<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
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
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, Georgia 30005
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (770) 521-5600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of Class)
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 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. [X] Yes[ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $189,481,929 at July 31, 1998 (8,328,876 shares).
The number of common shares outstanding at July 31, 1998 was 9,807,947
(exclusive of treasury shares).
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be mailed to
stockholders in connection with the registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III, Items 10-13.
Note: The discussions in this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The actual results of IMNET
Systems, Inc. and subsidiaries (the "Company") could differ significantly from
those set forth herein. Statements contained in this Form 10-K that are not
historical facts are forward-looking statements that 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. A number of important factors could cause
the Company's actual results for fiscal 1999 and beyond to differ materially
from past results and those expressed in any forward-looking statements made by,
or on behalf of, the Company. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 1 --
"Business" particularly "Business-Risk Factors," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Form 10-K.
-2-
<PAGE> 3
PART I
ITEM 1. BUSINESS.
INTRODUCTION
IMNET Systems, Inc. ("IMNET", the "Company" or "Registrant") develops,
markets, installs and services electronic information and document management
systems to meet the needs of the healthcare industry and other
document-intensive businesses. The Company's hardware and software systems
electronically capture, index, store and retrieve information which is resident
on most storage media, including magnetic disk, optical disk, microfilm, paper
and x-ray film. IMNET's information management solution, the IMNET Electronic
Information Warehouse(TM) ("EIW"), allows users to re-engineer their information
management processes to access information on a cost-effective basis and to
achieve immediate cost savings through productivity increases. The IMNET EIW is
used by healthcare providers and healthcare information systems ("HCIS") vendors
to create an electronic medical record ("EMR") by integrating current and
historical patient information with existing information management systems. By
providing access to information that is not otherwise available electronically,
the Company believes that the IMNET EIW is a necessary component to create a
complete healthcare information system solution. Since September 1994, the
Company has entered into agreements to supply its systems through its HCIS
Distribution Partners, including Cerner Corporation, The Compucare Company,
Eclipsys Corporation ("Eclipsys"), HBO and Company ("HBOC"), HealthVision, Inc.,
IDX Systems Corporation, Medical Systems Management, Inc., and Pyramid Health
Systems, Inc. (collectively the "HCIS Distribution Partners").
Businesses and other organizations have made significant investments over
the years in information technology with the goal of creating a "paperless" work
environment in which information is made available electronically through
computers. Despite dramatic advances in computer technology, only a small amount
of current and historical information used by certain businesses today is
accessible by computer. Most of the critical information used by businesses and
other organizations continues to reside on non-electronic storage media such as
paper, creating costly information management problems including: (i) delays in
accessing information; (ii) space and personnel costs to store and move
paper-based records; (iii) lost and misfiled documents; (iv) single user access
to relevant data; and (v) errors in entering and reading information.
The need to access information by computer on a real-time basis is
particularly evident in the healthcare industry where the vast majority of
patient records are stored in paper files, on x-ray film, and in other formats.
Electronic access through computers to current and historical patient
information contained in the patient file permits physicians and other care
providers to make informed decisions regarding patient care, while avoiding
unnecessary costs and delays such as performing duplicate tests already
administered by other groups in the healthcare organization. Furthermore,
market-driven efforts to contain rising healthcare costs have resulted in an
increasing demand for sophisticated healthcare information systems that capture
patient data on a real-time basis in an EMR. In order to better control
healthcare costs while improving the quality of care provided, physicians need
immediate electronic access to patient information.
The IMNET Electronic Information Warehouse provides healthcare
organizations and other document-intensive businesses with a complete electronic
information management solution by integrating current and historical data,
regardless of storage media, with currently installed information management
systems. IMNET's systems electronically capture, index, store and retrieve
scanned, microfilmed, or electronically generated paper documents or medical
images, utilizing third party hardware devices, while
-3-
<PAGE> 4
structuring the flow of information to achieve increases in productivity.
IMNET's hierarchical information storage management system provides necessary
patient information on-line while adding the capability to access less essential
information contained in a more cost-effective storage medium. The IMNET
Electronic Information Warehouse provides a complementary extension of existing
healthcare information systems and clinical databases, thereby enabling the
creation of a complete EMR.
IMNET Systems, Inc. was incorporated in Delaware in May 1992. On October 5,
1992, the Company acquired substantially all of the assets (the "1992
Acquisition") of the electronic imaging business of IMGE, Inc. and certain of
its subsidiaries (collectively, "IMGE").
HEALTHCARE INFORMATION SYSTEMS INDUSTRY BACKGROUND
The importance of healthcare information systems is increasing as a result
of significant economic pressures within the healthcare industry. Healthcare
delivery costs continue to increase at a rate equal to or greater than the costs
of other goods and services. The ongoing pressure to contain healthcare costs is
accelerating the shift in economic risks from healthcare payors to providers, as
evidenced by the movement toward managed care reimbursement models, including
capitation. Under capitation, providers assume certain financial risks because
they are paid a pre-determined fee per individual to provide all healthcare
services. In response to this changing reimbursement environment, many
healthcare providers are expanding to create integrated healthcare delivery
enterprises that serve the healthcare needs of regional populations, while
achieving economies of scale.
The availability of complete, timely and cost-effective patient-centered
information is essential to controlling healthcare costs while providing high
quality patient care. The effectiveness of existing healthcare information
systems is limited because a large amount of healthcare information exists on
paper or on film and is not accessible by computer. In many cases, information
necessary to provide effective patient care is located at several different
sites and is not immediately available to the physician. To implement a
computerized patient-centered information system that accesses patient
information in a cost-effective manner, current and historical paper records and
x-rays must be made available by computer to all points of care.
Healthcare providers and HCIS vendors have increasingly focused their
development efforts on providing a complete EMR at the point of patient care.
HCIS vendors have made significant progress integrating many components
necessary to construct an EMR, including: (i) the combination of disparate
information systems within a provider network; (ii) the automation of certain
points of data entry, such as patient admission and scheduling; and (iii) the
development of tools such as graphical user interfaces and database management
capabilities. However, the EMR's full potential cannot be realized unless it
contains needed current and historical patient information and information
generated and stored outside of the local computer network. A complete EMR would
provide enterprise-wide computer access to, and integration of, information
regarding the patient's clinical history including the paper and film-based
medical record, as well as the patient's demographic, financial and insurance
information, which is often contained in a paper-based financial folder.
The storage and retrieval of non-computer-based information on a
cost-effective basis is essential to the creation of the computer-based patient
record. The IMNET Electronic Information Warehouse addresses this need by
providing on-line access to current and historical paper-based, film-based and
other electronically-generated information, thereby enabling the creation of the
complete EMR.
-4-
<PAGE> 5
RECENT DEVELOPMENT - PROPOSED MERGER WITH HBO & COMPANY
On July 23, 1998, IMNET signed an Agreement of Merger (the "Merger
Agreement") to be acquired by HBO & Company ("HBOC"). The acquisition, which is
subject to several terms and conditions, including regulatory and IMNET
stockholder approval, the availability of pooling of interests accounting, the
absence of material adverse events and the receipt of a "fairness opinion," is
anticipated to close during the fourth calendar quarter of 1998. Terms of the
acquisition call for IMNET stockholders to receive 0.84 of a share of HBOC
common stock for each IMNET share held. If the average closing price per share
of HBOC common stock during the twenty consecutive trading days ending on the
second trading day prior to the IMNET stockholder special meeting is less than
$30.00 per share, then the 0.84 exchange ratio shall be increased ratably to a
maximum exchange rate of 1.1111 shares of HBOC for each IMNET share if the
average closing price reaches $22.50 per share or below the IMNET Board of
Directors may elect to terminate the Merger Agreement if the average closing
price of HBOC during the twenty day period drops below $22.50 per share. HBOC
delivers enterprise-wide patient care, clinical, financial and strategic
management software solutions, as well as networking technologies, electronic
commerce, outsourcing and other services to healthcare organizations throughout
the world. See Item 1 -- "Risk Factors -- Proposed Merger with HBOC."
IMNET'S STRATEGY
IMNET's mission is to make the IMNET Electronic Information Warehouse the
de facto standard for the electronic capture, storage and retrieval of
healthcare information. To achieve this mission, the Company is pursuing the
following strategy:
Enable Creation of the Electronic Medical Record. As healthcare providers
are under increasing economic pressure to reduce the cost and improve the
quality of care provided, the need for on-line access to all relevant current
and historical patient information is critical. IMNET's systems allow healthcare
providers to access such patient information on a cost-effective, real-time
basis, enabling the creation of a functional EMR. The Company's technology
allows healthcare providers to gain access to information resident in most
storage media, such as magnetic disk, optical disk, on-line microfilm, paper and
x-ray film. Therefore, the Company believes IMNET's systems are a necessary
component of a complete EMR.
Expand Relationships with HCIS Vendors. The Company believes that
integrating its systems with those of HCIS vendors enhances the total system
value to an end-user by providing a complete EMR solution. Since September 1994,
IMNET has entered into distribution agreements with its HCIS Distribution
Partners to sell IMNET's systems as an integrated component of each vendor's
system. Management believes IMNET benefits from these agreements as a result of:
(i) the HCIS Distribution Partner's willingness to "private label" the IMNET
system which provides increased credibility and acceptance for the product; (ii)
the potential for a shortened sales cycle for a sale to the HCIS Distribution
Partner's current customers due to such partner's pre-existing relationship and
its knowledge of the customer's needs; (iii) the HCIS Distribution Partner's
existing sales and marketing capability, reducing the amount of time and
resources IMNET must apply in this area; and (iv) the reduced likelihood that
the HCIS Distribution Partner will develop or otherwise acquire a product
competitive to IMNET's. The Company intends to continue developing additional
distribution partner relationships with leading HCIS vendors. However, the
proposed merger with HBOC, which competes directly with many HCIS vendors, may
adversely impact this strategy.
-5-
<PAGE> 6
Maintain Technological Leadership. IMNET's open client-server architecture,
media-independent software and information systems management capabilities
provide an electronic information repository which can be accessed by users on a
local, regional or system-wide basis. The Company believes that it has
established a leadership position by providing complete access to electronic
documents in an on-line, mixed-media environment. IMNET intends to maintain the
technological advantages of its product offerings while enhancing its system
capabilities and performance through internal development, licensing
arrangements and the acquisition or integration of other third party products,
when appropriate.
Grow Through Acquisitions of Businesses, Products and Technologies. The
Company believes it is well-positioned to capitalize on the significant
consolidation opportunities which exist in the healthcare information systems
industry and other document-intensive businesses. In pursuit of such growth
opportunities, the Company completed, in fiscal 1996, the acquisitions of
Evergreen Technologies, Inc. ("Evergreen"), a radiological imaging software
company, and Quesix Software Inc. ("Quesix"), an electronic patient record
management software company. In September 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. In June 1997, the Company acquired Advisoft Consulting, S.A.
("Advisoft"), a systems integration and consulting services company which had
been its distribution partner in France since 1993. Collectively, these
transactions are referred to herein as "the Acquisitions". The Company will
continue to evaluate potential acquisitions which would enable it to continue to
expand its market size and to improve its information systems solutions for its
customers by leveraging existing strengths, adding core technological
competencies and expanding its product offerings. In March 1997, the Company
entered into an agreement under which ISG Technologies, Inc., a leading supplier
of medical imaging visualization technology, became the exclusive supplier of
medical imaging visualization technology to the Company. The licensed technology
is marketed under the Company's MedVision product line.
Expand Beyond the Healthcare Industry. Although IMNET is principally
focused on the healthcare market, the Company believes that its product and
distribution strategy can be applied in other markets in which large-scale
information systems management requirements exist. Outside of healthcare, IMNET
has several end-user customers, which include major insurance companies, such as
Teachers Insurance and Annuity Association, as well as government agencies such
as the CNAV (French Social Security Agency). IMNET intends to continue offering
its products and services in non-healthcare industries as opportunities arise.
PRODUCTS
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. The IMNET Electronic Information Warehouse
consists of integrated product modules marketed as components of the IMNET Image
Engine(R), the IMNET Workflow Engine(TM), IMNET MedVision(TM), the IMNET
Electronic Patient Record System(TM) ("EPRS"), IMNET EPRS/Web(TM), IMNET
LaserArc(R), IMNET/LaserArc(R)/SE, the IMNET Information Search Engine(TM) and
related IMNET Application Programming Interfaces together with integrated
hardware products and support services. IMNET's software and hardware
components, when integrated with an enterprise's currently installed information
management system, can enable needed information within the enterprise to be
accessible by computer through a complete information management system. The
IMNET Electronic Information Warehouse manages information resident on magnetic
disk, optical disk, microfilm, paper or x-ray film.
-6-
<PAGE> 7
The open systems architecture of the IMNET Electronic Information Warehouse
supports multiple software systems developed by the Company, its customers or
its HCIS Distribution Partners. IMNET's systems provide access to an expanded
base of information beyond that which is managed by its HCIS Distribution
Partners' applications and databases. For the end-user, there may be no change
in the appearance of the interface screens other than the ability to display a
wider range of information, such as document or medical images. While the
distribution partners' software applications store and retrieve discrete data
within their own databases or clinical data repositories, IMNET's software
controls the storage and retrieval of other patient information made available
by the IMNET Electronic Information Warehouse.
IMNET EIW-based system costs, including hardware, software and services,
typically range from $250,000 for a small departmental system to over $5 million
for a large enterprise-wide system. In many cases, customers expand their
systems with additional product options which may exceed the original system
purchase price. IMNET's software products are written in Visual Basic, C and C++
programming languages and operate on a variety of platforms, including
Microsoft's Windows, Windows 95 and Windows NT. IMNET's application programming
interfaces support systems running on operating environments ranging from IBM,
Siemens and Hitachi mainframes to DEC VAX, UNIX, standard personal computers or
other workstations. The Company's software products use embedded relational
database management systems provided by Microsoft's SQL Server.
IMNET Image Engine(R)
The IMNET Image Engine is the core component of the IMNET Electronic
Information Warehouse. The IMNET Image Engine's functions include: (i) document
capture; (ii) prioritized access to information using magnetic disk, optical
disk, microfilm, paper and x-ray media; (iii) information retrieval, display and
output in print or fax formats; and (iv) interaction with external host
applications through standard Application Programming Interfaces ("APIs") and
electronic gateways. The IMNET Image Engine, developed internally by the
Company, is sold as a stand-alone software product or as a component of a more
comprehensive IMNET Electronic Information Warehouse solution. The IMNET Image
Engine has an open architecture design supporting a wide range of applications,
from departmental systems to high-volume, enterprise-wide or community-wide
document management systems. The IMNET Image Engine allows access to a wide
range of information including text, data, scanned or microfilmed document
images, medical images and faxes.
The IMNET Image Engine is divided into three subsystems:
The Document Capture Subsystem supports the functions of document capture
from third party scanning or microfilming devices, quality control, indexing and
storage. In addition, electronically-generated reports or medical images can be
imported from other systems. A final method of document capture is the input of
faxes directly from the IMNET Image Engine Fax Server to the Document Capture
Subsystem for indexing and storage.
The Storage and Retrieval Subsystem incorporates a hierarchical information
management process which provides for information storage on the most efficient,
cost-effective medium available including magnetic disk, optical disk,
microfilm, x-ray film or paper. This allows information with high retrieval
frequency to be stored on high-speed, on-line magnetic media while enabling less
critical information to be accessed from more cost effective storage media.
On-line retrieval can be performed on information stored in third party optical
disk jukeboxes or in the IMNET MegaSAR Microfilm Jukebox. Information which is
-7-
<PAGE> 8
accessed less frequently can be stored on mountable optical disks or on
microfilm cartridges and then loaded to magnetic storage when requested by the
user. In addition, less frequently-used documents in paper folders or on x-ray
film can be scanned on demand and delivered on-line to the user.
The Output Services Subsystem controls the target destination of the
requested information. Destinations may include the display monitor of the
user's workstation or the IMNET Image Engine Print Server or Fax Server. Hard
copy output for complex print or fax requests may be composed of multiple
documents retrieved from a variety of media.
IMNET Workflow Engine(TM)
The IMNET Workflow Engine enables improvements in productivity by
structuring the flow of information within an organization. The IMNET Workflow
Engine allows a business process analyst or medical records administrator to
automate the flow of information, to streamline manual work steps and to manage
the interaction of automated systems. A visual design tool is used to depict the
logical sequence of work steps and to define the rules which are used to route
or distribute information. A workflow model is then created which controls the
process by monitoring, re-routing and managing the distribution of information.
As an item of work progresses electronically, its contents can be changed by
adding or deleting pieces of electronic information, such as word processing
files, spreadsheets, annotations, voice recordings, document folders and images.
Productivity is also improved by the concurrent management and processing of
information.
The IMNET Workflow Engine is also being used to manage certain aspects of
the reimbursement process after a patient's discharge from a hospital. After
receiving notification by computer of a patient's discharge, the IMNET Workflow
Engine can assemble the patient chart automatically, analyze it for completion,
route the record to a physician for insertion of certain missing information and
route the electronic chart for concurrent coding and abstracting. By automating
this process, healthcare providers can accelerate the post-discharge billing
cycle.
The IMNET Workflow Engine includes reporting tools to monitor workflow,
enabling performance measurement and automatic adjustment of workflow
priorities. The IMNET Workflow Engine may be sold as a stand-alone product
independent of the other elements of the IMNET Electronic Information Warehouse.
IMNET MedVision(TM)
IMNET MedVision consists of a set of application software products and
interface modules which allow the capture, storage and retrieval of radiological
images, whether scanned from x-ray film or captured in direct digital form from
scanning devices such as computed tomography (CT), nuclear medicine or magnetic
resonance imaging (MRI) units. Through direct digital capture, IMNET MedVision
is able to preserve all information contained in the original image and to avoid
the image degradation inherent in other methods of radiological data transfer
and storage. IMNET MedVision allows the transfer and storage of image files
using the Digital Imaging Communications for Medicine (DICOM) format and
provides access to numerous proprietary file formats developed by medical
imaging modality manufacturers, including General Electric, Siemens, Philips
Electronics N.V., Toshiba and Picker. IMNET MedVision provides a scalable
solution that can support diagnostic usage within the radiology department, as
well as access across
-8-
<PAGE> 9
the enterprise, by clinical and referring physicians. IMNET MedVision can also
be used for distribution of image files to support teleradiology and
consultation by remote radiology groups.
IMNET Electronic Patient Record System(TM) (EPRS)
IMNET EPRS is an information and document management application software
product which facilitates access to the EMR. EPRS can be sold by the Company's
HCIS Distribution Partners as an enhancement of their currently available
healthcare application products, or it can be sold as a stand-alone application
software product. EPRS users in both the medical records department and the
business office have on-line access to a wide range of electronic patient
information, including HCIS data, ancillary system reports, images of scanned or
microfilmed paper documents and medical images. Information from external HCIS
systems can also be imported into the EPRS database using discrete data
transactions, thereby improving consistency in indexing documents associated
with the patient record, as well as providing access to other reference data,
which contributes to efficient workflow and improves retrieval accuracy. EPRS
includes a workflow module through which user-defined procedures route patient
records for action by physicians and other end-users.
IMNET EPRS/Web(TM)
IMNET EPRS/Web allows physicians the capability to view electronic patient
information from virtually any location. Using secured Internet/Intranet access,
authorized physicians can use standard web browsers to access EPRS/Web from
their office, home, or other remote locations. Because it is easier to install,
operate, and support, EPRS/Web results in lower costs for operations and
maintenance. In addition, its greater accessibility results in improved
workflow, thereby encouraging increased electronic access to the medical record
throughout the enterprise.
IMNET LaserArc(TM)
IMNET LaserArc is a cost-effective solution for the storage and retrieval
of report information. It allows a computer-generated report to be treated as a
continuous stream of data which can be searched using pre-defined indices or by
user-defined, free-text search criteria. Queries can be run across multiple
report files and within defined date ranges, allowing flexibility for
extracting, saving, exporting and analyzing information.
IMNET LaserArc/SE(TM)
IMNET LaserArc/SE extends the text-only electronic report distribution and
retrieval capabilities of LaserArc to include both report text and scanned
images in a single cost-effective departmental solution. LaserArc/SE integrates
the document capture and retrieval features of the IMNET Image Engine with the
standalone LaserArc product. LaserArc/SE is based upon an open, client/server
architecture using standard PC workstations and servers. It provides information
capture, storage, retrieval, display, print and fax services.
-9-
<PAGE> 10
IMNET Information Search Engine(TM) (ISE)
The IMNET Information Search Engine (ISE) is a generalized storage and
retrieval tool which supports both scanned and computer-generated document types
across a wide range of departmental applications. It was created primarily using
the core IMNET Image Engine and Workflow Engine components. By using a flexible
database definition combined with easy-to-configure templates for document
indexing and retrieval, ISE can be customized for virtually any application.
This product provides the customer with a low-cost of entry for simple retrieval
applications with significant upgrade potential through the addition of IMNET's
Workflow Engine and EPRS products.
IMNET Application Programming Interfaces
IMNET supplies standard Application Programming Interfaces ("APIs") which
allow its customers and distribution partners to access workflow, information
management and imaging capabilities directly from the application software of
these customers and distribution partners. The APIs, developed internally by
IMNET, convert the request for information into a format which the IMNET Image
Engine, IMNET Workflow Engine, IMNET Electronic Patient Record System, IMNET
LaserArc, IMNET Information Search Engine and IMNET MedVision products can
interpret. The applications of customers and distribution partners may run on
the same workstation or on any external host computer, ranging from a PC to a
mainframe. After a particular application has been integrated using the API, the
development cost is eliminated for subsequent installations of the same
application, creating an advantage for IMNET and the HCIS Distribution Partners,
who may install the same application at many customer sites.
IMNET MegaSAR(R) Microfilm Jukebox
The IMNET MegaSAR Microfilm Jukebox is a robotic microfilm storage and
retrieval device that reads requested documents from microfilm and translates
them into an electronic format for on-line delivery. The Company believes that
the MegaSAR is presently the only on-line microfilm storage and retrieval device
commercially available in the United States. The MegaSAR can store up to 420
reels of standard microfilm, with each reel holding images of 6,000 8 1/2" x 11"
pages, creating a minimum image capacity of 2.5 million pages per MegaSAR.
Depending upon microfilm format and document type, a MegaSAR can store nearly 10
million pages. Single image retrieval times are comparable to those of single
drive optical disk jukeboxes.
PROFESSIONAL SERVICES
In order to offer a complete information and document management solution
to its customers and to ensure customer satisfaction, IMNET provides system
design, installation, integration and other post-installation services to
end-users both directly and together with the HCIS Distribution Partners. In
addition, the Company offers installation, training and integration services to
its distribution partners, particularly in early stages of the partnership, to
help assure the success of the distribution partner's initial customer
installations.
Installation and Integration Services. IMNET provides system analysis and
design recommendations, project management, site preparation, customization,
systems integration, installation and training services for its direct customers
and distribution partners. IMNET also assists end-users and distribution
partners in selecting third party services, such as those for the conversion of
paper files to other
-10-
<PAGE> 11
formats, on an as-needed basis. The Company believes that the quality of its
installation and integration services is crucial to its success.
Post-installation Services. The Company's post-installation services
include routine software and hardware maintenance, user assistance and a
software product upgrade release program. These services are provided under the
terms of the Company's renewable hardware and software maintenance agreements,
fees for which are generally based upon a percentage of the then-current list
prices of its hardware and software. The Company maintains a user hotline for
customers to obtain technical support and provides additional services,
including system customization, system management consulting, user training and
workflow analysis.
RESEARCH AND DEVELOPMENT
IMNET plans to extend the capabilities of the IMNET Electronic Information
Warehouse to increase its functionality as an electronic information storage and
retrieval system. IMNET's research and development efforts are currently focused
primarily on enhancing existing software products. Although most IMNET products
historically have been developed internally, the Company believes that it can
respond more quickly to market requirements in certain cases by acquiring
complementary products or by licensing them for distribution.
The Company's research and development efforts are influenced significantly
by customer requirements. For example, using existing components from the IMNET
Image and Workflow Engines, the Information Search Engine product has been
developed to provide a generic storage and retrieval platform which can be used
to support both healthcare and non-healthcare applications. The Information
Search Engine was first delivered in June 1998. Similarly, the Company is
strongly influenced by its HCIS Distribution Partners, particularly to extend
higher-level APIs to speed integration of the partners' applications.
Significant effort in fiscal 1998 was expended in conforming the Company's
product releases in order to improve integrated product delivery. In almost all
cases, customer delivery requires the simultaneous integration of multiple IMNET
products. In order to simplify installation and support, these products will be
delivered as part of an integrated EIW release. In addition, many significant
product enhancements are being delivered, such as multifacility support for
EPRS, Workflow Engine and ISE, as well as the completed integration of the ISG
medical image viewing technology into the EPRS product.
SALES AND MARKETING
The Company currently sells its products directly through its own sales
organization and indirectly through its HCIS Distribution Partners. The Company
is committed to expanding its presence in the healthcare industry through
pursuing additional distribution partnerships with HCIS vendors, medical imaging
vendors and systems integration firms, as well as by marketing directly to
healthcare providers.
The Company's distribution partners typically enter into multi-year
distribution agreements providing them the right to acquire the Company's
products at a discount and to offer them to third parties under private labels.
These agreements either do not permit a partner to offer or develop a product
competitive with the Company's products, or else they provide the Company the
right to terminate the arrangement upon notification of the partner's intention
to offer or develop a competitive product.
-11-
<PAGE> 12
For both direct and indirect sales, the Company's sales resources are
organized into teams of account executives paired with one or more application
consultants. These teams identify a customer's business issues and propose
cost-justified information management solutions. When working with a
distribution partner, the Company's sales teams work as a complementary
extension of the distribution partner's sales team. IMNET requires a formal
product "roll-out" project plan, which includes sales and technical training, as
well as cooperative development of marketing materials and product packaging, to
be developed jointly with each new distribution partner. To support its
private-label distribution strategy, IMNET has designed its marketing, training
and documentation materials so that they can be quickly integrated into a
partner's sales process.
The Company primarily markets its products through its headquarters office
in Alpharetta, GA, although some sales support teams are located at the
distribution partners' premises. The Company's marketing efforts are organized
into corporate marketing, target marketing and customer communication programs.
The Company supports these efforts by publishing articles, presenting or
sponsoring talks at professional meetings, assuming leadership positions in
professional organizations, participating in trade shows, advertising in trade
publications and issuing frequent announcements to the trade press. Prospective
clients are identified through the marketing programs of the Company's
distribution partners, as well as the Company's own direct mail and
telemarketing efforts.
CUSTOMERS AND SIGNED SALES CONTRACTS
The Company's customers principally consist of healthcare providers located
throughout the United States as well as non-healthcare organizations located
throughout the United States and worldwide. The Company believes that the
installed customer base of its HCIS Distribution Partners represents a
significant opportunity to market and sell its products and services.
At June 30, 1998, the Company had approximately $74.4 million of signed
sales contracts for systems and services which had not yet been delivered. This
amount includes software license fees, hardware sales and maintenance and
professional services which are expected to result in future revenues over
periods of as much as five years. The amount of the Company's signed sales
contracts for systems and services not yet delivered at June 30, 1997 was
approximately $51.0 million. Certain contracts may also include provisions
permitting termination that do not relate to IMNET's performance or which allow
the customer to delay certain aspects of the order. Because the Company adjusts
the timing of an end-user installation to accommodate the customer's needs and
because a typical installation requires two to 12 months to complete after
contract execution, the Company is unable to predict with any degree of accuracy
the amount of revenue it expects to achieve in any particular period. A
termination or installation delay of one or more contracts, or the failure of
the Company to procure additional contracts, could have a material adverse
effect on the Company's business, its financial position, and its results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In fiscal 1998, HBOC accounted for 31% and Eclipsys accounted for 14% of
the Company's total revenues. In fiscal 1997, HBOC accounted for 31% and Baptist
Memorial Healthcare Systems, Inc. ("Baptist") accounted for 16% of the Company's
total revenues. In fiscal 1996, McLaren Regional Healthcare Center ("McLaren")
accounted for 22% and SoftNet Systems, Inc. ("SoftNet") accounted for 10% of the
Company's total revenues. No other customers accounted for more than 10% of
total revenues in such fiscal years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
-12-
<PAGE> 13
The Company's direct end-user healthcare customers include Aurora Health
Care, Baptist, Charleston Area Medical Center, Duke University Hospital, Eastern
Maine Healthcare Center, The Emory Clinic, Greenwich Hospital, Hoag Memorial
Hospital, Indiana University Medical Center, Iowa Health Services, Kaweah Delta
Health Care District, Loma Linda University Medical Center, the Mayo Clinic at
Jacksonville, McLaren, New York Hospital, Owensboro Mercy Health System, St.
