's discounts
and offering costs from its initial public offering. In February 1996, the
Company received an additional $18.5 million net of underwriters discounts and
offering costs from a subsequent offering of its Common Stock.
Cash and cash equivalents and marketable securities at June 30, 1996
were $38.4 million, an increase of $36.6 million from June 30, 1995. The
increase was primarily due to the proceeds from the Company's initial and
secondary offerings of Common Stock. During fiscal 1996, the Company used cash
of $10.1 million for operating activities, as compared to the prior fiscal year
same period cash used in operating activities of $5.8 million. The increase was
primarily due to the funding of additional accounts receivable of $15.1 million
and inventories of $1.2 million associated with increased sales volume, offset
by increased net income, net of non-recurring charges. The cash dividends paid
on common stock disclosed in the consolidated statements of stockholders' equity
and cash flows for the years ended June 30, 1996, 1995, and 1994 were normal
stockholder distributions paid by Hunter prior to the merger. IMNET has not paid
any dividends on its common stock.
The Company plans to continue to increase its professional staff during
fiscal 1997 and the foreseeable future, to meet anticipated sales volume and to
support research and development efforts. The Company expects that its
requirements for office facilities and office equipment will grow as staffing
requirements dictate. The Company currently leases 54,000 square feet of office
space. To accommodate continuing growth, the Company signed an operating lease,
effective January 1997, to increase its headquarters space. The Company expects
to move to the new facility in January 1997 and will incur increased rental
expense. The Company has budgeted capital expenditures of approximately $1.9
million in fiscal 1997 for the purchase of computer equipment for existing and
new employees, furniture and fixtures, and equipment associated with the new
office facility, new training equipment, and new equipment for customer
demonstrations.
The purchase price for the Evergreen acquisition included $1.8 million
in cash and the issuance of 82,353 shares of Common Stock having a market value
as of November 3, 1995 of approximately $2.3 million. The purchase price for the
Quesix acquisition was $4.2 million, paid in cash. These acquisitions were
consummated in the three months ended December 31, 1995.
In August 1996, counsel to a competitor contacted the Company,
asserting that the Company's Electronic Information Warehouse infringed a patent
owned by it relating to systems which incorporate database management systems
and support bulk storage systems, and that other patents might also be
infringed. The Company consulted its patent counsel and met with representatives
of this competitor. The parties entered into a patent license agreement in
November 1996 pursuant to which the Company made a nominal payment and agreed to
pay a nominal royalty on certain revenues derived from the sale of certain
products. The royalty obligation expires in December 2003.
The Company's accounts receivable days sales outstanding ("DSO")
continued to increase in fiscal 1996. Management believes that its willingness
to grant extended terms, on a negotiated, case by case basis, provides the
customer or distributor with additional incentives to commit to large purchases,
because
SMDA-9
<PAGE> 10
such terms (i) demonstrate that the Company is comfortable with providing the
purchaser the leverage inherent in deferred payments (thereby demonstrating its
confidence in its product), and (ii) permit the purchaser (and the Company) to
commit to a large order, while the payment stream is tailored to a longer period
of time (thereby providing the purchaser with a means to finance the project
over one or more internal cash budgeting cycles). Therefore, management believes
the accounts receivable DSO trend will continue in fiscal 1997, due to the
extended terms selling strategy. However, the failure by customers to pay
amounts as they become due could have a material adverse effect on the Company.
The Company believes that its cash and cash equivalents and marketable
securities, along with revenues from operations, will be sufficient to finance
expected cash requirements for operating activities and anticipated growth for
at least the next 12 months. The Company's ability to meet its cash obligations
on a long-term basis will depend on its achieving and maintaining profitable
operations and on consistent and timely collection of its accounts receivable.
To date, inflation has not had a material impact on the Company's revenues or
income.
The Company will require significant funds to implement its business
strategies. Unless its revenues increase significantly, the Company will
continue to experience losses due to the following factors: (i) the Company's
operating expenses are budgeted on anticipated revenues; (ii) the Company incurs
significant expenses in connection with research and development, and more
recently, the development of its direct and indirect selling and marketing
efforts; and (iii) a high percentage of the Company's expenses are fixed. As a
result, there can be no assurance that the Company will be profitable in the
future or that available funds, together with any funds provided by operations,
will be sufficient to fund the Company's ongoing operations. If the Company has
insufficient funds, there can be no assurance that additional financing can be
obtained on acceptable terms, if at all. The absence of such financing would
have a material adverse effect on the Company's business, including a possible
reduction or cessation of operations.
In addition to the information in this filing, certain risk factors,
among others, should be considered carefully in evaluating the Company and its
business. These risk factors include the following: (i) limited operating
history; lack of profitable operations; (ii) variability in quarterly operating
results; volatility of stock price; (iii) customer concentration; (iv) product
acceptance and market development; dependence on distribution partners; (v) long
sales and delivery cycle; dependence on future system sales; (vi) ability to
manage growth; (vii) risks associated with acquisitions; (viii) risks associated
with new distribution partner (HBOC); (ix) technological changes; competition;
(x) uncertainty in healthcare industry; government healthcare reform proposals;
(xi) dependence on key personnel; (xii) dependence on proprietary rights and
patents; (xiii) product liability; (xiv) foreign operations; (xv) control by
officers and directors; (xvi) shares eligible for future sale; and (xvii)
certain anti-takeover considerations. For additional detail, please refer to
"Business Risk Factors" contained in Part I, Item 1 of the Company's Form 10-K
for the year ended June 30, 1996. Also, see the note preceding Part I of
"Business" in the Form 10-K for additional information regarding the Private
Securities Litigation Reform Act.
Recent Accounting Pronouncement
On October 23, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 allows companies to retain the
current approach set forth in APB Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB Opinion No. 25) for recognizing stock-based expense in their
financial statements in lieu of the new accounting method prescribed by
Statement 123 based on the estimated fair
SMDA-10
<PAGE> 11
value of employee stock options. Companies that do not follow the new fair value
based method will be required to provide expanded footnote disclosures. The
provisions of Statement 123 are effective for fiscal years beginning after
December 15, 1995. However, disclosure of the pro forma net income and earnings
per share, as if the fair value method of accounting for stock-based
compensation had been elected, is required for all awards granted in fiscal
years beginning after December 15, 1994.
