<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 December 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 or organization) Identification No.)
3015 Windward Plaza, Windward Fairways II, Alpharetta, GA 30005
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(770) 521-5600
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(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(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 9,776,229 shares of Common Stock outstanding as of January 31, 1998.
<PAGE> 2
IMNET SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE
----
Consolidated Balance Sheets - December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations - Three Months and Six Months
Ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - Six Months Ended
December 31, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 6 - 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 - 19
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 9,299,628 $ 9,132,631
Marketable securities .................................................... 5,350,077 11,606,287
Accounts receivable, net ................................................. 35,644,690 33,858,910
Inventories .............................................................. 2,307,727 2,100,060
Prepaid expenses and other current assets ................................ 4,523,179 2,136,686
------------ ------------
Total current assets .................................................. 57,125,301 58,834,574
Noncurrent accounts receivable ............................................... -- 233,949
Property and equipment, net .................................................. 6,840,339 6,242,243
Computer software development costs, net ..................................... 3,694,041 2,556,663
Advance royalties, net ....................................................... 6,640,607 6,919,179
Other intangibles, net ....................................................... 1,377,280 1,717,120
Goodwill, net ................................................................ 8,884,003 9,349,174
------------ ------------
$ 84,561,571 $ 85,852,902
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 2,347,786 $ 3,026,276
Accrued expenses ......................................................... 11,287,032 9,471,314
Income taxes payable ..................................................... 1,435,673 2,379,220
Deferred revenue ......................................................... 1,043,890 1,186,388
------------ ------------
Total current liabilities ............................................. 16,114,381 16,063,198
Stockholders' equity:
Common stock, $.01 par value. Authorized 25,000,000 shares;
9,798,428 shares issued and 9,760,791 shares outstanding at
December 31, 1997 and 9,779,374 shares issued and 9,741,737 shares .... 97,984 97,794
outstanding at June 30, 1997
Additional paid-in capital ............................................... 83,669,761 83,378,585
Treasury stock, 37,637 shares, at cost ................................... (148,417) (148,417)
Accumulated deficit ...................................................... (15,205,035) (13,538,258)
Cumulative foreign currency translation adjustment ....................... 32,897 --
------------ ------------
Total stockholders' equity ............................................ 68,447,190 69,789,704
------------ ------------
$ 84,561,571 $ 85,852,902
============ ============
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
System sales ................................... $12,060,737 $ 8,962,138 $ 17,586,389 $16,656,958
Maintenance and professional services .......... 4,013,009 2,148,073 6,457,360 4,112,527
----------- ----------- ------------ -----------
Total revenue ............................... 16,073,746 11,110,211 24,043,749 20,769,485
----------- ----------- ------------ -----------
Operating expenses:
Cost of system sales ........................... 3,151,740 2,447,088 7,143,014 4,540,579
Cost of maintenance and professional services .. 1,840,507 1,411,153 3,253,935 2,887,692
Sales and marketing ............................ 3,920,780 3,096,816 7,495,070 5,745,611
Research and development ....................... 2,116,105 1,270,517 4,179,572 2,420,390
General and administrative ..................... 2,824,902 1,588,218 5,081,661 2,975,223
Non-recurring charges .......................... -- -- -- 749,545
----------- ----------- ------------ -----------
Total operating expenses .................... 13,854,034 9,813,792 27,153,252 19,319,040
----------- ----------- ------------ -----------
Operating income (loss) ........................ 2,219,712 1,296,419 (3,109,503) 1,450,445
----------- ----------- ------------ -----------
Interest income, net ............................... 168,637 398,053 421,153 890,262
----------- ----------- ------------ -----------
Income (loss) before income taxes .............. $ 2,388,349 $ 1,694,472 $ (2,688,350) $ 2,340,707
Income tax expense (benefit) ....................... 907,573 -- (1,021,573) --
----------- ----------- ------------ -----------
Net income (loss) .............................. $ 1,480,776 $ 1,694,472 $ (1,666,777) $ 2,340,707
