<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ --------------------
Commission File Number 0-26306
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IMNET SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 39-1730068
- --------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3015 Windward Plaza, Windward Fairways II, Alpharetta, GA 30202
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(770) 521-5600
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(Registrant's telephone number, including area code)
8601 Dunwoody Place, Suite 420, Atlanta, GA 30350
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 9,634,714 shares of Common Stock outstanding as of March 31, 1997.
<PAGE> 2
IMNET SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page
<S> <C> <C>
Consolidated Balance Sheets - March 31, 1997 and June 30, 1996 3
Consolidated Statements of Operations - Three Months Ended
March 31, 1997 and 1996 and Nine Months Ended March 31, 1997
and 1996 4
Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements -
March 31, 1997 6 - 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7 - 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
IMNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
-------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 18,340,182 $ 16,894,711
Marketable securities................................................ 10,843,825 21,541,760
Trade accounts receivable, net....................................... 28,681,816 15,360,291
Note receivable from related party................................... 232,627 2,910,876
Inventories.......................................................... 1,586,638 2,079,574
Prepaid expenses and other current assets............................ 862,570 712,204
-------------- --------------
Total current assets.............................................. 60,547,658 59,499,416
Noncurrent trade accounts receivable..................................... 344,939 1,085,927
Notes receivable from employees.......................................... 250,000 105,000
Property and equipment, net.............................................. 5,118,906 3,329,331
Computer software development costs, net................................. 2,167,896 1,212,875
Acquired technology, net................................................. 348,626 959,755
Goodwill and other intangibles, net...................................... 10,070,222 3,343,774
-------------- --------------
$ 78,848,247 $ 69,536,078
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 7,315,718 $ 1,264,479
Accrued expenses..................................................... 5,714,238 6,644,211
Deferred revenue..................................................... 1,474,096 804,357
-------------- --------------
Total current liabilities......................................... $ 14,504,052 $ 8,713,047
Stockholders' equity:
Common stock, $.01 par value. Authorized 25,000,000 shares;
9,672,351 shares issued and 9,634,714 shares outstanding at
March 31, 1997 and 9,627,071 shares issued and 9,589,434
shares outstanding at June 30, 1996............................... 96,724 96,271
Additional paid-in capital........................................... 81,199,861 80,795,841
Treasury stock, 37,637 shares, at cost............................... (148,417) (148,417)
Accumulated deficit.................................................. (16,803,973) (19,920,664)
-------------- --------------
Total stockholders' equity........................................ 64,344,195 60,823,031
-------------- --------------
$ 78,848,247 $ 69,536,078
============== ==============
</TABLE>
See accompanying notes to interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
System sales .................................... $ 11,525,391 $ 5,544,623 $ 28,182,349 $ 14,897,113
Maintenance and professional services ........... 2,017,784 1,441,176 6,130,311 2,851,486
------------ ------------ ------------ ------------
Total revenues ............................... 13,543,175 6,985,799 34,312,660 17,748,599
------------ ------------ ------------ ------------
Operating expenses:
Cost of system sales ............................ 3,261,121 1,636,879 7,801,700 3,625,464
Cost of maintenance and professional services ... 1,029,217 752,394 3,916,909 1,788,285
Sales and marketing ............................. 3,629,379 2,473,951 9,374,990 6,883,331
Research and development ........................ 1,245,913 1,085,799 3,666,303 2,640,528
General and administrative ...................... 1,033,758 1,001,015 4,008,980 3,232,453
Non-recurring charges ........................... 1,836,513 4,630,000 2,586,058 10,370,000
------------ ------------ ------------ ------------
Total operating expenses ..................... 12,035,901 11,580,038 31,354,940 28,540,061
------------ ------------ ------------ ------------
Operating income (loss) ...................... 1,507,274 (4,594,239) 2,957,720 (10,791,462)
Interest income, net ................................ 343,639 468,937 1,233,900 1,380,043