The Company intends to continue accounting for stock related
compensation using APB Opinion No. 25 and will provide the expanded footnote
disclosures required under Statement 123 beginning with its consolidated
financial statements for the year ending June 30, 1997.
SMDA-11
<PAGE> 1
EXHIBIT 99.3
IMNET SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report................................................SF-2
Consolidated Balance Sheets.................................................SF-3
Consolidated Statements of Operations.......................................SF-4
Consolidated Statements of Stockholders' Equity.............................SF-5
Consolidated Statements of Cash Flows.......................................SF-6
Notes to Consolidated Financial Statements............................SF-7-SF-20
Financial Statement Schedule of Valuation and Qualifying
Accounts--Allowance for doubtful accounts.............................SF-21
Computation of Per Share Earnings..........................................SF-22
</TABLE>
SF-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IMNET Systems, Inc.:
We have audited the accompanying consolidated balance sheets of IMNET
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1996. In connection
with our audits of the accompanying consolidated financial statements, we also
have audited the accompanying financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The consolidated financial statements give retroactive effect to the
merger of IMNET Systems, Inc. and Hunter International, Inc. on September 30,
1996, which has been accounted for as a pooling of interests as described in
Note 2 to the consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they are the historical consolidated
financial statements of IMNET Systems, Inc. and subsidiaries, effective with the
issuance of financial statements as of and for the period ended September 30,
1996, which include the date of consummation of the business combination.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IMNET
Systems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 27, 1997
SF-2
<PAGE> 3
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 16,894,711 $ 1,856,970
Marketable securities, at cost (estimated market value of $21,629,750) ..................... 21,541,760 --
Trade accounts receivable, net of allowance for doubtful accounts of $333,290 and
$63,043 at June 30, 1996 and 1995, respectively ......................................... 15,360,291 4,403,376
Note receivable from related party ......................................................... 2,910,876 --
Inventories ................................................................................ 2,079,574 1,268,118
Prepaid expenses and other current assets .................................................. 712,204 136,736
Offering costs ............................................................................. -- 439,935
------------ ------------
Total current assets .................................................................. 59,499,416 8,105,135
Noncurrent trade accounts receivable .......................................................... 1,085,927 --
Notes receivable from officer ................................................................. 105,000 105,000
Property and equipment, net ................................................................... 3,329,331 1,524,198
Computer software development costs, net of accumulated amortization of $73,531 ............... 1,212,875 --
Acquired technology, net of accumulated amortization of $2,627,244 and $1,916,673
at June 30, 1996 and 1995, respectively .................................................... 959,755 1,568,327
Goodwill and other intangibles, net of accumulated amortization of $211,579 ................... 3,343,774 --
------------ ------------
$ 69,536,078 $ 11,302,660
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases ................................... $ 404 $ 4,251
Accounts payable ........................................................................... 1,264,479 1,577,079
Accrued expenses ........................................................................... 6,643,807 1,003,375
Deferred revenue ........................................................................... 804,357 404,177
Dividends payable .......................................................................... -- 242,950
------------ ------------
Total current liabilities ............................................................. 8,713,047 3,231,832
------------ ------------
Total liabilities ..................................................................... 8,713,047 3,231,832
------------ ------------
Stockholders' equity:
Preferred stock ............................................................................ -- 19,422,722
Common stock, $.01 par value. Authorized 25,000,000 shares; 9,627,071 shares issued
and 9,589,434 shares outstanding at June 30, 1996, and 2,896,619 shares issued
and 2,858,982 outstanding at June 30, 1995 .............................................. 96,271 28,966
Additional paid-in capital ................................................................. 80,795,841 2,233,811
Treasury stock, 37,637 shares, at cost ..................................................... (148,417) (148,417)
Accumulated deficit ........................................................................ (19,920,664) (13,466,254)
------------ ------------
Total stockholders' equity ............................................................ 60,823,031 8,070,828
Commitments and contingencies .................................................................
------------ ------------
$ 69,536,078 $ 11,302,660
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
SF-3
<PAGE> 4
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
System sales .......................................................... $ 24,532,389 $ 8,880,592 $ 4,551,359
Maintenance and professional services ................................. 4,847,696 2,393,157 1,789,375
------------ ------------ ------------
Total revenues, including revenues from a related party of
$2,850,000 and $485,000 in 1996 and 1995 ...................... 29,380,085 11,273,749 6,340,734
------------ ------------ ------------
Operating expenses:
Cost of system sales .................................................. 6,457,962 4,644,283 3,253,138
Cost of maintenance and professional services ......................... 2,704,536 1,636,885 1,154,980
Sales and marketing ................................................... 9,752,525 4,433,444 3,526,620
Research and development .............................................. 3,915,032 2,342,889 1,881,483
General and administrative ............................................ 4,144,848 2,429,611 1,930,125
Non-recurring charges ................................................. 10,370,000 -- --
------------ ------------ ------------
Total operating expenses ......................................... 37,344,903 15,487,112 11,746,346
------------ ------------ ------------
Operating loss ................................................... (7,964,818) (4,213,363) (5,405,612)
------------ ------------ ------------
Interest income (expense), net ................................... 1,937,653 133,765 29,238
------------ ------------ ------------
Loss before income taxes ......................................... (6,027,165) (4,079,598) (5,376,374)
Income taxes ............................................................. -- -- --
------------ ------------ ------------
Net loss ......................................................... $ (6,027,165) $ (4,079,598) $ (5,376,374)
============ ============ ============
Net loss per common share and common share equivalent .................... $ (0.69) $ (0.77) $ (1.38)
============ ============ ============
Weighted average outstanding common shares and common share