=========== =========== ============ ===========
Net income (loss) per common share:
Basic ........................................ $ 0.15 $ 0.18 $ (0.17) $ 0.24
=========== =========== ============ ===========
Diluted ...................................... $ 0.15 $ 0.17 $ (0.17) $ 0.23
=========== =========== ============ ===========
Weighted average shares outstanding:
Basic ........................................ 9,760,756 9,601,633 9,758,705 9,596,779
=========== =========== ============ ===========
Diluted ...................................... 10,053,574 9,959,934 9,758,705 9,977,490
=========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (1,666,777) $ 2,340,707
Adjustments to net income:
Depreciation and amortization of property and equipment .. 831,658 507,238
Amortization of computer software development costs,
acquired technology, goodwill and other intangibles .. 1,172,767 773,112
Provision for doubtful accounts receivable ............... 632,792 130,171
Loss on disposal of property and equipment ............... -- 16,738
(Increase) decrease in:
Trade accounts receivable ................................ (2,184,623) (7,206,814)
Note receivable from related party ....................... -- 2,501,249
Inventories .............................................. (207,667) (299,355)
Prepaid expenses and other current assets ................ (2,386,493) (1,028,685)
Increase (decrease) in:
Accounts payable ......................................... (678,490) 1,020,885
Accrued expenses ......................................... 1,815,718 (1,799,236)
Income tax payable ....................................... (943,547) --
Deferred revenue ......................................... (142,498) 341,206
------------ ------------
Net cash used in operating activities ................ (3,757,160) (2,702,784)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities .......................... (12,624,420) (11,809,469)
Maturities of marketable securities ......................... 18,880,630 11,316,943
Additions to property and equipment ......................... (1,429,754) (848,628)
Additions to computer software development costs ............ (1,300,223) (976,480)
Additions to intangible assets .............................. -- (135,433)
Additions to goodwill ....................................... 73,661 --
Issuance of notes receivable from employees ................. -- (145,000)
------------ ------------
Net cash provided by (used in) investing activities .. 3,599,894 (2,598,067)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ........ 291,366 130,574
Dividends paid .............................................. -- (600,000)
------------ ------------
Net cash provided by (used in) financing activities .. 291,366 (469,426)
------------ ------------
Effect of exchange rate changes on cash ..................... 32,897 --
------------ ------------
Net (decrease) increase in cash and cash equivalents . 166,997 (5,770,277)
Cash and cash equivalents at beginning of period ................ 9,132,631 16,894,711
------------ ------------
Cash and cash equivalents at end of period ...................... $ 9,299,628 $ 11,124,434
============ ============
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited 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 made. 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, 1997.
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 hardware components which are integrated to create
electronic information and document management systems. IMNET supports its
customers through a broad range of systems integration, installation, training
and maintenance services.
The Company's revenue is derived primarily from the sale, installation
and support of components of the IMNET Electronic Information Warehouse: the
IMNET Image Engine(R), the IMNET Workflow Engine(TM), IMNET MedVision, the IMNET
Electronic Patient Record System (EPRS)(TM), IMNET EPRS/Web, IMNET LaserArc, and
the IMNET Application Programming Interfaces. 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
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.
Revenue from sales to the healthcare industry decreased to 82% and 81%
of total revenue in the three and six month periods ended December 31, 1997 from
85% and 89% of total revenue in the corresponding periods in fiscal 1997.
Although such sales may fluctuate from quarter to quarter, the Company
anticipates that sales to the healthcare industry will increase as a percentage
of total annual revenue over time. Revenue from sales outside of the United
States was 14% and 16%, respectively, of total revenue in the three and six
month periods ended December 31, 1997
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compared to 9% and 6% for the corresponding periods in fiscal 1997. On June 25,
1997, the Company acquired Advisoft, a French systems integration and consulting
services company which had been its distribution partner in France since 1993.
As a result of this acquisition, the amount of revenue derived and the
percentage of total revenue from sales outside the United States are expected to
increase in fiscal 1998.
Revenue Recognition Policies.