------------ ------------ ------------ ------------
Income (loss) before income taxes ............... 1,850,913 (4,125,302) 4,191,620 (9,411,419)
Income taxes ........................................ 474,929 -- 474,929 --
------------ ------------ ------------ ------------
Net income (loss) ............................... $ 1,375,984 $ (4,125,302) $ 3,716,691 $ (9,411,419)
============ ============ ============ ============
Net income per common share ......................... $ 0.13 $ (0.45) $ 0.37 $ (1.10)
============ ============ ============ ============
Weighted average outstanding common shares and
common share equivalents ......................... 10,218,196 9,144,354 10,052,282 8,525,631
============ ============ ============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 3,716,691 $ (9,411,419)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization of property and equipment ............ 797,209 443,768
Amortization of computer software development costs, acquired
technology, and goodwill and other intangibles .................. 1,011,179 623,723
Non-recurring charges .............................................. -- 10,370,000
(Increase) decrease in:
Trade accounts receivable .......................................... (12,580,537) (7,255,542)
Note receivable from related party ................................. 2,678,249 --
Inventories ........................................................ 492,936 (1,526,327)
Prepaid expenses and other current assets .......................... (150,366) (562,779)
Increase (decrease) in:
Accounts payable ................................................... 6,051,239 153,700
Accrued expenses ................................................... 870,027 339,326
Deferred revenue ................................................... 669,739 332,436
------------ ------------
Net cash provided by (used in) operating activities ............. 3,556,366 (6,493,114)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash and cash equivalents acquired .. -- (4,813,969)
Purchases of marketable securities ..................................... (16,839,892) (8,922,485)
Maturities of marketable securities .................................... 27,537,827 --
Additions to property and equipment .................................... (2,586,784) (1,923,083)
Additions to computer software development costs ....................... (1,130,221) (834,381)
Additions to intangible assets ......................................... (6,951,298) (85,469)
Payments in connection with business alliance .......................... (1,800,000) (600,000)
Issuance of notes receivable from employees ............................ (145,000) --
------------ ------------
Net cash used in investing activities ........................... (1,915,368) (17,179,387)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ..................................... -- 56,491,989
Proceeds from exercise of stock options and warrants ................... 404,473 315,817
Dividends paid ......................................................... (600,000) (200,000)
------------ ------------
Net cash provided by (used in) financing activities ............. (195,527) 56,607,806
------------ ------------
Net increase in cash and cash equivalents ....................... 1,445,471 32,935,305
Cash and cash equivalents at beginning of period ........................... 16,894,711 1,856,970
------------ ------------
Cash and cash equivalents at end of period ................................. $ 18,340,182 $ 34,792,275
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
Page 5
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IMNET SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
(1) BASIS OF PRESENTATION
The accompanying interim consolidated financial statements represent
the accounts of IMNET Systems, Inc. and its wholly owned subsidiaries (the
"Company" or "IMNET"). The consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for fair presentation of financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments, consisting of normal recurring accruals,
which, in the opinion of management, are necessary to a fair statement of
financial position and results of operations for the periods covered by this
report have been included. The accompanying unaudited interim consolidated
financial statements should be read in conjunction with the Company's financial
statements and related notes appearing in the Company's Annual Report on Form
10-K for the year ended June 30, 1996.
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.
("Hunter"). The merger has been accounted for as a pooling of interests and, as
a result, the Company's financial statements for all periods prior to the merger
have been restated to include the financial position and results of Hunter.
In addition, certain reclassifications have been made to prior
consolidated financial statements to conform with presentations adopted as of
and for the period ended March 31, 1997.