Barnabas Hospital, Shannon Health System, and Tenet Healthcare Corporation. The
Company's general business end-user customers include Associates Insurance, CNAV
(the French Social Security Agency), Hastings Mutual Insurance Company,
Laborers' Pension and Welfare Fund, Los Angeles County, Teachers Insurance
Annuity Association/College Retirement Equities Fund and TNT/USF Holland.
The Company had international sales of $5.6 million, $1.4 million, and $2.3
million for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
Included in the 1998 amount are revenues of $5.5 million realized by the
Company's French subsidiary, IMNET/France.
COMPETITION
The Company competes with other information and document management systems
companies, as well as with certain HCIS vendors and medical imaging systems
vendors. Such companies and vendors may team together to place bids for large
contracts in competition with the Company and its HCIS Distribution Partners. A
decision on the part of any of these competitors to focus their resources in the
markets addressed by the Company could have an adverse effect on the Company and
its business. In addition, the Company's HCIS Distribution Partners compete with
other applications suppliers who do not offer the Company's products. To the
extent the Company's HCIS Distribution Partners are unsuccessful compared with
their competitors, the Company's business may be adversely affected.
The Company's competitors include many companies which are larger and more
established and have substantially more resources than the Company. The Company
believes that the principal competitive factors in its market are company
reputation, product reliability, system features, customer service and support,
price, the effectiveness of marketing and sales efforts and company size. In
addition, the Company believes that the speed with which companies in its market
can anticipate the evolving healthcare industry structure and identify unmet
needs are important competitive factors.
REGULATION
On April 29, 1998, the United States Food and Drug Administration ("the
FDA") published a final rule which classifies five medical image management
devices that operate using computer software as medical devices under the
Federal Food, Drug and Cosmetic Act ("the FDC Act"). To the extent that
computer software is a medical device under the regulation, the manufacturers of
such products will be required, depending on the product, to: (i) register and
list their products with the FDA; (ii) notify the FDA and demonstrate
substantial equivalence to other products on the market before marketing such
products; (iii) satisfy certain performance standards or special controls; or
(iv) obtain FDA approval by filing a premarket application that established the
safety and effectiveness of the product. The Company expects that the FDA is
likely to remain active in regulating computer software that is intended for use
in healthcare settings. The FDA currently regulates components of the IMNET
MedVision product line for which the Company has the necessary clearances for
marketing. For regulated devices, the FDA can impose extensive requirements
governing pre- and post-market conditions relating to clinical investigations,
approvals, labeling and manufacturing. In addition, such products would be
subject to the FDA Acts general controls, including those relating to good
manufacturing practices and adverse experience reporting.
-13-
<PAGE> 14
PROPRIETARY TECHNOLOGY PROTECTION
The Company regards its software as proprietary and relies primarily on a
combination of copyrights, trademarks and trade secrets of general
applicability, employee confidentiality and invention assignment agreements,
distribution and software license agreements and other intellectual property
protection methods to safeguard its software products. In addition, certain
aspects of the Company's hardware products are patented.
EMPLOYEES
As of June 30, 1998, IMNET had 353 full time employees, including 273 in
its Alpharetta, GA headquarters. None of the Company's employees are represented
by a labor union or are subject to a collective bargaining agreement. The
Company has never experienced a work stoppage and believes that its employee
relations are excellent.
RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly and
materially from past results and from those indicated by such forward-looking
statements. Factors that may cause such differences include, but are not limited
to, those discussed below.
Proposed Merger with HBOC. On July 23, 1998, the Company and HBOC signed a
Merger Agreement pursuant to which the Company agreed to be acquired by HBOC.
See "Business-Recent Developments." The closing of the acquisition transaction
is subject to numerous terms and conditions, including regulatory and IMNET
stockholder approvals, the absence of certain material adverse events and the
receipt of a "fairness opinion." Until the completion of the transaction, there
can be no assurance that the Company will be able to continue to generate sales
to and by its HCIS Distribution Partners and direct customers due, in part, to
uncertainties relating to the proposed merger. Further, if the acquisition is
consummated, then there can be no assurance that the savings and benefits
expected to be realized as a result of the transaction will materialize. If the
transaction is not consummated, the relationship between: (i) HBOC and the
Company; (ii) the Company and its other HCIS Distribution Partners; and (iii)
the Company and its direct customers and sales prospects may be materially
adversely effected. If the Company's stockholders do not approve the
transaction, or if the Company's Board of Directors exercises its right to
terminate the transaction to respond to another opportunity, the Company must
pay a fee to HBOC of $7.5 million. Stockholders of IMNET should consider that
they will receive 0.84 of a share of HBOC common stock for each share of IMNET
Common Stock owned by them. If the average closing price per share of HBOC
common stock during the twenty consecutive trading days ending on the second
trading day prior to the IMNET stockholder special meeting is less than $30.00
per share, then the 0.84 exchange ratio shall be increased based on a formula to
a maximum exchange ratio of 1.1111 shares of HBOC for each IMNET share if the
average closing price reaches $22.50 or below. The IMNET Board of Directors may
elect to terminate the Merger Agreement, but is not obligated to do so, if the
average closing price of HBOC during the twenty day period drops below $22.50
per share. Accordingly, if the average closing price is less than $22.50, the
Merger proposal is approved by IMNET stockholders and the IMNET Board does not
exercise its right to terminate the Merger Agreement, IMNET stockholders could
receive merger consideration whose market value is less than the current market
value of their shares of IMNET Common Stock. Furthermore, the determination of
the right to increase the exchange ratio, and IMNET's right to terminate, are
based on an
-14-
<PAGE> 15
average. There can be no assurance that the market value of HBOC stock received
in the merger, at the date of the merger, will equal or exceed that average.
Integrating the operations (including research and development, inventory
purchasing, marketing plans and activities, employee hiring and training, and
expansion strategy) and management of the two companies will be a time-consuming
process and no assurance can be given that the integration will result in the
achievement of all of the anticipated synergies and other benefits expected to
be realized from the Merger. Moreover, the integration of these organizations
will require the dedication of management resources, which may distract
attention from the day-to-day business of the combined company. The inability of
management to successfully integrate the operations of the two companies could
have a material adverse effect on the business and operating results of HBOC.
Limited Operating History; Lack of Profitable Operations. The Company
commenced operations in 1992 and has sustained substantial losses resulting in
an accumulated deficit of $15.4 million at June 30, 1998. The Company incurred
net losses in two of the last three fiscal years, including a net loss in 1998
of $1.9 million (after non-recurring charges of $1.5 million) and in 1996 of
$6.0 million (after non-recurring charges of $10.4 million). Previously, the
Company had incurred net losses of $4.1 million for fiscal 1995 and $5.4 million
for fiscal 1994. In addition, 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 revenues; (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; (iii) a high percentage of the Company's
expenses are fixed; and (iv) the Company may incur charges related to
acquisitions, business alliances or changing technologies. 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. The Company believes its cash, cash
equivalents and marketable securities, along with net cash provided from
operations, and the liquidity available under the Company's line of credit will
be sufficient to finance its cash requirements for at least the next 12 months.
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.
Variability in Quarterly Operating Results; Volatility of Stock Price.
Results of operations have fluctuated and may continue to fluctuate
significantly from quarter to quarter as a result of a number of factors,
including: (i) contract terms and the volume and timing of system sales and
customer acceptances; (ii) customer purchasing patterns, long sales cycles,
order cancellations and rescheduling of system installations; (iii) the mix of
direct and indirect sales; (iv) the mix of higher-margin software revenues and
lower-margin hardware and services revenues; and (v) the actions of competitors.
In addition, the Company periodically recognizes revenue from large multi-site
licenses and from transactions in which the Company's HCIS Distribution Partners
purchased software licenses in quantity for resale. These transactions, which
typically have higher margins, are difficult to predict, particularly as to when
a distribution partner will acquire additional licenses, and the quantity such
partner will purchase. Accordingly, the Company's future operating results are
likely to be subject to significant variability from quarter to quarter and
could be adversely affected in any particular quarter. The Company's total
revenues and results of operations may also be affected by seasonal trends
including the possibility of higher revenues in the Company's second and fourth
fiscal quarters and lower revenues in its first and third fiscal quarters as a
result of many customers' annual purchasing and budgetary practices and the
Company's sales commission practices relying in part on
-15-
<PAGE> 16
annual quotas. As a result, the Company believes that period-to-period
comparisons of its revenues and results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
Due to the foregoing factors, among others, it is possible that the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially and adversely affected. In addition, the market price for the
Company's Common Stock has been volatile and in the future could be adversely
affected by general trends in the Company's industry, changes in general market
conditions and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Customer Concentration. The Company's product sales have been concentrated
in a small number of customers, and the Company has historically derived a
substantial percentage of its total revenues from a relatively small number of
customers. For the year ended June 30, 1998, two customers accounted for
approximately 45% of total revenues. In fiscal 1997, two customers accounted for
47% of the Company's total revenues. In fiscal 1996, two customers accounted for
32% of the Company's total revenues. Furthermore, the Company frequently has
granted extended payment terms. Developments adverse to the financial condition
of any of these customers, their failure to honor payment obligations, or the
inability to replace any such customer with significant new customers would have
a material adverse effect on the Company's financial position and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers and Signed Sales Contracts."
Product Acceptance and Market Development; Dependence on Distribution
Partners. The market for electronic information and document management systems,
as it relates to integrated mixed-media healthcare information systems, is still
relatively new and may not develop as expected. The Company's success is
dependent upon market acceptance of its products in preference to competing
products and products that may be developed by others. The Company's success is
also dependent on the success of its marketing and distribution strategy which
involves, to a significant degree, a reliance upon HCIS vendors to sell the
Company's electronic information and document management systems as a necessary
component of the integrated systems being marketed by such distribution
partners. If the HCIS Distribution Partners or future distribution partners
elect not to include the Company's products as components in their integrated
systems or are unsuccessful in achieving significant sales of those systems, the
Company's business would be materially and adversely affected.
Long Sales and Delivery Cycles; Dependence on Future System Sales. The
decision by a healthcare provider to replace or substantially upgrade its
information systems typically involves a major commitment of capital and an
extended review and approval process. Accordingly, the sales and delivery cycle
for the Company's system can range from two to 24 months from initial contact to
delivery and acceptance of the products. The time required from initial contact
to contract execution can range from two to 12 months. During these periods, the
Company may expend substantial time, effort and funds assessing the customer
needs, demonstrating the products, preparing contract proposals and negotiating
contracts. Under customary direct sales agreements, the Company does not record
revenues on products until they have been accepted by the customer at the IMNET
system integration facility and then delivered. The length of time between
contract execution and acceptance typically ranges from one to 12 months for an
end-user depending on the size of the order, the products ordered and delivery
terms. At June 30, 1998, the Company had approximately $74.4 million of signed
sales contracts for systems and services which had not yet been delivered. This
amount includes contracts for software license fees, hardware sales and services
that may include cancellation provisions that do not pertain to IMNET's
performance, and contracts that are expected to result in revenues over periods
of as much as five years. Any significant or ongoing failure to achieve
-16-
<PAGE> 17
signed contracts and subsequent customer acceptance after expending time, effort
and funds could have a material adverse effect on the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Ability to Manage Growth. As a result of both internal development and
expansion into additional applications and markets, the Company is currently
experiencing a period of rapid growth and expansion. Such growth and expansion
has placed and could continue to place a significant strain on the Company's
services and support operations, sales and administrative personnel and other
resources. The Company's ability to manage such growth effectively will require
the Company to continue to improve its operational, management and financial
systems and controls and to train, motivate and manage its employees. As a
result, IMNET is subject to certain growth-related risks, including the risk
that it will be unable to retain the necessary personnel or acquire other
resources necessary to service such growth adequately.
Risks Associated with Acquisitions. As part of the Company's strategy to
enhance and maintain its competitive position, IMNET consummated the
Acquisitions and continues to evaluate potential acquisitions of businesses,
products and technologies. In considering an acquisition, the Company may
compete with other potential acquirors, which may have greater financial and
operations resources. Further, the evaluation, negotiation, and integration of
such acquisitions may divert significant time and resources of the Company,
particularly of management. There can be no assurance that suitable acquisition
candidates will be identified, that any acquisitions can be consummated or that
any acquired businesses or products can be successfully integrated into the
Company's operations. In addition, there can be no assurance that future
acquisitions will not have a material adverse effect upon the Company,
particularly in the fiscal quarters immediately following the consummation of
such transactions due to operational disruptions, unexpected expenses and
accounting charges which may be associated with the integration of such
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Acquisitions."
Technological Changes; Competition. The market for the Company's products
is characterized by continued and rapid technological advances in both hardware
and software development requiring ongoing expenditures for research and
development and the timely introduction of new products. Compatibility with
existing and emerging industry standards is essential to the Company's marketing
strategy and research and development efforts. The establishment of standards is
largely a function of user acceptance, and standards are therefore subject to
change. IMNET's products are dependent upon a number of advanced technologies,
including those relating to computer hardware and software, storage devices,
robotics systems and other peripheral components, all of which are subject to
rapid change. To be competitive, IMNET must respond effectively to technological
changes by continuing to enhance its existing products to incorporate emerging
or evolving standards. There can be no assurance that the Company will be able
to respond effectively to technological changes or new product announcements or
introductions by others. Furthermore, there can be no assurance that the Company
will be able to access needed new technology at an acceptable price. The market
for healthcare information systems is intensely competitive. Certain of the
Company's competitors have significantly greater financial, technical, research
and development and marketing resources than the Company. Competitors vary in
size and in the scope and breadth of the products and services offered. The
Company's products compete both with other technologies as well as similar
products developed by other companies, and other major information management
companies may enter the market in which the Company competes. Competitive
pressures and other factors, such as new product introductions by the Company or
its competitors, or the entry into new geographic markets, may result in
significant price erosion that could have a material adverse effect on the
Company's business.
-17-
<PAGE> 18
Uncertainty in Healthcare Industry; Government Healthcare Reform Proposals.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare providers. Many lawmakers have announced that they intend to propose
programs to reform the U.S. healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment. Healthcare
providers may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's products and related services. Cost containment measures instituted by
healthcare providers as a result of regulatory reform or otherwise could result
in greater selectivity in the allocation of capital funds. Such selectivity
could have a material adverse effect on the Company's ability to sell its
products and related services.
On April 29, 1998, the FDA published a final rule which classifies five
medical image management devices that operate using computer software. The rule
clarifies the regulatory status of some of IMNET's products as medical devices.
In addition, the regulation indicates that some of the Company's products are
not medical devices subject to FDA regulation. Medical devices are subject to
regulation by the FDA which requires, among other things, premarket
notifications or approvals and compliance with labeling, registration and
listing requirements, good manufacturing practices and records and reporting
requirements. The FDA currently regulates components of the Company's MedVision
product line.
Dependence on Key Personnel. Kenneth D. Rardin and certain other executive
officers have been primarily responsible for the development and expansion of
the Company's business, and the loss of the services of one or more of these
individuals could have a material adverse effect on the Company. In addition,
the Company believes that its future success will be dependent in part on its
continued ability to recruit, motivate and retain qualified personnel. There can
be no assurance the Company will be successful in this regard. The Company
maintains a $1.0 million key man life insurance policy on the life of Mr.
Rardin.
Dependence on Proprietary Rights and Patents. To develop and maintain its
competitive position, IMNET relies primarily upon the technical expertise and
creative skills of its personnel, confidentiality agreements and, to some
degree, patents and copyrights. The Company owns patents and has license rights
to certain patents held by third parties. These patents and patent rights relate
to aspects of the technology used in certain of the Company's products.
Successful litigation against the Company regarding its patents or patent
rights, or infringement by the Company of the patent rights of others, could
have a material adverse effect on the Company's business. There can be no
assurance that patents issued to or licensed by the Company will not be
challenged or circumvented by competitors or be found to be sufficiently broad
to protect the Company's technology or to provide it with any competitive
advantage. In addition, there can be no assurance that confidentiality
agreements will not be breached or that the Company will have adequate remedies
for any such breach.
There has been substantial litigation regarding patent and other
intellectual property rights in the computer industry. Although to the knowledge
of the Company there are no such claims pending against or involving the
Company, there can be no assurance that such claims will not be instituted.
Adverse determinations in any such claim or any such claim could subject the
Company to significant liabilities to third parties and could require the
Company to seek licenses from third parties. There can be no assurance that any
such licenses will be available on commercially reasonable terms. See "Business
- -- Proprietary Technology Protection".
-18-
<PAGE> 19
Product Liability. The Company's products are used to provide information
that relates to healthcare enterprise operations and information that may be
used in other critical applications. Any failure by the Company's systems to
provide accurate and timely information could result in claims against the
Company. The Company maintains insurance to protect against claims associated
with the use of its products, but there can be no assurance that its insurance
coverage would adequately cover any claim asserted against the Company. A
successful claim brought against the Company in excess of its insurance coverage
could have a material adverse effect on the Company. Even unsuccessful claims
could result in damage to the Company's reputation and the Company's expenditure
of funds in litigation and management time and resources. There can be no
assurance that the Company will not be subject to product liability claims, that
such claims will not result in liability in excess of its insurance coverage or
that the Company's insurance will cover such claims or that appropriate
insurance will continue to be available to the Company in the future at
commercially reasonable rates.
Foreign Operations. Approximately 10%, 3% and 8% of the Company's total
revenues for the respective fiscal years 1998, 1997 and 1996 were attributable
to sales outside the United States. Virtually all of the 1998 amount was
realized by the Company's French subsidiary, IMNET/France. As of June 30, 1998,
the Company had approximately $7.3 million in signed sales contracts,
denominated in foreign currencies for systems and services not yet delivered.
Sales to customers outside the United States are subject to incremental risks,
including the following: (i) agreements may be more difficult to enforce and
receivables more difficult to collect through foreign legal systems; (ii) to the
extent the Company invoices in foreign currencies as is the case with
IMNET/France, exchange rate fluctuations could adversely affect the Company's
results of operations; (iii) foreign customers often have longer payment cycles;
and (iv) foreign countries could impose withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, embargoes or exchange controls or
adopt other restrictions on foreign trade. Through June 30, 1998, the Company's
results of operations had not been materially affected by currency exchange rate
fluctuations.
ITEM 2. PROPERTIES.
During fiscal 1997, the Company relocated its main office to 3015 Windward
Plaza, Windward Fairways II, Alpharetta, Georgia 30005. At this location, IMNET
now leases approximately 118,000 square feet of floor space under lease
agreements which expire in 2006. The Company's previously occupied Atlanta
facility has been sublet. Pursuant to the Hunter acquisition, the Company
acquired leased space of approximately 6,500 square feet in Wilsonville, Oregon.
This space is held under a two year lease, expiring on May 31, 2000. Pursuant to
the Advisoft acquisition, the Company acquired leased space of approximately
4,100 square feet in Paris, France. This space is held under a three year lease,
expiring June 30, 2000.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, to the Company's knowledge, there are no material
legal proceedings pending against the Company.
-19-
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following are the executive officers of the Company as of July 31,
1998.
<TABLE>
<S> <C> <C>
Kenneth D. Rardin........................ 48 Chairman of the Board, President and Chief Executive
Officer
Gary D. Bowers........................... 45 Executive Vice President and Chief Operating Officer
Thomas D. Underwood...................... 40 Senior Vice President - Client Services
Raymond L. Brown......................... 41 Senior Vice President - Business Development
Paul J. Collins, Jr...................... 41 Senior Vice President - Marketing
James L. Hall............................ 38 Senior Vice President - Sales
Scott A. Remley.......................... 44 Senior Vice President and Chief Financial Officer
Charles F. Warner........................ 58 Vice President - Assistant to the Chairman
</TABLE>
Mr. Rardin has been Chairman of the Board and Chief Executive Officer of
the Company since October 1992, when the Company acquired certain assets of
IMGE, Inc. and certain of its subsidiaries (collectively, "IMGE"). Mr. Rardin
has over 25 years of experience in the computer software field. Beginning in
late 1990 until the consummation of the 1992 IMGE acquisition (the "1992
Acquisition"), he was Chief Executive Officer of IMGE. From 1989 to 1990, Mr.
Rardin was a self-employed consultant in the computer and data communications
industries. From 1986 to 1989, Mr. Rardin served as President and Chief
Executive Officer of GMD, Inc., a provider of systems which integrated design
and manufacturing automation with business systems. From 1983 to 1986, Mr.
Rardin was President and Chief Executive Officer of FutureSoft Synergies, Inc.,
a venture capital investment and management company. From 1977 to 1982, Mr.
Rardin was Chief Operating Officer of Software AG of North America. During such
time, Software AG of North America grew from a small private software company to
one of the industry's largest publicly-held international software companies.
Mr. Bowers has been Executive Vice President and Chief Operating Officer of
the Company since July 1998. From October 1997 to July 1998, Mr. Bowers served
as Senior Vice President - Product Technology. Mr. Bowers has over 24 years of
technical and management experience in the computer software and services field.
Mr. Bowers joined the Company following the 1992 Acquisition in October 1992 as
Vice President Marketing and Business Development. He was employed by IMGE
beginning in 1991 as Vice President of Technical Operations. From 1986 through
1991, Mr. Bowers was employed at Software AG as Director of Sales Support for
its newly-formed Federal Systems subsidiary and subsequently as Director of the
Geographic Information Systems Group.
Mr. Underwood became Senior Vice President - Client Services in January
1996. He was Vice President - Technical Operations from July 1995 until January
1996. Mr. Underwood has over 16 years of experience in operations management and
hardware and software development. From May 1992 through June 1995, Mr.
Underwood was Business Unit Manager for the Document Management Systems division
of Perceptics Corporation ("Perceptics"), a subsidiary of Westinghouse Electric
Corporation. From November 1988 through May 1992, Mr. Underwood served as the
Director - Operations and Engineering for Perceptics.
-20-
<PAGE> 21
Mr. Brown has been Senior Vice President - Business Development since
November 1997, and served as the Company's Chief Financial Officer from December
1995 to November 1997. Prior to joining IMNET, he was employed by Communications
Central, Inc., a pay telephone service provider, as Vice President, Chief
Financial Officer and Treasurer from October 1994 to November 1995. From March
1993 to September 1994, Mr. Brown served as Vice President, Chief Financial
Officer, Treasurer and Secretary of AER Energy Resources, Inc., a battery
manufacturing company, where he had responsibility for all finance, management
information systems and human resource activities. From September 1989 to
February 1993, Mr. Brown served as Vice President, Finance and Chief Operating
Officer of Delta Color, Inc., an ink manufacturing company, where he was
responsible for finance and operations. Prior to September 1989, Mr. Brown
served as Director, Accounting and Financial Planning for Gould, Inc. in its
imaging and graphics division.
Mr. Collins has been Senior Vice President - Marketing of the Company since
April 1995. Mr. Collins has 15 years of experience in information processing,
including ten years in the healthcare industry. Prior to joining IMNET, he was
employed by Lanier Worldwide ("Lanier") for 14 years, most recently as Marketing
Director. From 1991 through 1993 he served as Director of Product Marketing, and
from 1985 through 1991, he served as a District Manager for Lanier.
Mr. Hall joined IMNET in November 1996 as Senior Vice President - Sales.
Prior to joining IMNET, he was employed by The Compucare Company as Vice
President of Sales, from September 1995 to October 1996. From March 1987 to June
1995, Mr. Hall served in various sales capacities with divisions of American
Express Health Systems Group, and subsequently as National Sales Director of
First Data Corporation.
Mr. Remley joined IMNET in November 1997 as Senior Vice President and Chief
Financial Officer. Prior to joining IMNET, he was employed by The
Robinson-Humphrey Co., LLC as a securities analyst covering the healthcare
industry. From 1990 until 1996 he was employed by Health Management Systems,
Inc. as Vice President and Chief Financial Officer. From 1976 until 1990 he was
employed by KPMG Peat Marwick serving two years as a partner in the firm's audit
division. Mr. Remley is a certified public accountant.
Mr. Warner joined IMNET in July 1995 and became Vice President and
Assistant to the Chairman in December 1997. From July 1995 until December 1997
he served in various sales management positions at IMNET primarily dealing with
national accounts and business partners. Prior to joining IMNET, from 1990 until
1995 he served in various sales management capacities with American Express
Health Systems Group, and from 1983 until 1990 he was employed by Shared Medical
Systems, also in various sales management positions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company is traded on The Nasdaq Stock Market under
the symbol "IMNT". The chart below sets forth the high and low closing stock
prices for each quarter during the last two fiscal years.
-21-
<PAGE> 22
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
---------------------------------------------- ---------- ----------
<S> <C> <C>
September 30, 1996 $33.50 $14.63
December 31, 1996 $25.00 $11.50
March 31, 1997 $30.00 $13.75
June 30, 1997 $31.06 $13.50
September 30, 1997 $40.44 $26.88
December 31, 1997 $24.75 $15.13
March 31, 1998 $25.69 $16.44
June 30, 1998 $23.00 $ 9.88
</TABLE>
The closing price for the Company's Common Stock on July 31, 1998 was
$22.75 per share. As of July 29, 1998, there were approximately 92 record
holders of the Company's Common Stock. The Company has never declared any cash
dividends on its Common Stock. However, Hunter had paid dividends to its
stockholders prior to being acquired by the Company. The Company does not
anticipate paying any cash dividends in the foreseeable future. The Board of
Directors of the Company intends to review this policy from time to time, after
taking into account various factors such as the Company's financial condition,
results of operations, current and anticipated cash needs and plans for
expansion.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. The selected financial data presented
below under "Consolidated Statement of Operations Data" and "Consolidated
Balance Sheet Data" as of and for the five fiscal years ended June 30, 1998 is
derived from the consolidated financial statements of IMNET Systems, Inc., and
subsidiaries, and notes thereto. The consolidated financial statements as of
June 30, 1998 and 1997, and for each of the years in the three-year period ended
June 30, 1998, and the independent auditors' report thereon, are included at
Item 8 of this Form 10-K. The Selected Financial Data is qualified by, and
should be read in conjunction with, such consolidated financial statements, and
other financial information appearing elsewhere in this Form 10-K, including
Item 7- Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-22-
<PAGE> 23
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
System sales .................................... $ 40,467 $ 41,025 $ 24,532 $ 8,881 $ 4,551
Maintenance and professional services ........... 14,178 9,159 4,848 2,393 1,790
-------- -------- -------- -------- --------
Total revenues ............................... 54,645 50,184 29,380 11,274 6,341
-------- -------- -------- -------- --------
Operating expenses:
Cost of system sales ............................ 15,904 10,569 6,458 4,644 3,253
Cost of maintenance and professional services ... 8,674 5,511 2,705 1,637 1,155
Sales and marketing ............................. 16,146 13,261 9,752 4,433 3,527
Research and development ........................ 8,544 5,194 3,915 2,343 1,881
General and administrative ...................... 7,289 5,780 4,145 2,430 1,930
Non-recurring charges ........................... 1,486 2,586 10,370 -- --
-------- -------- -------- -------- --------
Total operating expenses ..................... 58,043 42,901 37,345 15,487 11,746
-------- -------- -------- -------- --------
Operating income (loss) ................. (3,398) 7,283 (7,965) (4,213) (5,405)
Interest income, net ............................. 532 1,582 1,938 134 29
-------- -------- -------- -------- --------
Income (loss) before income taxes ....... (2,866) 8,865 (6,027) (4,079) (5,376)
Income tax expense (benefit) ..................... (991) 1,883 -- -- --
-------- -------- -------- -------- --------
Net income (loss) ....................... $ (1,875) $ 6,982 $ (6,027) $ (4,079) $ (5,376)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic ...................................... $ (0.19) $ 0.73 $ (0.69) $ (0.77) $ (1.38)
======== ======== ======== ======== ========
Diluted .................................... $ (0.19) $ 0.69 $ (0.69) $ (0.77) $ (1.38)
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic ...................................... 9,768 9,615 8,779 5,330 3,888
======== ======== ======== ======== ========
Diluted .................................... 9,768 10,067 8,779 5,330 3,888
======== ======== ======== ======== ========
<CAPTION>
JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ 15,666 $ 9,133 $ 16,895 $ 1,857 $ 2,634
Marketable securities ............................ 2,132 11,606 21,542 -- --
Working capital .................................. 41,590 42,771 49,407 4,873 3,276
Total assets ..................................... 82,595 85,853 70,915 11,303 9,405
Total stockholders' equity ....................... 68,412 69,790 60,823 8,071 6,552
</TABLE>
Note: The selected financial data gives retroactive recognition to the 1997
acquisition of Hunter, which has been accounted for using the pooling of
interests method of accounting.