The Company's typical sale of a software license to an end-user
customer involves several milestones, beginning with the execution of the
agreement between the Company and the customer. The agreement describes the
software license terms, any hardware to be delivered, and if any services and
maintenance are to be performed. The Company and the customer mutually agree
upon functional specifications as to the operating environment, number of
terminals, response times, etc. The Company then assembles the hardware
components required to demonstrate compliance with the functional
specifications, at the Company's offices, and loads the Company's and other
third party proprietary software. The configured system is then used to
demonstrate that the system meets the functional specifications. The Company and
the customer participate in this process. When all functional specifications
have been demonstrated, the customer signs a written acknowledgment signifying
the completion of factory acceptance. The Company repackages the software and
those hardware components to be delivered to the customer, which are picked up
by common carrier and delivered to the customer. At this point, the Company
recognizes 100% of the hardware revenue and 90% of the software license revenue.
The Company assists the customer in installing the system and in
loading the customer's information at the customer's location. The Company and
the customer mutually review each of the functional specifications in the
customer's environment to confirm that the configured system meets the
functional specifications. When there is mutual agreement that all functional
specifications have been met, the customer signs a written acknowledgment
signifying completion of site acceptance. The Company then recognizes the
remaining 10% of software license revenue which was deferred at the time of
factory acceptance and delivery.
On occasion, as for example when an existing end-user previously has
accepted a software product, an end-user may elect to waive the factory and site
acceptance procedures. In such instances, the end-user becomes obligated to pay
upon delivery of the software product and the Company recognizes 100% of the
revenue from the software license upon such delivery. Similarly, the Company
recognizes 100% of the revenue from enterprise-wide licenses of software to
end-users upon delivery of the software, assuming there are no further
significant vendor obligations. Revenue derived from system sales to
distribution partners is recognized 100% upon delivery to the distribution
partner, if 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 the distribution partner meets the Company's criteria with respect
to sell-through and credit risk.
Revenue from professional services, which may include preparation of
functional specifications, systems integration, and training, among others, is
recognized as the services are performed. Revenue derived from maintenance and
support contracts is recognized ratably over the terms of the related contracts.
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Deferred revenue represents 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 December 31, 1997, the Company had approximately $59.3 million of
signed sales contracts for systems and services which had not yet been delivered
("Backlog"), of which approximately $21.0 million is to be recognized as revenue
in the next twelve months. Backlog includes contracts for software license fees,
hardware sales and maintenance and professional services that may include
cancellation provisions that do not pertain to IMNET's performance, and
contracts that are expected to result in revenue 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 a typical
end-user installation requires from one 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 revenue it expects to achieve in any
particular period.
Software Capitalization Policy.
The Company capitalizes a portion of its computer software development
costs. These costs relate primarily to the development of new products and
substantial 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 general 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.
ADVISOFT ACQUISITION
On June 25, 1997, the Company completed the acquisition of Advisoft
Consulting, S.A. ("Advisoft"), a systems integration and consulting services
company which had been the Company's distribution partner in France since 1993.
Prior to its acquisition of Advisoft, the Company recognized revenue of
$1,157,000 and $1,392,000 from Advisoft for the years ended June 30, 1997 and
1996, respectively. Aggregate consideration for the acquisition, which has been
accounted for by the purchase method, was $5.1 million in cash and 85,084 shares
of IMNET Common Stock having a market value of $2.0 million as of such date. The
Company has allocated $6.9 million of the purchase price to goodwill and has
included the results of operations of Advisoft in the Company's consolidated
statement of operations effective July 1, 1997. Over time, the Company expects
to work with Advisoft to adapt and market the Company's healthcare application
software products for use in France and other European countries.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenue for each fiscal period indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----- ------- ----- ----
<S> <C> <C> <C> <C>
Revenue:
System sales .................................... 75.0% 80.7 % 73.1% 80.2%
Maintenance and professional services ........... 25.0 19.3 26.9 19.8
------ ------ ----- -----
Total revenue ................................ 100.0 100.0 100.0 100.0
------ ------ ----- -----
Operating expenses:
Cost of system sales ............................ 19.6 22.0 29.7 21.9
Cost of maintenance and professional services ... 11.4 12.7 13.5 13.9
Sales and marketing ............................. 24.4 27.9 31.2 27.7
Research and development ........................ 13.2 11.4 17.4 11.7
General and administrative ...................... 17.6 14.3 21.1 14.3
Non-recurring charges ........................... -- -- -- 3.6
------ ------ ----- -----
Total operating expenses ..................... 86.2 88.3 112.9 93.1
------ ------ ----- -----
Operating income (loss) ...................... 13.8 11.7 (12.9) 6.9
Interest and other income, net ...................... 1.0 3.6 1.8 4.3
------ ------ ----- -----
Income (loss) before income taxes ............... 14.8 15.3 (11.1) 11.2
Income tax expense (benefit) ........................ 5.6 -- (4.2) --
------ ------ ----- -----
Net income (loss) ............................... 9.2% 15.3% (6.9)% 11.2%
====== ====== ===== =====
</TABLE>
Comparison of the Three Months Ended December 31, 1997 and 1996.