(2) ACQUISITION
As described in Note 1 above, IMNET acquired Hunter through a merger,
effective September 30, 1996. Hunter was a privately held company which provides
electronic report management and distribution software solutions to the
healthcare and other industries. The Company and Hunter incurred $750,000 in
non-recurring charges related to costs associated with the acquisition. The
acquisition costs were charged to the consolidated statement of operations for
the three month period ended September 30, 1996. No elimination of intercompany
transactions or other adjustments were required in combining the results of
IMNET and Hunter. The $600,000 and $200,000 in dividends paid, disclosed in the
consolidated statements of cash flows for the nine months ended March 31, 1997
and 1996, respectively, represented normal stockholder distributions paid by
Hunter prior to the acquisition. IMNET has not paid dividends on its Common
Stock. Combined and separate results of IMNET and Hunter for the three month and
nine month periods ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
----------------------------------------
IMNET Hunter Combined
----------- -------- ------------
<S> <C> <C> <C>
Revenues.......................... $ 6,227,845 $757,954 $ 6,985,799
Net income (loss)................. $(4,337,051) $211,749 $(4,125,302)
</TABLE>
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<TABLE>
<CAPTION>
Nine Months Ended March 31, 1996
--------------------------------
IMNET Hunter Combined
----- ------ --------
<S> <C> <C> <C>
Revenues.......................... $15,717,642 $2,030,957 $17,748,599
Net income........................ $(9,780,754) $ 369,335 $(9,411,419)
</TABLE>
(3) VALUE ADDED RESELLER AGREEMENT WITH ISG TECHNOLOGIES, INC.
In March 1997, the Company signed a Value Added Reseller Agreement with
ISG Technologies, Inc., a Canadian Corporation ("ISG"), whereby the Company will
distribute certain of ISG's medical image visualization software products and
certain of ISG's medical surgical visualization products under a seven year
distribution agreement. IMNET will pay $7.8 million to ISG by December 31, 1997,
constituting both advance royalties against future sales by IMNET of ISG
products and the right to sublicense certain of the ISG products without payment
of any additional fees. The first payment of $2.6 million to ISG was made in the
third quarter of fiscal 1997. The Company has capitalized the $7.8 million of
advance royalties in other intangible assets and expects to amortize these
advance royalties as revenues are derived from the ISG products. The remaining
obligation to ISG of $5.2 million has been classified in accounts payable in the
accompanying March 31, 1997 consolidated balance sheet. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".)
ITEM 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. IMNET's products include proprietary and
third-party software and third-party 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,
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. Certain of the Company's
relationships with its healthcare information systems ("HCIS") distribution
partners are relatively new and the Company expects that sales to and through
its HCIS distribution partners and other distribution partners will increase.
Revenues derived from sales to and through the Company's distribution partners
expressed as a percentage of total revenues were 54% and 43%, respectively, in
the three month and nine month periods ended March 31, 1997 compared to 53% and
25%, respectively, in the corresponding periods in fiscal 1996.
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Revenues from sales to the healthcare industry, expressed as a
percentage of total revenues, increased to 97% and 92%, respectively, in the
three month and nine month periods ended March 31, 1997 from 78% and 78%,
respectively, in the corresponding periods in fiscal 1996. 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 North America were 0% and 4%,
respectively, of total revenues in the three month and nine month periods ended
March 31, 1997 compared to 11% and 8%, respectively, for the corresponding
periods in fiscal 1996.
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 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 to
the customer and maintenance and support services billed in advance that have
not yet been recognized as revenue by the Company.
At March 31, 1997, the Company had approximately $40.0 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. Over time, the proportion of such signed
sales contracts represented by long-term contracts is expected to increase. Any
significant or ongoing failure to achieve signed contracts and subsequent
customer acceptance after expending time, effort and funds could have a
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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
research and development costs in the accompanying consolidated statements of
operations.
HUNTER ACQUISITION
On September 30, 1996, the Company completed the acquisition of Hunter
International, Inc. ("Hunter"), 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 consolidated financial statements for all
periods prior to the merger have been restated to include the financial position
and results of Hunter.
VALUE ADDED RESELLER AGREEMENT WITH ISG TECHNOLOGIES, INC.
In March 1997, the Company signed a Value Added Reseller Agreement with
ISG Technologies, Inc., a Canadian Corporation ("ISG"), whereby the Company will
distribute certain of ISG's medical image visualization software products and
certain of ISG's medical surgical visualization products under a seven year
distribution agreement. IMNET will pay $7.8 million to ISG by December 31, 1997,
constituting both advance royalties against future sales by IMNET of ISG
products and the right to sublicense certain of the ISG products without payment
of any additional fees. The first payment of $2.6 million to ISG was made in the
third quarter of fiscal 1997. The Company has capitalized the $7.8 million of
advance royalties in other intangible assets and expects to amortize these
advance royalties as revenues are derived from the ISG products. The remaining
obligation to ISG of $5.2 million has been classified in accounts payable in the
accompanying March 31, 1997 consolidated balance sheet. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".)