-23-
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The accompanying discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with Item 1-
"Business" and the Company's Consolidated Financial Statements and Notes thereto
included as a part of this Form 10-K. In addition, on July 23, 1998 the Company
announced that it has entered into an Agreement of Merger with HBOC. See Item 1
- - "Business - Recent Developments - Proposed Merger with HBOC" and "Proposed
Merger with HBOC", below.
IMNET develops, markets, installs and services electronic information and
document management systems to meet the needs of the healthcare industry and
other document-intensive businesses. The Company, which was incorporated on May
15, 1992, acquired the electronic imaging assets of IMGE, Inc. ("IMGE") on
October 5, 1992 (the "1992 Acquisition"). From May 15, 1992 through October 5,
1992, the Company's activities consisted primarily of efforts to raise funds and
to negotiate the 1992 Acquisition. IMNET's products include proprietary and
third party software and hardware components which are integrated to create
electronic information and document management systems. IMNET supports its
customers through a broad range of 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. 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, and training, as well as maintenance and
service contracts for software and certain hardware support. IMNET systems are
sold directly to end-users as well as through third party distribution partners.
Although most of the Company's relationships with the HCIS Distribution Partners
are relatively new, the Company expects that sales to and through its HCIS
Distribution Partners and other distribution partners will continue to increase.
Revenues from sales to the healthcare industry decreased to 83% of total
revenues in fiscal 1998 from 93% of total revenues in fiscal 1997, principally
as a result of the inclusion of the results of operations of Advisoft (renamed
IMNET/France) since its acquisition in late fiscal 1997. The Company anticipates
that sales to the healthcare industry will increase as a percentage of total
annual revenues from fiscal 1998 levels, although such sales may fluctuate from
quarter to quarter. Revenues from sales outside of the United States increased
to 10% of total revenues in fiscal 1998 from 3% in fiscal 1997, also as a result
of the IMNET/France acquisition.
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 ordered, and if any services and maintenance
are to be performed. The Company and the customer mutually agree upon functional
requirements as to the operating environment, number of workstations, response
times and similar criteria. The Company then assembles the hardware components
required to demonstrate compliance with the functional requirements 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 customer's requirements. The Company and the customer participate in
this process. When all the customer's requirements have been demonstrated, the
customer signs a written acknowledgement signifying customer acceptance,
typically referred to as "factory acceptance". The Company repackages the
software and hardware components, which are picked up by
-24-
<PAGE> 25
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 the installation of the system at the
customer's location and in loading the customer's information. 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 specification. When there is mutual agreement that all functional
specifications have been met, the customer signs a written acknowledgement
signifying completion of site installation, typically referred to as "site
acceptance." The Company then recognizes the remaining 10% of software license
revenue which was deferred at the time of customer 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 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.
As noted in the description of a typical transaction with an end-user
customer, the Company recognizes revenues derived from system sales to end-user
customers, including 90% of software license fees and 100% of hardware revenues,
upon customer acceptance provided that acceptance is a condition of the
agreement and delivery of the configured system has occurred. The Company defers
recognition of 10% of the software license fees until completion of certain
insignificant vendor obligations primarily related to the site installation by
the customer. The Company recognizes 100% of revenues from enterprise-wide
licenses of software to end-users upon delivery of the software, assuming there
are no further significant vendor obligations. Revenues derived from system
sales to HCIS Distribution Partners are generally recognized 100% upon delivery,
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 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.
During the fiscal year ended June 30, 1996, the Company recognized revenue on
one arrangement that included payments beyond one year. That contract was with
McLaren Regional Healthcare Corporation.
Revenues from professional services, which may include preparation of
functional specifications, project management, systems integration, and
training, among others, are recognized as the services are performed, either on
a percentage of completion basis or on an hourly rate basis depending on the
terms of the underlying services agreement. Revenues derived from maintenance
and support contracts are recognized ratably over the terms of the related
contracts.
Deferred revenues represent billings rendered to, or payments received
from, customers for either (i) system sales prior to customer acceptance and
delivery to the customer or (ii) maintenance and support services prior to
rendering such services.
At June 30, 1998, the Company had approximately $74.4 million of signed
sales contracts for systems and services which had not yet been delivered and
for which no revenue had been recognized. The amount of signed sales contracts
for systems and services which have not been delivered includes contracts
-25-
<PAGE> 26
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 revenues over periods
of as much as five years. Any significant or ongoing failure to achieve signed
contracts and subsequent customer acceptance after expending time, effort and
funds could have a material adverse effect on the Company's business. Because
the Company adjusts the timing of an installation to accommodate customers'
needs, and because a typical end-user 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: (i) the amount
computed using the ratio of current product revenue to the total of current and
anticipated product revenue or (ii) the amount determined using the
straight-line method over the estimated useful life of the software, not to
exceed three years.
FISCAL 1997 ACQUISITIONS
On June 25, 1997, the Company acquired Advisoft Consulting, S.A.
("Advisoft"), a systems integration and consulting services company which had
been the Company's distribution partner in France since 1993. Aggregate
consideration paid at the time of the acquisition, which has been accounted for
utilizing 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. Of the
total original consideration, $6.9 million was allocated to goodwill. Contingent
consideration is potentially payable to the former shareholder of Advisoft over
the six year period following the transaction in the event that Advisoft exceeds
certain operating results goals. In fiscal 1998, $0.4 million was paid as
contingent consideration and goodwill was increased by a like amount. The
Company expects to build upon its established working partnership with Advisoft
to begin adapting and marketing the Company's healthcare application software
products for use in France and elsewhere in continental Europe.
On September 30, 1996, the Company acquired 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 having a market value as of such date of approximately $8.4
million for all of the outstanding common stock of Hunter. The acquisition of
Hunter and its LaserArc product line provides the Company with electronic report
management and distribution solutions. The acquisition was accounted for as a
pooling of interests and, accordingly, the Company's accompanying consolidated
financial statements have been restated to give retroactive recognition to the
acquisition to include the results of operations, financial position and cash
flows of Hunter for all periods.
FISCAL 1996 ACQUISITIONS
On November 3, 1995, the Company acquired Evergreen Technologies, Inc.
("Evergreen") by merger for aggregate consideration consisting of $1.3 million
in cash and 82,353 shares of IMNET Common Stock having a market value as of such
date of approximately $2.3 million. In connection with the Evergreen
acquisition, the Company allocated and expensed in the three months ended
December 31, 1995, approximately $2.9 million to in-process research and
development and allocated approximately $0.6
-26-
<PAGE> 27
million to intangible assets, including goodwill and acquired technology.
Additionally, on December 14, 1995 the Company acquired Quesix Software, Inc.
("Quesix"). The aggregate consideration for the acquisition of Quesix was $4.2
million in cash, acquisition costs and assumption of liabilities. In connection
with the Quesix acquisition, the Company allocated and expensed in the three
months ended December 31, 1995, approximately $2.8 million to in-process
research and development, and allocated approximately $1.4 million to goodwill.
Subsequent to the fiscal year ended June 30, 1996, the Company discovered a
possible income tax liability may have been incurred resulting from the
acquisition of Quesix of $1.4 million and reflected such amounts as an increase
to goodwill and income taxes payable in the consolidated financial statements as
of June 30, 1997. During 1998, the issues that gave rise to the possible income
tax liability were resolved and the amounts were reversed. The in-process
research and development expensed at the dates of the acquisitions had not
reached technological feasibility and had no alternative future use to the
Company.
The Company pursued the acquisitions discussed above to enhance the
capabilities and applications of the IMNET Electronic Information Warehouse. The
acquisition of Advisoft will enable the Company to adopt and market its
healthcare software products internationally and increase its market
penetration. The acquisition of Hunter provided the Company with additional
electronic report management capabilities. The acquisition of Evergreen and its
radiological imaging product line, MedVision, provided the Company with the
technology to expand and improve the radiological information storage, retrieval
and display capabilities of the IMNET Electronic Information Warehouse.
VALUE ADDED RESELLER AGREEMENT WITH ISG TECHNOLOGIES, INC.
In March 1997, the Company signed a value added reseller agreement with ISG
Technologies, Inc. ("ISG"), a Canadian corporation, whereby the Company will
distribute certain of ISG's medical image visualization software products under
a seven-year non-exclusive distribution agreement. IMNET made aggregate payments
in fiscal 1997 and 1998 totaling $7.8 million to ISG 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 license
fees. The Company has capitalized the $7.8 million of advance royalties and is
amortizing these advance royalties using the greater of the ratio of revenues
realized versus expected revenues (utilizing the ISG technology) or the straight
line method over seven years.
As a result of the value added reseller agreement entered into with ISG,
which rendered obsolete certain technology previously acquired by the Company in
the Evergreen acquisition, the Company incurred a non-recurring charge of $1.4
million in the third quarter of fiscal 1997, related to the write-down of the
Evergreen technology and the accrual of severance and other costs. These costs
included $0.9 million related to the write-off of capitalized software and
intangible assets, $0.3 million in severance and other costs related to the
termination of employees from Evergreen, and $0.2 million of other expenses.
BUSINESS ALLIANCE WITH HBOC
In March 1996, the Company signed agreements with HBOC to distribute
IMNET's products on a private label basis. Under the terms of the agreements,
HBOC markets the IMNET Electronic Information Warehouse, which has been
integrated with HBOC's clinical and information solutions, and HBOC will not
develop or market competing products. Under the terms of the distribution
agreement, the Company paid an aggregate $3.0 million in cash to HBOC in
exchange for the seven-year exclusive distribution rights. The Company also
agreed to support HBOC's First Perspective product line customers. The First
Perspective
-27-
<PAGE> 28
product line, prior to the distribution agreement, competed with the IMNET
Electronic Information Warehouse. The distribution agreement provided that HBOC
would offer its First Perspective product line customers the opportunity to
convert to the IMNET Electronic Information Warehouse and that the cost for such
conversion, estimated by the Company at the time of the agreement to be
approximately $3.0 million, will be assumed by the Company. As of June 30, 1998,
the Company believes that 8 of 11 total customers will convert to the Company's
products and 3 customers will not convert.
As a result of these transactions, during the three months ended March 31,
1996, the Company recorded a nonrecurring charge of $4.6 million to the
Company's consolidated statement of operations and capitalized $1.4 million of
intangible assets related to the Company's valuation of the expected cash flows
from maintenance revenues for the support of the First Perspective customers.
The $1.4 million intangible asset is being amortized on a straight-line basis
over an estimated life of seven years. During 1998, the Company determined that
the estimated First Perspective conversion costs would exceed the $3.0 million
originally estimated and, accordingly, recorded an additional conversion cost
charge of $0.5 million. The Company has classified the remaining $2.2 million of
estimated conversion costs, net of the $1.3 million conversion costs incurred
through June 30, 1998, in accrued expenses in the accompanying June 30, 1998
consolidated balance sheet. The Company believes the amounts accrued are
adequate based on current estimates of conversion costs.
Transactions between HBOC and the Company under the distribution agreement
typically involve several steps. HBOC maintains a master copy of IMNET software
which it replicates for delivery to its customers when they receive a
sublicense. HBOC provides the Company with notice of the number of copies of
software that HBOC has duplicated, in writing, either at the end of the
accounting period or at the time HBOC grants a sublicense to its customer.
HBOC's unconditional obligation to pay the Company for the duplicated software
is without regard to the terms and conditions of HBOC's sublicense with its
customer. The Company recognizes 100% of the revenue from HBOC as of the date of
the notification of duplication by HBOC.
The Company recognized revenue from the business alliance with HBOC of
$16.7 million, $15.8 million and $2.4 million during the years ended June 30,
1998, 1997 and 1996, respectively. These amounts included purchases of software
sublicenses by HBOC of $2.0 million in fiscal 1996 and $3.0 million in fiscal
1997 whereby at the time of purchase, HBOC had not identified all of the
end-user customers by name, although HBOC had several likely prospects.
Subsequently these licenses were delivered to identified customers.
GRANT OF MANUFACTURING RIGHTS TO SOFTNET
On June 30, 1996, the Company granted to SoftNet Systems, Inc. ("SoftNet")
worldwide, exclusive manufacturing rights and non-exclusive, non-healthcare
distribution rights for the MegaSAR Microfilm Jukebox and its associated
technology. The terms of the transaction also included $1.0 million of
nonrefundable software license fees related to the MegaSAR product. The Company
will continue to sell the MegaSAR to be manufactured by SoftNet (as the market
may demand such technology) and provide maintenance and support for its existing
MegaSAR customers.
-28-
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for each fiscal period indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales ................................ 74.1% 81.7% 83.5%
Maintenance and professional services ....... 25.9 18.3 16.5
-------- -------- --------
Total revenues ......................... 100.0 100.0 100.0
-------- -------- --------
Operating expenses:
Cost of system sales ........................ 29.1 21.1 22.0
Cost of maintenance and professional services 15.9 11.0 9.2
Sales and marketing ......................... 29.5 26.4 33.2
Research and development .................... 15.6 10.3 13.3
General and administrative .................. 13.4 11.5 14.1
Non-recurring charges ....................... 2.7 5.2 35.3
-------- -------- --------
Total operating expenses ............... 106.2 85.5 127.1
-------- -------- --------
Operating income (loss) ................ (6.2) 14.5 (27.1)
-------- -------- --------
Interest income, net ........................... 1.0 3.2 6.6
-------- -------- --------
Income (loss) before income taxes ...... (5.2) 17.7 (20.5)
-------- -------- --------
Income tax expense (benefit) ................... (1.8) 3.8 --
-------- -------- --------
Net income (loss) ...................... (3.4)% 13.9% (20.5)%
======== ======== ========
</TABLE>
Note: The financial data shown above gives retroactive recognition to the 1997
acquisition of Hunter, which has been accounted for using the pooling of
interests method of accounting.
Comparison of Fiscal Years Ended June 30, 1998 and June 30, 1997
Revenues. The Company's total revenues were $54.6 million compared to $50.2
million for fiscal 1997, an increase of $4.4 million, or 9%. The Company's total
revenues derived from sales to domestic healthcare customers were $45.6 million
for fiscal 1998 or 83% of total revenue, compared to $46.4 million or 93% of
total revenue in fiscal 1997. This change in revenue mix is primarily
attributable to the inclusion of the results of the Company's French subsidiary,
IMNET/France (formerly Advisoft), in fiscal 1998 results since its purchase in
late fiscal 1997, and the Company expects the level of domestic sales to
increase as a percentage of total sales in the future. Revenues from sales to
international customers also increased as a result of the Advisoft acquisition
and totaled $5.6 million in fiscal 1998 compared to $1.4 million in fiscal 1997,
an increase of $4.2 million, or 309%. The Company acquired Advisoft on June 25,
1997 and anticipates that sales to international customers will continue to
increase in fiscal 1999. Revenue derived from direct sales activity was $23.4
million or 43% of total revenue for fiscal 1998 compared to $26.8 million or 53%
of fiscal 1997 revenue. Included in total revenues is $31.2 million of revenue
resulting from the Company's alliances with its HCIS Distribution Partners,
including $16.7 million from HBOC. The Company expects the revenue mix between
its direct sales force and that of its HCIS Distribution Partners to remain
relatively even in the future, although quarterly fluctuations in mix are
likely. Revenues from sales to domestic general business customers remained
relatively small at $3.4 million or 6% of total revenue in fiscal 1998 compared
to $2.4 million or 5% of total revenue in fiscal 1997.
-29-
<PAGE> 30
Revenues from system sales totaled $40.5 million in fiscal 1998 compared to
$41.0 million in fiscal 1997, a decrease of $0.5 million, or 1%. System sales
activity was hampered in the Company's first quarter of fiscal 1998 due, in
part, to delayed customer purchasing decisions resulting from the Company's
disclosure of the receipt of a series of anonymous letters critical of the
Company's financial reporting practices. The Company's third fiscal quarter
sales were also weaker than expected because several purchase decisions were
postponed by prospective customers. Revenues from maintenance and professional
services were $14.2 million in fiscal 1998 compared to $9.2 million in fiscal
1997, an increase of $5.0 million, or 55%. The increase in maintenance and
professional services revenues is primarily attributable to an increase in
project installation activity to healthcare customers and additional maintenance
contracts that are beginning to generate revenue as the Company's installed
customer base increases.
The Company's product sales have been volatile and concentrated in a small
number of customers and the Company has historically derived a substantial
percentage of its total revenues from a relatively small number of customers.
Developments adverse to the financial condition of any of these customers or the
inability to replace any such customer with significant new customers would have
a material adverse effect on the Company's business.
Cost of Revenues. The cost of system sales in fiscal 1998 was $15.9 million
compared to $10.6 million in fiscal 1997, an increase of $5.3 million, or 50%.
As a percentage of system sales revenues, the cost of system sales increased to
39% of such revenues in fiscal 1998 from 26% in fiscal 1997, resulting in a
decline in gross margins on system sales. Contributing to the decline in gross
margin on systems sales was an increase in less profitable hardware sales in
fiscal 1998 (23% of system sales in fiscal 1998 as compared to 15% in fiscal
1997), increases in estimated costs to complete the First Perspective
conversions (approximately $0.5 million) and certain other projects, increased
software amortization expense related to internally developed software ($0.4
million), and the net cost of increased staffing in the client services areas
through the first three fiscal quarters.
The cost of maintenance and professional services was $8.7 million in
fiscal 1998 compared to $5.5 million in fiscal 1997, an increase of $3.2 million
or 57%, and was substantially in line with the corresponding revenue increase of
55%. The increase in maintenance and professional service costs is primarily a
result of the need to add additional installation and support personnel as the
installed customer base continues to grow.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and related benefits and administrative costs allocated to
the Company's sales and marketing efforts. Sales and marketing expenses
increased to $16.1 million in fiscal 1998 compared to $13.3 million in fiscal
1997, an increase of $2.8 million, or 22%. With relatively flat systems sales,
commission expense in fiscal 1998 approximated the fiscal 1997 levels.
Accordingly, the increase in sales and marketing expenses of 22% in fiscal 1998
approximated the 20% increase in staffing in these areas during the year as the
Company continued to build its sales and marketing infrastructure in order to
generate additional system sales revenue. Expressed as a percentage of total
revenues, sales and marketing expenses were 30% in fiscal 1998 compared to 26%
in fiscal 1997.
Research and Development. Research and development expenses consist
primarily of salaries and related benefits and administrative costs allocated to
research and development efforts, offset by certain costs that meet the
Company's software capitalization policies. Research and development expenses
increased to $8.5 million in fiscal 1998 from $5.2 million in fiscal 1997, an
increase of $3.3 million, or 65%. Of this increase, $1.6 million or about
one-half of the increase, relates to the development activities of
-30-
<PAGE> 31
IMNET/France since its acquisition. Excluding these costs which were not
included in the fiscal 1997 results, research and development costs increased
34% over fiscal 1997 levels, a rate approximating the 31% growth in research and
development personnel for the year. The $3.1 million of capitalized computer
software development costs in fiscal 1998 represented 27% of the Company's total
research and development expenditures, a decline from the 28% level reported for
fiscal 1997. Management believes that the capitalization rate in fiscal 1999
will continue at a rate similar to that incurred in fiscal 1998, due to the
scheduled release dates of several new software products. As a percentage of
total revenues, research and development expenses increased to 16% from 10% in
fiscal 1998 as compared to fiscal 1997 due to the lower than anticipated revenue
for the year and the increase in such costs related to IMNET/France, which was
acquired at the end 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 $7.3 million in fiscal 1998 from $5.8 million in fiscal 1997, an increase of
$1.5 million, or 26%. General and administrative expenses as a percentage of
total revenues remained relatively stable at 13% in fiscal 1998 compared to 12%
in fiscal 1997. Included in general and administrative costs are $0.9 million of
such costs incurred by IMNET/France which was acquired at the end of fiscal
1997. Adjusting for these costs, general and administrative costs increased 12%,
in line with the 11% increase in personnel in these areas. Additionally, the
Company incurred additional goodwill amortization in fiscal 1998 of $0.5 million
related to the Advisoft acquisition, an incremental provision for doubtful
accounts over the prior year's amount of $0.4 million, which was partially
offset by reduced bonus expense of $0.6 million due to the Company not achieving
its earnings expectations.
Non-recurring Charges. The Company incurred non-recurring charges of $1.5
million during fiscal 1998. These charges relate to non-recurring costs of
settling a claim against the Company ($0.8 million) and legal and other
professional service costs incurred by the Company ($0.7 million) to investigate
and address the issues related to a series of anonymous letters received by the
Company that were critical of the financial reporting practices of the Company.
The Company incurred non-recurring charges of $2.6 million during fiscal 1997,
comprised of: (i) $0.7 million related to acquisition costs associated with the
Hunter 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 (see "Value Added Reseller Agreement
with ISG Technologies, Inc." above for information concerning these charges);
and (iii) $0.5 million 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.
Income Taxes. The Company recorded an income tax benefit of approximately
$1.0 million in fiscal 1998 which resulted in an effective rate of 35% compared
to an effective rate of 21% in fiscal 1997. The effective rate in fiscal 1998 is
a function of the mix of foreign income tax expense of IMNET/France combined
with the income tax benefit in the United States. The 1997 effective rate was
lower than the statutory federal and state income rates primarily because of the
change in the valuation allowance for deferred tax assets. The Company believes
that the net deferred tax assets recorded at June 30, 1998 of $0.9 million will
be realized in the future.
Net Income (Loss). The Company's net loss for fiscal 1998 was $1.9 million,
or ($0.19) per share, compared to net income of $7.0 million, or $0.69 per
share, in fiscal 1997. Excluding the non-recurring charges of $1.5 million, the
tax effected net loss in fiscal 1998 would have been $0.9 million or ($0.09) per
share. The decline in the Company's results is largely attributable to the
Company's continued investment
-31-
<PAGE> 32
in its operating infrastructure during the first three fiscal quarters of 1998
in advance of, and at a rate that substantially exceeded, the Company's revenue
growth.
Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996
Revenues. The Company's total revenues were $50.2 million compared to $29.4
million for fiscal 1996, an increase of $20.8 million, or 71%. The Company's
total revenues derived from sales to domestic healthcare customers were $46.4
million for fiscal 1997 compared to $20.5 million for fiscal 1996, an increase
of $25.9 million, or 126%. This increase was primarily due to a significantly
larger customer base and the recognition of revenue from $7.9 million of
enterprise-wide software licenses for the IMNET EPRS, IMNET LaserArc, and IMNET
MedVision delivered to Baptist. Also contributing to the increase was $18.2
million of revenue resulting from the Company's alliances with its HCIS
Distribution Partners ($15.8 million from HBOC).
Revenues from sales to domestic general business customers were $2.4
million in fiscal 1997 compared to $6.5 million in fiscal 1996, a decrease of
$4.1 million, or 63%. Revenues from sales to international customers were $1.4
million in fiscal 1997 compared to $2.3 million in fiscal 1996, a decrease of
$0.9 million, or 40%. Revenues from system sales increased to $41.0 million in
fiscal 1997 compared to $24.5 million in fiscal 1996, an increase of $16.5
million, or 67%. Revenues from maintenance and professional services were $9.2
million in fiscal 1997 compared to $4.8 million in fiscal 1996, an increase of
$4.4 million, or 89%. The increase in maintenance and professional services
revenues is primarily attributable to an increase in services to healthcare
customers and additional maintenance contracts, resulting from a larger
installed base.
Cost of Revenues. The cost of system sales in fiscal 1997 was $10.6 million
compared to $6.5 million in fiscal 1996, an increase of $4.1 million, or 64%. As
a percentage of total revenues, the cost of system sales declined to 21% in
fiscal 1997 from 22% in fiscal 1996 as software license fees continued to be a
larger proportion of system sales in the revenue sales mix. As a percentage of
system sales revenues, the cost of system sales was 26% in both fiscal 1997 and
1996. The cost of system sales also reflected amortization expenses in each
fiscal year of $0.7 million relating to technology acquired in the 1992
acquisition and $0.9 million related to the ISG agreement in fiscal 1997. The
cost of maintenance and professional services was $5.5 million in fiscal 1997
compared to $2.7 million in fiscal 1996, an increase of $2.8 million, or 104%.
As a percentage of total revenues, this amount represented an increase to 11%
from 9%. This increase is primarily a result of the need to hire additional
installation and support personnel as the installed customer base continues to
grow. As a result, the cost of maintenance and professional services, as a
percentage of maintenance and professional services revenues, increased to 60%
in fiscal 1997 compared to 56% in fiscal 1996.
Sales and Marketing. Sales and marketing expenses increased to $13.3
million in fiscal 1997 compared to $9.8 million in fiscal 1996, an increase of
$3.5 million, or 36%. The increase was primarily due to higher sales commissions
from increased system sales and higher sales salary expenses associated with the
increase in the number of sales personnel. Expressed as a percentage of total
revenues, sales and marketing expenses were 26% in fiscal 1997 compared to 33%
in fiscal 1996.
Research and Development. Research and development expenses increased to
$5.2 million in fiscal 1997 from $3.9 million in fiscal 1996, an increase of
$1.3 million, or 33%. This increase was primarily attributable to an increase in
the number of research and development personnel and associated costs, partially
offset by the capitalization of $2.0 million in computer software development
costs related to
-32-
<PAGE> 33
new products and enhancements to be released over the next year. The $2.0
million of capitalized computer software development costs represented 28% of
the Company's total research and development expenditures in fiscal 1997 as
compared to 25% for fiscal 1996. As a percentage of total revenues, research and
development expenses decreased to 10% from 13% in fiscal 1997 as compared to
fiscal 1996.
General and Administrative. General and administrative expenses increased
to $5.8 million in fiscal 1997 from $4.1 million in fiscal 1996, an increase of
$1.7 million, or 39%. This increase was primarily attributable to increases in
salaries and associated costs, additional facilities costs due to the January
1997 relocation of the company's corporate offices and an increase in
depreciation expense associated with equipment to support increased staffing and
the Company's new corporate office facility. General and administrative expenses
as a percentage of total revenues decreased to 12% in fiscal 1997 from 14% in
fiscal 1996.
Non-recurring Charges. The Company incurred non-recurring charges of $2.6
million during fiscal 1997, comprised of (i) $0.7 million related to acquisition
costs associated with the Hunter acquisition, completed during the three month
period ended September 30, 1996; (ii) $1.4 million related to the write-down of
Evergreen technology associated with its MedVision product line, which was
obsoleted by the licensed technology under 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 information concerning
these charges); and (iii) $0.5 million 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 fiscal 1996, the Company
incurred nonrecurring 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 and Quesix incurred in the three month period
ended December 31, 1995; and (ii) $4.6 million related to the HBOC business
alliance entered into in the three month period ended March 31, 1996 (see "1996
Acquisitions" and "Business Alliance with HBOC" above for information concerning
these charges).
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 1997 was 21%, which is lower than the
statutory federal and state income tax rates primarily because of the decrease
in the valuation allowance for deferred income tax assets of $2.0 million. The
Company believes it likely that the net deferred income tax assets recorded at
June 30, 1997 of $1.1 million will be realized in the future and that the
effective income tax rate incurred in the future will increase if the Company
profit targets are achieved.
Net Income (Loss). The Company's net income for fiscal 1997 was $7.0
million, or $0.69 per share, compared to a net loss of $6.0 million, or $0.69
per share, in fiscal 1996. Exclusive of the non-recurring charges discussed
above, the Company recorded net income of $9.6 million, or $0.95 per share, for
fiscal 1997 compared to $4.3 million, or $0.47 per share, for fiscal 1996. The
improvement in the Company's results, exclusive of non-recurring charges, was
due to the significant growth in revenues, partially offset by increases in
operating expenses necessary to support the Company's continuing growth.
-33-
<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial data for the
fiscal years ended June 30, 1998 and June 30, 1997. This quarterly information
is unaudited, has been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of the Company's management, reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------------------------- --------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ....................... $ 17,414 $ 13,187 $ 16,074 $ 7,970 $ 15,872 $ 13,543 $ 11,110 $ 9,659
Operating expenses ................... 15,224 15,666 13,854 13,299 11,546 12,036 9,814 9,505
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) .............. 2,190 (2,479) 2,220 (5,329) 4,326 1,507 1,296 154
Interest income, net ................. 51 60 168 253 348 344 398 492
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes .... 2,241 (2,419) 2,388 (5,076) 4,674 1,851 1,694 646
Income tax expense (benefit) ......... 950 (919) 907 (1,929) 1,408 475 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .................... $ 1,291 $ (1,500) $ 1,481 $ (3,147) $ 3,266 $ 1,376 $ 1,694 $ 646
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Note: The financial data shown above gives retroactive recognition to the 1997
acquisition of Hunter, which has been accounted for using the pooling of
interests method of accounting.