equivalents ........................................................... 8,779,356 5,330,321 3,887,840
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
SF-4
<PAGE> 5
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------------------------
Series A Series B Series I Series II
--------------------- --------------------- -------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ----------- ------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 ........... 48,436 $ 4,842,015 40,000 $ 2,111,503 -- $ -- -- $ --
Sale of common stock at $0.053
per share ........................ -- -- -- -- -- -- -- --
Sale of common stock at $0.063
per share and Series A preferred
stock at $99.81 per share ........ 1,461 145,826 -- -- -- -- -- --
Sale of common stock at $0.08 per
share and Series A preferred stock
at prices ranging from $147.95 to
$148.41 .......................... 15,496 2,295,315 -- -- -- -- -- --
Sale of Series I convertible
preferred stock at $140.00
per share ........................ -- -- -- -- 38,209 5,349,320 -- --
Dividends paid ..................... -- -- -- -- -- -- -- --
Net loss ........................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance at June 30, 1994 ........... 65,393 7,283,156 40,000 2,111,503 38,209 5,349,320 -- --
Purchase of treasury stock and
redemption of preferred stock,
at cost .......................... -- -- -- -- (213) (20,235) -- --
Dividends accrued on Series A
preferred stock .................. -- -- -- -- -- -- -- --
Sale of Series II convertible
preferred stock at $140
per share ........................ -- -- -- -- -- -- 51,729 6,810,481
Cancellation of Series B
convertible preferred stock ...... -- -- (40,000) (2,111,503) -- -- -- --
Dividends paid ..................... -- -- -- -- -- -- -- --
Net loss ........................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance at June 30, 1995 ........... 65,393 7,283,156 -- -- 37,996 5,329,085 51,729 6,810,481
Dividends accrued on Series A
preferred stock .................. -- -- -- -- -- -- -- --
Conversion of preferred stock and
accrued dividends to common stock (65,393) (7,283,156) -- -- (37,996) (5,329,085) (51,729) (6,810,481)
Sale of common stock ............... -- -- -- -- -- -- -- --
Exercise of stock options and
warrants ......................... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with an acquisition ... -- -- -- -- -- -- -- --
Dividends paid ..................... -- -- -- -- -- -- -- --
Net loss ........................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance at June 30, 1996 ........... -- $ -- -- $ -- -- $ -- -- $ --
======= =========== ======= =========== ======= =========== ======= ===========
<CAPTION>
Common Stock Additional Treasury Stock Total
------------------- Paid-in ------------------ Accumulated Stockholders'
Shares Amount capital Shares Amount deficit equity
--------- ------- ---------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 ........... 2,488,738 $24,887 94,658 -- $ -- (2,367,332) 4,705,731
Sale of common stock at $0.053
per share ........................ 9,400 94 406 -- -- -- 500
Sale of common stock at $0.063
per share and Series A preferred
stock at $99.81 per share ........ 34,334 343 1,831 -- -- -- 148,000
Sale of common stock at $0.08 per
share and Series A preferred stock
at prices ranging from $147.95 to
$148.41 .......................... 364,147 3,642 25,413 -- -- -- 2,324,370
Sale of Series I convertible
preferred stock at $140.00
per share ........................ -- -- -- -- -- -- 5,349,320
Dividends paid ..................... -- -- -- -- -- (600,000) (600,000)
Net loss ........................... -- -- -- -- -- (5,376,374) (5,376,374)
--------- ------- ---------- ------ --------- ----------- ----------
Balance at June 30, 1994 ........... 2,896,619 28,966 122,308 -- -- (8,343,706) 6,551,547
Purchase of treasury stock and
redemption of preferred stock,
at cost .......................... -- -- -- 37,637 (148,417) -- (168,652)
Dividends accrued on Series A
preferred stock .................. -- -- -- -- -- (242,950) (242,950)
Sale of Series II convertible
preferred stock at $140
per share ........................ -- -- -- -- -- -- 6,810,481
Cancellation of Series B
convertible preferred stock ...... -- -- 2,111,503 -- -- -- --
Dividends paid ..................... -- -- -- -- -- (800,000) (800,000)
Net loss ........................... -- -- -- -- -- (4,079,598) (4,079,598)
--------- ------- ---------- ------ --------- ----------- ----------
Balance at June 30, 1995 ........... 2,896,619 28,966 2,233,811 37,637 (148,417) (13,466,254) 8,070,828
Dividends accrued on Series A
preferred stock .................. -- -- -- -- -- (27,245) (27,245)
Conversion of preferred stock and
accrued dividends to common stock 2,316,257 23,163 19,669,734 -- -- -- 270,175
Sale of common stock ............... 4,248,500 42,485 55,927,969 -- -- -- 55,970,454
Exercise of stock options and
warrants ......................... 83,342 833 659,267 -- -- -- 660,100
Issuance of common stock in
connection with an acquisition ... 82,353 824 2,305,060 -- -- -- 2,305,884
Dividends paid ..................... -- -- -- -- -- (400,000) (400,000)
Net loss ........................... -- -- -- -- -- (6,027,165) (6,027,165)
--------- ------- ---------- ------ --------- ----------- ----------
Balance at June 30, 1996 ........... 9,627,071 $96,271 80,795,841 37,637 $(148,417) (19,920,664) 60,823,031
========= ======= ========== ====== ========= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
SF-5
<PAGE> 6
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................... $ (6,027,165) $(4,079,598) $(5,376,374)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment .............. 680,448 293,387 133,502
Amortization of computer software development costs, acquired
technology, and goodwill and other intangibles .................... 995,682 696,972 696,972
Provision for doubtful accounts receivable ........................... 259,846 200,758 24,000
Loss on disposal of property and equipment ........................... -- 9,443 14,974
Non-recurring charges ................................................ 10,370,000 -- --
(Increase) decrease in:
Trade accounts receivable ............................................ (15,134,683) (2,763,501) (206,412)
Inventories .......................................................... (1,177,212) 131,831 161,708
Prepaid expenses and other current assets ............................ (575,468) (407,597) (66,813)
Increase (decrease) in:
Accounts payable ..................................................... (346,385) 1,107,684 (316,761)
Accrued expenses ..................................................... 419,432 192,954 400,015
Deferred revenue ..................................................... 400,180 (1,165,451) (178,725)
------------ ----------- -----------
Net cash used in operating activities ............................. (10,135,325) (5,783,118) (4,713,914)
------------ ----------- -----------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired ....................... (4,813,969) -- --
Issuance of notes receivable from officer .............................. -- -- (30,000)
Additions to property and equipment .................................... (2,385,217) (831,293) (409,925)
Additions to computer software development costs ....................... (1,286,406) -- --
Purchases of marketable securities ..................................... (62,226,760) -- --
Maturities of marketable securities .................................... 40,685,000 -- --
Additions to intangible assets ......................................... (155,204) -- --
Payments in connection with business alliance .......................... (1,200,000) -- --
------------ ----------- -----------
Net cash used in investing activities ............................. (31,382,556) (831,293) (439,925)