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for each fiscal period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
System sales ....................................... 85.1% 79.4% 82.1% 83.9%
Maintenance and professional
services ........................................ 14.9 20.6 17.9 16.1
----- ----- ----- -----
Total revenues .................................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of system sales ............................... 24.1 23.4 22.7 20.4
Cost of maintenance and
professional services ........................... 7.6 10.8 11.4 10.1
Sales and marketing ................................ 26.8 35.4 27.3 38.8
Research and development ........................... 9.2 15.5 10.7 14.9
General and administrative ......................... 7.6 14.3 11.7 18.2
Non-recurring charges .............................. 13.6 66.3 7.6 58.4
----- ----- ----- -----
Total operating expenses ........................ 88.9 165.8 91.4 160.8
----- ----- ----- -----
Operating income (loss) ......................... 11.1 (65.8) 8.6 (60.8)
Interest income, net ................................... 2.4 6.7 3.6 7.8
----- ----- ----- -----
Income before income taxes ......................... 13.7 (59.1) 12.2 (53.0)
Income taxes ........................................... 3.5 0.0 1.4 0.0
----- ----- ----- -----
Net income (loss) .................................. 10.2% (59.1)% 10.8% (53.0)%
===== ===== ===== =====
</TABLE>
Comparison of the Three Months Ended March 31, 1997 and 1996.
Revenues. The Company's total revenues were $13.5 million for the three
month period ended March 31, 1997 compared to revenues of $7.0 million for the
three month period ended March 31, 1996, an increase of $6.6 million, or 94%.
The Company's total revenues derived from sales to North American healthcare
customers were $12.9 million for the three month period ended March 31, 1997
compared to $5.4 million for the corresponding period in fiscal 1996, an
increase of $7.5 million, or 139%. This increase was primarily due to a
significantly larger customer base as well as $7.4 million of revenue resulting
from the Company's alliances with distribution partners. Revenues from sales to
North American general business customers were $593,000 for the three month
period ended March 31, 1997 compared to $792,000 for the three month period
ended March 31, 1996, a decrease of $199,000, or 25%. The Company expects this
trend to continue due to its strategic focus on customers in the healthcare
industry. Revenues from sales to international customers were $56,000 for the
three month period ended March 31, 1997 compared to $761,000 in the
corresponding period of fiscal 1996, a decrease of $705,000 or 93%. The Company
expects this trend to continue due to the Company's emphasis on customers in the
United States healthcare industry. However, management continues to explore
other opportunities as they arise. Revenues from maintenance and professional
services were $2.0 million for the three month period ended March 31, 1997
compared to $1.4 million for the three month period ended March 31, 1996, an
increase of $577,000, or 40%. The increase in services revenues is primarily
attributable to an
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increase in healthcare professional services and additional maintenance
contracts associated with increased system sales.
Cost of Revenues. The cost of system sales for the three month period
ended March 31, 1997 was $3.3 million compared to $1.6 million in the
corresponding period of fiscal 1996. As a percentage of system sales revenues,
the cost of system sales decreased to 28.3% for the three month period ended
March 31, 1997 compared to 29.5% for the three month period ended March 31,
1996. The cost of maintenance and professional services as a percentage of
maintenance and professional service revenues for the three month periods
decreased from 52.2% in fiscal 1996 to 51.0% in fiscal 1997, due primarily to
the substantial revenue increase mentioned above. The Company's total gross
margin for the three month periods increased to 68.3% in fiscal 1997 from 65.8%
in fiscal 1996 during the prior year, primarily due to a change in the revenue
mix.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales commissions and related costs and expenses allocated to the Company's
sales and marketing personnel. Sales and marketing expenses increased to $3.6
million for the three month period ended March 31, 1997 from $2.5 million for
the three month period ended March 31, 1996, an increase of $1.2 million, or
47%. The increase is primarily due to higher sales commissions from increased
system sales and higher sales salary expense associated with increases in sales
personnel. Sales and marketing expenses as a percentage of total revenues
decreased to 26.8% for the three month period ended March 31, 1997 compared to
35.4% for the three month period ended March 31, 1996.