Revenue. The Company's total revenue was $16.1 million for the second
quarter of fiscal 1998 compared to revenue of $11.1 million for the second
quarter of fiscal 1997, an increase of $5.0 million, or 45%. Revenue generated
from direct sales and distribution partners was $5.8 million and $10.3 million,
respectively, for the second quarter of fiscal 1998 compared with $8.5 million
and $2.6 million for the corresponding period in 1997. This change in revenue
mix reflects the continued maturation of the Company's business partner
relationships. The Company's total revenue derived from sales to healthcare
customers was $13.2 million or 82% of total revenue for the second quarter of
fiscal 1998 compared to $9.4 million or 85% of total revenue for the
corresponding period in fiscal 1997. Revenue from sales to international
customers was $2.3 million in the second quarter of fiscal 1998 compared to $1.0
million in the corresponding quarter of fiscal 1997, an increase that
substantially reflects the inclusion of the Advisoft operations in the Company's
consolidated results since its acquisition on June 25, 1997. Revenue from
maintenance and professional services was $4.0 million in the second quarter of
fiscal 1998 compared to $2.1 million in the second quarter of fiscal 1997, an
increase of $1.9 million, or 90%. The increase in revenue from these services is
primarily attributable to increased installation and training activities,
additional maintenance contracts, and service-based revenue recognized by
Advisoft.
Cost of Revenue. The cost of system sales in the second quarter of
fiscal 1998 was $3.2 million compared to $2.4 million in the corresponding
period of fiscal 1997. As a percentage of system sales revenue, the cost of
system sales remained stable at 26% in the second quarter of fiscal 1998
compared to 27% in the second quarter of fiscal 1997. The cost of maintenance
and professional
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services in the second quarter of fiscal 1998 was $1.8 million compared to $1.4
million in the corresponding period of fiscal 1997. The cost of maintenance and
professional services as a percentage of maintenance and professional services
revenue decreased to 46% in the second quarter of fiscal 1998 compared to 66% in
the corresponding period. The percentage decrease was in part due to continued
improvement in the efficiency of service personnel and the increased service
revenue recognized by Advisoft.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales commissions and related costs and expenses of the Company's sales and
marketing personnel. Sales and marketing expenses increased to $3.9 million in
the second quarter of fiscal 1998 from $3.1 million in the second quarter of
fiscal 1997, an increase of 26%. The increase is primarily due to higher sales
salary expense associated with increases in sales personnel. Sales and marketing
expenses as a percentage of total revenue decreased to 24% in the second quarter
of fiscal 1998 compared to 28% in the second quarter of fiscal 1997.
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 $2.1 million in the
second quarter of fiscal 1998 from $1.3 million in the second quarter of fiscal
1997, an increase of $.8 million, or 62%. 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 $.6 million in
software development costs in the second quarter of fiscal 1998 related to new
products expected to be released over the next six months. These capitalized
costs represented 21% of the Company's total research and development
expenditures during this period compared to 29% in the corresponding quarter of
fiscal 1997. As a percentage of total revenue, research and development expenses
increased to 13% from 11% in the second quarter of fiscal 1998 as compared to
the corresponding quarter of fiscal 1997.
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 $2.8 million in the second quarter of fiscal 1998 compared to $1.6
million in the second quarter of fiscal 1997, an increase of 75%. This increase
is partially attributable to increased staffing and related costs necessary to
support the Company's growth as well as incremental professional services fees.
General and administrative expenses as a percentage of total revenue increased
to 18% in the second quarter of fiscal 1998 from 14% in the second quarter of
fiscal 1997.