------------ ----------- -----------
Cash flows from financing activities:
Principal payments on obligations under capital leases ................. (3,847) (4,429) (7,435)
Proceeds from notes payable to stockholders ............................ -- 500,000 --
Proceeds from sale of common and preferred stock ....................... 56,410,370 6,310,481 7,622,190
Proceeds from exercise of stock options and warrants ................... 549,099 -- --
Purchases of treasury stock and redemption of preferred stock .......... -- (168,652) --
Dividends paid ......................................................... (400,000) (800,000) (600,000)
------------ ----------- -----------
Net cash provided by financing activities ......................... 56,555,622 5,837,400 7,014,755
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents .............. 15,037,741 (777,011) 1,860,916
Cash and cash equivalents at beginning of year ........................... 1,856,970 2,633,981 773,065
------------ ----------- -----------
Cash and cash equivalents at end of year ................................. $ 16,894,711 $ 1,856,970 $ 2,633,981
============ =========== ===========
Disclosures of cash flow information:
Cash paid for interest ................................................. $ -- $ 15,497 $ 20,649
============ =========== ===========
Significant noncash transactions:
Noncash transfers from inventories to property and equipment ......... $ 365,756 $ 129,556 $ --
============ =========== ===========
Noncash transfers from property and equipment to inventories ......... $ -- $ 43,185 $ --
============ =========== ===========
Noncash transfer of trade accounts receivable to note receivable from
related party ...................................................... $ 2,910,876 $ -- $ --
============ =========== ===========
Exchange of notes payable to stockholders for Series A preferred stock
and Series II convertible preferred stock, respectively ........... $ -- $ 500,000 $ 200,000
============ =========== ===========
Conversion of preferred stock and accrued dividends to common stock .. $ 19,692,897 $ -- $ --
============ =========== ===========
Issuance of common stock in connection with an acquisition ........... $ 2,305,884 $ -- $ --
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
SF-6
<PAGE> 7
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business and Basis of Presentation
IMNET Systems, Inc. and subsidiaries (the Company) develop, market,
install, and service electronic information and document management systems to
meet the needs of the healthcare industry and other document-intensive
businesses. The Company's hardware and software systems electronically capture,
index, store and retrieve information which is resident on most storage media,
including magnetic disk, optical disk, microfilm, paper and x-ray film. The
Company sells systems to end-users and distributes systems through distribution
partners. Because of the Company's concentration of revenues and accounts
receivable with certain major customers and an increasing concentration of
revenues and accounts receivable in the healthcare industry, a decline in the
economic conditions or financial stability with respect to these major customers
or the healthcare industry could have a material adverse impact on the Company's
financial position and results of operations.
The accompanying consolidated financial statements of IMNET Systems,
Inc. and subsidiaries include the accounts of IMNET Systems, Inc. and its wholly
owned subsidiaries, Evergreen Technologies, Inc., Hunter International, Inc. and
Quesix Software, Incorporated. All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated financial
statements have been restated to reflect the effect of the merger with Hunter
International, Inc. as described in Note 2.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(b) Revenue Recognition and Deferred Revenue
The Company recognizes revenues derived from system sales to end-user
customers, including 90% of software license fees and 100% of hardware revenues,
upon the factory acceptance by the customer and delivery of the configured
system. The Company defers recognition of 10% of the software license fees until
completion of certain insignificant vendor obligations primarily related to the
site acceptance by the customer.
Revenues derived from system sales to distribution partners are
recognized upon delivery when the contract is between the Company and the
distribution partner, the payment terms are fixed with all amounts due within
twelve months, there are no other significant obligations to be performed by the
Company and provided that the distribution partner meets the Company's criteria
with respect to sell-through and credit risk. Revenues derived from system sales
to distribution partners in which the contract is between the Company and the
customer (the end-user) of the distribution partner are recognized in accordance
with the Company's revenue recognition policy for end-user customers described
above.
Revenue recognition for system sales to end-users that have been
delivered and accepted by the customer with contractual payment terms that
extend beyond one year is determined by the Company
SF-7
<PAGE> 8
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
based upon the Company's historical experience with the customer, the customer's
credit worthiness, and an assessment of the enforceability of the contract. All
revenues recognized related to contracts with payments due in more than one year
are discounted at the Company's incremental borrowing rate.
Revenues from professional services, which may include preparation of
functional specifications, customization and programming, systems integration,
and training, among others, are recognized as the services are performed.
Revenues derived from maintenance and support contracts are recognized ratably
over the terms of the related contracts.
Deferred revenues represent either billings rendered to or payments
received from customers for systems prior to factory acceptance and delivery and
maintenance and support services billed in advance.
(c) Cash and Cash Equivalents
The Company classifies all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(d) Marketable Securities
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (Statement 115). Under Statement 115,
investments in equity and debt securities are classified as held to maturity,
trading, or available for sale securities. Trading securities are reported at
fair value, with changes in fair value included in the statement of operations,
while available for sale securities are reported at fair value, with net
unrealized gains or losses included as a component of stockholders' equity. Held
to maturity securities are reported at amortized cost. Unrealized losses on all
securities that are other than temporary are reported in the statement of
operations upon determination that the loss is other than temporary.
Marketable securities include U.S. treasury bills and debt securities
of certain other U.S. government agencies and U.S. government sponsored
corporations with original maturities greater than 90 days and equal to or less
than one year.
Marketable securities are carried at amortized cost, held to maturity,
and are classified as current assets in the accompanying consolidated balance
sheet.
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Marketable Securities............... $21,541,760 $ 92,221 $ (4,231) $ 21,629,750
</TABLE>
SF-8
<PAGE> 9
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
Market values have been determined through information obtained from quoted
market sources.
(e) Inventories
Inventories consist of components and assemblies associated with the
manufacture of the Company's MegaSAR Microfilm Jukebox (the MegaSAR) and
personal computers and other computer equipment held for sale to customers.