Research and Development. Research and development expenditures consist
primarily of personnel costs of research and development staff and the
facilities, computing, benefits and other administrative costs allocated to such
personnel. Research and development expenses increased to $1.2 million for the
three month period ended March 31, 1997 from $1.1 million for the three month
period ended March 31, 1996, an increase of $160,000, or 15%. The increase was
primarily attributable to an increase in the number of research and development
personnel and associated costs, partially offset by increased software
development capitalization costs of $137,000 for the three month period ended
March 31, 1997. These capitalized costs represented 30% of the Company's total
research and development expenditures during this period. As a percentage of
total revenues, research and development expenses decreased to 9.2% from 15.5%
for the three month period ended March 31, 1997, as compared to the
corresponding period of fiscal 1996.
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
were flat at $1.0 million for the three month period ended March 31, 1997
compared to $1.0 million for the three month period ended March 31, 1996. The
flat spending in G&A year over year was primarily due to the timing of various
expenses which did not occur and also due to increased allocations of common
costs to other spending categories in the three month period ended March 31,
1997. Management expects that G&A spending on general and administrative
expenses will increase in the Company's next fiscal quarter to approximately
$1.6 million. General and administrative expenses as a percentage of total
revenues decreased to 7.6% for the three month period ended March 31, 1997 from
14.3% for the three month period ended March 31, 1996.
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Non-recurring Charges. The Company recorded a non-recurring charge of
$1.8 million in the three month period ended March 31, 1997, comprised of: (i)
$1.4 million related to the write-down of assets associated with its MedVision
product line, due to the Value Added Reseller Agreement entered into with ISG
Technologies, Inc. in March 1997 (See "Value Added Reseller Agreement with ISG
Technologies, Inc." above for further explanation.); and (ii) $468,000 related
to relocation costs associated with the Company's move to its new corporate
headquarters, which was completed in the three month period ended March 31,
1997. The Company recorded a non-recurring charge of $4.6 million in the three
month period ended March 31, 1996 related to the Company's business alliance
with HBO & Company, entered into in the three month period ended March 31, 1996.
Income Taxes. The Company had a total net operating loss carryforward
of approximately $9.4 million as of June 30, 1996 to offset some of the taxable
income in fiscal year 1997. Due to increased profitability and certain
limitations on the use of net operating loss carryforwards, the Company recorded
income tax expense in the three month period ended March 31, 1997 of $474,000,
which represented estimated income tax payments made by the Company during the
third quarter of 1997.
Net Income (loss). The Company's net income for the three month period
ended March 31, 1997 was $1.4 million, or $0.13 per share, compared to a net
loss of $4.1 million, or $0.45 per share, for the three month period ended March
31, 1996. Exclusive of the non-recurring charges discussed above, net income for
the three month period ended March 31, 1997 would have been $3.2 million, or
$0.31 per share, compared to $505,000, or $0.06 per share, for the same period
in the prior year.
Comparison of the Nine Months Ended March 31, 1997 and 1996.
Revenues. The Company's total revenues were $34.3 million for the first
nine months of fiscal 1997 compared to revenues of $17.7 million for the first
nine months of fiscal 1996, an increase of $16.6 million, or 93%. The Company's
total revenues derived from sales to North American healthcare customers were
$31.4 million for the first nine months of fiscal 1997 compared to $13.8 million
for the corresponding period in fiscal 1996, an increase of $17.6 million, or
128%. This increase was primarily due to a significantly larger customer base as
well as $14.6 million of revenue resulting from the Company's alliances with
distribution partners. Revenues from sales to North American general business
customers were $1.6 million in the first nine months of fiscal 1997 compared to
$2.4 million in the first nine months of fiscal 1996, a decrease of $800,000, or
33%. The Company expects this trend to continue due to its strategic focus on
customers in the healthcare industry. Revenues from sales to international
customers were $1.3 million in the first nine months of fiscal 1997 compared to
$1.5 million in the corresponding nine months of fiscal 1996, a decrease of
$200,000, or 13%. The Company expects this trend to continue due to the
Company's emphasis on customers in the United States healthcare industry.