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, changes in product mix, and customer
acceptance and delivery. Professional services revenues have also fluctuated
from quarter to quarter as a result of the timing of the installation of
software and hardware, project management and customized programming. Revenues
from maintenance services have not fluctuated significantly from quarter to
quarter and have been increasing as the number of the Company's installed
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.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1992, the Company has funded its operations,
working capital needs and capital expenditures primarily from revenues and sales
of equity securities. The Company was initially capitalized primarily by three
investment companies. Subsequently, the Company completed four private
placements in which new investors purchased Company securities. In July 1995,
the Company received approximately $37.5 million net of underwriter's discounts
and offering costs from its initial public offering. In February 1996, the
Company received an additional $18.5 million net of underwriters discounts and
offering costs from a subsequent offering of its Common Stock.
-34-
<PAGE> 35
The Company will require significant funds to implement its business
strategies. The Company may experience losses due to the following factors: (i)
many of the Company's operating expenses are incurred in anticipation of future
revenue; (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; (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 any funds
provided by operations, will be sufficient to fund the Company's ongoing
operations. If the Company has insufficient funds, there can be no assurance
that additional financing can be obtained on acceptable terms, if at all. The
absence of such financing would have a material adverse effect on the Company's
business, including a possible reduction or cessation of operations.
Cash, cash equivalents and marketable securities were $17.8 million at
June 30, 1998 compared to $20.7 million at June 30, 1997, a decrease of $2.9
million. In spite of the Company's net loss for fiscal 1998 of $1.9 million, the
Company generated positive cash flow from operations of $3.8 million. Cash flow
from operations was aided by net non-cash charges of $7.2 million and an
increase in current liabilities of $3.0 million, offset by increases in accounts
receivable and inventories aggregating $1.0 million. Outlays for fixed assets
and capitalized technology costs (including the final $2.6 million royalty
payment to ISG) totaled $2.4 million and $5.7 million, respectively. To fund
these and other costs, the Company liquidated approximately $9.5 million of
short-term investments during the year.
As revenue goals were not met in the first and the third quarter of fiscal
year 1998, the Company reduced the rate at which it hired professional staff in
the fourth quarter of fiscal 1998. Additionally, the Company made a series of
decisions to limit the growth of other operating expenses. The Company plans to
modestly increase its professional staff during fiscal 1999 and, as such, the
Company expects that its incremental requirements for office facilities and
office equipment to facilitate additional staffing should not be significant in
fiscal 1999.
The Company believes that its cash, cash equivalents and marketable
securities, along with net cash flows provided from operations, and liquidity
available under the Company's line of credit will be sufficient to finance
expected cash requirements for its operating activities and its anticipated
growth for at least the next 12 months. The Company's ability to meet its cash
obligations on a long-term basis will depend on its achieving and maintaining
profitable operations and on consistent and timely collection of its accounts
receivable. To date, inflation has not had a material impact on the Company's
revenues or income.
Accounts Receivables and DSOs. The Company's accounts receivable balance
increased $0.2 million in fiscal 1998, a significantly lower growth rate than
the $17.5 million and $15.1 million increases in fiscal 1997 and 1996. During
the second half of fiscal 1998, the Company implemented improved cash collection
procedures that resulted in fourth quarter cash collections in excess of $22.0
million.
The Company's accounts receivable days sales outstanding ("DSO" or "days")
decreased in fiscal 1998 to 215 days compared to 245 days at the end of fiscal
1997 computed on a trailing four quarters revenue basis, and to 171 days from
196 days computed on the last quarter revenue annualized basis. The Company's
DSOs are high by most industry standards due to the Company's historic use of
granting payment terms that extend as long as 12 months. 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
-35-
<PAGE> 36
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. The Company has not experienced any
significant losses as a result of this practice.
The following table summarizes the Company's DSO trends for each of the
last three years computed using the trailing four quarters approach and the last
quarter annualized approach:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Trailing four Current Trailing four Current Trailing four Current
quarters quarter quarters quarter quarters quarter
DSO DSO DSO DSO DSO DSO
-------------- --------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
September 30 ..... 229 356 239 219 175 143
December 31 ...... 240 204 218 198 200 140
March 31 ......... 252 254 229 194 188 153
June 30 .......... 215 171 245 196 237 151
</TABLE>
In April 1998, the Company announced that it had entered into a product
financing relationship with Sun Data, Inc., an information technology financing
organization with extensive experience in the financing of hardware, software
and service solutions in the healthcare industry. The agreement calls for the
financing organization to make available lease financing terms to future IMNET
customers as such needs arise. Under such an arrangement, the Company's customer
may stretch payment terms over several years with the leasing company, while the
leasing company makes payments directly to the Company sooner than has generally
been experienced.
While the Company believes that the product financing program may
contribute to reduced DSOs over time, it also believes that the selective use of
extended billing and payment terms will continue. Hence, the Company does not
anticipate material changes in DSO levels from those at June 30, 1998 in the
foreseeable future. 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.
Leases and Capital Expenditures. At July 1, 1996, the Company had an
operating lease agreement for 54,000 square feet of office space. To accommodate
continued growth, the Company signed operating leases, effective January 1997
and October 1997, bringing the total leased operating office space in its
Alpharetta, GA headquarters to 118,000 square feet and resulting in increased
rental expense in fiscal 1997 and 1998. Given the reduced rate of hiring
recently implemented, the Company does not expect to incur materially higher
levels of rental expense in fiscal 1999.
The Company anticipates capital expenditures of less than $2.0 million in
fiscal 1999 for the purchase of computer equipment for existing and new
employees, furniture and fixtures, new training equipment, and new equipment for
customer demonstrations.
Unsecured Credit Facility. During the quarter ended March 31, 1998, the
Company established a $15.0 million unsecured credit facility for working
capital and general corporate purposes. The credit facility, which is subject to
certain financial covenants, takes the form of an unsecured revolving line of
credit, has a one year term, and is priced below the lender's prevailing prime
rate of interest. The credit
-36-
<PAGE> 37
facility has been established to provide financial flexibility if cash needs
arise in the future. The Company is in compliance with all credit facility
covenants as of June 30, 1998.
Dividends. The cash dividends paid on common stock disclosed in the
consolidated statements of stockholders' equity and cash flows for the years
ended June 30, 1997 and 1996 represent normal stockholder distributions paid by
Hunter prior to its merger with IMNET, which was accounted for as a pooling of
interests. IMNET has not paid, and does not intend to pay, any dividends on its
common stock.
Certain Risk Factors. Several 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. For additional
detail, please refer to "Business-Risk Factors" contained in Part I, Item 1 of
this Form 10-K. Also, see the note preceding Part I of "Business" in this Form
10-K for additional information regarding the Private Securities Litigation
Reform Act.
YEAR 2000 IMPACT
To accommodate its growth, the Company intends, as a normal part of its
expansion, to upgrade and replace certain software products currently in use for
internal data processing purposes. Certain of these systems are not "Year 2000"
compliant, the most significant of which is the Company's financial management
system. Demonstrated "Year 2000" compliance will be a critical selection
criterion for the replacement systems and the costs incurred for the procurement
of such systems by the Company will be recorded at the time of procurement. At
this time, the Company does not anticipate any significant incremental expense
due to "Year 2000" compliance, but it does expect to incur costs of up to $0.4
million to upgrade internal systems over the course of the next 12 months, at
which time all internal data processing systems should be "Year 2000" compliant.
The Company has marketed "Year 2000" compliant versions of its software
product since June 1997. Over the course of the past year, the Company has been
in communication with its customers to advise them of version levels required to
avoid "Year 2000" issues. The Company has made available such software products
to customers utilizing earlier versions of the Company's products as part of the
normal upgrade process defined in the maintenance agreements in force between
the Company and such customers. Those agreements also provide that the customer
bear the costs of installing upgrades provided as part of the maintenance
agreements. The Company also offers its customers software which it licenses
from third parties and many of the Company's software programs interface with
software developed by its customers or software that its customers directly
license from third parties. There can be no assurance that such third party
software products are "Year 2000" compliant. The Company does not believe that
it has any material financial exposure to the "Year 2000" issue.
Because of the immediacy of "Year 2000", considerable investment is now
being made by information technology users to upgrade and convert computer
systems which are not "Year 2000" compliant. To the degree that the Company's
potential and existing customers will need to make such investments, it is
expected that other software purchases may be eliminated, reduced or deferred.
This may or may not include new purchases or upgrades to the Company's EIW
products.
-37-
<PAGE> 38
PROPOSED MERGER WITH HBOC
On July 23, 1998, IMNET Systems, Inc. ("IMNET", the "Company" or
"Registrant") signed an Agreement of Merger (the "Merger Agreement") to be
acquired by HBO & Company ("HBOC"). The acquisition, which is subject to several
terms and conditions, including regulatory and IMNET stockholder approval, the
availability of pooling of interests accounting, the absence of material adverse
events and the receipt of a "fairness opinion," is anticipated to close during
the fourth calendar quarter of 1998. Terms of the acquisition call for IMNET
stockholders to receive 0.84 of a share of HBOC common stock for each IMNET
share held. If the average closing price per share of HBOC common stock during
the twenty consecutive trading days ending on the second trading day prior to
the IMNET stockholder special meeting is less than $30.00 per share, then the
0.84 exchange ratio shall be increased based on a formula to a maximum exchange
rate of 1.1111 shares of HBOC for each IMNET share. If the average closing price
reaches $22.50 per share or below the IMNET Board of Directors may elect to
terminate the Merger Agreement if the average closing price of HBOC drops below
$22.50 per share. HBOC delivers enterprise-wide patient care, clinical,
financial and strategic management software solutions, as well as networking
technologies, electronic commerce, outsourcing and other services to healthcare
organizations throughout the world.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires companies to display, with the same prominence as other
financial statements, the components of other comprehensive income. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that an
enterprise disclose certain information about operating segments. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), Software Revenue Recognition
which superseded the previous authoritative guidance on this matter, SOP 91-1.
The pronouncement is effective for the Company beginning in fiscal year 1999. In
summary, this accounting pronouncement has significant ramifications for all
software companies that sell multiple element technology solutions including
those solutions comprised of software, hardware and services. As with many
accounting pronouncements, there are a number of approaches available to the
Company in applying SOP 97-2. Most approaches result in the delay of revenue
recognition from that experienced under SOP 91-1. The Company believes that SOP
97-2 will have the greatest impact on multiple component sales to end-user
customers, which will generally be accounted for using the percentage of
completion method of accounting. The Company believes that the application of
SOP 97-2 will have little impact on revenue from its HCIS distribution partners,
enterprise-wide licenses to end-users or maintenance revenue. The Company
expects that SOP 97-2 will result in the delay of some revenue recognition by
the Company beginning in fiscal 1999, however the impact on future results will
be
-38-
<PAGE> 39
dependent on the mix of sales activity experienced by the Company. Accordingly,
the overall impact on the Company's future results of operations is not
ascertainable at this time.
ANONYMOUS LETTERS
As previously disclosed, a series of "anonymous letters" were written
through September 1997 that raised issues about the Company's application of
generally accepted accounting principles. The Securities and Exchange Commission
(SEC) made a confidential and informal inquiry of the Company and its auditors,
KPMG Peat Marwick, LLP ("KPMG"), regarding the anonymous letter allegations.
KPMG and the Company have voluntarily provided to the SEC requested documents
and analyses relating to the Company's position relative to the matters raised
in the anonymous letters. Based on the information currently available, the
Company does not believe that the issues raised in the anonymous letters will
result in a retroactive or prospective change in the accounting policies
utilized by the Company, however, there can be no assurance as to the final
outcome of this informal investigation.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
-39-
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IMNET Systems, Inc.:
We have audited the accompanying consolidated balance sheets of IMNET
Systems, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998. In connection
with our audits of the accompanying consolidated financial statements, we also
have audited the financial statement schedule listed under Item 14(a)2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IMNET Systems, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
July 31, 1998
-40-
<PAGE> 41
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 15,666,109 $ 9,132,631
Marketable securities, at cost (estimated market value of $2,132,444 and $11,652,556
at June 30, 1998 and 1997, respectively) .............................................. 2,132,444 11,606,287
Trade accounts receivable, net of allowance for doubtful accounts of $2,076,491 and
$1,115,640 at June 30, 1998 and 1997, respectively .................................... 32,677,175 33,858,910
Inventories ............................................................................ 2,070,524 2,100,060
Prepaid expenses and other current assets .............................................. 2,443,739 2,136,686
------------ ------------
Total current assets .............................................................. 54,989,991 58,834,574
Property and equipment, net .............................................................. 6,714,584 6,242,243
Computer software development costs, net of accumulated amortization of $1,146,270 and
$391,867 at June 30, 1998 and 1997, respectively ....................................... 4,906,344 2,556,663
Acquired technology, net of accumulated amortization of $3,485,000 and $3,310,617
at June 30, 1998 and 1997, respectively ................................................ -- 174,383
Advance royalties, net of accumulated amortization of $1,551,381 at June 30, 1998 and
$880,821 at June 30, 1997, respectively ................................................ 6,548,619 6,919,179
Other intangibles, net of accumulated amortization of $614,244 and $283,332 at June 30,
1998 and 1997, respectively ............................................................ 1,211,825 1,542,737
Goodwill, net of accumulated amortization of $982,613 and $309,032 at June 30, 1998 and
1997, respectively ..................................................................... 7,579,561 9,349,174
Other noncurrent assets .................................................................. 644,477 233,949
------------ ------------
$ 82,595,401 $ 85,852,902
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 2,156,136 $ 3,026,276
Accrued expenses ....................................................................... 8,723,508 9,471,314
Income taxes payable ................................................................... -- 2,379,220
Deferred revenue ....................................................................... 2,520,536 1,186,388
------------ ------------
Total current liabilities ......................................................... 13,400,180 16,063,198
Other long-term liabilities .............................................................. 783,595 --
------------ ------------
Total liabilities ............................................................ 14,183,775 16,063,198
Stockholders' equity:
Common stock, $.01 par value. Authorized 25,000,000 shares; 9,818,786 shares issued
and 9,781,149 shares outstanding at June 30, 1998, and 9,779,374 shares issued
and 9,741,737 outstanding at June 30, 1997 ........................................... 98,188 97,794
Additional paid-in capital ............................................................. 83,939,746 83,378,585
Treasury stock, 37,637 shares, at cost ................................................. (148,417) (148,417)
Accumulated deficit .................................................................... (15,413,183) (13,538,258)
Cumulative foreign currency translation adjustment ..................................... (64,708) --
------------ ------------
Total stockholders' equity ........................................................ 68,411,626 69,789,704
Commitments and contingencies ...........................................................
------------ ------------
$ 82,595,401 $ 85,852,902
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-41-
<PAGE> 42
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
System sales ..................................... $ 40,466,642 $ 41,024,717 $ 24,532,389
Maintenance and professional services ............ 14,178,289 9,158,945 4,847,696
------------ ------------ ------------
Total revenues ................................. 54,644,931 50,183,662 29,380,085
------------ ------------ ------------
Operating expenses:
Cost of system sales ............................. 15,904,470 10,568,920 6,457,962
Cost of maintenance and professional services .... 8,674,248 5,510,716 2,704,536
Sales and marketing .............................. 16,145,812 13,261,111 9,752,525
Research and development ......................... 8,544,110 5,193,678 3,915,032
General and administrative ....................... 7,288,810 5,780,008 4,144,848
Non-recurring charges ............................ 1,485,610 2,586,059 10,370,000
------------ ------------ ------------
Total operating expenses ....................... 58,043,060 42,900,492 37,344,903
------------ ------------ ------------
Operating income (loss) ........................ (3,398,129) 7,283,170 (7,964,818)
Interest income, net ............................. 532,031 1,582,301 1,937,653
------------ ------------ ------------
Income (loss) before income taxes .............. (2,866,098) 8,865,471 (6,027,165)
Income tax expense (benefit) ..................... (991,173) 1,883,065 --
------------ ------------ ------------
Net income (loss) .............................. $ (1,874,925) $ 6,982,406 $ (6,027,165)
============ ============ ============
Net income (loss) per common share
Basic ............................................ $ (0.19) $ 0.73 $ (0.69)
============ ============ ============
Diluted .......................................... $ (0.19) $ 0.69 $ (0.69)
============ ============ ============
Weighted average shares outstanding
Basic ............................................ 9,768,243 9,614,708 8,779,356
============ ============ ============
Diluted .......................................... 9,768,243 10,067,359 8,779,356
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-42-
<PAGE> 43
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------------------------------------------
Series A Series B Series I Series II
------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 65,393 7,283,156 -- -- 37,996 5,329,085 51,729 6,810,481
Dividends accrued on
Series A preferred
stock .................. -- -- -- -- -- -- -- --
Conversion of
preferred stock and
accrued dividends to
common stock ........... (65,393) (7,283,156) -- -- (37,996) (5,329,085) (51,729) (6,810,481)
Sale of common stock ... -- -- -- -- -- -- -- --
Exercise of stock
options and warrants ... -- -- -- -- -- -- -- --
Issuance of common
stock in connection
with an acquisition .... -- -- -- -- -- -- -- --
Dividends paid ......... -- -- -- -- -- -- -- --
Net loss ............... -- -- -- -- -- -- -- --
----------- ------------ ------ ----- ----------- ------------ ------------ ------------
Balance at June 30, 1996 -- -- -- -- -- -- -- --
Exercise of stock
options and warrants ... -- -- -- -- -- -- -- --
Issuance of common
stock in connection
with an acquisition .... -- -- -- -- -- -- -- --
Dividends paid ......... -- -- -- -- -- -- -- --
Net income ............. -- -- -- -- -- -- -- --
----------- ------------ ------ ----- ----------- ------------ ------------ ------------
Balance at June 30, 1997 -- $ -- -- $ -- -- $ -- -- $ --
----------- ------------ ------ ----- ----------- ------------ ------------ ------------
Exercise of stock
options and warrants ... -- -- -- -- -- -- -- --
Issuance of common
stock in connection
with stock purchase
plan ................... -- -- -- -- -- -- -- --
Cumulative foreign
currency translation
adjustment ............. -- -- -- -- -- -- -- --
Net loss ............... -- -- -- -- -- -- -- --
----------- ------------ ------ ----- ----------- ------------ ------------ ------------
Balance at June 30, 1998 -- $ -- -- $ -- -- $ -- -- $ --
=========== ============ ====== ===== =========== ============ ============ ============
<CAPTION>
Common Stock Additional Treasury Stock
------ ------ Paid-in ------ ------
Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,896,619 28,966 2,233,811 37,637 (148,417)
Dividends accrued on
Series A preferred
stock .................. -- -- -- -- --
Conversion of
preferred stock and
accrued dividends to
common stock ........... 2,316,257 23,163 19,669,734 -- --
Sale of common stock ... 4,248,500 42,485 55,927,969 -- --
Exercise of stock
options and warrants ... 83,342 833 659,267 -- --
Issuance of common
stock in connection
with an acquisition .... 82,353 824 2,305,060 -- --
Dividends paid ......... -- -- -- -- --
Net loss ............... -- -- -- -- --
----------- ------------ ------------ ----------- -----------
Balance at June 30, 1996 9,627,071 96,271 80,795,841 37,637 (148,417)
Exercise of stock
options and warrants ... 67,219 672 583,595 -- --
Issuance of common
stock in connection
with an acquisition .... 85,084 851 1,999,149 -- --
Dividends paid ......... -- -- -- -- --
Net income ............. -- -- -- -- --
----------- ------------ ------------ ----------- -----------
Balance at June 30, 1997 9,779,374 $ 97,794 $ 83,378,585 37,637 $ (148,417)
----------- ------------ ------------ ----------- -----------
Exercise of stock
options and warrants ... 11,849 118 118,962 -- --
Issuance of common
stock in connection
with stock purchase
plan ................... 27,563 276 442,199 -- --
Cumulative foreign
currency translation
adjustment ............. -- -- -- -- --
Net loss ............... -- -- -- -- --
----------- ------------ ------------ ----------- -----------
Balance at June 30, 1998 9,818,786 $ 98,188 $ 83,939,746 37,637 $ (148,417)
=========== ============ ============ =========== ===========
<CAPTION>
Cumulative
Foreign
Currency Total
Accumulated Translation Stockholders'
Deficit Adjustment Equity
----------- ----------- -------------
<S> <C> <C> <C>
Balance at June 30, 1995 (13,466,254) -- 8,070,828
Dividends accrued on
Series A preferred
stock .................. (27,245) -- (27,245)
Conversion of
preferred stock and
accrued dividends to
common stock ........... -- -- 270,175
Sale of common stock ... -- -- 55,970,454
Exercise of stock
options and warrants ... -- -- 660,100
Issuance of common
stock in connection
with an acquisition .... -- -- 2,305,884
Dividends paid ......... (400,000) -- (400,000)
Net loss ............... (6,027,165) -- (6,027,165)
------------ ------------ ------------
Balance at June 30, 1996 (19,920,664) -- 60,823,031
Exercise of stock
options and warrants ... -- -- 584,267
Issuance of common
stock in connection
with an acquisition .... -- -- 2,000,000
Dividends paid ......... (600,000) -- (600,000)
Net income ............. 6,982,406 -- 6,982,406
------------ ------------ ------------
Balance at June 30, 1997 $(13,538,258) -- $ 69,789,704
------------ ------------ ------------
Exercise of stock
options and warrants ... -- -- 119,080
Issuance of common
stock in connection
with stock purchase
plan ................... -- -- 442,475
Cumulative foreign
currency translation
adjustment ............. -- (64,708) (64,708)
Net loss ............... (1,874,925) -- (1,874,925)
------------ ------------ ------------
Balance at June 30, 1998 $(15,413,183) $ (64,708) $ 68,411,626
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-43-
<PAGE> 44
IMNET SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ (1,874,925) $ 6,982,406 $ (6,027,165)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization of property and equipment .............. 1,889,780 1,117,249 680,448
Amortization of computer software development costs, acquired
technology, advanced royalties, goodwill and other intangibles .... 2,603,839 2,395,112 995,682
Provision for doubtful accounts receivable ........................... 960,851 557,754 259,846
Provision for inventory obsolescence ................................. 755,722 1,482,421 222,487
Non-recurring charges ................................................ 833,436 869,524 10,370,000
Deferred income tax expense (benefit) ................................ 174,375 (1,076,330) --
(Increase) decrease in:
Trade accounts receivable ............................................ (229,534) (17,477,665) (15,134,683)
Note receivable from related party ................................... -- 2,500,000 --
Inventories .......................................................... (726,186) (1,168,552) (1,399,699)
Prepaid expenses and other current assets ............................ (1,860,648) 152,580 (575,468)
Other non-current assets ............................................. (644,477) -- --
Increase (decrease) in:
Accounts payable ..................................................... (1,019,209) 1,425,962 (346,385)
Accrued expenses ..................................................... 2,635,789 (271,461) 419,432
Income tax payable ................................................... (1,000,000) 1,000,000 --
Deferred revenue ..................................................... 1,334,148 319,935 400,180
------------ ------------ ------------
Net cash provided by (used in) operating activities ............... 3,832,961 (1,191,065) (10,135,325)
------------ ------------ ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired ....................... -- (5,087,313) (4,813,969)
Additions to property and equipment .................................... (2,362,121) (3,911,893) (2,385,217)
Additions to computer software development costs ....................... (3,104,084) (2,015,058) (1,286,406)
Proceeds from sales of marketable securities ........................... -- 1,990,622 --
Purchases of marketable securities ..................................... (13,557,703) (32,134,579) (62,226,760)
Maturities of marketable securities .................................... 23,031,546 41,808,166 40,685,000
Additions to intangible assets ......................................... 796,032 (205,227) (155,204)
Payments in connection with HBOC business alliance ..................... -- (1,800,000) (1,200,000)
Payments of advance royalties to ISG ................................... (2,600,000) (5,200,000) --
------------ ------------ ------------
Net cash (used in) provided by investing activities ............... 2,203,670 (6,555,282) (31,382,556)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on obligations under capital leases ................. -- -- (3,847)
Proceeds from sale of common and preferred stock ....................... 119,080 -- 56,410,370
Proceeds from exercise of stock options and warrants ................... 442,475 584,267 549,099
Dividends paid ......................................................... -- (600,000) (400,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities ............... 561,555 (15,733) 56,555,622
------------ ------------ ------------
Effect of exchange rate changes on cash ........................... (64,708) -- --
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ........ 6,533,478 (7,762,080) 15,037,741
Cash and cash equivalents at beginning of year ........................... 9,132,631 16,894,711 1,856,970
------------ ------------ ------------
Cash and cash equivalents at end of year ................................. $ 15,666,109 $ 9,132,631 $ 16,894,711
============ ============ ============
Disclosures of cash flow information:
Cash paid for interest ................................................. $ -- $ -- $ --
============ ============ ============
Cash paid for income taxes ............................................. $ -- $ 1,883,065 $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE> 45
IMNET SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business and Basis of Presentation
IMNET Systems, Inc. and subsidiaries (the Company) develop, market,
install, and service electronic information and document management systems to
meet the needs of the healthcare industry and other document-intensive
businesses. The Company's hardware and software systems electronically capture,
index, store and retrieve information which is resident on most storage media,
including magnetic disk, optical disk, microfilm, paper and x-ray film. The
Company sells systems to end-users and distributes systems through distribution
partners. Because of the Company's concentration of revenues and accounts
receivable with certain major customers and the concentration of revenues and
accounts receivable in the healthcare industry, a decline in the economic
conditions or financial stability with respect to these major customers or the
healthcare industry could have a material adverse impact on the Company's
financial position and results of operations.
The accompanying consolidated financial statements of IMNET Systems,
Inc. and subsidiaries include the accounts of IMNET Systems, Inc. and its wholly
owned subsidiaries, IMNET/France, Inc. (formerly Advisoft Consulting, S.A.),
Evergreen Technologies, Inc. ("Evergreen"), Hunter International, Inc.
("Hunter") and Quesix Software, Inc. ("Quesix"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements have been restated to reflect the effect of
the merger with Hunter as described in Note 2.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(b) Revenue Recognition and Deferred Revenue
The Company recognizes revenues derived from system sales to end-user
customers, including 90% of software license fees and 100% of hardware revenues,
upon the factory acceptance by the customer and delivery of configured system,
provided that acceptance is a condition of the agreement. 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. The Company recognizes 100% of revenues from enterprise-wide
licenses of software to end-users upon delivery of the software, if there are no
further significant vendor obligations.
Revenues derived from system sales to distribution partners are
recognized upon delivery of the system, provided that 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.
-45-
<PAGE> 46
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. During the fiscal year ended June 30,
1996, the Company recognized revenue on one arrangement that included payment
terms beyond one year.
Revenues from professional services, which may include preparation of
functional specifications, systems integration, and training, among others, are
recognized as the services are performed, using either the percentage of
completion method or an hourly rate basis depending on the terms of the
underlying services agreement. 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 (a) systems sales prior to factory acceptance and
delivery, or (b) maintenance or support services prior to the delivery of such
service or support.
(c) Cash and Cash Equivalents
The Company classifies all highly liquid investments with an original
maturity of three months or less as cash equivalents.
(d) Marketable Securities
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115,
investments in equity and debt securities are classified as held to maturity,
trading, or available for sale securities. Trading securities are reported at
fair value, with changes in fair value included in the statement of operations,
while available for sale securities are reported at fair value, with net
unrealized gains or losses included as a component of stockholders' equity.
Held-to-maturity securities are reported at amortized cost. Unrealized losses on
all securities that are other than temporary are reported in the statement of
operations upon determination that the loss is other than temporary.
Marketable securities include U.S. Treasury bills and debt securities
of certain other U.S. government agencies, U.S. government sponsored
corporations, and foreign government securities with original maturities greater
than 90 days and equal to or less than one year.
Marketable securities are carried at amortized cost, classified as
held-to-maturity, and are included in current assets in the accompanying
consolidated balance sheet. Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
June 30, 1998....................... $ 2,132,444 $ -- $ -- $ 2,132,444
============ ========= ======== ============
June 30, 1997....................... $ 11,606,287 $ 48,609 $ (2,340) $ 11,652,556
============ ========= ======== ============
</TABLE>
-46-
<PAGE> 47
Realized gains and losses from sales of held-to-maturity securities were $16,001
for the year ended June 30, 1997.
Market values have been determined through information obtained from quoted
market sources.
(e) Inventories
Inventories consist of personal computers and other computer equipment held for
sale to customers as well as components and assemblies associated with the
Company's MegaSAR Microfilm Jukebox (the "MegaSAR"). Inventories are carried at
the lower of cost (average cost method) or market (net realizable value).
(f) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization of property and
equipment are provided using the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Computer software............................................................................... 3-5 years
Computer equipment.............................................................................. 3-5 years
Machinery and equipment......................................................................... 5-7 years
Furniture and fixtures.......................................................................... 7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method
over the estimated useful life of the improvement or the lease term, whichever
is shorter. Amortization of assets held under capital lease arrangements is
included in depreciation expense.