Inventories are carried at the lower of cost (average cost method) or market
(net realizable value).
(f) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold improvements....................... through January 1997
Computer software............................ 3-5 years
Computer equipment........................... 3-5 years
Machinery and equipment...................... 5-7 years
Furniture and fixtures....................... 7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method
over the estimated useful life of the improvement or the lease term, whichever
is shorter. Amortization of assets held under capital lease arrangements is
included in depreciation expense.
(g) Intangible Assets
Intangible assets include computer software development costs, acquired
technology, goodwill, and an intangible asset associated with customers acquired
in connection with the business alliance with HBO & Company (the HBOC Alliance)
(see note 3). The Company's policy with respect to the amortization of computer
software development costs is described in (h) below. The cost of acquired
technology results from the Company's acquisition of other businesses and is
amortized using the straight-line method over estimated useful lives of five
years. Goodwill has been recorded in connection with the Company's acquisition
of other businesses and is being amortized using the straight-line method over
seven years. The intangible asset associated with the HBOC alliance is being
amortized using the straight-line method over the life of the agreement (seven
years). The carrying values of all intangible assets are reviewed by the Company
for impairments which are recognized when the expected undiscounted future cash
flows derived from such intangible assets are less than their carrying values.
If the Company's review indicates a potential impairment, the Company uses fair
value in determining the amount that should be written off.
(h) Research and Development and Computer Software Development Costs
Research and development costs consist principally of compensation and
benefits paid to the Company's employees. All research and development costs are
expensed as incurred.
SF-9
<PAGE> 10
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
Computer software development costs consist principally of compensation
and benefits related to the development and modification of the Company's
software products and are capitalized in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
such costs begins upon the establishment of technological feasibility for the
product or enhancement which is defined by the Company as completion of a
detailed program design and ends when the resulting product or enhancement is
available for use by customers.
Amortization of computer software development costs is provided by the
Company on individual products or enhancements and begins when the product or
enhancement is available for use by customers. Amortization is recorded using
the greater of: (1) the amount computed using the ratio of current product
revenue to the total of current and anticipated product revenue or (2) the
amount determined using the straight-line method over the estimated useful life
of the software, not to exceed three years. Amortization of computer software
development costs is included in cost of system sales in the accompanying
consolidated statements of operations.
(i) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" (Statement 109). Under the asset and
liability method of Statement 109, deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss and tax credit
carryforwards. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in the consolidated statement of operations in
the period that includes the enactment date.
(j) Net Loss Per Common Share and Common Share Equivalent
Net loss per common share and common share equivalent has been computed
based upon the weighted average number of common shares and common share
equivalents outstanding during each period. Common share equivalents recognize
the dilutive effects of the conversion of preferred stock and accrued dividends
to common stock prior to their conversion and of outstanding options and
warrants to acquire common stock. The Company has used the initial public
offering price of $12.00 per common share for all periods prior to the
completion of the offering for purposes of computing the potential dilutive
effects of common share equivalents. Pursuant to the rules of the Securities and
Exchange Commission, common and common equivalent shares issued in the 12 months
prior to the Company's initial public offering have been included in the
computation of common and common equivalent shares as if they were outstanding
for all periods prior to the Company's initial public offering, including loss
years where the impact of the incremental shares is antidilutive. All other
common stock equivalents including the effect of outstanding options after the
Company's initial public offering have been excluded from the computations
because their impact on the Company's net loss per share is antidilutive.
SF-10
<PAGE> 11
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(k) Fair Value of Financial Instruments
The Company uses financial instruments in the normal course of its
business. The carrying values of cash equivalents, accounts and notes
receivable, obligations under capital leases, accounts payable, accrued expenses
and deferred revenues approximate fair value due to the short-term maturities of
these assets and liabilities. The fair value of the Company's investment in
marketable securities is disclosed in (d) above.
(l) Recent Accounting Pronouncement
On October 23, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 allows companies to retain the
current approach set forth in APB Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB Opinion No. 25) for recognizing stock-based expense in their
financial statements in lieu of the new accounting method prescribed by
Statement 123 based on the estimated fair value of employee stock options.
Companies that do not follow the new fair value based method will be required to
provide expanded footnote disclosures. The provisions of Statement 123 are
effective for fiscal years beginning after December 15, 1995. However,
disclosure of the pro forma net income and earnings per share, as if the fair
value method of accounting for stock-based compensation had been elected, is
required for all awards granted in fiscal years beginning after December 15,
1994.
The Company intends to continue accounting for stock related
compensation using APB Opinion No. 25 and will provide the expanded footnote
disclosures required under Statement 123 beginning with its consolidated
financial statements for the year ending June 30, 1997.
(m) Reclassifications
Certain reclassifications have been made to the June 30, 1994 and 1995
financial statements to conform with presentations adopted as of and for the
year ended June 30, 1996.
SF-11
<PAGE> 12
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(2) MERGERS AND ACQUISITIONS
On September 30, 1996, the Company issued 429,292 shares of its common
stock for all of the outstanding common stock of Hunter International, Inc. The
merger has been accounted for as a pooling of interests, and accordingly, the
Company's consolidated financial statements have been restated for all periods
prior to the merger to include the results of operations, financial position and
cash flows of Hunter. Total revenue and net income (loss) for the individual
companies as previously reported are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Total Revenue:
IMNET .............. $ 26,623,305 $ 8,464,639 $ 4,130,097
Hunter ............. 2,756,780 2,808,810 2,210,637
------------ ------------ -----------
$ 29,380,085 $ 11,273,749 $ 6,340,734
============ ============ ===========
Net income (loss):
IMNET .............. $ (6,390,893) $ (4,809,523) $(5,945,861)
Hunter ............. 363,278 729,925 569,487
------------ ------------ -----------
$ (6,027,165) $ (4,079,598) $(5,376,374)
============ ============ ===========
</TABLE>
In connection with the merger with Hunter, the Company recorded merger
related costs of approximately $750,000 in the quarter ended September 30, 1996.
These costs consist primarily of legal, accounting and broker's fees related to
the Hunter transaction.