However, management continues to explore other opportunities as they arise.
Revenues from maintenance and professional services were $6.1 million in the
first nine months of fiscal 1997 compared to $2.9 million in the first nine
months of fiscal 1996, an increase of $3.3 million, or 115%. The increase in
revenues from professional services is primarily attributable to an increase in
healthcare professional services and additional maintenance contracts associated
with increased system sales.
Page 12
<PAGE> 13
Cost of Revenues. The cost of system sales in the first nine months of
fiscal 1997 was $7.8 million compared to $3.6 million in the corresponding
period of fiscal 1996. As a percentage of system sales revenue, the cost of
system sales increased to 27.7% in the first nine months of fiscal 1997 compared
to 24.3% in the corresponding period of fiscal 1996. The cost of maintenance and
professional services as a percentage of maintenance and professional service
revenues increased from 62.7% in fiscal 1996 to 63.9% in fiscal 1997, due
primarily to increased staffing in maintenance and professional service
personnel, partially offset by the substantial revenue increase mentioned above.
The Company's total gross margin decreased to 65.8% from 69.5% during the prior
year, primarily due to a change in the revenue mix.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales commissions and related costs and expenses allocated to the Company's
sales and marketing personnel. Sales and marketing expenses increased to $9.4
million in the first nine months of fiscal 1997 from $6.9 million in the same
period of fiscal 1996, an increase of 36%. The increase is primarily due to
higher sales commissions from increased system sales and higher sales salary
expense associated with increases in sales personnel. Sales and marketing
expenses as a percentage of total revenues decreased to 27% in the first nine
months of fiscal 1997 compared to 39% in the first nine months of fiscal 1996.
Research and Development. Research and development expenditures consist
primarily of personnel costs of research and development staff and the
facilities, computing, benefits and other administrative costs allocated to such
personnel. Research and development expenses increased to $3.7 million in the
first nine months of fiscal 1997 from $2.6 million in the first nine months of
fiscal 1996, an increase of $1.0 million, or 39%. 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 $1.5 million in
software development costs in the first nine months of fiscal 1997. These
capitalized costs represented 29.8% of the Company's total research and
development expenditures during this period. As a percentage of total revenues,
research and development expenses decreased to 11% from 15% in the first nine
months of fiscal 1997, as compared to the corresponding period in fiscal 1996.
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 $4.0 million in the first nine months of fiscal 1997 compared to
$3.2 million in the first nine months of fiscal 1996, an increase of $777,000,
or 24%. This increase is partially attributable to increased staffing and
related costs necessary to support the Company's growth. General and
administrative expenses as a percentage of total revenues decreased to 12% in
the first nine months of fiscal 1997 from 18% in the first nine months of fiscal
1996.
Non-recurring Charges. The Company incurred non-recurring charges of
$2.6 million during the first nine months of fiscal 1997, comprised of (i)
$750,000 related to acquisition costs associated with the Hunter International,
Inc. acquisition, completed during the three month period ended September 30,
1996; (ii) $1.4 million related to the write-down of assets associated with its
MedVision product line, due to the Value Added Reseller Agreement entered into
with ISG Technologies, Inc. in March 1997; and (iii) $468,000 related to
relocation costs associated with the Company's move to its new corporate
headquarters, which was completed in the three month period ended March 31,
1997. During the first nine months of fiscal 1996, the Company incurred
Page 13
<PAGE> 14
non-recurring charges of $10.4 million, comprised of (i) $5.7 million related to
in-process research and development expenses associated with the Company's
acquisition of Evergreen Technologies, Inc. and Quesix Software, Incorporated
incurred in the three month period ended December 31, 1995; and (ii) $4.6
million related to the HBO & Company business alliance entered into in the three
month period ended March 31, 1996.