(g) Intangible Assets
Intangible assets include computer software development costs, acquired
technology, goodwill, advance royalties associated with the agreement with ISG
Technologies, Inc. ("ISG") (see note 3), and other intangible assets, including
amounts associated with customers acquired in connection with the business
alliance with HBO & Company (the "HBOC alliance") (see note 4). The Company's
accounting policy with respect to the amortization of computer software
development costs is described in (h) below. The cost of acquired technology
results from the Company's acquisitions of other businesses and is amortized
using the straight-line method over estimated useful lives of five years. The
advance royalties associated with the ISG value added reseller agreement are
being amortized using the greater of the ratio of revenues earned from the ISG
products to expected revenue or the straight-line method over seven years. The
intangible asset associated with the HBOC alliance is being amortized using the
straight-line method over the life of the agreement (seven years). Goodwill has
been recorded in connection with the Company's acquisitions of other businesses
and is being amortized using the straight-line method over seven to fifteen
years. The carrying values of all intangible assets are reviewed by the Company
for impairments which are recognized when the expected undiscounted future cash
flows derived from such intangible assets are less than their carrying values.
If the Company's review indicates a potential impairment, the Company uses fair
value in determining the amount that should be written off.
-47-
<PAGE> 48
(h) Research and Development and Computer Software Development Costs
Research and development costs consist principally of compensation and
benefits paid to the Company's employees, amounts paid to independent
contractors, and the allocation of facilities, computing and other
administrative costs directly related to those efforts. All research and
development costs are expensed as incurred.
Computer software development costs consist principally of compensation
and benefits related to the development and modification of the Company's
software products and are capitalized in accordance with the provisions of
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
such costs begins upon the establishment of technological feasibility for the
product or enhancement which is defined by the Company as completion of a
detailed program design and ends when the resulting product or enhancement is
available for use by customers.
Amortization of computer software development costs is provided by the
Company on individual products or enhancements and begins when the product or
enhancement is available for use by customers. Amortization is recorded using
the greater of: (1) the amount computed using the ratio of current product
revenue to the total of current and anticipated product revenue or (2) the
amount determined using the straight-line method over the estimated useful life
of the software, not to exceed three years. Amortization of computer software
development costs is included in cost of system sales in the accompanying
consolidated statements of operations.
(i) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability
method of SFAS 109, deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit carryforwards.
Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred income tax assets and liabilities of a change in tax rates is
recognized in the consolidated statement of operations in the period that
includes the enactment date.
(j) Net Income (Loss) Per Common Share
Net income (loss) per common share has been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Basic earnings per share has been computed based upon the weighted
average number of common shares outstanding during each period. Diluted earnings
per share has been computed based upon the weighted average number of common
shares and common share equivalents outstanding during each period. Common share
equivalents recognize the dilutive effects of outstanding options and warrants
to acquire common stock. The effect of common stock equivalents has not been
included in the computations when their impact on the Company's net loss per
share is antidilutive. The potentially dilutive shares not included in the
computation of diluted earnings per share in 1998 because the inclusion
of such shares would have been antidilutive was 423,681 shares.
The following computations set forth the calculations of basic and
diluted earnings per share for the years ended June 30, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------- --------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)................... $(1,874,925) $(1,874,925) $ 6,982,406 $ 6,982,406 $(6,027,165) $(6,027,165)
=========== =========== =========== ============ =========== ===========
Weighted average outstanding
common shares....................... 9,768,243 9,768,243 9,614,708 9,614,708 8,779,356 8,779,356
Increase due to assumed issuance
of shares related to outstanding
stock options using the treasury
stock method........................ -- -- -- 452,651 -- --
----------- ----------- ----------- ------------ ----------- -----------
Adjusted weighted average
outstanding common shares
and common share equivalents........ 9,768,243 9,768,243 9,614,708 10,067,359 8,779,356 8,779,356
=========== =========== =========== ============ =========== ===========
Net income (loss) per common
share and common share
equivalent.......................... $ (0.19) $ (0.19) $ 0.73 $ 0.69 $ (0.69) $ (0.69)
=========== =========== =========== ============ =========== ===========
</TABLE>
-48-
<PAGE> 49
(k) Fair Value of Financial Instruments
The Company uses financial instruments in the normal course of its
business. The carrying values of cash equivalents, accounts and notes
receivable, accounts payable, accrued expenses and deferred revenues approximate
fair value due to the short-term maturities of these assets and liabilities. The
fair value of the Company's investment in marketable securities is disclosed in
(d) above.
(l) Stock Compensation Plans
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On July 1,
1996, the company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which required entities
that continue to apply the provisions of APB 25 to provide pro forma disclosures
for employee stock compensation awards made in fiscal 1996 and future years as
if the fair-value-based method defined in SFAS 123 had been applied.
(m) Foreign Currency
Assets and liabilities denominated in foreign currencies have been
translated into U.S. dollars at the period-end exchange rate. Revenues and
expenses denominated in foreign currencies have been translated in the U.S.
dollars at the weighted average exchange rate. Translation gains and losses are
accounted for in a separate component of stockholders' equity. The exchange
gains and losses arising on transactions are charged to income as incurred and
were not material for all periods presented.
(n) Reclassifications
Certain reclassifications have been made to the June 30, 1996 and 1997
financial statements to conform with presentations adopted as of and for the
year ended June 30, 1998.
(o) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires companies to display, with the same prominence
as other financial statements, the components of other comprehensive income.
SFAS 130 requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that an
enterprise disclose certain information about operating segments. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
-49-
<PAGE> 50
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2, Software Revenue Recognition
("SOP 97-2") which superseded the previous authoritative guidance on this
matter, SOP 91-1. The pronouncement is effective for the Company beginning in
fiscal year 1999. In summary, this accounting pronouncement has significant
ramifications for all software companies that sell multiple element technology
solutions including those solutions comprised of software, hardware and
services. As with many accounting pronouncements, there are a number of
approaches available to the Company in applying SOP 97-2. Most approaches result
in the delay of revenue recognition from that experienced under SOP 91-1. The
Company believes that SOP 97-2 will have the greatest impact on multiple
component sales to end user customers, which will generally be accounted for
using the percentage of completion method of accounting. The Company believes
that the application of SOP 97-2 will have little impact on revenue from its
HCIS distribution partners, enterprise-wide licenses to end users or maintenance
revenues. The Company expects that SOP 97-2 will result in the delay of some
revenue recognition by the Company in fiscal 1999, however the impact on future
results will be dependant on the mix of sales activity experienced by the
Company. Accordingly, the overall impact on the Company's consolidated financial
statements is not ascertainable at this time.
(2) MERGERS AND ACQUISITIONS
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.
Aggregate consideration paid at the time of the acquisition, which has been
accounted for utilizing the purchase method of accounting, 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 allocated $6.9 million of the original
purchase price to goodwill and included the results of operations of Advisoft
(renamed IMNET/France) in the Company's consolidated statement of operations
effective July 1, 1997. Contingent consideration is potentially payable to the
former shareholder of Advisoft over the six year period following the
transaction in the event that Advisoft exceeds certain operating results goals.
In fiscal 1998, $0.4 million was paid as contingent consideration and goodwill
was increased by a like amount. Prior to the acquisition of Advisoft, the
Company recognized revenue of $1.2 million and $1.4 million from Advisoft for
the years ended June 30, 1997 and 1996, respectively.
On September 30, 1996, the Company issued 429,292 shares of its common
stock for all of the outstanding common stock of Hunter. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the merger to include the results of operations, financial position and cash
flows of Hunter. Total revenue and net income (loss) for the individual
companies for the periods prior to the merger are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Total Revenue:
IMNET ...... $ 26,623,305 $ 8,464,639
Hunter ..... 2,756,780 2,809,110
------------ ------------
$ 29,380,085 $ 11,273,749
============ ============
Net income (loss):
IMNET ...... $ (6,390,893) $ (4,809,523)
Hunter ..... 363,728 729,925
------------ ------------
$ (6,027,165) $ (4,079,598)
============ ============
</TABLE>
-50-
<PAGE> 51
In connection with the merger with Hunter, the Company recorded merger
related costs of approximately $750,000 in the quarter ended September 30, 1996.
These costs consist primarily of legal, accounting and broker's fees related to
the Hunter transaction and have been included in non-recurring charges in the
accompanying 1997 consolidated statement of operations.
On December 14, 1995, the Company acquired all of the common stock of
Quesix for $4.2 million in cash and acquisition costs. The Company recorded the
acquisition using the purchase method of accounting with $2.8 million of the
purchase price allocated to in-process research and development and charged to
the consolidated statement of operations in December 1995 and $1.4 million of
the purchase price allocated to goodwill. Subsequent to the fiscal year ended
June 30, 1996, the Company discovered that a possible income tax liability may
have been incurred resulting from the acquisition of Quesix of $1,379,220 and
reflected such amount as an increase to goodwill and income taxes payable in the
accompanying consolidated financial statements. During 1998, the issues that
gave rise to the possible income tax liability were resolved favorably and the
amounts were reversed. The results of operations of Quesix have been included in
the Company's consolidated statement of operations since the effective date of
the acquisition.
On November 3, 1995, the Company acquired all of the common stock of
Evergreen in a merger with a wholly owned subsidiary of the Company for $1.3
million in cash and acquisition costs and the issuance of 82,353 shares of the
Company's common stock with a market value of $2.3 million. The Company recorded
the acquisition using the purchase method of accounting with $2.9 million of the
purchase price allocated to in-process research and development and charged to
the consolidated statement of operations in November 1995 and $546,000 and
$102,000 allocated to goodwill and acquired technology, respectively. The
results of operations of Evergreen have been included in the Company's
consolidated statement of operations since the effective date of the
acquisition.
The unaudited pro forma consolidated results of operations of the
Company for the years ended June 30, 1997 and 1996 are summarized below as if
the acquisitions described above had occurred on July 1, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1997 1996
-------- --------
(amounts in thousands, except per share data)
<S> <C> <C>
Revenues ........................... $ 54,121 $ 33,461
======== ========
Net income (loss) .................. $ 6,696 $ (5,753)
======== ========
Net income (loss) per common share:
Basic ............................ $ 0.69 $ (0.65)
======== ========
Diluted .......................... $ 0.66 $ (0.65)
======== ========
Weighted average shares outstanding:
Basic ............................ 9,699 8,892
======== ========
Diluted .......................... 10,151 8,892
======== ========
</TABLE>
The unaudited pro forma consolidated results of operations included
above do not necessarily represent results which would have occurred if the
acquisitions had taken place on the dates indicated nor are they necessarily
indicative of the results of future operations.
-51-
<PAGE> 52
(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 has paid its full obligation under this agreement
of $7.8 million through June 30, 1998. The Company has capitalized the $7.8
million of advance royalties and is amortizing these advance royalties using the
greater of the ratio of revenues realized to expected revenue (utilizing ISG
technology) or the straight-line method over seven years.
(4) BUSINESS ALLIANCE WITH HBO & COMPANY
In March 1996, the Company signed agreements with HBO & Company (HBOC),
forming a business alliance whereby HBOC will distribute the Company's products
on a private label basis and HBOC has agreed to certain noncompete provisions
with respect to the Company's products. As part of these agreements, the Company
also assumed certain customer support and conversion obligations with respect to
HBOC customers currently using HBOC's First Perspective product line. The
Company initially accrued $3.0 million at the time of the agreement to reflect
its estimate of the cost of converting the First Perspective customers to the
Company's products. During 1998, the Company determined that the estimated
conversion costs would exceed the initial $3.0 million initial estimate and
recorded additional estimated conversion costs of $0.5 million. The HBOC
alliance provided for a seven year term and five equal payments to HBOC totaling
$3.0 million, beginning upon execution of the agreements through March 1997.
Payments of $1.2 million were made to HBOC by the Company in fiscal 1996 and the
remaining $1.8 million was paid in fiscal 1997. The Company recorded a
non-recurring charge of $4.6 million to the Company's consolidated statement of
operations and capitalized the remaining $1.4 million as an intangible asset
related to the Company's valuation of estimated cash flows from the maintenance
and support revenues expected from the First Perspective customers. The Company
has classified the remaining $2.2 million of estimated conversion costs, net of
the $1.3 million conversion costs incurred through June 30, 1998, in accrued
expenses in the accompanying June 30, 1998 consolidated balance sheet (see note
17 - Subsequent Event).
(5) INVENTORIES
Inventories, which principally consist of finished goods, are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computer equipment and components, held for resale $ 1,914,934 $ 943,213
Computer equipment and components, other ......... 2,189,808 2,490,520
----------- -----------
4,104,742 3,433,733
Less allowance for inventory obsolescence ........ (2,034,218) (1,333,673)
----------- -----------
$ 2,070,524 $ 2,100,060
=========== ===========
</TABLE>
-52-
<PAGE> 53
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Leasehold improvements ....................... $ 85,740 $ 32,937
Computer software ............................ 793,823 501,076
Computer equipment ........................... 6,763,532 5,321,095
Machinery and equipment ...................... 240,912 216,304
Furniture and fixtures ....................... 2,680,317 2,310,091
------------ ------------
10,564,324 8,381,503
Less accumulated depreciation and amortization (3,849,740) (2,139,260)
------------ ------------
$ 6,714,584 $ 6,242,243
============ ============
</TABLE>
(7) ACCRUED EXPENSES
Components of accrued expenses are summarized as follows:
<TABLE>
JUNE 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Salaries and employee related costs .... $3,713,727 $3,599,768
Obligations under the HBOC alliance, net 2,154,511 1,741,041
Advance royalties payable to ISG ....... -- 2,600,000
Accrued sales and other taxes payable .. 1,397,799 431,321
Other .................................. 1,457,471 1,099,184
---------- ----------
$8,723,508 $9,471,314
========== ==========
</TABLE>
(8) INCOME TAXES
The provision for income tax expense (benefit) includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax basis of assets and liabilities and any increase
or decrease in the valuation allowance for deferred income tax assets. For the
year ended June 30, 1998 the Company generated a Federal tax net operating loss
of $3,455,000. This amount is available as a carryback to offset Federal and
state taxable income for the year ended June 30, 1997.
Income (loss) before income tax expense (benefit) for the years ended
June 30, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
U.S. operations ........... $(4,691,393) $ 8,865,471 $(6,027,165)
Foreign operations ........ 1,825,295 -- --
----------- ----------- -----------
Total income (loss) $(2,866,098) $ 8,865,471 $(6,027,165)
=========== =========== ===========
</TABLE>
-53-
<PAGE> 54
Income tax expense (benefit) for the years ended June 30, 1998, 1997
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Current:
Federal ..................... $(1,679,304) $ 2,647,880 $ --
State ....................... (115,727) 311,515 --
Foreign ..................... 629,483 -- --
----------- ----------- -------------
Total current .......... (1,165,548) 2,959,395 --
----------- ----------- -------------
Deferred:
Federal ..................... 162,345 (963,033) --
State ....................... 12,030 (113,297) --
Foreign ..................... -- -- --
----------- ----------- -------------
Total deferred ......... 174,575 (1,076,330) --
----------- ----------- -------------
Total income tax expense (benefit) $ (991,173) $ 1,883,065 $ --
=========== =========== =============
</TABLE>
The significant components of the deferred income tax expense (benefit)
for the years ended June 30, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred income tax expense (benefit) ............. $ 163,860 $ 888,539 $ (272,959)
----------- ----------- -----------
Increase (decrease) in the beginning of the year
balance of the valuation allowance for deferred
income tax assets ............................. 10,515 (1,964,869) 272,959
----------- ----------- -----------
$ 174,375 $(1,076,330) $ --
=========== =========== ===========
</TABLE>
-54-
<PAGE> 55
The tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable, due to allowance for doubtful accounts ....... $ 731,831 $ 357,408
Net operating loss carryforwards .................................. 2,389,090 2,389,129
Intangibles, due to basis differences ............................. 1,263,454 1,191,343
Acquired technology, due to differences in amortization ........... 191,521 367,766
Research and experimentation credit carryforwards ................. 204,787 184,799
Inventory differences ............................................. 899,025 749,354
Compensation related accruals ..................................... 906,674 734,126
Other ............................................................. 612,337 214,541
----------- -----------
Total deferred income tax assets ............................... 7,198,719 6,188,466
----------- -----------
Less valuation allowance .......................................... (3,895,193) (3,884,678)
----------- -----------
Net deferred income tax assets ................................. 3,303,526 2,303,788
----------- -----------
Deferred income tax liabilities -- property and equipment, due to
differences in depreciation and computer software development costs (2,401,571) (1,227,458)
----------- -----------
Net deferred income tax assets (liabilities) included in other
assets in the consolidated balance sheet ....................... $ 901,955 $ 1,076,330
=========== ===========
</TABLE>
Income tax expense (benefit) differs from the amounts computed by
applying the Federal statutory income tax rate of 34% to income (loss) before
income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) ............... $ (974,473) $ 3,014,260 $(2,172,904)
State income taxes, net of Federal income tax expense (benefit) (76,380) 352,920 (254,447)
Non deductible charge for goodwill amortization and
other permanent differences ............................... 204,875 623,361 2,138,600
Increase (decrease) in the valuation allowance for
deferred income tax assets ................................ 10,515 (1,964,869) 272,959
Other .......................................................... (155,710) (142,607) 15,792
----------- ----------- -----------
$ (991,173) $ 1,883,065 $ --
=========== =========== ===========
</TABLE>
The net change in the valuation allowance for the years ended June 30,
1998, 1997 and 1996 was an increase (decrease) of $10,515, ($1,964,869) and
$272,959, respectively. Under SFAS 109, deferred income tax assets and
liabilities are recognized for differences between the financial statement
carrying amounts and the tax bases of assets and liabilities which will result
in future deductible or taxable amounts and for net operating loss and research
and experimentation credit carryforwards. A valuation allowance is then
established to reduce the deferred income tax assets to the level at which it is
"more likely than not" that the
-55-
<PAGE> 56
tax benefits will be realized. Realization of tax benefits of deductible
temporary differences and operating loss and tax credit carryforwards depends on
having sufficient taxable income within the carryback and carryforward periods.
Sources of taxable income that may allow for the realization of tax benefits
include: (1) taxable income in the current year or prior years that is available
through carryback, (2) future taxable income that will result from the reversal
of existing taxable temporary differences and (3) taxable income generated by
future operations. The Company believes it is more likely than not that the net
deferred income tax assets recorded at June 30, 1998 of $901,955 will be
realized.
As of June 30, 1998, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $6.1 million and research and
experimentation credit carryforwards of approximately $205,000 which are
available to offset future Federal taxable income. The carryforwards expire
beginning in 2007 through 2011. The expiration of the Company's net operating
loss and research and experimentation credit carryforwards by year is summarized
as follows:
<TABLE>
<CAPTION>
RESEARCH AND
NET OPERATING EXPERIMENTATION CREDIT FISCAL YEAR
LOSS CARRYFORWARDS CARRYFORWARDS OF EXPIRATION
<S> <C> <C>
$ -- $ 6,000 2007
-- 31,000 2008
1,602,000 70,000 2009
4,524,000 93,000 2010
-- 5,000 2011
---------- ----------
$6,126,000 $ 205,000
========== ==========
</TABLE>
The amount of net operating loss and research and experimentation
credit carryforwards that the Company may use to offset taxable income in future
years is limited as a result of an ownership change, as defined, under Internal
Revenue Code Section 382 ("section 382"), which occurred effective with the
completion of the Company's initial public offering in July 1995. The Company's
annual Section 382 limitation on the amount of taxable income that can be offset
in the future by net operating loss and research and experimentation credit
carryforwards is approximately $3,396,000.
(9) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In July 1995, the Company completed an initial public offering of its
common stock. The Company sold 3,450,000 shares at $12.00 per share, which
resulted in proceeds to the Company of $37.5 million, net of underwriting
discounts and offering costs.
(b) Conversion of Preferred Stock and Accrued Dividends to Common Stock
In connection with the completion of the offering described in (a)
above, all of the Company's Series A, Series I, and Series II preferred stock,
including accrued dividends on the Series A preferred stock of $270,175, were
converted to shares of the Company's common stock. As a result of this
conversion, the Company issued 606,904, 714,332, and 972,507 shares of common
stock to these preferred shareholders, respectively, and issued 22,514 shares of
common stock in lieu of payment of accrued dividends on the
-56-
<PAGE> 57
Series A preferred stock. Also in connection with the same offering, warrants to
acquire 39,168 shares of the Company's common stock were exercised resulting in
$250,008 in proceeds to the Company.
(c) Secondary Offering
In February 1996, the Company completed a secondary offering of 798,500
shares of common stock at a price of $25.50, which resulted in proceeds to the
Company of $18.5 million, net of underwriting discounts and offering costs.
(10) EMPLOYEE BENEFIT PLANS
(a) Stock Option and Stock Purchase Plans
The Company's Employee Stock Option and Rights Plan (the "Employee Plan")
provides for the grant of options to acquire up to 1,590,000 shares of common
stock, as well as stock appreciation rights, to key employees, directors, and
advisors. Options granted under the plan generally vest ratably over 5 years and
are generally granted with an exercise price no less than the fair market value
of the common stock on the grant date. The term of each option is generally 10
years.
The Company's Non-Employee Directors Stock Option Plan (the "Directors Plan")
provides for the grant of options to purchase up to 94,000 shares of common
stock to non-employee directors of the Company. This plan provides for automatic
grants of non-qualified stock options at an exercise price equal to the
then-current fair market value. Options to purchase 3,760 shares are granted
annually to non-employee directors after directors are elected at the annual
meeting of stockholders. They vest on the first anniversary. They expire on the
first anniversary without vesting if the director has not, during that year,
attended at least 75% of all meetings of the Board and any committees on which
the director serves. The options have a five year term.
The Company has an Informal Stock Option Plan (the "Informal Plan") which
provides for the grant of options to acquire a maximum of 810,000 shares of
Common Stock. As of June 30, 1998, 296,150 options were currently exercisable
under the Informal Plan. Options granted under the Informal Plan are granted on
terms substantially similar to the Employee Plan.
The Company's 1997 Long-Term Incentive Plan was established in fiscal 1998.
This plan provides for the grant of options to acquire up to 875,000 shares of
common stock. Options granted under this plan are granted on terms substantially
similar to the Employee Plan described above. As of June 30, 1998, no options
had been granted under this plan.
On December 19, 1996, the stockholders approved the adoption of the IMNET
Systems, Inc. Employee Discount Stock Purchase Plan for eligible employees of
the Company and its subsidiaries (the "Stock Purchase Plan"). The Stock Purchase
Plan was established pursuant to the provisions of Section 423 of the Internal
Revenue Code. Under the Stock Purchase Plan, eligible employees may elect to
make contributions which are used to purchase the Company's common stock. The
purchase price for common stock is equal to 85% of the closing sale price on The
Nasdaq Stock Market for the common stock on either the first or last day of the
applicable six-month period, whichever is the lower. An aggregate of 300,000
shares of common stock of the Company have been reserved for issuance under the
Stock Purchase Plan, and as of June 30, 1998 an aggregate of 27,563 shares of
common stock have been purchased and issued under the Plan at an average price
of $16.05 per share. The weighted average fair
-57-
<PAGE> 58
value of stock issued under the stock purchase plan was $8.15 per share for
the year ended June 30, 1998. Participants contributed approximately $515,000
and $235,000 in the years ended June 30, 1998 and 1997, respectively.
A summary of the status of the Company's stock option plans as of June 30,
1998, 1997, and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------- --------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,484,705 $ 15.75 906,809 $ 13.40 574,559 $ 7.08
Granted ......................... 391,260 18.07 735,520 17.15 433,104 20.33
Exercised ....................... (11,849) 10.05 (67,219) 8.69 (41,419) 6.78
Forfeited/canceled .............. (200,529) 20.04 (90,405) 8.79 (59,435) 7.39
---------- ---------- ---------
Outstanding at end of year ...... 1,663,587 15.82 1,484,705 15.75 906,809 13.40
========== ========== =========
Options exercisable at year-end . 663,651 219,594 100,488
========== ========== =========
Weighted-average fair value of
options granted during the year $ 11.44 $ 9.90 $ 13.00
========== ========== =========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGES OF EXERCISE PRICES AT JUNE 30, 1998 LIFE PRICE AT JUNE 30, 1998 PRICE
------------------------- ---------------- ------------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
$ 6.38 - $ 7.45 ......... 321,385 6.36 $ 7.19 185,913 $ 7.10
$12.00 - $15.75 ......... 549,120 8.07 $ 15.31 322,920 $ 15.46
$16.13 - $20.38 ......... 406,760 9.23 $ 18.13 2,200 $ 18.65
$20.50 - $26.88 ......... 386,322 7.51 $ 21.28 152,618 $ 21.32
--------- -------
$ 6.38 - $26.88 ......... 1,663,587 7.89 $ 15.82 663,651 $ 14.47
========= =======
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans and its stock purchase plan because the exercise
price of the option equals or exceeds the fair value of the underlying stock at
the date of grant and the stock purchase plan is a non-compensatory plan. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net income (loss) and net
income (loss) per common share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) applicable to
common stockholders:
As reported ....................... $ (1,874,925) $ 6,982,406 $ (6,027,165)
============= ============= =============
Pro forma ................... $ (4,418,888) $ 3,084,366 $ (6,767,992)
============= ============= =============
Net income (loss) per common share:
As reported:
Basic .................... (0.19) 0.73 (0.69)
============= ============= =============
Diluted .................. (0.19) 0.69 (0.69)
============= ============= =============
Pro forma:
Basic ................... (0.45) 0.32 (0.77)
============= ============= =============
Diluted ................. (0.45) 0.31 (0.77)
============= ============= =============
</TABLE>
-58-
<PAGE> 59
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0.0%;
expected volatility of 65.0%; risk-free interest rate of 6.0%; and expected
lives of 5.7 years for all options and 6 months for the purchase rights under
the stock purchase plan.
(b) Retirement Plan
The Company maintains a defined contribution savings plan, the IMNET
Systems, Inc. Retirement Savings Plan ("the Plan"), for the benefit of all
eligible employees. The Plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986 (the "Code"), as amended. Employees may
participate in the Plan at any time following their date of employment and can
elect to contribute a portion of their annual earnings (subject to an annual
limit specified in the Code) to the Plan on a pretax basis. The Company incurred
$68,503 in matching contributions to the Plan in 1998 and no contributions were
made in 1997.
(c) Deferred Compensation Plan
In 1997, the Company adopted a non-qualified deferred compensation plan, the
IMNET Systems, Inc. Nonqualified Deferred Compensation Plan, that provides for
deferrals of bonuses and salaries. This plan, unlike a qualified plan which is
subject to, among other things, the compensation limitations and vesting
requirements of the Internal Revenue Code and additional requirements of the
Employee Retirement Income Security Act, is an arrangement for a select group of
management or other highly compensated employees that is not subject to any
specific qualification criteria. The participants do not recognize income until
amounts are paid to the participant. The Company is not entitled to an income
tax deduction until such amounts are paid to participants.
(11) RELATED PARTY TRANSACTIONS
The Company believes the terms and conditions of the related party
transactions described below are comparable to those which could have been
obtained in transactions with unaffiliated parties.
(a) Notes Receivable from Officer
The Company advanced funds to its chairman and chief executive officer in
exchange for two promissory notes receivable, as amended, in the amounts of
$75,000 and $30,000 dated October 5, 1992 and January 31, 1994, respectively.
The $75,000 note was without interest for two years from the date of issuance,
accrued interest at a rate of 10% per annum thereafter, and was due on September
30, 1997. The $30,000 note beared interest from the date of issuance at a rate
of 10% per annum and was due by June 30, 1997. Repayment in full of the
principal and accrued interest under the notes was made in fiscal 1997.
(b) Distribution and Manufacturing Rights Agreement with Softnet
(i) Distribution Agreement
In March 1993, the Company entered into a distribution
agreement with SoftNet Systems, Inc. or its affiliated or predecessor
companies ("SoftNet"). SoftNet was a related party and founding
investor/stockholder of the Company and three officers and directors of
SoftNet were on the Company's Board of Directors at June 30, 1996. In
June 1995, the distribution agreement was
-59-
<PAGE> 60
amended to provide for a commitment by SoftNet to take delivery of
hardware and software from the Company totaling approximately $2.0
million no later than June 30, 1996. During the year ended June 30,
1995, the Company delivered software to SoftNet under the distribution
agreement and recognized revenue of $485,000, which was included in
accounts receivable at June 30, 1995. This amount was paid in full by
SoftNet in February 1996.