Provision for Income Taxes. Because of operating losses experienced
through fiscal 1996, the Company had not incurred any current income tax
liabilities or provided for any income taxes through the second quarter of
fiscal 1997. Beginning in the third fiscal quarter of 1997, the Company began
providing for income tax expense due to the expected current income tax
liabilities that resulted from profitable operations in fiscal 1997 coupled with
the impact of the annual limitation on the Company's use of net operating loss
and credit carryforwards. The Company's effective income tax rate for fiscal
1998 is expected to be approximately 38%. The Company recorded an income tax
provision of $0.9 million in the second quarter of fiscal 1998 as a result of
incurring pre-tax operating profits for the period.
Net Income. The Company's net income for the second quarter of fiscal
1998 was $1.5 million or $0.15 per share, compared to net income of $1.7
million, or $0.17 per share, in the second
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quarter of fiscal 1997. 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 during fiscal 1997. As a result, the Company did not record any income
tax expense for the second quarter of fiscal 1997. Had income tax expense been
recorded in the second quarter of fiscal 1997 at the currently anticipated 38%
effective tax rate, net income for the period would have been $1.1 million, or
$0.11 per share.
Comparison of Six Months Ended December 31, 1997 and 1996.
Revenue. The Company's total revenue was $24.0 million for the first
six months of fiscal 1998 compared to revenue of $20.8 million for the first six
months of fiscal 1997, an increase of $3.2 million, or 15%. Revenue generated
from direct sales and distribution partners was $10.6 million and $13.4 million,
respectively, for the first six months of fiscal 1998 compared with $13.5
million and $7.3 million for the first six months of fiscal 1997. The Company's
total revenue derived from sales to healthcare customers was $19.6 million for
the first six months of fiscal 1998 compared to $18.5 million for the
corresponding period in fiscal 1997, an increase of $1.1 million, or 6%. This
increase was primarily due to a larger customer base as well as an increase of
$7.2 million of revenue resulting from the Company's alliances with distribution
partners. Revenue from additional sales to international customers was $3.6
million in the first six months of fiscal 1998 compared to $1.3 million in the
corresponding six months of fiscal 1997, an increase of $2.3 million, or 177%,
principally due to the inclusion of the operating results of Advisoft since the
acquisition on June 25, 1997. Revenue from maintenance and professional services
was $6.4 million in the first six months of fiscal 1998 compared to $4.1 in the
first six months of fiscal 1997, an increase of $2.3 million, or 56%. The
increase in revenue from these services is primarily attributable to increased
installation and training activity, additional maintenance contracts, and
service-based revenue recognized by Advisoft.
Cost of Revenue. The cost of system sales in the first six months of
fiscal 1998 was $7.1 million compared to $4.5 million in the corresponding
period of fiscal 1996. As a percentage of system sales revenue, the cost of
system sales increased to 40.6% in the first six months of fiscal 1998 compared
to 27.3% in the corresponding period of fiscal 1997. The cost of maintenance and
professional services as a percentage of maintenance and professional service
revenue decreased to 50.4% from 70.2%, due primarily to the revenue increase
mentioned above. The Company's total gross margin decreased to 56.8% from 64.2%
during the prior year, primarily due to the unexpectedly low revenue results of
the Company's first fiscal quarter ended September 30, 1997.
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 $7.5
million in the first six months of fiscal 1998 from $5.7 million in the same
period of fiscal 1997, an increase of 32%. 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 revenue increased to 31% in the first six
months of fiscal 1998 compared to 28% in the first six months of fiscal 1997,
primarily due to the unexpectedly low revenue results of the Company's first
fiscal quarter ended September 30, 1997.
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 $4.2 million in the
first six months of fiscal 1998 from $2.4 million in the first six months of
fiscal 1997, an increase of $1.8 million, or 75%. The increase was primarily
attributable to an increase in the number of research and development personnel
and associated costs, partially offset by the
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<PAGE> 12
capitalization of $1.3 million in software development costs in the first six
months of fiscal 1998. These capitalized costs represented 24% of the Company's
total research and development expenditures during this period. As a percentage
of total revenue, research and development expenses increased to 17% from 12% in
the first six months of fiscal 1998, as compared to the corresponding period in
fiscal 1997, primarily due to the unexpectedly low revenue results of the
Company's first fiscal quarter ended September 30, 1997.