On November 3, 1995, the Company acquired all of the common stock of
Evergreen Technologies, Inc. (Evergreen) in a merger with a wholly owned
subsidiary of the Company for $1,282,000 in cash and acquisition costs and the
issuance of 82,353 shares of the Company's common stock with a market value of
$2,306,000. The Company recorded the acquisition using the purchase method of
accounting with $2,940,000 of the purchase price allocated to in-process
research and development and charged to the consolidated statement of operations
in November 1995 and $546,000 and $102,000 allocated to goodwill and acquired
technology, respectively. The results of operations of Evergreen have been
included in the Company's consolidated statement of operations since the
effective date of the acquisition.
On December 14, 1995, the Company acquired all of the common stock of
Quesix Software, Incorporated (Quesix) in a merger with a wholly owned
subsidiary of the Company for $4,188,000 in cash and acquisition costs. The
Company recorded the acquisition using the purchase method of accounting with
$2,800,000 of the purchase price allocated to in-process research and
development and charged to the consolidated statement of operations in December
1995 and $1,388,000 of the purchase price allocated to goodwill. The results of
operations of Quesix have been included in the Company's consolidated statement
of operations since the effective date of the acquisition.
SF-12
<PAGE> 13
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
The unaudited pro forma consolidated results of operations of the
Company for the years ended June 30, 1996 and 1995 are summarized below as if
the acquisitions described above had occurred on July 1, 1995 and 1994,
respectively:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
---------------------------
1996 1995
-------- --------
(amounts in thousands,
except per share data)
<S> <C> <C>
Revenues .................................................. $ 29,918 $ 12,539
======== ========
Net loss .................................................. $ (6,287) $ (4,917)
======== ========
Net loss per common share and common share equivalent ..... $ (0.71) $ (0.91)
======== ========
Weighted average outstanding common shares and common share
equivalents ........................................... 8,807 5,412
======== ========
</TABLE>
The unaudited pro forma consolidated results of operations included
above do not necessarily represent results which would have occurred if the
acquisitions had taken place on the dates indicated nor are they necessarily
indicative of the results of future operations.
(3) BUSINESS ALLIANCE WITH HBO & COMPANY
In March 1996, the Company signed agreements with HBO & Company (HBOC),
forming a business alliance whereby HBOC will distribute the Company's products
on a private label basis and HBOC has agreed to certain noncompete provisions
with respect to the Company's products. As part of these agreements, the Company
also assumed certain customer support and conversion obligations with respect to
HBOC customers currently using HBOC's First Perspective product line. The
Company has accrued $3.0 million to reflect its estimate of the cost of
converting the First Perspective customers to the Company' products. The HBOC
alliance provides for a seven year term and five equal payments to HBOC totaling
$3.0 million, beginning upon execution of the agreements through March 1997.
Payments of $600,000 were made to HBOC by the Company in March and June 1996.
The Company recorded a non-recurring charge of $4.6 million to the Company's
consolidated statement of operations and capitalized the remaining $1.4 million
as an intangible asset related to the Company's valuation of the margin on the
maintenance and support revenues expected from the First Perspective customers.
The Company has classified the remaining obligation to HBOC of $1.8 million in
cash and the $2.8 million in estimated conversion costs, net of conversion costs
incurred through June 30, 1996, in accrued expenses in the accompanying June 30,
1996 consolidated balance sheet.
SF-13
<PAGE> 14
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Finished goods, including computer equipment and parts
held for resale.................................................... $ 714,255 $ 245,301
Work in progress...................................................... 380,315 248,292
Raw materials.......................................................... 985,004 774,525
---------- ----------
$2,079,574 $1,268,118
========== ==========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Leasehold improvements ............................ $ 152,659 $ 146,838
Computer software ................................. 267,012 268,373
Computer equipment ................................ 2,813,919 1,088,361
Machinery and equipment ........................... 331,129 129,861
Furniture and fixtures ............................ 964,118 482,861
---------- ----------
4,528,837 2,116,294
Less accumulated depreciation and amortization .... 1,199,506 592,096
---------- ----------
$3,329,331 $1,524,198
========== ==========
</TABLE>
(6) ACCRUED EXPENSES
Components of accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Employee vacations .......................... $ 269,727 $ 278,534
Salaries and wages .......................... 1,351,542 526,215
Obligations under the HBOC alliance, net .... 4,587,983 --
Rent ........................................ 124,097 125,541
Other ....................................... 310,458 73,085
---------- ----------
$6,643,807 $1,003,375
========== ==========
</TABLE>
(7) INCOME TAXES
The Company has not recorded any income tax expense (benefit) during
the years ended June 30, 1996, 1995, and 1994 because of operating losses
incurred since inception. Due to the operating losses
SF-14
<PAGE> 15
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
incurred by the Company prior to the Hunter acquisition, there would be no
income tax expense that would have been reported if Hunter (an S corporation for
income tax reporting purposes) had been a C corporation for the years ended June
30, 1996, 1995 and 1994. Therefore, there is no pro forma provision provided for
income taxes to reflect income tax expense. As a result, the effective income
tax rate is different from amounts computed by applying the statutory U.S.
Federal income tax rate of 34% to loss before income taxes because of the
Company's provision for a valuation allowance on substantially all deferred
income tax assets.
The tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable, due to allowance for doubtful accounts ..... $ 107,753 $ 24,587
Net operating loss carryforwards ................................ 3,675,395 5,132,017
Non-recurring charges ........................................... 1,805,700 --
Acquired technology, due to differences in amortization ......... 253,778 101,667
Research and experimentation credit carryforwards ............... 184,799 184,799
Accrued employee vacations ...................................... 93,143 99,659
Other ........................................................... 370,357 117,126
----------- -----------
Total deferred income tax assets .............................. 6,490,925 5,659,855
Less valuation allowance ........................................ 5,849,547 5,576,588
----------- -----------
Net deferred income tax assets ................................ 641,377 83,267
----------- -----------
Deferred income tax liabilities -- property and equipment, due to
differences in depreciation and amortization of
computer software development costs ........................... (641,377) (83,267)
----------- -----------
Net deferred income tax assets (liabilities) .................. $ -- $ --
=========== ===========
</TABLE>
The net change in the valuation allowance for the years ended June 30,
1996, 1995, and 1994 was an increase of $272,959, $2,267,847, and $2,393,724,
respectively. Under Statement 109, deferred income tax assets and liabilities
are recognized for differences between the financial statement carrying amounts
and the tax bases of assets and liabilities which will result in future
deductible or taxable amounts and for net operating loss and research and
experimentation credit carryforwards. A valuation allowance is then established
to reduce the deferred income tax assets to the level at which it is "more
likely than not" that the tax benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating loss and tax credit
carryforwards depends on having sufficient taxable income within the carryback
and carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include: (1) taxable income in the current year or
prior years that is available through carryback, (2) future taxable income that
will result from the reversal of existing taxable temporary differences and (3)
taxable income generated by future operations. In order to fully realize its
deferred income tax assets at June 30, 1996, the Company will need to generate
future taxable income of approximately $16.6 million
SF-15
<PAGE> 16
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
prior to the expiration of the Company's net operating loss and tax credit
carryforwards. Because of the uncertainties with respect to the Company's
ability to generate taxable income in the future sufficient to realize the
benefits of the Company's deferred income tax assets, the Company has provided a
valuation allowance against substantially all of its deferred income tax assets
at June 30, 1996 and 1995.