On June 30, 1996, the distribution agreement was amended a
second time to convert the original $2.0 million commitment for
hardware and software to a $2.0 million commitment for software. Also
in June 1996, the Company delivered the remaining software associated
with this commitment of $1,515,000 and recognized revenue of the same
amount, which was converted into the note receivable from related party
at June 30, 1996 (see (iii) below). During the year ended June 30,
1996, the Company also provided services to SoftNet beyond the terms of
the distribution agreement described above which resulted in additional
service revenues to the Company of approximately $335,000, which was
also converted to the note receivable from related party at June 30,
1996 (see (iii) below).
(ii) Grant of Manufacturing and Distribution Rights
On June 30, 1996, the Company entered into certain agreements
with SoftNet and an affiliated company, which provided for the grant of
exclusive worldwide manufacturing rights and nonexclusive distribution
rights with respect to markets other than healthcare, as defined, for
the MegaSAR, the Company's proprietary microfilm storage device. The
terms of the agreements included an obligation by SoftNet to pay the
Company nonrefundable advance license fees of $1,000,000, representing
the license fees for the first 250 manufactured units. These
nonrefundable advance license fees were recognized as revenue by the
Company in the year ended June 30, 1996 (see (iii) below). The terms of
the agreements also provided for SoftNet to pay the Company a fixed
license fee per unit for all units manufactured, and a provision for
SoftNet to purchase, at carrying value, the Company's remaining raw
materials inventories on an as needed basis.
(iii) Note Receivable from SoftNet
Simultaneous with the execution of the manufacturing and
distribution rights agreements and the second amendment to the
distribution agreement described above under (i), the Company converted
all amounts due from SoftNet into a secured note receivable from
SoftNet bearing interest at the prime rate plus 2%, due upon the
earlier of: (1) the sale of IMNET common stock owned by SoftNet or (2)
June 29, 1997. The note receivable was fully secured at June 30, 1996
by 112,913 shares of IMNET Common Stock owned by SoftNet and held as
collateral by the Company.
On September 24, 1996, the Company received a $2.5 million
cash payment on the $2.9 million note receivable from related party
described above and released the collateral that the Company held under
the note. SoftNet also ceased to be a related party based upon the sale
of its IMNET common stock and the resignation of two members of the
IMNET Board of Directors and one member of the SoftNet Board of
Directors, such that the two Boards of Directors have no members in
common.
-60-
<PAGE> 61
(iv) Amended Agreement
In July 1997, the Company and SoftNet amended the distributor
agreement referred to above. The Company agreed to a credit related to
disputed amounts of $177,000 and accepted property valued at $71,000 in
partial satisfaction of the remaining amount due and executed a new
unsecured note receivable for the remaining balance of $161,000 which
has been included in prepaid expenses and other current assets in the
accompanying 1998 and 1997 consolidated balance sheets. In addition,
SoftNet agreed to manufacture the MegaSAR based on an order from the
Company for which a certain portion of the payment for each MegaSAR
delivered to IMNET will be applied against the balance of the note due
IMNET.
(12) MAJOR CUSTOMERS AND INTERNATIONAL OPERATIONS
(a) Major Customers
For the years ended June 30, 1998, 1997, and 1996, major customers accounted
for the following as a percentage of total revenues and receivable balances at
June 30, 1998:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL REVENUES
------------------------------- TRADE
FOR THE YEARS ENDED ACCOUNTS
JUNE 30, RECEIVABLE
------------------------------- BALANCES
1998 1997 1996 AT JUNE 30, 1998
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Customer A.......... 31% 31% 8% $ 7,045,017
Customer B.......... 5% 16% 9% 912,182
Customer C.......... 1% 5% 22% 273,737
Customer D.......... -- -- 10% --
Customer E.......... 14% -- -- 7,867,341
</TABLE>
(b) International Revenue
International revenues, excluding revenues of the Company's France-based
subsidiary IMNET/France, were $114,300, $1,373,895 and $2,301,729 for the
years ended June 30, 1998, 1997 and 1996, respectively.
(c) Foreign Operations
Revenues, operating income, and total assets of the Company's subsidiary
IMNET/France, as of and for the year ended June 30, 1998 totaled $5.5 million,
$1.9 million, and $11.4 million, respectively.
(13) COMMITMENTS AND CONTINGENCIES
(a) Line of Credit
On March 25,1998, the Company established a $15.0 million unsecured
credit facility for working capital and general corporate purposes with Wachovia
Bank, N.A. (the "Bank"). The credit facility, which is subject to a minimum
tangible net worth covenant, takes the form of an unsecured revolving line of
credit and has a one year term. The loan bears interest at the Bank's prime rate
of
-61-
<PAGE> 62
interest minus 0.25% or LIBOR plus 1.25%. The Company incurred a $25,000 credit
facility initiation fee which is being amortized on a straight-line basis over
the term of the loan.
(b) Leases
The Company leases office facilities under noncancelable operating lease
agreements which extend through January 2007. Rental expense from noncancelable
operating leases and all other cancelable operating leases for the years ended
June 30, 1998, 1997, and 1996 was approximately $2,382,000, $1,203,000 and
$509,000, respectively.
Future minimum lease payments under all noncancelable operating lease
agreements with original terms in excess of one year in the aggregate and for
the next five years are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
<S> <C>
1999.................................... $ 2,542,000
2000.................................... 2,190,000
2001.................................... 2,133,000
2002.................................... 2,246,000
2003.................................... 2,359,000
Thereafter.............................. 8,228,000
------------
Total future minimum lease payments $ 19,698,000
============
</TABLE>
Future minimum sublease payments due to the Company associated with the
subleasing of the Company's prior office facility are $302,000 for the fiscal
year ended June 30, 1999.
(c) Contractual Commitments
The Company has a licensing agreement which obligates the Company to
pay 1.5% of net license fee revenue from new licenses of certain of its products
effective July 1, 1997 and continues through December 31, 2003. The Company has
paid $100,000 in advance which is being offset against amounts due under this
agreement.
The Company enters into agreements with customers in the ordinary
course of business which contain certain contractual commitments. The Company
believes that all such contractual commitments will be satisfied or renegotiated
and no material adverse financial impact will result from the Company's failure
to meet any of these commitments.
(14) NON-RECURRING CHARGES
During fiscal 1998, the Company incurred non-recurring charges of $1.5
million. Of this amount, approximately $0.7 million relates to professional
services expense incurred as a result of the anonymous letters matter and $0.8
million relate to the resolution of a contractual dispute.
The Company incurred non-recurring charges of $2.6 million during fiscal
1997. A total of $750,000 of acquisition costs were recorded related to the
Hunter acquisition, which was completed during the quarter ended September 30,
1996. As a result of the value added reseller agreement entered into with ISG,
which obsoleted certain technology previously acquired by the Company in the
Evergreen acquisition, the Company incurred a non-recurring charge of $1.4
million in the third quarter of fiscal
-62-
<PAGE> 63
1997, related to the write-down of the Evergreen technology and the accrual of
severance and other costs. These costs included $870,000 related to the
write-off of capitalized software and intangible assets, $277,000 in severance
and other costs related to the termination of employees, and $222,000 of other
expenses. A total of $468,000 was recorded related to relocation costs from the
Company's move to its new corporate headquarters, which was completed in the
quarter ended March 31, 1997.
During fiscal 1996, the Company incurred nonrecurring 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 and
Quesix incurred in the three month period ended December 31, 1995; and (ii) $4.6
million related to the HBOC business alliance entered into in the three month
period ended March 31, 1996.
(15) NON-CASH TRANSACTIONS
The Company had noncash transactions during the years ended June 30, 1998,
1997, and 1996 as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Noncash transfers from inventories to property and
equipment......................................... $ 603,664 $ 319,583 $ 365,756
=========== ========== ============
Noncash transfer of trade accounts receivable to
note receivable from related party................ $ -- $ -- $ 2,910,876
=========== ========== ============
Conversion of preferred stock and accrued dividends
to common stock................................... $ -- $ -- $ 19,692,897
=========== ========== ============
Issuance of common stock in connection with an
acquisition....................................... $ -- $2,000,000 $ 2,305,884
=========== ========== ============
Increase (decrease) in goodwill and income taxes
payable........................................... $(1,379,220) $ -- $ 1,379,220
=========== ========== ============
</TABLE>
-63-
<PAGE> 64
(16) QUARTERLY RESULTS (UNAUDITED):
The following table summarizes the Company's quarterly operating results form
1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
-----------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues .......................... $ 17,414 $ 13,187 $ 16,074 $ 7,970
Operating income (loss) ........... 2,190 (2,479) 2,220 (5,329)
Net income (loss) ................. 1,291 (1,500) 1,481 (3,147)
Net income (loss) per common share:
Basic ........................ $ 0.13 $ (0.15) $ 0.15 $ (0.32)
======== ======== ======== ========
Diluted ...................... $ 0.13 $ (0.15) $ 0.15 $ (0.32)
======== ======== ======== ========
<CAPTION>
YEAR ENDED JUNE 30, 1997
-----------------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues .......................... $ 15,872 $ 13,543 $ 11,110 $ 9,659
Operating income .................. 4,326 1,507 1,296 154
Net income ........................ 3,266 1,376 1,694 646
Net income per common share:
Basic ........................ $ 0.34 $ 0.14 $ 0.18 $ 0.07
======== ======== ======== ========
Diluted ...................... $ 0.32 $ 0.13 $ 0.17 $ 0.07
======== ======== ======== ========
</TABLE>
(17) SUBSEQUENT EVENTS
On July 23, 1998, the Company signed an Agreement of Merger (the
"Merger Agreement") to be acquired by HBOC. The acquisition, which is subject to
several terms and conditions, including regulatory and Company stockholder
approval, the availability of pooling of interests accounting, the absence of
material adverse events and the receipt of a "fairness opinion," is anticipated
to close during the fourth calendar quarter of 1998. Terms of the acquisition
call for IMNET stockholders to receive 0.84 of a share of HBOC common stock for
each IMNET share held. If the average closing price per share of HBOC common
stock during the twenty consecutive trading days ending on the second trading
day prior to the IMNET stockholder special meeting is less than $30.00 per
share, then the 0.84 exchange ratio shall be increased based on a formula to a
maximum exchange rate of 1.1111 shares of HBOC for each IMNET share if the
average closing price reaches $22.50 per share or below. The IMNET Board of
Directors may elect to terminate the Merger Agreement if the average closing
price of HBOC drops below $22.50 per share, but is not obligated to do so. HBOC
delivers enterprise-wide patient care, clinical, financial and strategic
management software solutions, as well as networking technologies, electronic
commerce, outsourcing and other services to healthcare organizations throughout
the world.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-64-
<PAGE> 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to Item 10, applicable to the Directors of the Company, is
incorporated herein by reference to the information to be set forth under the
caption "Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders, which the Company expects to file within 120 days after June 30,
1998. Information concerning executive officers is included in Part I, Item 4.A
of this Form 10-K.
The response to Item 10, applicable to Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference to the
information to be set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of
Stockholders, which the Company expects to file within 120 days after June 30,
1998.
ITEM 11. EXECUTIVE COMPENSATION
The response to Item 11 is incorporated herein by reference to the
information to be set forth under the captions "Report of the Compensation
Advisory Committee on Executive Compensation," "Performance Graph" and
"Executive Compensation" in the Proxy Statement for the Annual Meeting of
Stockholders, which the Company expects to file within 120 days after June 30,
1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to Item 12 is incorporated herein by reference to the
information to be set forth under the captions "Ownership of Principal
Stockholders and Certain Executive Officers" and "Election of Directors" in the
Proxy Statement for the Annual Meeting of Stockholders, which the Company
expects to file within 120 days after June 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to Item 13 is incorporated herein by reference to the
information to be set forth under the caption "Executive Compensation" in the
Proxy Statement for the Annual Meeting of Stockholders, which the Company
expects to file within 120 days after June 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following are filed as part of this report:
(a)1. Consolidated Financial Statements
The following consolidated financial statements are filed
herewith:
Independent Auditors' Report.
Consolidated Balance Sheets at June 30, 1998 and 1997.
-65-
<PAGE> 66
Consolidated Statements of Operations for each of the years in
the three-year period ended June 30, 1998.
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended June 30, 1998.
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended June 30, 1998.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules
The following Financial Statement Schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
All other financial statements and schedules not listed above are
omitted, as the required information is not applicable or the
information is presented in the consolidated financial statements or
related notes.
(a) 3. A. Exhibits
The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1(5) -- The Agreement and Plan of Merger dated as of October 27,
1995 among the Registrant, Evergreen Technologies, Inc.,
Jeffrey Siegel and Karen Siegel is incorporated herein by
reference to the Exhibit with the same number filed with
the Registrant's Form 8-K for November 3, 1995, filed on
November 20, 1995.
2.1.1(4)+++ -- Agreement and Plan of Merger dated as of September 30, 1996
among the Registrant, Hunter International, Inc., Larry C.
Hunter and Paul Sherman.
2.2(5) -- Agreement and Plan of Merger by and among the Registrant,
Quesix Software, Incorporated, IMNET California Acquisition
Corporation, Leslie H. Wong and Martin Minjoe, dated as of
November 28, 1995.
3.2.2(1) -- Amended and Restated Certificate of Incorporation of
Registrant.
3.3.1(2) -- Amended and Restated Bylaws dated September 10, 1996.
3.3.2* -- Amendment to Bylaws of Registrant, effective January 15, 1998.
4(1) -- Form of Common Stock certificate.
10.3.1(5) -- Amended and Restated Registration Agreement by and
among the Registrant and certain stockholders of the
Registrant, dated as of May 22, 1992.
10.3.2(1) -- First Amendment to Amended and Restated Registration
Agreement by and among the Registrant and certain
stockholders of the Registrant, dated as of March 31, 1993.
10.3.3(1) -- Second Amendment to Amended and Restated Registration
Agreement by and among the Registrant and certain
stockholders of the Registrant, dated as of October 18, 1993.
10.3.4(1) -- Third Amendment to Amended and Restated Registration Agreement
by and among the Registrant and certain stockholders of the
Registrant, dated as of January 13, 1995.
</TABLE>
-66-
<PAGE> 67
<TABLE>
<S> <C>
10.5(1) -- Employee Stock Option and Rights Plan.
10.5.1(6) -- Amendments to IMNET Systems, Inc. Employee Stock Option
Rights Plan, adopted September 9, 1996.
10.5.2(7) -- Forms of Key Employee Stock Options.
10.6(1) -- 1995 Non-Employee Directors Stock Option Plan.
10.6.1(8) -- IMNET Systems, Inc. Employee Discount Stock Purchase Plan.
10.7.1(1) -- Form of Incentive Stock Option Agreement used by Registrant
in 1994 in connection with the Employee Stock Option
Rights Plan.
10.7.2(1) -- Form of Incentive Stock Option Agreement used by
Registrant in 1995 in connection with the Employee Stock
Option and Rights Plan.
10.7.3(5) -- Form of Incentive Stock Option Agreement used by Registrant
in 1996 in connection with the Employee Stock Option
and Rights Plan.
10.8(1) -- Form of Indemnification Agreement.
10.9(1) -- Employment Agreement between the Registrant and
Kenneth D. Rardin, dated May 22,1992, as amended
pursuant to an addendum, dated as of January 1, 1995.
10.9.1(2) -- Second Addendum to Employment Agreement between the
Registrant and Kenneth D. Rardin, dated as of September
15, 1996.
10.10.1(1) -- Incentive Stock Option Agreement between the Registrant
and Kenneth D. Rardin, dated as of February 14, 1995.
10.10.2(1) -- Incentive Stock Option Agreement between the Registrant
and Gary D. Bowers, dated February 14, 1995.
10.10.4(1) -- Incentive Stock Option Agreement between the
Registrant and Paul Collins, dated April 19, 1995.
10.18(1) -- Distributor Agreement between the Registrant and JELCO
Data Services, Inc., dated March 29, 1993.
10.19(1) -- International Distribution Agreement between the
Registrant and SG2, dated September 20, 1993.
10.20(1) -- Value-Added Reseller Agreement between the Registrant
and Cerner Corporation, dated September 30, 1994.
10.21(1) -- Distribution Agreement between the Registrant and IDX
Systems Corporation, dated February 15, 1995.
10.22(1) -- Distribution Agreement between the Registrant and
PHAMIS, Inc., dated November 16, 1994.
10.23(1) International Distributor Agreement between the
Registrant and Software AG Germany, dated April 10, 1993.
10.26(1) -- Amendment to Distributor Agreement between the
Registrant and SoftNet Systems, Inc., dated June 20, 1995.
10.28(5) -- Distribution Agreement between the Registrant and
Datacom Imaging Systems, Inc., dated as of March 29, 1995.
10.28(11) -- Distribution Agreement between the Registrant and
HealthVISION, Inc., dated June 13, 1997.
10.30(5) -- End-user Equipment Purchase and Software License Terms
and Conditions between the Registrant and McLaren
Health Care Corporation, dated February 10, 1995.
10.32(5) -- Employment Agreement between the Registrant and
Raymond L. Brown, dated as of November 17, 1995.
10.33(5) -- Incentive Stock Option Agreement between Registrant and
Raymond L. Brown, dated as of December 1, 1995.
10.35(2)+ -- Manufacturing and Distribution License Agreement
between Registrant, SoftNet Systems, Inc. and Micrographic
Technology Corporation, dated as of June 30, 1996.
10.36(6) -- Employment Agreement between the Registrant and James A.
Gilbert, dated as of September 10, 1996.
10.37(9)+ -- Value Added Reseller Agreement between the Registrant
and ISG Technologies, Inc., dated March 18, 1997.
10.38(10)++ -- Stock Purchase Agreement dated as of June 25, 1997
among Registrant, Advisoft and Stockholder.
10.39(12) -- Amended and Restated Non-Qualified Deferred Compensation Plan.
10.40(12) -- Form of IMNET Systems, Inc. Endorsement Split-Dollar
Life Insurance Agreement with certain executives.
10.41 -- IMNET Systems, Inc. 1997 Long-term Incentive Plan
</TABLE>
-67-
<PAGE> 68
<TABLE>
<S> <C>
(incorporated herein by reference to Exhibit 10.41
filed with Registrant's Registration Statement (No.
333-49299) on Form S-8).
10.42* -- Employment Letter Agreement dated November 6,1997,
between the Registrant and Scott A. Remley.
10.43* -- Third Addendum to Employment Agreement of Kenneth D.
Rardin, to be effective November 6,1997
10.44* -- Employment Letter dated June 12,1998, between
Registrant and Charles Warner.
10.45* -- First Amendment to Employment Letter Agreement, dated
April 24, 1998, between the Registrant and Gary D.
Bowers.
10.46* -- Loan Agreement between the Company and Wachovia Bank
dated March 25,1998.
21(11) -- Subsidiaries of the Registrant.
23* -- Consent of KPMG Peat Marwick LLP.
27.1* -- Financial Data Schedule (for SEC use only).
27.2* -- Financial Data Schedule (for SEC use only).
</TABLE>
- ----------
* Filed herewith
(1) Incorporated by reference to the Exhibit with the same number in the
Registrant's Registration Statement on Form S-1 (No. 33-92130).
(2) Incorporated by reference to the Exhibit with the same number in the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1996.
(3) Incorporated by reference to the same Exhibit number in the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1995.
(4) Incorporated by reference to the Exhibit 2.1 filed with the Company's Form
8-K dated September 30, 1996, filed on October 15, 1996.
(5) Incorporated by reference to the same Exhibit number in the Registrant's
report on Form S-1 (No. 33-99846).
(6) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form 10-Q dated December 31, 1996, filed on February 13,
1996.
(7) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form S-8 (Reg. No. 333-19429).
(8) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form S-8 (Reg. No. 333-19397).
(9) 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.
(10) Incorporated by reference to the Exhibit with the same number filed with
the Company's Form 8-K dated June 25, 1997.
(11) Incorporated herein by reference to the Exhibit with the same number in
the Registrant's Annual Report on Form 10-K for the year ended June
30,1997.
(12) Incorporated herein by reference to the Exhibit with the same number in
the Registrant's Amendment No. 1 to Annual Report on Form 10-K/A for the
year ended June 30,1997.
+ 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.
++ In accordance with Item 601(b) (2) of Regulation S-K, the schedules have
been omitted and a list briefly describing the schedules is at the end of
the Exhibit. The Registrant will furnish supplementally a copy of any
omitted schedule to the Commission upon request.
(a) 3.B. Executive Compensation Plans and Arrangements.
-68-
<PAGE> 69
1. Employee Stock Option and Rights Plan (Exhibit 10.5 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
2. Amendments to IMNET Systems, Inc. Employee Stock Option Rights Plan,
adopted September 9, 1996 (Exhibit 10.5.1 hereof, and of the Company's
Form 10-Q dated December 31, 1996, filed on February 13, 1996).
3. Forms of Key Employee Stock Options (Exhibit 10.5.2 hereof, and of the
Company's Form S-8 (Reg. No. 333-19429)).
4. 1995 Non-Employee Directors Stock Option Plan (Exhibit 10.6 hereof, and of
the Company's Registration Statement on Form S-1 (No. 33-92130)).
5. IMNET Systems, Inc. Employee Discount Stock Purchase Plan (Exhibit 10.6.1
hereof, and of the Company's Form S-8 (Reg. No. 333-19397)).
6. Form of Incentive Stock Option Agreement used by Registrant in 1994 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.1
hereof, and of the Company's Registration Statement on Form S-1 (No.
33-92130)).
7. Form of Incentive Stock Option Agreement used by Registrant in 1995 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.2
hereof, and of the Company's Registration Statement on Form S-1 (No.
33-92130)).
8. Form of Incentive Stock Option Agreement used by Registrant in 1996 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.3
hereof, and of the Company's Form S-1 (No. 33-99846)).
9. Form of Indemnification Agreement (Exhibit 10.8 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
10. Employment Agreement between the Registrant and Kenneth D. Rardin, dated
May 22, 1992, as amended pursuant to an Addendum, dated as of January 1,
1995 (Exhibit 10.9 hereof, and of the Company's Registration Statement on
Form S-1 (No. 33-92130)).
11. Second Addendum to Employment Agreement between the Registrant and Kenneth
D. Rardin, dated as of September 15, 1996 (Exhibit 10.9.1 hereof, and of
the Company's Annual Report on Form 10-K for the year ended June 30,
1996).
12. Incentive Stock Option Agreement between the Registrant and Kenneth D.
Rardin, dated as of February 14, 1995 (Exhibit 10.10.1 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
13. Incentive Stock Option Agreement between the Registrant and Gary D.
Bowers, dated February 14, 1995 (Exhibit 10.10.2 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
14. Incentive Stock Option Agreement between the Registrant and Paul Collins,
dated April 19, 1995 (Exhibit 10.10.4 hereof, and of the Company's
Registration Statement on Form S-1 (No. 33-92130)).
15. Employment Agreement between the Registrant and Raymond L. Brown, dated as
of November 17, 1995 (Exhibit 10.32 hereof, and of the Company's report on
Form S-1 (No. 33-99846)).
16. Incentive Stock Option Agreement between Registrant and Raymond L. Brown,
dated as of December 1, 1995 (Exhibit 10.33 hereof, and of the Company's
report on Form S-1 (No. 33-99846)).
17. Employment Agreement between the Registrant and James A. Gilbert, dated as
of September 10, 1996 (Exhibit 10.36 hereof, and of the Company's Form
10-Q dated December 31, 1996, filed on February 13, 1996).
18. Amended and Restated Non-Qualified Deferred Compensation Plan (Exhibit
10.39 hereof, and of the Company's Amendment No. 2 to Annual Report on
Form 10-K/A for the year ended June 30,1997)
19. Form of IMNET Systems, Inc. Endorsement Split-Dollar Life Insurance
Agreement with certain executives (Exhibit 10.40 hereof, and of the
Company's Amendment No. 2 to Annual Report on Form 10-K/A for the year
ended June 30, 1997).
-69-
<PAGE> 70
20. IMNET Systems, Inc. 1997 Long-term Incentive Plan (Exhibit 10.41 hereof,
and of the Company's Registration Statement (No. 333-49299) on Form S-8).
21. Employment Letter Agreement dated November 6, 1997, between the Registrant
and Scott A. Remley (Exhibit 10.42 hereof).
22. Third Addendum to Employment Agreement of Kenneth D. Rardin, to be
effective November 6, 1997 (Exhibit 10.43 hereof).
23. Employment Letter dated June 12, 1998, between the Registrant and Charles
Warner (Exhibit 10.44 hereof).
24. First Amendment to Employment Letter Agreement, dated April 24, 1998,
between the Registrant and Gary D. Bowers (Exhibit 10.45 hereof).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended June
30, 1998.
-70-
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMNET SYSTEMS, INC.
By: /s/ KENNETH D. RARDIN
--------------------------------
Kenneth D. Rardin
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
August 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KENNETH D. RARDIN Chairman of the Board, President and Chief August 5, 1998
- ------------------------------------------- Executive Officer (Principal Executive Officer)
Kenneth D. Rardin
/s/ SCOTT A. REMLEY Senior Vice President, Chief Financial Officer August 5, 1998
- ------------------------------------------- and Secretary (Principal Financial and Accounting
Scott A. Remley Officer)
/s/ DANIEL P. HOWELL Director August 5, 1998
-------------------------------------------
Daniel P. Howell
/s/ JAMES A. GORDON Director August 5, 1998
- --------------------------------------------
James A. Gordon
</TABLE>
-71-
<PAGE> 72
IMNET SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
No.1
----
<S> <C>
Schedule II Valuation and Qualifying Accounts... 73
</TABLE>
-72-
<PAGE> 73
SCHEDULE II
IMNET SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- -------------------------------- ----------- ---------- ---------- ---------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996........... 63,043 259,846 50,000(2) 39,599(1) 333,290
Year ended June 30, 1997........... 333,290 557,754 237,208(2) 12,612(1) 1,115,640
Year ended June 30, 1998.......... 1,115,640 960,851 -- -- 2,076,491
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------- --------- ---------- --------- ---------- ---------
ALLOWANCE FOR INVENTORY OBSOLSCENCE
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996........... 72,481 222,487 -- 151,506 143,462
Year ended June 30, 1997........... 143,462 1,482,421 -- 292,210(3) 1,333,673
Year ended June 30, 1998.......... 1,333,673 755,722 -- 55,177(3) 2,034,218
</TABLE>
- ----------
(1) Accounts deemed to be uncollectible and written off during the period.
(2) Allowance for doubtful accounts of subsidiary at acquisition date.
(3) Amount to be deemed to be obsolete and written off during the period.
-73-
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<S> <C>
2.1(5) -- The Agreement and Plan of Merger dated as of October 27,
1995 among the Registrant, Evergreen Technologies,
Inc., Jeffrey Siegel and Karen Siegel is incorporated
herein by reference to the Exhibit with the same number
filed with the Registrant's Form 8-K for November 3,
1995, filed on November 20, 1995.
-- Agreement and Plan of Merger dated as of September 30,
1996
2.1.1(4)+++ among the Registrant, Hunter International, Inc.,
Larry C. Hunter and Paul Sherman.
2.2(5) -- Agreement and Plan of Merger by and among the
Registrant, Quesix Software, Incorporated, IMNET California
Acquisition Corporation, Leslie H. Wong and Martin Minjoe,
dated as of November 28, 1995.
3.2.2(1) -- Amended and Restated Certificate of Incorporation of
Registrant.
3.3.1(2) -- Amended and Restated Bylaws dated September 10, 1996.
3.3.2* -- Amendment to Bylaws of Registrant effective January 15, 1998.
4(1) -- Form of Common Stock certificate.
10.3.1(5) -- Amended and Restated Registration Agreement by and
among the Registrant and certain stockholders of the
Registrant, dated as of May 22, 1992
10.3.2(1) -- First Amendment to Amended and Restated Registration
Agreement by and among the Registrant and certain
stockholders of the Registrant, dated as of March 31, 1993.
10.3.3(1) -- Second Amendment to Amended and Restated Registration
Agreement by and among the Registrant and certain
stockholders of the Registrant, dated as of October 18, 1993.
10.3.4(1) -- Third Amendment to Amended and Restated Registration
Agreement by and among the Registrant and certain
stockholders of the Registrant, dated as of January 13, 1995.
10.5(1) -- Employee Stock Option and Rights Plan.
10.5.1(6) -- Amendments to IMNET Systems, Inc. Employee Stock Option
Rights Plan, adopted September 9, 1996.
10.5.2(7) -- Forms of Key Employee Stock Options.
10.6(1) -- 1995 Non-Employee Directors Stock Option Plan.
10.6.1(8) -- IMNET Systems, Inc. Employee Discount Stock Purchase Plan.
10.7.1(1) -- Form of Incentive Stock Option Agreement used by Registrant
in 1994 in connection with the Employee Stock Option
Rights Plan.