Income Taxes. The Company had a total net operating loss carryforward
of approximately $9.4 million as of June 30, 1996 to offset some of the taxable
income in fiscal year 1997. Due to increased profitability and certain
limitations on the use of net operating loss carryforwards, the Company recorded
income tax expense in the three month period ended March 31, 1997 of $474,000,
which represented estimated income tax payments made by the Company during the
third quarter of 1997.
Net Income (loss). The Company's net income for the first nine months
of fiscal 1997 was $3.7 million, or $0.37 per share, compared to a net loss of
$9.4 million, or $1.10 per share, for the first nine months of fiscal 1996.
Exclusive of the non-recurring charges discussed above, net income for the first
nine months of fiscal 1997 would have been $6.3 million, or $0.63 per share,
compared to $959,000, or $0.11 per share, for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1992, the Company has funded its operations,
working capital needs and capital expenditures primarily from sales of equity
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
underwriter's discounts and offering costs, from a subsequent offering of its
Common Stock.
Cash and cash equivalents and marketable securities at March 31, 1997
were $29.2 million, a decrease of $9.3 million from June 30, 1996. During the
nine months ended March 31, 1997, the Company's operating activities provided
cash of $3.6 million, as compared to cash used in operating activities of $6.5
million in the first nine months of fiscal 1996. The decrease in cash used in
operating activities for the nine months ended March 31, 1997 compared to the
corresponding period in the prior year is primarily due to the increased
profitability year over year, partially offset by increased accounts receivable
due to increased revenues year over year. The $600,000 and $200,000 in dividends
paid, disclosed in the consolidated statements of cash flows for the nine months
ended March 31, 1997 and 1996, respectively, were normal stockholder
distributions paid by Hunter prior to the acquisition. IMNET has not paid
dividends on its Common Stock.
The Company plans to continue to increase its professional staff during
the remainder of 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. In January 1997, the Company moved its
headquarters to a new facility and entered into a ten year operating lease for
96,000 square feet. As a result, the Company is incurring increased rental
expense as compared to prior periods. The Company has budgeted capital
expenditures of approximately $400,000 for the remainder of fiscal 1997 for the
purchase of computer equipment for existing and new employees, furniture and
Page 14
<PAGE> 15
fixtures, and equipment associated with the new office facility, new training
equipment, and new equipment for customer demonstrations.
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 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. Furthermore, margins are affected
by the mix of products sold.
The Company's trade accounts receivable days sales outstanding ("DSO")
have fluctuated from quarter to quarter. 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 such terms (i) demonstrate that the Company is
comfortable with providing the customer or distributor the leverage inherent in
deferred payments (thereby demonstrating its confidence in its products), and
(ii) permit the customer or distributor (and the Company) to commit to a large
order, while the payment stream is tailored to a longer period of time (thereby
providing the customer or distributor with a means to finance the project over
one or more internal cash budgeting cycles). Therefore, management believes the
trade accounts receivable DSO trend will continue in fiscal 1997, due to the
extended terms selling strategy. However, the failure by one or more customers
or distributors to pay the Company significant accounts receivable balances
outstanding as they become due would have a material adverse effect on the
Company's financial position and results of operations.
The Company believes that its cash and cash equivalents and marketable
securities, along with cash provided by 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 ability to continue to
achieve 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 expenses.
The Company will require significant funds to implement its business
strategies. Unless its revenues increase significantly, the Company may
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; (iii) a high percentage of the Company's expenses are fixed; and (iv)
the Company may incur charges related to acquisitions and business alliances. As
a result, there can be no assurance that the Company will be profitable in the
future or that available funds, together with 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.
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<PAGE> 16
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 partners; (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.
Note regarding Private Securities Litigation Reform Act: Statements
made by IMNET which are not historical facts, including projections, statements
of plans, objectives, expectations, or future economic performance, are forward
looking statements that involve risks and uncertainties and are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995.