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 $5.1 million in the first six months of
fiscal 1998 compared to $3.0 million in the first six months of fiscal 1997, an
increase of 70%. 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 revenue increased to 21% in the
first six months of fiscal 1998 from 14% in the first six months of fiscal 1997,
primarily due to the unexpectedly low revenue results of the Company's first
fiscal quarter ended September 30, 1997.
Non-recurring Charges. The Company incurred a non-recurring charge
of $.8 million during the first six months of fiscal 1997 related to acquisition
costs associated with the Hunter International, Inc. acquisition completed
during the Company's first quarter ended September 30, 1996.
Provision of Income Taxes. The Company had a total operating loss
carryforward of approximately $9.4 million as of June 30, 1996 to offset some of
the taxable income in fiscal year 1997. As a result, the Company did not provide
any income tax expense for the first six months of fiscal 1997. Due to the
increased profitability of the Company, management expects to begin making
estimated income tax payments in the second half of fiscal 1998. Although the
Company expects to pay income taxes in fiscal 1998, due to certain net operating
loss limitations, the Company believes that a reduction in its valuation
allowance for deferred income tax assets will offset some income tax expense.
Net Income. The Company's net loss for the first six months of fiscal
1998 was $1.7 million, or $0.17 per share, compared to net income of $2.3
million, or $0.23 per share, in the first six months of fiscal 1997. Exclusive
of non-recurring charges recorded in the first six months of fiscal 1997, net
income for the first six months of fiscal 1997 would have been $3.1 million, or
$0.31 per share. The decline in the Company's results was primarily due to the
net loss in the first quarter of fiscal 1998 of $3.2 million, or $0.15 per share
partially offset by the second quarter performance of the Company. Had income
tax expense been recorded in the first six months of fiscal 1997 at the current
anticipated 38% effective tax rate, net income for the period would have been
$1.5 million or $0.15 per share.
Page 12
<PAGE> 13
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, and completed four subsequent private placements. 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, cash equivalents and marketable securities totaled $14.6 million
at December 31, 1997 compared to $20.7 million at June 30, 1997. The $6.1
million decrease in cash and marketable securities was largely due to: (i) the
net loss of $1.7 million incurred during the six months of fiscal 1998; (ii) a
decrease in income tax payable of $1.2 million, due to the payment of estimated
taxes; and (iii) a $2.2 million increase in accounts receivable. The cash
dividends paid on common stock disclosed in the consolidated statements of
stockholders' equity and cash flows for the period ended September 30, 1997 were
normal stockholder distributions paid by Hunter, Inc. prior to the merger of
Hunter, Inc. with the Company, which was accounted for as a pooling of
interests. IMNET has not paid any dividends on its common stock.
The Company plans to continue to increase its professional staff during
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. To
accommodate its growth, the Company signed an operating lease, effective January
1997, to increase its headquarters space to 96,000 square feet. In October 1997,
the Company signed an additional operating lease increasing the leased square
footage to 118,000. As a result, the Company will incur increased rental
expense. The Company has forecast capital expenditures of approximately $1.2
million for the remainder of fiscal 1998 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 Company's accounts receivable days sales outstanding ("DSO") remain
relatively high and have increased in fiscal 1998. Management believes that its
willingness to grant extended billing and payment 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 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's
will remain relatively high in fiscal 1998 due to the extended terms selling
strategy. However, the failure by customers to pay significant amounts 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 net cash flows provided from operations, will be
sufficient to finance expected cash requirements for operating activities and
anticipated growth for at least the next 12 months.
Page 13
<PAGE> 14
Nonetheless, the Company may seek a credit facility in the future to provide for
any working capital or capital expenditure needs that may arise. 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 revenue or income.
RISK FACTORS
The Company will require significant funds to implement its business
strategies. The Company may experience losses due to the following factors: (i)
the Company's operating expenses are budgeted on anticipated revenue that may
not materialize as quickly or smoothly as anticipated; (ii) the Company incurs
significant expenses in connection with research and development, as well as the
development of its direct and indirect selling and marketing efforts; and (iii)
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 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 Company has experienced significant quarterly fluctuations in
operating results which may continue in future periods. The Company's revenue
from system sales has varied significantly from quarter to quarter as a result
of the volume and timing of system sales and customer acceptance and delivery.