10.7.2(1) -- Form of Incentive Stock Option Agreement used by Registrant
in 1995 in connection with the Employee Stock Option
and Rights Plan.
10.7.3(5) -- Form of Incentive Stock Option Agreement used by Registrant
in 1996 in connection with the Employee Stock Option
and Rights Plan.
10.8(1) -- Form of Indemnification Agreement.
10.9(1) -- Employment Agreement between the Registrant and Kenneth D.
Rardin, dated May 22,1992, as amended pursuant to an addendum,
dated as of January 1, 1995
10.9.1(2) -- Second Addendum to Employment Agreement between
the Registrant and Kenneth D. Rardin, dated as of September
15, 1996.
10.10.1(1) -- Incentive Stock Option Agreement between the Registrant and
Kenneth D. Rardin, dated as of February 14, 1995.
10.10.2(1) -- Incentive Stock Option Agreement between the
Registrant and Gary D. Bowers, dated February 14, 1995.
10.10.4(1) -- Incentive Stock Option Agreement between the
Registrant and Paul Collins, dated April 19, 1995.
10.18(1) -- Distributor Agreement between the Registrant and JELCO
</TABLE>
-75-
<PAGE> 75
<TABLE>
<S> <C>
Data Services, Inc., dated March 29, 1993
10.19(1) -- International Distribution Agreement between the Registrant
and SG2, dated September 20, 1993.
10.20(1) -- Value-Added Reseller Agreement between the Registrant and
Cerner Corporation, dated September 30, 1994.
10.21(1) -- Distribution Agreement between the Registrant and IDX
Systems Corporation, dated February 15, 1995.
10.22(1) -- Distribution Agreement between the Registrant and PHAMIS,
Inc., dated November 16, 1994.
10.23(1) -- International Distributor Agreement between the Registrant
and Software AG Germany, dated April 10, 1993.
10.26(1) -- Amendment to Distributor Agreement between the Registrant
and SoftNet Systems, Inc., dated June 20, 1995.
10.28(5) -- Distribution Agreement between the Registrant and Datacom
Imaging Systems, Inc., dated as of March 29, 1995.
10.28(11) -- Distribution Agreement between the Registrant and
HealthVISION, Inc., dated June 13, 1997.
10.30(5) -- End-user Equipment Purchase and Software License Terms
and Conditions between the Registrant and McLaren Health
Care Corporation, dated February 10, 1995
10.32(5) -- Employment Agreement between the Registrant and
Raymond L. Brown, dated as of November 17, 1995
10.33(5) -- Incentive Stock Option Agreement between Registrant and
Raymond L. Brown, dated as of December 1, 1995.
10.35(2)+ -- Manufacturing and Distribution License Agreement between
Registrant, SoftNet Systems, Inc. and Micrographic
Technology Corporation, dated as of June 30, 1996.
10.36(6) -- Employment Agreement between the Registrant and James A.
Gilbert, dated as of September 10, 1996.
10.37(9)+ -- Value Added Reseller Agreement between the Registrant and
ISG Technologies, Inc., dated March 18, 1997.
10.38(10)++ -- Stock Purchase Agreement dated as of June 25, 1997 among
Registrant, Advisoft and Stockholder
10.39(12) -- Amended and Restated Non-Qualified Deferred Compensation Plan
10.40(12) -- Form of IMNET Systems, Inc. Endorsement Split-Dollar Life
Insurance Agreement with certain executives
10.41 -- IMNET Systems, Inc. 1997 Long-term Incentive Plan
(incorporated herein by reference to Exhibit 10.41 filed with
Registrant's Registration Statement (No. 333-49299) on Form S-8
10.42* -- Employment Letter Agreement dated November 6, 1997, between the
Registrant and Scott A. Remley
10.43* -- Third Addendum to Employment Agreement of Kenneth D. Rardin,
to be effective November 6,1997
10.44* -- Employment Letter dated June 12,1998, between Registrant and
Charles Warner
10.45* -- First Amendment to Employment Letter Agreement, dated
April 24, 1998, between the Registrant and Gary D. Bowers
10.46* -- Loan Agreement between the Company and Wachovia Bank dated
March 25,1998.
21(11) -- Subsidiaries of the Registrant.
23* -- Consent of KPMG Peat Marwick LLP.
27.1* -- Financial Data Schedule (for SEC use only).
27.2* -- Financial Data Schedule (for SEC use only).
</TABLE>
- ----------
* Filed herewith
(1) Incorporated by reference to the Exhibit with the same number in the
Registrant's Registration Statement on Form S-1 (No. 33-92130).
(2) Incorporated by reference to the Exhibit with the same number in the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1996.
(3) Incorporated by reference to the same Exhibit number in the Registrant's
Annual Report on Form 10-K for the year ended June 30, 1995.
-76-
<PAGE> 76
(4) Incorporated by reference to the Exhibit 2.1 filed with the Company's Form
8-K dated September 30, 1996, filed on October 15, 1996.
(5) Incorporated by reference to the same Exhibit number in the Registrant's
report on Form S-1 (No. 33-99846).
(6) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form 10-Q dated December 31, 1996, filed on February 13, 1996.
(7) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form S-8 (Reg. No. 333-19429).
(8) Incorporated by reference to the Exhibit with the same number in the
Registrant's Form S-8 (Reg. No. 333-19397).
(9) 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.
(10) Incorporated by reference to the Exhibit with the same number filed with
the Company's Form 8-K dated June 25, 1997.
(11) Incorporated herein by reference to the Exhibit with the same number in the
Registrant's Annual Report on Form 10-K for the year ended June 30,1997.
(12) Incorporated herein by reference to the Exhibit with the same number in the
Registrant's Amendment No. 1 to Annual Report on Form 10-K/A for the year
ended June 30,1997.
+ 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.
++ In accordance with Item 601(b) (2) of Regulation S-K, the schedules have
been omitted and a list briefly describing the schedules is at the end of
the Exhibit. The Registrant will furnish supplementally a copy of any
omitted schedule to the Commission upon request.
(a) 3.B. Executive Compensation Plans and Arrangements.
1. Employee Stock Option and Rights Plan (Exhibit 10.5 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
2. Amendments to IMNET Systems, Inc. Employee Stock Option Rights Plan,
adopted September 9, 1996 (Exhibit 10.5.1 hereof, and of the Company's Form
10-Q dated December 31, 1996, filed on February 13, 1996).
3. Forms of Key Employee Stock Options (Exhibit 10.5.2 hereof, and of the
Company's Form S-8 (Reg. No. 333-19429)).
4. 1995 Non-Employee Directors Stock Option Plan (Exhibit 10.6 hereof, and of
the Company's Registration Statement on Form S-1 (No. 33-92130)).
5. IMNET Systems, Inc. Employee Discount Stock Purchase Plan (Exhibit 10.6.1
hereof, and of the Company's Form S-8 (Reg. No. 333-19397)).
6. Form of Incentive Stock Option Agreement used by Registrant in 1994 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.1
hereof, and of the Company's Registration Statement on Form S-1 (No.
33-92130)).
7. Form of Incentive Stock Option Agreement used by Registrant in 1995 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.2
hereof, and of the Company's Registration Statement on Form S-1 (No.
33-92130)).
8. Form of Incentive Stock Option Agreement used by Registrant in 1996 in
connection with the Employee Stock Option and Rights Plan (Exhibit 10.7.3
hereof, and of the Company's Form S-1 (No. 33-99846)).
-77-
<PAGE> 77
9. Form of Indemnification Agreement (Exhibit 10.8 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
10. Employment Agreement between the Registrant and Kenneth D. Rardin, dated
May 22, 1992, as amended pursuant to an Addendum, dated as of January 1,
1995 (Exhibit 10.9 hereof, and of the Company's Registration Statement on
Form S-1 (No. 33-92130)).
11. Second Addendum to Employment Agreement between the Registrant and Kenneth
D. Rardin, dated as of September 15, 1996 (Exhibit 10.9.1 hereof, and of
the Company's Annual Report on Form 10-K for the year ended June 30, 1996).
12. Incentive Stock Option Agreement between the Registrant and Kenneth D.
Rardin, dated as of February 14, 1995 (Exhibit 10.10.1 hereof, and of the
Company's Registration Statement on Form S-1 (No. 33-92130)).
13. Incentive Stock Option Agreement between the Registrant and Gary D. Bowers,
dated February 14, 1995 (Exhibit 10.10.2 hereof, and of the Company's
Registration Statement on Form S-1 (No. 33-92130)).
14. Incentive Stock Option Agreement between the Registrant and Paul Collins,
dated April 19, 1995 (Exhibit 10.10.4 hereof, and of the Company's
Registration Statement on Form S-1 (No. 33-92130)).
15. Employment Agreement between the Registrant and Raymond L. Brown, dated as
of November 17, 1995 (Exhibit 10.32 hereof, and of the Company's report on
Form S-1 (No. 33-99846)).
16. Incentive Stock Option Agreement between Registrant and Raymond L. Brown,
dated as of December 1, 1995 (Exhibit 10.33 hereof, and of the Company's
report on Form S-1 (No. 33-99846)).
17. Employment Agreement between the Registrant and James A. Gilbert, dated as
of September 10, 1996 (Exhibit 10.36 hereof, and of the Company's Form 10-Q
dated December 31, 1996, filed on February 13, 1996).
18. Amended and Restated Non-Qualified Deferred Compensation Plan (Exhibit
10.39 hereof, and of the Company's Amendment No. 2 to Annual Report on Form
10-K/A for the year ended June 30,1997)
19. Form of IMNET Systems, Inc. Endorsement Split-Dollar Life Insurance
Agreement with certain executives (Exhibit 10.40 hereof, and of the
Company's Amendment No. 2 to Annual Report on Form 10-K/A for the year
ended June 30, 1997).
20. IMNET Systems, Inc. 1997 Long-term Incentive Plan (Exhibit 10.41 hereof,
and of the Company's Registration Statement (No. 333-49299) on Form S-8).
21. Employment Letter Agreement dated November 6, 1997, between the Registrant
and Scott A. Remley (Exhibit 10.42 hereof).
22. Third Addendum to Employment Agreement of Kenneth D. Rardin, to be
effective November 6, 1997 (Exhibit 10.43 hereof).
23. Employment Letter dated June 12, 1998, between the Registrant and Charles
Warner (Exhibit 10.44 hereof).
24. First Amendment to Employment Letter Agreement, dated April 24, 1998,
between the Registrant and Gary D. Bowers (Exhibit 10.45 hereof).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended June
30, 1998.
-78-
<PAGE> 1
EXHIBIT 3.3.2
AMENDMENT TO BYLAWS OF IMNET SYSTEMS, INC.
The Bylaws of IMNET Systems, Inc. a Delaware corporation, (the
"Company") are hereby amended as follows:
1. The first sentence of Section 3.2 of the By-laws of the
Company is hereby amended to decrease the number of directors, effective at
noon, January 15, 1998, or such later date as the next annual meeting of
stockholders is held.
Except as amended hereby, the By-laws of the Corporation shall remain
in full force and effect.
Amended by the Board of Directors as of December 9, 1997, effective at
noon, January 15, 1998, or such later date as the next annual meeting of
stockholders is held.
<PAGE> 1
EXHIBIT 10.42
Mr. Scott A. Remley
November 6, 1997
Page 7
November 6, 1997
Mr. Scott A. Remley
9200 Nesbit Lakes Drive
Alpharetta, GA 30022
Re: Employment Agreement
Dear Scott:
This letter is our official offer to retain you as Senior Vice President and
Chief Financial Officer of IMNET Systems, Inc. (the "Company"). I have been
authorized to make this offer subject to the following terms and conditions:
1. EFFECTIVE DATE. The effective date of this Agreement shall be as of
November 6, 1997.
2. INITIAL TITLE AND DUTIES. Your initial title will be Senior Vice President
and Chief Financial Officer, and you will report directly to Kenneth D.
Rardin, who is the Chairman of the Board and Chief Executive Officer of the
Company. As such, you will be responsible for investor relations, legal,
all accounting and financial functions of the Company, administrative and
human resources functions, purchasing, materials and inventory control, and
to perform such services not inconsistent with your position as assigned
from time-to-time by Kenneth D. Rardin or the Board of Directors. You will
be expected to devote your best efforts, experience, ability, talent and
entire time in normal business hours, energy and attention to the business
of the Company and the performance of your duties.
3. COMPENSATION; TERM. You will receive an annual base salary of $160,000 (the
"Base Salary") paid in accordance with standard Company payroll procedures,
with annual increases determined in accordance with Exhibit A hereto. The
Base Salary payable hereunder, as may be adjusted from time-to-time, shall
be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the Company's employee benefit plans.
The term of your employment under this Agreement will begin on the
Effective Date and shall continue until terminated in accordance with
Paragraph 7 below.
4. BONUS. Upon reporting for your duties on November 6, 1997, you will become
eligible for a signing bonus of $50,120 to be paid in accordance with the
Company's standard payroll procedure, as of the next payroll processing
date. In addition, you will be eligible to earn a bonus of 35% of your
annual base salary, prorated to your hire date, based upon the Company's
attainment of a minimum of $0.39 earnings per share for fiscal year 1998 or
the analyst consensus at June 30, 1998. Payment of this additional bonus is
conditional upon your employment by IMNET at the end of FY 1998. The annual
bonus is to be paid after IMNET files its 10-K Annual Report.
<PAGE> 2
Mr. Scott A. Remley
November 6, 1997
Page 2
5. STOCK OPTION AWARD. This Agreement has been reached with the understanding
that you will be issued share options amounting to 100,000 shares in the
Company's common stock at the closing price on November 6, 1997, vested
over five (5) years at twenty percent (20%) per year.
6. EMPLOYEE BENEFITS. You will participate in all employee welfare benefit
plans of the Company applicable to senior level executives. In addition,
you shall be entitled to one (1) weeks' paid vacation in calendar year 1997
and four (4) weeks' paid vacation per year thereafter.
7. TERMINATION AND SEVERANCE.
(a) During the term of employment hereunder, your employment may be
terminated as follows:
(i) At any time upon three (3) months' written notice by either you
or the Company. The date set forth in the notice shall be
hereinafter defined as the Termination Date.
(ii) Automatically in the event of your death.
(iii) Immediately upon written notice if such termination is for Cause
(as defined below in subparagraph 7(d); or
(iv) At any time by mutual written agreement of you and the Company.
(v) Immediately, if the Company is in default hereunder and fails to
cure any such default within thirty (30) days after you send
written notice of such default to the Company.
(b) Upon termination of your employment hereunder for any reason, all
obligations of the Company shall cease upon such termination, except its
obligations to (i) pay the compensation set forth in paragraph 3 hereof
through the date of such termination, (ii) provide the benefits set forth
in paragraph 6 hereof through the date of such termination, and any unpaid
bonus earned under paragraph 4 and to comply with all state and federal
laws and regulations applying to such benefits and (iii) pay the severance
benefits, if applicable, to you pursuant to the terms and conditions set
forth in subparagraph 7(c) below.
(c) In the event that your employment is terminated by the Company for any
reason other than Cause (as such term is defined below in subparagraph
7(d)), you will receive, commencing on the Termination Date, six (6)
months' severance pay at the monthly rate of your then current Base Salary
(paid on a bi-weekly basis over the six (6) month period in accordance with
the Company's standard payroll procedure). Notwithstanding the foregoing,
the obligations of the
<PAGE> 3
Mr. Scott A. Remley
November 6, 1997
Page 3
Company with respect to severance shall expire on the date that you
commence full-time employment with a subsequent employer, if such
commencement date occurs within six (6) months of the Termination Date
pursuant to this subparagraph 7(c). The Company shall continue to be
responsible for all severance pay obligations accrued through the date such
full-time employment commences.
(d) For purposes hereof, the term "Cause" means the following: (i) any
defalcation or misappropriation of funds or property of the Company or any
affiliate by you or the commission of any dishonest or deceitful act in the
course of your employment with the Company; (ii) your conviction of a
felony or of any crime involving moral turpitude; (iii) the engaging by you
in illegal conduct which, in the reasonable judgment of the Company, places
you and the Company or any affiliate, by association with you, in
disrepute; (iv) refusal to perform your duties and responsibilities
hereunder persistent neglect of duty or chronic absenteeism; (v) any
material breach by you of the terms and conditions hereof, including,
without limitation, those certain provisions pertaining to inventions,
confidentiality, noncompetition set forth in paragraphs 8, 9 and 10 hereof;
or (vi) any attempt to obtain a personal profit from any transaction in
which you have an interest adverse to the Company unless such adverse
interest and the potential profit is disclosed in writing to the Board of
Directors in advance of the transaction. Any disagreement concerning
whether there has been "Cause" for termination will be resolved by the
Board of Directors in its sole discretion acting in good faith.
Notwithstanding the foregoing, in the event of a determination by the
Company of Cause pursuant to subparagraphs d(i), d(iv), d(v) or d(vi)
above, you will have a cure period of five (5) days after you receive
notice thereof from the Company. If you fail to cure such default within
the cure period, then the Company may terminate you for Cause as set out
above.
(e) The provisions in Paragraphs 10 through 15 shall survive the
termination of the Agreement.
8. INVENTIONS. You shall treat as for the sole benefit of the Company and
promptly disclose and assign to the Company without additional compensation
all ideas, discoveries, inventions and improvements, patentable or not,
which, while you are so retained under this Agreement are made, conceived
or reduced to practice by you, alone or with others during or after usual
work hours, either on or off the job, and which are related to the
products, processes, projects or the business interests of the Company or
which involve the use of the time, material or facilities of the Company.
You agree, at the expense of the Company, at any time during or within a
reasonable time after the termination of this employment relationship, to
sign all papers and do such other acts and things you deem necessary or
desirable and which may be reasonably required to protect the rights of the
Company to such ideas, discoveries, inventions and improvements in any and
all countries.
<PAGE> 4
Mr. Scott A. Remley
November 6, 1997
Page 4
9. DEFINITIONS. For purpose of Paragraphs 10 through 15 hereof, the following
defined terms shall be applicable:
(a) "Business of the Company" as used herein means the manufacture, sale,
distribution, marketing and servicing of electronic information and
document management systems and related products and services produced or
promoted by the Company.
(b) "Confidential Information" as used herein means any and all
confidential information of the Company which is not generally known to or
by businesses which compete with the Company with respect to the Business
of the Company and which does not constitute a "Trade Secret" (as defined
in subparagraph (d) below). It includes, without limitation, information
relating to accounting, marketing, all information of the foregoing type
relating to any client or account of the Company, client account records,
training and operations material and memoranda, personnel records, pricing
information, and any other information related to the Business of the
Company and treated by the Company as being confidential, including items
labeled "Confidential," all of which are hereby agreed to be the property
of and confidential to the Company hereafter. "Confidential Information"
does not include any information which, after the date hereof, becomes part
of the public domain through no fault of yours.
(c) "Territory" as used herein means the United States, Canada, Mexico,
Europe and Japan.
(d) "Trade Secret" as used herein means information including, but not
limited to, technical or nontechnical data, a formula, a pattern, a
compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, or a list of
actual or potential customers or suppliers which:
(i) derives economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its
disclosure or use; and
(ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
10. CONFIDENTIAL INFORMATION. You covenant and agree that you will treat as
confidential and will not use (other than in the performance of your
designated duties for the Company), or disclose any Confidential
Information either during the term of your employment by the Company or for
a period of two years thereafter.
11. TRADE SECRETS. You covenant and agree that you will treat as confidential
and will not use (other than in the performance of your designated duties
for the Company) or disclose any Trade Secrets either during or after the
term of your employment by the Company.
<PAGE> 5
Mr. Scott A. Remley
November 6, 1997
Page 5
12. RECORDS. All records, notes, files, memoranda, reports, price lists, client
lists, catalogues, prospect lists, drawings, plans, sketches, documents,
equipment, apparatus, physical manifestations of programs and like items,
and all copies thereof, relating to the Business of the Company,
Confidential Information or Trade Secrets, which were prepared by you or
which have been disclosed to or which have come into your possession, shall
be and remain the sole and exclusive property of the Company. You agree
that upon the termination of your employment by the Company, or at any
other time upon reasonable request from the Company, you will promptly (and
in the event of your termination of employment, no later than ten (10) days
after such termination) deliver to the Company the originals and all copies
of any of the foregoing that are in your possession, custody or control,
and any other property belonging to the Company.
13. AGREEMENT NOT TO COMPETE. You covenant and agree that during your
employment by the Company and for a period of one year after termination of
such employment for any reason, you will not, without the prior written
consent of the Company, directly or indirectly within the Territory for
yourself or an officer, director, shareholder, owner, partner, joint
venturer, employee, promoter, consultant, manager, independent contractor,
agent or in some similar capacity, compete with the Business of the Company
by engaging in any business in which you provide services which are the
same or substantially similar to your duties and responsibilities as herein
described; provided, however, that the foregoing covenant shall not be
deemed to prohibit you from acquiring as an investment not more than 2% of
the capital stock of a business that competes with the Business of the
Company whose stock is traded on a national securities exchange or
over-the-counter.
14. AGREEMENT NOT TO SOLICIT CUSTOMERS. You covenant and agree that during the
term of your employment by the Company and for a period of one year
thereafter, you will not, either directly or indirectly, on your own behalf
or in the service or on behalf of others, solicit or attempt to solicit,
divert or appropriate away from the Company, with a view to the sale or
providing of any product or service competitive or potentially competitive
with the Company's products or services, any persons and/or entities
located within the Territory who are customers of the Company with whom you
had contact within the last year of your employment.
15. AGREEMENT NOT TO SOLICIT EMPLOYEES. You covenant and agree that during the
term of your employment by the Company and for a period of one year
thereafter, you will not either directly or indirectly, on your own behalf
or in the service or on behalf of others, solicit or attempt to solicit,
divert or hire away to any business competing with the Business of the
Company, within the Territory, any person currently employed by the
Company, or hired by the Company during the term of this Agreement, for the
purpose of such employee providing services similar to those provided by
such employee to the Company.
16. REMEDIES. You acknowledge and agree that, by virtue of the duties and
responsibilities attendant to your employment by the Company and the
special knowledge of the Company's
<PAGE> 6
Mr. Scott A. Remley
November 6, 1997
Page 6
affairs, business, clients, sales techniques and operations that you will
have as a consequence of such employment, irreparable loss and damage will
be suffered by the Company if you should breach or violate any of the
covenants and agreements contained in Paragraphs 8 through 13; and you
further acknowledge and agree that each of such covenants are reasonably
necessary to protect and preserve the Business of the Company so that the
Company will receive the benefits of its bargain with you. You, therefore,
agree and consent that the remedy at law for any breach of any of your
obligations hereunder would be inadequate, and, therefore, you further
agree and consent that, in addition to any other available remedy,
temporary and permanent injunctive relief may be granted in any proceeding
which may be brought to enforce any provision of this Agreement without the
necessity of proof that any other remedy at law is adequate. You further
acknowledge and agree that the provisions of the Georgia Trade Secrets Act
shall apply to any breach by you of the covenant set forth in Paragraph 9
hereof. During the period of your employment by the Company and for a
period of one year thereafter, you shall notify the Company prior to
engaging in any business or professional activity involving or in any way
relating to the Business of the Company within the Territory, which notice
shall describe the proposed activity with reasonable specificity.
17. ACKNOWLEDGMENT. You acknowledge that the restrictions contained in Sections
8 through 14 hereof may limit your ability to earn a livelihood in a
competing business. By signing below to acknowledge your acceptance of the
terms and conditions of this Agreement, you acknowledge that you believe
you will receive sufficient consideration and other benefits as an employee
of the Company and as otherwise provided hereunder to clearly justify such
restrictions which, in any event (given your education, skills and ability
and the limited scope of the prohibited business activity in Sections 8
through 13) you do not believe would prevent you from earning a living. By
signing below, you acknowledge that the unique nature of the Business of
the Company and the fact that significant sales have occurred and are under
negotiation in the geographical areas specified in Section 9(c) clearly
justify the scope of the restriction in Section 13.
18. BINDING EFFECT. Upon the Effective Date, the terms hereof shall be binding
upon and shall inure to the benefit of you and the Company, the successors
and assigns of the Company, and the heirs, executors, administrators, legal
representatives and assigns of you, provided that your rights and
obligations hereunder may not be delegated or assigned.
19. ENTIRE AGREEMENT. Upon the Effective Date, this Agreement shall supersede
any former oral agreement and any formal written agreement heretofore
executed relating generally to your employment with the Company, and this
Agreement can only be amended by an agreement in writing signed by you and
the Company.
20. APPLICABLE LAW; SEVERABILITY. This Agreement shall be construed and
enforced under the laws of the State of Georgia without giving effect to
the principles of conflicts of laws thereof. If any provision of this
Agreement is held invalid or unenforceable by operation of law or
<PAGE> 7
Mr. Scott A. Remley
November 6, 1997
Page 7
otherwise, such circumstances shall not have the effect of rendering any of
the other provisions of this Agreement invalid or unenforceable.
21. NOTICES. Any notice of other communication required or permitted to be
given hereunder shall be in writing and shall be deemed duly given or
served when delivered personally to the party intended, or sent by
registered or certified mail, postage prepaid, effective as of the date
received, addressed to the Company at its principal office and to you at
your address then appearing on the books of the Company.
22. ATTORNEY'S FEES. In case any one or more of the covenants and agreements
set forth in this Agreement shall be breached by any party hereto, the
non-breaching party may proceed to enforce its rights by arbitration or by
suit in equity and/or by action at law, including but not limited to, an
action for damages or specific performance. In such event, the prevailing
party shall be entitled to also receive reasonable attorneys' fees and
other expenses incurred in enforcing its rights hereunder.
By signing below, the Company agrees to all of the terms and conditions of this
letter. Please indicate your acceptance of these terms and conditions by signing
each enclosed copy of this letter where indicated below, and return an
originally executed copy of the letter to me.
Sincerely,
By: /s/ Kenneth D. Rardin
----------------------------
Kenneth D. Rardin
Chairman and
Chief Executive Officer
ACCEPTED AND AGREED
as of this 6th day of November, 1997.
Scott A. Remley
- -------------------------------------
Scott A. Remley
<PAGE> 8
EXHIBIT "A"
CPI Increases
The amount of Base Salary shall increase each January 1 by the amount, if any,
calculated as of January 1, in each year commencing with January 1, 1998, equal
to $160,000 multiplied by the Annual Increase (as defined below). The "Annual
Increase" shall not be a negative number and shall mean (i) the Consumer Price
Index (as defined below) for the month of December of the year preceding the
year in which the Annual Increase is to be determined, less (ii) the Consumer
Price Index for the month next following the month during which the Effective
Date falls (the "Base CPI"), divided by (iii) the Base CPI. For purposes hereof,
the "Consumer Price Index" shall mean the All-Items portion of the Consumer
Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor
Statistics of the United States Department of Labor.
<PAGE> 1
EXHIBIT 10.43
THIRD ADDENDUM TO EMPLOYMENT AGREEMENT
IMNET Systems, Inc., a Delaware corporation (the "Company") and KENNETH D.
RARDIN, a Georgia resident ("Employee") are party to that certain Employment
Agreement, dated as of May 22, 1992 as amended by the Addendum to Employment
Agreement dated July 1, 1995, an interpretive letter dated May 2, 1996, and the
Second Addendum to Employment Agreement dated September 15, 1996 (collectively,
the "Employment Agreement"), and hereby agree that effective as of November 6,
1997, Employee's employment with the Company shall continue under the terms and
provisions of the Employment Agreement as supplemented and amended by the terms
hereof, as follows:
1. Employee shall be employed as Chairman of the Board of Directors and
Chief Executive Officer of the Company, for a term ending on December 31, 2000
unless earlier terminated in accordance with the terms hereof and of the
Employment Agreement.
2. In the event that Employee's employment with the Company is terminated
prior to January 1, 2000 by reason of (i) termination by the Company other than
for cause; or (ii) Employee's election within the six-month period following a
Severance Event (as defined in the Employment Agreement), the Company will
provide to Employee the payments and benefits specified in Section 8 of the
Employment Agreement through the period ending December 31, 2000. In the event
that Employee's employment with the Company is terminated on or after January 1,
2000 for any of the aforementioned reasons, the Company will provide to Employee
the payments and benefits specified in Section 8 of the Employment Agreement for
a period of twelve (12) months from the date of termination of Employee's
employment with the Company.
3. Other than as provided for herein, the Employment Agreement is not
superseded hereby but remains in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed this Addendum to
Employment Agreement as of November 6, 1997.
The Company:
IMNET Systems, Inc.