As of June 30, 1996, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $9.4 million and research and
experimentation credit carryforwards of approximately $185,000 which are
available to offset future Federal taxable income. The carryforwards expire
beginning in 2008 through 2010. The expiration of the Company's net operating
loss and research and experimentation credit carryforwards by year is summarized
as follows:
<TABLE>
<CAPTION>
RESEARCH AND
NET OPERATING EXPERIMENTATION CREDIT FISCAL YEAR
LOSS CARRYFORWARDS CARRYFORWARDS OF EXPIRATION
------------------ ------------- -------------
<S> <C> <C>
$ -- $ 26,000 2008
4,800,000 70,000 2009
4,600,000 89,000 2010
---------- --------
$9,400,000 $185,000
========== ========
</TABLE>
The amount of net operating loss and research and experimentation
credit carryforwards that the Company may use to offset taxable income in future
years is limited as a result of an ownership change, as defined, under Internal
Revenue Code Section 382 (section 382), which occurred effective with the
completion of the Company's initial public offering in July 1995. The Company's
annual Section 382 limitation on the amount of taxable income that can be offset
in the future by net operating loss and research and experimentation credit
carryforwards is approximately $3,396,000.
(8) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In July 1995, the Company completed an initial public offering of its
common stock. The Company sold 3,450,000 shares at $12.00 per share, which
resulted in proceeds to the Company of $37.5 million, net of underwriting
discounts and offering costs.
(b) Conversion of Preferred Stock and Accrued Dividends to Common Stock
In connection with the completion of the offering described in (a)
above, all of the Company's Series A, Series I, and Series II preferred stock,
including accrued dividends on the Series A preferred stock of $270,175, were
converted to shares of the Company's common stock. As a result of this
conversion, the Company issued 606,904, 714,332, and 972,507 shares of common
stock to these preferred shareholders, respectively, and issued 22,514 shares of
common stock in lieu of payment of accrued dividends on the Series A preferred
stock. Also in connection with the same offering, warrants to acquire 39,168
shares of the Company's common stock were exercised resulting in $250,008 in
proceeds to the Company.
SF-16
<PAGE> 17
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(c) Secondary Offering
In February 1996, the Company completed a secondary offering of 798,500
shares of common stock at a price of $25.50, which resulted in proceeds to the
Company of $18.5 million, net of underwriting discounts and offering costs.
(9) EMPLOYEE BENEFIT PLANS
(a) Stock Option Plans
The Company has an Employee Stock Option and Rights Plan and a
Non-Employee Directors Stock Option Plan (the Stock Option Plans) for the
benefit of key employees and advisors. The Stock Option Plans provide for
940,000 and 94,000 shares of common stock, respectively, to be reserved for
future issuance.
The Stock Option Plans provide for the grant of incentive stock
options, nonqualified stock options, and stock appreciation rights to key
employees and advisors. The option price and other terms of such grants shall be
determined by a Committee of the Board of Directors (the Committee), subject to
the terms of the Stock Option Plans.
A summary of activity in outstanding stock options under the Stock Option Plans
is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTION PRICE
OPTIONS PER SHARE
----------- ------------
<S> <C> <C>
Options outstanding at June 30, 1993 .............................. --
Options granted ................................................... 255,178 $ 6.38
Options canceled .................................................. --
Options exercised ................................................. --
--------
Options outstanding at June 30, 1994 .............................. 255,178 6.38
Options granted ................................................... 397,831 7.45
Options canceled .................................................. (116,348) 6.38-7.45
Options exercised ................................................. --
--------
Options outstanding at June 30, 1995 .............................. 536,661 6.38-7.45
Options granted ................................................... 433,104 12.00-21.25
Options canceled .................................................. (18,780) 6.38-7.45
Options exercised ................................................. (44,174) 6.38-7.45
--------
Options outstanding at June 30, 1996 .............................. 906,811 $ 6.38-21.25
========
Options exercisable at June 30, 1996 .............................. 108,967 $ 6.38-7.45
========
Options available for grant at June 30, 1996 under the terms of the
Stock Option Plans ............................................. 83,015
========
</TABLE>
SF-17
<PAGE> 18
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
(b) Retirement Plan
The Company maintains a defined contribution savings plan (the IMNET
Systems, Inc. Retirement Savings Plan or the Plan) for the benefit of all
eligible employees. The Plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986 (the Code), as amended. Employees may participate
in the Plan at any time following their date of employment and can elect to
contribute a portion of their annual earnings (subject to an annual limit
specified in the Code) to the Plan on a pretax basis. The Company has not made
any matching or other contributions to the Plan through June 30, 1996.
(10) RELATED PARTY TRANSACTIONS
The Company believes the terms and conditions of the related party
transactions described below are comparable to those which could have been
obtained in transactions with unaffiliated parties.
(a) Notes Receivable from Officer
The Company has advanced funds to its chairman and chief executive
officer in exchange for two promissory notes receivable, as amended, in the
amounts of $75,000 and $30,000 dated October 5, 1992 and January 31, 1994,
respectively. The $75,000 note is without interest for two years from the date
of issuance, bears interest at a rate of 10% per annum thereafter, and is
extended to be due on September 30, 1997. The $30,000 note bears interest from
the date of issuance at a rate of 10% per annum and is due by June 30, 1997.