Professional services revenue has also fluctuated from quarter to quarter as a
result of the timing of installation of software and hardware and project
management. Revenue from maintenance services has not fluctuated significantly
from quarter to quarter and has 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 revenue. Furthermore, margins are affected by the mix of products sold.
In addition, 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) technological changes; competition; (ix)
uncertainty in healthcare industry; government healthcare reform proposals; (x)
dependence on key personnel; (xi) dependence on proprietary rights and patents;
(xii) product liability; and (xiii) foreign operations.
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.
Words such as "believes", "anticipates", "expects", "intends", and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. 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 in
any forward looking statements include,
Page 14
<PAGE> 15
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, 1997, including the "Business-Risk Factors" section
thereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
Page 15
<PAGE> 16
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>
11 Computation of Per Share Earnings - Three and Six Months
Ended December 31, 1997 and 1996. 16
27 Financial Data Schedule (for SEC use only).
</TABLE>
(B) REPORTS ON FORM 8-K:
1. The Company filed a report on Form 8-K dated October 29,
1997 containing press releases concerning the Company's
financial results for the period ending September 30, 1997
and certain management changes.
Page 16
<PAGE> 17
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.
By: /s/ Kenneth D. Rardin
-------------------------------------
Kenneth D. Rardin
President and Chief Executive Officer
Dated: February 13, 1998 By: /s/ Scott A. Remley
-------------------------------------
Scott A. Remley
Senior Vice President and Chief Financial
Officer
Page 17
<PAGE> 1
EXHIBIT 11
IMNET SYSTEMS, INC.
COMPUTATION OF PER SHARE EARNINGS
The following computations set forth the calculations of basic and diluted
earnings per share for the three and six month periods ended December 31, 1997
and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1997 1996
--------------------------- --------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ...................................... $1,480,776 $ 1,480,776 $1,694,472 $1,694,472
========== =========== ========== ==========
Weighted average outstanding common
shares ...................................... 9,760,756 9,760,756 9,601,633 9,601,633
Increase due to assumed issuance of shares
related to outstanding stock options using
the treasury stock method ................... -- 292,818 -- 358,301
---------- ----------- ---------- ----------
Adjusted weighted average outstanding
common shares and common share
equivalents ................................. 9,760,756 10,053,574 9,601,633 9,959,934
========== =========== ========== ==========
Net income per common share and common
share equivalent ................................ $ 0.15 $ 0.15 $ 0.18 $ 0.17
========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1997 1996
----------------------------- --------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) ............................. $(1,666,777) $ 1,666,777) $2,340,707 $2,340,707
=========== =========== ========== ==========
Weighted average outstanding common
shares ........................................ 9,758,705 9,758,705 9,596,779 9,596,779
Increase due to assumed issuance of shares
related to outstanding stock options using
the treasury stock method ................. -- -- -- 380,711
----------- ----------- ---------- ----------
Adjusted weighted average outstanding
common shares and common share
equivalents ............................... 9,758,705 9,758,705 9,596,779 9,977,490
=========== =========== ========== ==========
Net income (loss) per common share and
common share equivalent ....................... $ (0.17) $ (0.17) $ 0.24 $ 0.23
=========== =========== ========== ==========
</TABLE>
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IMNET
SYSTEMS, INC.'S FORM 10-Q FOR THE 6 MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,299,628
<SECURITIES> 5,350,077
<RECEIVABLES> 35,644,690
<ALLOWANCES> 1,748,432
<INVENTORY> 2,307,727
<CURRENT-ASSETS> 57,125,301
<PP&E> 9,790,609
<DEPRECIATION> 2,950,270
<TOTAL-ASSETS> 84,561,571
<CURRENT-LIABILITIES> 16,114,381
<BONDS> 0
0
0
<COMMON> 97,984
<OTHER-SE> 68,349,206
<TOTAL-LIABILITY-AND-EQUITY> 84,561,571
<SALES> 24,043,749
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 27,153,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 632,792
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,688,350)
<INCOME-TAX> (1,021,573)
<INCOME-CONTINUING> (1,666,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,666,777)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