IMNET's future financial performance could differ significantly from that set
forth herein, and from the expectations of management. Important factors that
could cause IMNET's financial performance to differ materially from past results
and from those expressed or implied in any forward looking statements include,
without limitation, the factors discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations". For further
information on these and other risk factors, please refer to IMNET's Form 10-K
for the year ended June 30, 1996, including the "Business-Risk Factors" section.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
- ------ ---------------------- -----------
<S> <C> <C>
10.37(1) Value Added Reseller Agreement between the Registrant and ISG
Technologies, Inc. dated March 18, 1997.
11 Computation of Per Share Earnings - Six Months Ended December 31, 1996
and 1995. 19
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------------------------
(1) Incorporated by reference to the Exhibit with the same number filed
with the Company's Form 8-K dated March 18, 1997, filed on April 2,
1997. The Company has applied for confidential treatment of portions of
this Agreement. Accordingly, portions thereof have been omitted and
filed separately with the Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K:
The following report was filed during the quarter for which this
report is filed:
The Registrant filed Form 8-K on April 2, 1997 reporting its
Value Added Reseller Agreement with ISG Technologies, Inc. on March 18,
1997.
Page 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
IMNET SYSTEMS, INC.
Dated: May 2, 1997 By: /s/ Raymond L. Brown
---------------------
Raymond L. Brown
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18
<PAGE> 1
IMNET SYSTEMS, INC. EXHIBIT 11 EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
The following computations set forth the calculations of primary and fully
diluted earnings per share for the three and nine month periods ended March 31,
1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
----------------------------- -----------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ...................................... $ 1,375,984 $ 1,375,984 $ (4,125,302) $ (4,125,302)
============ ============ ============ ============
Weighted average outstanding common shares ............. 9,619,378 9,619,378 9,144,354 9,144,354
Increase due to assumed issuance of
shares related to outstanding stock
options using the treasury stock method .............. 598,818 598,818 -- --
------------ ------------ ------------ ------------
Adjusted weighted average outstanding
common shares and common share
equivalents ........................................ 10,218,196 10,218,196 9,144,354 9,144,354
============ ============ ============ ============
Net income (loss) per common share and
common share equivalent ............................ $ 0.13 $ 0.13 $ (0.45) $ (0.45)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1997 1996
----------------------------- -----------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ............................... $ 3,716,691 $ 3,716,691 $ (9,411,419) $ (9,411,419)
============ ============ ============ ============
Weighted average outstanding common shares ...... 9,604,202 9,604,202 8,525,631 8,525,631
Increase due to assumed issuance of
shares related to outstanding stock
options using the treasury stock method ....... 448,080 448,080 -- --
------------ ------------ ------------ ------------
Adjusted weighted average outstanding
common shares and common share
equivalents ................................... 10,052,282 10,052,282 8,525,631 8,525,631
============ ============ ============ ============
Net income (loss) per common share and
common share equivalent ....................... $ 0.37 $ 0.37 $ (1.10) $ (1.10)
============ ============ ============ ============
</TABLE>
Note: Net income per common share and common share equivalent has been
computed based upon the weighted average outstanding common shares and
common share equivalents during each period. Common share equivalents
recognize the dilutive effects of outstanding options to acquire Common
Stock.
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE 9 MONTH PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 18,340,182
<SECURITIES> 10,843,825
<RECEIVABLES> 29,547,384
<ALLOWANCES> 623,941
<INVENTORY> 1,586,638
<CURRENT-ASSETS> 60,547,658
<PP&E> 6,781,551
<DEPRECIATION> 1,662,645
<TOTAL-ASSETS> 78,848,247
<CURRENT-LIABILITIES> 14,504,052
<BONDS> 0
0
0
<COMMON> 96,723
<OTHER-SE> 64,247,762
<TOTAL-LIABILITY-AND-EQUITY> 78,848,247
<SALES> 34,312,660
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 31,354,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 253,940
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,191,620
<INCOME-TAX> 474,929
<INCOME-CONTINUING> 3,716,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,716,691
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