Repayment of the principal and accrued interest due under the notes shall be
from bonuses earned under an employment agreement.
(b) Notes Payable to Stockholders
During the year ended June 30, 1994, the Company exchanged shares of
the Company's Series A preferred stock for $200,000 in notes payable to certain
stockholders, which originated during the year ended June 30, 1993. During the
year ended June 30, 1995, the Company received advances under notes payable to
certain stockholders in the amount of $500,000 bearing interest at a rate of
8.5% per annum. On January 13, 1995, in connection with the sale of Series II
convertible preferred stock, the stockholders exchanged their notes for the
issuance of Series II convertible preferred stock.
(c) Distribution Agreement with and Grant of Manufacturing and Distribution
Rights to Shareholder
(i) Distribution Agreement
In March 1993, the Company entered into a distribution
agreement with SoftNet Systems, Inc. or its affiliated or predecessor companies
(SoftNet). SoftNet is a related party and founding investor/shareholder of the
Company and three officers and directors of SoftNet were on the Company's Board
of Directors at June 30, 1996. In June 1995, the distribution agreement was
amended to provide for a commitment by SoftNet to take delivery of hardware and
software from the Company totaling approximately $2.0 million no later than June
30, 1996. During the year ended June 30, 1995, the Company delivered software to
SoftNet under the distribution agreement and recognized revenue of
SF-18
<PAGE> 19
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
$485,000, which was included in accounts receivable at June 30, 1995. This
amount was paid in full by SoftNet in February 1996.
On June 30, 1996, the distribution agreement was amended a
second time to convert the original $2.0 million commitment for hardware and
software to a $2.0 million commitment for software. Also in June 1996, the
Company delivered the remaining software associated with this commitment of
$1,515,000 and recognized revenue of the same amount, which was converted into
the note receivable from related party at June 30, 1996 (see (ii) below). During
the year end June 30, 1996, the Company also provided services to SoftNet beyond
the terms of the distribution agreement described above which resulted in
additional revenues to the Company of approximately $335,000, which was also
converted to the note receivable from related party at June 30, 1996 (see (ii)
below).
(ii) Grant of Manufacturing and Distribution Rights
On June 30, 1996, the Company entered into certain agreements
with SoftNet and an affiliated company, which provided for the grant of
exclusive worldwide manufacturing rights and nonexclusive distribution rights
with respect to markets other than healthcare, as defined, for the MegaSAR, the
Company's proprietary microfilm storage device. The terms of the agreements
included an obligation by SoftNet to pay the Company nonrefundable advance
license fees of $1,000,000, representing the license fees for the first 250
manufactured units. These nonrefundable advance license fees were recognized as
revenue by the Company in the year ended June 30, 1996 and included in the note
receivable from related party at June 30, 1996. The terms of the agreements also
provided for SoftNet to pay the Company a fixed license fee per unit for all
units manufactured, and a provision for SoftNet to purchase, at carrying value,
the Company's remaining raw materials inventories on an as needed basis.
(iii) Note Receivable from SoftNet
Simultaneous with the execution of the manufacturing and
distribution rights agreements and the second amendment to the distribution
agreement described above under (i), the Company converted all amounts due from
SoftNet into a secured note receivable from SoftNet bearing interest at the
prime rate plus 2%, due upon the earlier of: (1) the sale of IMNET common stock
owned by SoftNet or (2) June 29, 1997. The note receivable was fully secured at
June 30, 1996 by 112,913 shares of IMNET common stock owned by SoftNet and held
as collateral by the Company.
On September 24, 1996, the Company received a $2.5 million
cash payment on the $2.9 million note receivable from related party described
under note 10(c)(iii) above and released the collateral that the Company held
under the note.
(11) MAJOR CUSTOMERS AND INTERNATIONAL SALES
(a) Major Customers
For the year ended June 30, 1996, two customers accounted for
approximately 32% of total revenues (SoftNet, as described in note 10 above, was
one of these two major customers). In the year
SF-19
<PAGE> 20
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
ended June 30, 1995, four customers accounted for approximately 41% of total
revenues. In the year ended June 30, 1994, two customers accounted for
approximately 27% of total revenues.
Total receivables outstanding from these major customers were
$6,842,000 and $2,715,000 at June 30, 1996 and 1995, respectively.
(b) International Sales
International sales are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C>
1996........................... $2,301,729
==========
1995........................... $1,712,996
==========
1994........................... $1,057,053
==========
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company currently leases its main office space through 1999 and
recently committed to lease a new office facility that the Company plans to
occupy beginning in January 1997. These operating lease agreements are
noncancelable and require the Company to make payments through January 2007.
Rental expense from noncancelable operating leases and all other cancelable
operating leases for the years ended June 30, 1996, 1995, and 1994 was
approximately $509,000, $277,000, and $163,000, respectively.
Future minimum lease payments under all noncancelable operating lease
agreements with original terms in excess of one year in the aggregate and for
the next five years are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1997................................................ $ 1,309,000
1998................................................ 2,096,000
1999................................................ 1,917,000
2000................................................ 1,530,000
2001................................................ 1,530,000
Thereafter.......................................... 9,270,000
-----------
Total future minimum lease payments............. $17,652,000
===========
</TABLE>
(b) Contractual Commitments
The Company enters agreements with customers in the ordinary course of
business which contain certain contractual commitments. The Company believes
that all such contractual commitments will be satisfied or renegotiated and no
material adverse financial impact will result from the Company's failure to meet
any of these commitments.
SF-20
<PAGE> 21
Schedule II
IMNET SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ---------------------------------------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994 - allowance
for doubtful accounts................... $ 6,614 24,000 -- 20,296(1) 10,318
Year ended June 30, 1995 - allowance
for doubtful accounts................... $10,318 200,758 -- 148,033(1) 63,043
Year ended June 30, 1996 - allowance
for doubtful accounts................... $63,043 259,846 50,000(2) 39,599(1) 333,290
</TABLE>
(1) Accounts deemed to be uncollectible and written off during the period.
(2) Allowance for doubtful accounts of subsidiary at acquisition date.
SF-21