By: /s/ Daniel P. Howell
-------------------------------------
Its: Director
------------------------------------
Employee:
/s/ Kenneth D. Rardin
----------------------------------------
Kenneth D. Rardin
<PAGE> 1
EXHIBIT 10.44
June 12, 1998
Mr. Charles Warner
c/o IMNET Systems, Inc.
3015 Windward Plaza
Windward Fairways II
Alpharetta, Georgia 30202
Dear Charlie:
This letter is in response to our earlier discussion as to the terms of
your employment with IMNET (the "Company"). The terms of your employment are the
same as the other executive officers of the Company. Consequently, I hereby
confirm to you that effective as of your earlier promotion to be Vice President
and Assistant to the Chairman, the terms of your employment include the
following:
1. TERMINATION AND SEVERANCE.
(a) During the term of employment hereunder, your employment may be
terminated as follows:
(i) At any time upon three (3) months' written notice by either you
or the Company. The date set forth in the notice shall be
hereinafter defined as the Termination Date.
(ii) Automatically in the event of your death.
(iii) Immediately upon written notice if such termination is for
Cause (as defined below in subparagraph 1(d); or
(iv) At any time by mutual written agreement of you and the Company.
(v) Immediately, if the Company is in default hereunder and fails
to cure any such default within thirty (30) days after you send
written notice of such default to the Company.
(b) Upon termination of your employment for any reason, all obligations of
the Company shall cease upon such termination, except its obligations to
(i) pay the compensation earned by you through the date of such
termination, (ii) provide the benefits earned by you through the date of
such termination, and any unpaid bonus earned by you through the date of
such termination and to comply with all state and federal laws and
regulations applying to such benefits and (iii) pay the severance benefits,
<PAGE> 2
if applicable, to you pursuant to the terms and conditions set forth in
subparagraph 1(c) below.
(c) In the event that your employment is terminated by the Company for any
reason other than Cause (as such term is defined below in subparagraph
1(d)), you will receive, commencing on the Termination Date, six (6)
months' severance pay at the monthly rate of your then current Base Salary
(paid on a bi-weekly basis over the six (6) month period in accordance with
the Company's standard payroll procedure). Notwithstanding the foregoing,
the obligations of the Company with respect to severance shall expire on
the date that you commence full-time employment with a subsequent employer,
if such commencement date occurs within six (6) months of the Termination
Date pursuant to this subparagraph 1(c). The Company shall continue to be
responsible for all severance pay obligations accrued through the date such
full-time employment commences.
(d) For purposes hereof, the term "Cause" means the following: (i) any
defalcation or misappropriation of funds or property of the Company or any
affiliate by you or the commission of any dishonest or deceitful act in the
course of your employment with the Company; (ii) your conviction of a
felony or of any crime involving moral turpitude; (iii) the engaging by you
in illegal conduct which, in the reasonable judgment of the Company, places
you and the Company or any affiliate, by association with you, in
disrepute; (iv) refusal to perform your duties and responsibilities
hereunder, persistent neglect of duty or chronic absenteeism; (v) any
material breach by you of the terms and conditions hereof, including,
without limitation, those certain provisions pertaining to inventions,
confidentiality, noncompetition set forth in paragraphs 2 through 11
hereof; or (vi) any attempt to obtain a personal profit from any
transaction in which you have an interest adverse to the Company unless
such adverse interest and the potential profit is disclosed in writing to
the Board of Directors in advance of the transaction. Any disagreement
concerning whether there has been "Cause" for termination will be resolved
by the Board of Directors in its sole discretion acting in good faith.
Notwithstanding the foregoing, in the event of a determination by the
Company of Cause pursuant to subparagraphs d(i), d(iv), d(v) or d(vi)
above, you will have a cure period of five (5) days after you receive
notice thereof from the Company. If you fail to cure such default within
the cure period, then the Company may terminate you for Cause as set out
above.
(e) The provisions in Paragraphs 2 through 11 shall survive the
termination of the Agreement.
2. INVENTIONS. You shall treat as for the sole benefit of the Company and
promptly disclose and assign to the Company without additional compensation
all ideas, discoveries, inventions and improvements, patentable or not,
which, while you are retained as an employee under this Agreement are made,
conceived or reduced to practice by you, alone or with others during or
after usual work hours, either on or off the job, and which are
<PAGE> 3
related to the products, processes, projects or the business interests of
the Company or which involve the use of the time, material or facilities of
the Company. You agree, at the expense of the Company, at any time during
or within a reasonable time after the termination of this employment
relationship, to sign all papers and do such other acts and things you deem
necessary or desirable and which may be reasonably required to protect the
rights of the Company to such ideas, discoveries, inventions and
improvements in any and all countries.
3. DEFINITIONS. For purposes of Paragraphs 3 through 11 hereof, the following
defined terms shall be applicable:
(a) "Business of the Company" as used herein means the manufacture, sale,
distribution, marketing and servicing of electronic information and
document management systems and related products and services produced or
promoted by the Company.
(b) "Confidential Information" as used herein means any and all
confidential information of the Company which is not generally known to or
by business which compete with the Company with respect to the Business of
the Company and which does not constitute a "Trade Secret" (as defined in
subparagraph (d) below). It includes, without limitation, information
relating to accounting, marketing, all information of the foregoing type
relating to any client or account of the Company, client account records,
training and operations material and memoranda, personnel records, pricing
information, and any other information related to the Business of the
Company and treated by the Company as being confidential, including items
labeled "Confidential," all of which are hereby agreed to be the property
of and confidential to the Company hereafter. "Confidential Information"
does not include any information which, after the date hereof, becomes part
of the public domain through no fault of yours.
(c) "Territory" as used herein means the United States, Canada, Mexico,
Europe and Japan.
(d) "Trade Secret" as used herein means information including, but not
limited to, technical or nontechnical data, a formula, a pattern, a
compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, or a list of
actual or potential customers or suppliers which:
(i) derives economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by
proper means by, other persons who can obtain economic value
from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
<PAGE> 4
4. CONFIDENTIAL INFORMATION. You covenant and agree that you will treat as
confidential and will not use (other than in the performance of your
designated duties for the Company), or disclose any Confidential
Information either during the term of your employment by the Company or for
a period of two years thereafter.
5. TRADE SECRETS. You covenant and agree that you will treat as confidential
and will not use (other than in the performance of your designated duties
for the Company) or disclose any Trade Secrets either during or after the
term of your employment by the Company.
6. RECORDS. All records, notes, files, memoranda, reports, price lists, client
lists, catalogues, prospect lists, drawings, plans, sketches, documents,
equipment, apparatus, physical manifestations of programs and like items,
and all copies thereof, relating to the business of the Company,
Confidential Information or Trade Secrets, which were prepared by you or
which have been disclosed or to which have come into your possession, shall
be and remain the sole and exclusive property of the Company. You agree
that upon the termination of your employment by the Company, or at any
other time upon reasonable request from the Company, you will promptly (and
in the event of your termination of employment, no later than ten (10) days
after such termination) deliver to the Company the originals and all copies
of any of the foregoing that are in your possession, custody or control,
and any other property belonging to the Company.
7. AGREEMENT NOT TO COMPETE. You covenant and agree that during your
employment by the Company and for a period of one year after termination of
such employment for any reason, you will not, without the prior written
consent of the Company, directly or indirectly within the Territory for
yourself or an officer, director, shareholder, owner, partner, joint
venturer, employee, promoter, consultant, manager, independent contractor,
agent or in some similar capacity, compete with the Business of the Company
by engaging in any business in which you provide services which are the
same or substantially similar to your duties and responsibilities as herein
described; provided, however, that the foregoing covenant shall not be
deemed to prohibit you from acquiring as an investment not more than 2% of
the capital stock of a business that competes with the Business of the
Company whose stock is traded on a national securities exchange or
over-the-counter.
8. AGREEMENT NOT TO SOLICIT CUSTOMERS. You covenant and agree that during the
term of your employment by the Company and for a period of one year
thereafter, you will not, either directly or indirectly, on your own behalf
or in the service or on behalf of others, solicit or attempt to solicit,
divert or appropriate away from the Company, with a view to the sale or
providing of any product or service competitive or potentially competitive
with the Company's products or services, any persons and/or entities
located within the Territory who are customers of the Company with whom you
had contact within the last year of your employment.
<PAGE> 5
9. AGREEMENT NOT TO SOLICIT EMPLOYEES. You covenant and agree that during the
term of your employment by the Company and for a period of one year
thereafter, you will not either directly or indirectly, on your own behalf
or in the service or on behalf of others, solicit or attempt to solicit,
divert or hire away to any business competing with the Business of the
Company, within the Territory, any person currently employed by the
Company, or hired by the Company during the term of this Agreement, for the
purpose of such employee providing services similar to those provided by
such employee to the Company.
10. REMEDIES. You acknowledge and agree that, by virtue of the duties and
responsibilities attendant to your employment by the Company and the
special knowledge of the Company's affairs, business, clients, sales
techniques and operations that you will have as a consequence of such
employment, irreparable loss and damage will be suffered by the Company if
you should breach or violate any of the covenants and agreements contained
in Paragraphs 3 through 11; and you further acknowledge and agree that each
of such covenants are reasonably necessary to protect and preserve the
Business of the Company so that the Company will receive the benefits of
its bargain with you. You, therefore, agree and consent that the remedy at
law for any breach of any of your obligations hereunder would be
inadequate, and, therefore, you further agree and consent that, in addition
to any other available remedy, temporary and permanent injunctive relief
may be granted in any proceeding which may be brought to enforce any
provision of this Agreement without the necessity of proof that any other
remedy at law is adequate. you further acknowledge and agree that the
provisions of the Georgia Trade Secrets Act shall apply to any breach by
you of the covenant set forth in Paragraphs 3 and 4 hereof. During the
period of your employment by the Company and for a period of one year
hereafter, you shall notify the Company prior to engaging in any business
or professional activity involving or in any way relating to the Business
of the Company within the Territory, which notice shall describe the
proposed activity with reasonable specificity.
11. ACKNOWLEDGMENT. You acknowledge that the restrictions contained in
Paragraph 3 through 11 hereof may limit your ability to earn a livelihood
in a competing business. By signing below to acknowledge your acceptance of
the terms and conditions of this Agreement, you acknowledge that you
believe you will receive sufficient consideration and other benefits as an
employee of the Company and as otherwise provided hereunder to clearly
justify such restrictions which, in any event (given your education, skills
and ability and the limited scope of the prohibited business activity in
Section 3 through 11) you do not believe would prevent you from earning a
living. By signing below, you acknowledge that the unique nature of the
business of the Company and the fact that significant sales have occurred
and are under negotiation in the geographical areas specified in Section
3(c) clearly justify the scope of the restriction in Section 7.
12. BINDING EFFECT. Upon the date hereof, the terms hereof shall be binding
upon and shall inure to the benefit of you and the Company, the successors
and assigns of the Company,
<PAGE> 6
and the heirs, executors, administrators, legal representatives and assigns
of you, provided that your rights and obligations hereunder may not be
delegated or assigned.
13. ENTIRE AGREEMENT. Upon the date hereof, this Agreement, together with the
Letter Agreement constitutes the entire agreement, both written and oral,
between the parties with respect to the subject matter hereof. This
Agreement can only be amended by an agreement in writing signed by you and
the Company.
14. APPLICABLE LAW: SEVERABILITY. This Agreement shall be construed and
enforced under the laws of the State of Georgia without giving effect to
the principles of conflicts of laws thereof. If any provision of this
Agreement is held invalid or unenforceable by operation of law or
otherwise, such circumstances shall not have the effect of rendering any of
the other provisions of this Agreement invalid or unenforceable.
15. NOTICES. Any notice of other communication required or permitted to be
given hereunder shall be in writing and shall be deemed duly given or
served when delivered personally to the party intended, or sent by
registered or certified mail, postage prepaid, effective as of the date
received, addressed to the Company at its principal office and to you at
your address then appearing on the books of the Company.
16. ATTORNEY'S FEES. In case any one or more of the covenants and agreements
set forth in this Agreement shall be breached by any party hereto, the
non-breaching party may proceed to enforce its rights by arbitration or by
suit in equity and/or by action at law, including but not limited to, an
action for damages or specific performance. In such event, the prevailing
party shall be entitled to also receive reasonable attorneys' fees and
other expenses incurred in enforcing its rights hereunder.
If this document accurately sets forth your understanding of our agreement,
please execute this letter in the space provided below.
Best Regards.
Sincerely,
Kenneth D. Rardin
President
Acknowledged and Agreed:
- -------------------------
Charles Warner
- -------------------------
Date
<PAGE> 1
EXHIBIT 10.45
FIRST AMENDMENT TO EMPLOYMENT LETTER AGREEMENT
This First Amendment to Employment Letter Agreement (the "Amendment") is
effective as of April 24, 1998, by and between IMNET Systems, Inc., a Delaware
corporation (the "Company") and GARY D. BOWERS, a Georgia resident ("Bowers").
WITNESSETH
WHEREAS, the Company and Bowers entered into that certain Employment Letter
Agreement, dated May 22, 1992 (the "Employment Agreement"); and
WHEREAS, the Company and Bowers desire to amend the Employment Agreement.
NOW, THEREFORE, for and in consideration of the premises hereof and the
mutual covenants contained herein and in the Employment Agreement, the parties
hereto do hereby covenant and agree that Bowers' employment with the Company
shall continue under the terms and provisions of the Employment Agreement as
supplemented and amended by the terms hereof, as follows:
1. The current Base Salary of Bowers, subject to future adjustment as
provided in the Employment Agreement, shall be $200,000.
2. The first two sentences of Section 7(c) of the Employment Agreement
shall be deleted in their entirety and replaced with the following:
"In the event that (A) your employment is terminated by the Company
for any reason other than Cause (as such term is defined below), or (B) Kenneth
Rardin's employment with the Company is terminated for any reason and you elect
to terminate your employment within 30 days of the effective date thereof, you
will receive 12 months severance pay at the monthly rate of your then current
base salary (paid on a bi-monthly basis over the 12 month period) plus you will
be reimbursed for reasonable costs and expenses incurred by you in relocated
your household goods back to Virginia if you choose to do so. Notwithstanding
the foregoing, the obligations of the Company with respect to severance under
this paragraph 7 shall expire on the date that you commence full-time employment
with a subsequent employer, if such commencement date occurs within 12 months of
the effective date of your termination pursuant to this subparagraph 7(c)."
3. Except as provided herein, the Employment Agreement is not superseded
hereby but remains in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have duly executed this First Amendment
to Employment Letter Agreement as of the date first written above.
COMPANY: BOWERS:
IMNET SYSTEMS, INC.
By:
------------------------------- ------------------------------
Gary Bowers
Its:
------------------------------
-2-
<PAGE> 1
EXHHIBIT 10.46
- ------------------------------------------------------------------------------
LOAN AGREEMENT
BETWEEN
IMNET SYSTEMS, INC.
AND
WACHOVIA BANK, NATIONAL ASSOCIATION
CLOSING DATE: MARCH ___, 1998
- ------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS, TERMS AND REFERENCES........................................1
1.1. CERTAIN DEFINITIONS....................................1
1.2. USE OF DEFINED TERMS...................................7
1.3. ACCOUNTING TERMS. ....................................7
2. THE FINANCING............................................................7
2.1. EXTENSIONS OF CREDIT...................................7
2.2. INTEREST AND OTHER CHARGES.............................8
2.3. GENERAL PROVISIONS AS TO PAYMENTS.....................10
3. GENERAL REPRESENTATIONS AND WARRANTIES..................................11
3.1. EXISTENCE AND QUALIFICATION...........................11
3.2. AUTHORITY; AND VALIDITY AND BINDING EFFECT............11
3.3. INCUMBENCY AND AUTHORITY OF SIGNING OFFICERS..........11
3.4. NO MATERIAL LITIGATION................................11
3.5. TAXES.................................................11
3.6. CAPITAL...............................................11
3.7. ORGANIZATION..........................................11
3.8. INSOLVENCY............................................12
3.9. TITLE.................................................12
3.10. MARGIN STOCK..........................................12
3.11. NO VIOLATIONS.........................................12
3.12. FINANCIAL STATEMENTS..................................12
3.13. POSSESSION OF PERMITS.................................12
3.14. SUBSIDIARIES..........................................13
3.15. EMPLOYEE BENEFIT PLANS................................13
4. AFFIRMATIVE COVENANTS...................................................13
4.1. PERIODIC FINANCIAL STATEMENTS.........................13
4.2. ANNUAL FINANCIAL STATEMENTS...........................13
4.3. PAYMENT OF TAXES......................................13
4.4. MAINTENANCE OF INSURANCE..............................13
4.5. COMPLIANCE CERTIFICATE................................14
4.6. CHANGE OF PRINCIPAL PLACE OF BUSINESS, ETC............14
4.7. PRESERVATION OF EXISTENCE.............................14
4.8. COMPLIANCE WITH LAWS..................................14
5. NEGATIVE COVENANTS......................................................14
5.1. ENCUMBRANCES..........................................14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
5.2. DEBT..................................................14
5.3. CONTINGENT LIABILITIES................................15
5.4. DIVIDENDS.............................................15
5.5. REDEMPTION............................................15
5.6. INVESTMENTS...........................................15
5.7. MERGERS...............................................15
5.8. AFFILIATE TRANSACTIONS................................15
5.9. DISPOSITION OF ASSETS.................................16
5.10. EMPLOYEE BENEFIT PLANS................................16
6. FINANCIAL COVENANTS.....................................................16
7. EVENTS OF DEFAULT.......................................................16
7.1. OBLIGATIONS...........................................16
7.2. MISREPRESENTATIONS....................................16
7.3. CERTAIN COVENANTS.....................................16
7.4. OTHER COVENANTS.......................................16
7.5. OTHER DEBTS...........................................16
7.6. VOLUNTARY BANKRUPTCY..................................17
7.7. INVOLUNTARY BANKRUPTCY................................17
7.8. JUDGMENTS.............................................17
7.10. MATERIAL ADVERSE CHANGE...............................17
7.11. CHANGE OF CONTROL, ETC................................17
8. REMEDIES................................................................17
8.1. ACCELERATION OF THE OBLIGATIONS.......................18
8.2. DEFAULT...............................................18
8.3. OTHER REMEDIES........................................18
8.4. SET OFF...............................................18
9. MISCELLANEOUS...........................................................18
9.1. WAIVER................................................18
9.2. GOVERNING LAW.........................................19
9.3. SURVIVAL..............................................19
9.4. ASSIGNMENTS...........................................19
9.5. COUNTERPARTS..........................................19
9.6. REIMBURSEMENT.........................................19
9.7. SUCCESSORS AND ASSIGNS................................19
9.8. SEVERABILITY..........................................19
9.9. NOTICES...............................................20
9.10. ENTIRE AGREEMENT: AMENDMENTS..........................20
9.11. TIME OF ESSENCE.......................................20
9.12. INTERPRETATION........................................20
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C> <C> <C>
9.13. LENDER NOT A JOINT VENTURER...........................20
9.14. JURISDICTION..........................................20
9.15. ACCEPTANCE............................................20
9.16. PAYMENT ON NON-BUSINESS DAYS..........................21
9.17. CURE OF DEFAULTS BY LENDER............................21
9.18. RECITALS..............................................21
9.19. ATTORNEY-IN-FACT......................................21
9.20. SOLE BENEFIT..........................................21
9.21. INDEMNIFICATION.......................................21
9.22. JURY TRIAL WAIVER.....................................22
9.23. TERMINOLOGY...........................................22
9.24. EXHIBITS..............................................22
10. CONDITIONS PRECEDENT....................................................22
10.1. SECRETARY'S CERTIFICATE...............................22
10.2. GOOD STANDING CERTIFICATES............................22
10.3. LOAN DOCUMENTS........................................23
10.4. INSURANCE.............................................23
10.5. OPINION OF COUNSEL....................................23
10.6. NO DEFAULT............................................23
10.7. TELEPHONE INSTRUCTION LETTER..........................23
10.8. NO MATERIAL ADVERSE CHANGE............................23
10.9. OTHER.................................................23
</TABLE>
-iii-
<PAGE> 5
LOAN AGREEMENT
PREAMBLE. THIS LOAN AGREEMENT, made, entered into and effective as of March __,
1998, by and between IMNET SYSTEMS, INC., a Delaware corporation ("Borrower");
and WACHOVIA BANK, NATIONAL ASSOCIATION, a national bank ("Lender").
WITNESSETH:
WHEREAS, Borrower has applied to Lender for certain financing, as more
particularly described hereinbelow, consisting of a $15,000,000 revolving line
of credit; and
WHEREAS, Lender is willing to extend such financing to Borrower in
accordance with the terms hereof upon the execution of this Agreement by
Borrower, compliance by Borrower with all of the terms and provisions of this
Agreement and fulfillment of all conditions precedent to Lender's obligations
herein contained;
NOW, THEREFORE, to induce Lender to extend the financing provided for
herein, and for other good and valuable consideration, the sufficiency and
receipt of all of which are acknowledged by Borrower, Lender agrees with
Borrower as follows:
1. DEFINITIONS, TERMS AND REFERENCES.
1.1. CERTAIN DEFINITIONS. In addition to such other terms as
elsewhere defined herein, as used in this Agreement and in any Exhibit or
Schedule attached hereto, the following terms shall have the following meanings:
"Advance" shall mean an advance of borrowed funds made by Lender to or
on behalf of Borrower pursuant to this Agreement.
"Affiliate" shall mean, with respect to any Person, any Person
Controlling, Controlled by or under common Control with such Person.
"Agreement" shall mean this Loan Agreement, as it may be modified,
amended or supplemented from time to time; together with any and all Schedules
or Exhibits attached hereto.
"Applicable Rate" shall mean the interest rate per annum payable on the
Advances, as is defined and more particularly described in Section 2.2.1.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as it
may be amended from time to time.
"Borrower" shall have the meaning given to such term in the preamble to
this Agreement.
"Borrower Information Schedule" shall mean an information schedule, to
be completed by Borrower, in substantially the form of Exhibit "A" attached
hereto.
<PAGE> 6
"Borrowings" shall mean Advances of borrowed funds made hereunder to or
on behalf of Borrower pursuant to this Agreement.
"Business Day" shall mean a day on which Lender is open for the conduct
of banking business at its principal office in Atlanta, Georgia; provided,
however, that, for purposes of determining the timing of requests for, and
establishing the Applicable Rate on, LIBOR Borrowings, "Business Day" shall
mean, additionally, any day on which dealings in United States Dollar deposits
are also being carried out by Lender in the London interbank eurodollar market.
"Closing Date" shall mean the date set forth on the cover page as the
"Closing Date."
"Compliance Certificate" shall mean a certificate to be signed by a
duly authorized officer of Borrower in substantially the form of Exhibit "B"
attached hereto (unless otherwise required or approved by Lender).
"Commitment" shall mean the maximum amount which is available for
borrowing under the Line of Credit; namely, Fifteen Million Dollars
($15,000,000).
"Consolidated Subsidiaries" shall mean those Subsidiaries of Borrower
(if any) existing from time to time which, for purposes of GAAP, are required to
be consolidated for financial reporting purposes.
"Control," "Controlled" or "Controlling" shall mean, with respect to
any Person, the power to direct the management and policies of such Person,
directly, indirectly, whether through the ownership of voting securities or
otherwise; provided, however, that, in any event, any Person which owns directly
or indirectly fifty percent (50%) or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation shall be deemed to "Control" such corporation for purposes of this
Agreement.
"Debt" means all liabilities, obligations and indebtedness of a Person,
of any kind or nature, whether now or hereafter owing, arising, due or payable,
howsoever evidenced, created, incurred, acquired or owing, and whether primary,
secondary, direct, contingent, fixed or otherwise, including, without in any way
limiting the generality of the foregoing: (i) all obligations, liabilities and
indebtedness secured by any Lien on a Person's Property, even though such Person
shall not have assumed or become liable for the payment thereof; (ii) all
obligations or liabilities created or arising under any capital lease,
conditional sale or other title retention agreement; (iii) all accrued pension
fund and other employee benefit plan obligations and liabilities; (iv) all
Guaranteed Obligations; (v) any liabilities under, or associated with, interest
rate protection agreements; and (vi) any deferred taxes.
"Default Condition" shall mean the occurrence of any event which, after
satisfaction of any requirement for the giving of notice or the lapse of time,
or both, would become an Event of Default.
<PAGE> 7
"Default Rate" shall mean that interest rate per annum equal to two
percent (2%) per annum in excess of the otherwise Applicable Rate payable on any
Obligation.
"Dollars" or "$" shall mean United States Dollars.
"Employee Benefit Plan" shall mean any employee welfare benefit plan as
that term is defined in Section 3(1) of ERISA, any employee pension benefit
plan, as that term is defined in Section 3(2) of ERISA or any other plan which
is subject to the provisions of Title IV of ERISA which are for the benefit of
any employees of Borrower and any employees of any Subsidiary or any other
entity which is a member of a controlled group or under common control with
Borrower, as such terms are defined in Section 4001(a)(14) of ERISA.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as may be amended from time to time.
"Event of Default" shall mean any of the events or conditions described
in Article 7, provided that any requirement for the giving of notice or the
lapse of time, or both, has been satisfied.
"Executive Office" shall mean the address of Borrower's chief executive
office and principal place of business, as designated on the Borrower
Information Schedule.
"Fiscal Year", in respect of a Person, shall mean the fiscal year of
such Person, as employed by such Person as of the Closing Date, and designated
as such on the Borrower Information Schedule, as to Borrower. The terms "Fiscal
Quarter" and "Fiscal Month," if and when used herein, shall correspond
accordingly thereto.
"GAAP" shall mean generally accepted accounting principles consistently
applied for the fiscal period(s) in question.
"Guaranteed Obligations" shall mean, with respect to any Person, all
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or to assure or
in effect assure the holder of any such obligations against loss in respect
thereof.
"Guarantor" shall mean, individually and collectively, any and all
accommodation makers, endorsers, guarantors or sureties which, either on or
after the Closing Date, enter into any guaranty. As of the Closing Date, there
are no Guarantors of any of the Obligations.
"Guaranty" shall mean any agreement or other writing executed by a
Guarantor guaranteeing payment of any of the Obligations.
<PAGE> 8
"Interest Period" shall mean, in respect of LIBOR Borrowings, a period
commencing on the date of such borrowing and ending on the numerically
corresponding date in the first (1st), second (2nd) or third (3rd) month
thereafter, as Borrower may elect in the applicable notice of such borrowing to
be given pursuant to Section 2.2.1; provided, however, that any Interest Period
which would otherwise end on a day which is not a Business Day shall be extended
to the next succeeding Business Day unless such Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding Business Day, and any Interest Period which begins on the last
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end on the
last Business Day of the appropriate subsequent calendar month.
"Interest Rate Determination Date" shall mean, in respect of LIBOR
Borrowings, three (3) Business Days prior to the first day of each Interest
Period.
"Lender" shall have the meaning given to such term in the preamble to
this Agreement.
"Letter of Credit" shall have the meaning given to such term in Section
2.1.2.
"Letter of Credit Obligations" shall mean all Obligations of Borrower
arising in respect of Letters of Credit, including, without limitation, (i) all
contingent liabilities arising in respect of Letters of Credit issued, but not
drawn upon, and (ii) all reimbursement liabilities arising in respect of
drawings made under Letters of Credit.
"LIBOR Borrowings" shall mean those Borrowings which Borrower elects,
pursuant to Section 2.2.1, to bear interest at a rate per annum determined by
reference to the LIBOR Rate plus any applicable margin described therein.
"LIBOR Rate" shall mean, with respect to any Interest Period, an
interest rate per annum computed by dividing: (x) the rate per annum determined
by Lender from time to time on the basis of the offered rate for deposits in
dollars in the London interbank borrowing market of amounts equal to or
comparable to the amount of a requested borrowing under the Line of Credit to
which such Interest Period relates offered for a term comparable to such
Interest Period, which rate appears on the display designated as page "3750" of
the Telerate Service (or such other page as may replace page "3750" of that
service or such other service or services as may be nominated by the British
Bankers' Association for the purpose of displaying London interbank offered
rates for U.S. dollar deposits) as of 11:00 a.m., London time, on the Interest
Rate Determination Date pertaining to such Interest Period (which rate shall be
rounded upward, if necessary, to the next higher 1/10,000 of 1%); provided,
however, that if more than one such offered rate appears on such service on such
date, the offered rate shall be deemed to be the arithmetic average (rounded
upward, if necessary, to the next higher of 1/100 of 1%) of such offered rates;
by (y) the number 1 minus any then applicable percentage (expressed as a
decimal) which is in effect on such day, as prescribed by the Board of Governors
of the Federal Reserve System (or its successor) for determining the maximum
reserve requirement for a member of the Federal Reserve System in respect of
"Eurocurrency liabilities" (or any other category of liabilities which includes
deposits by reference to which the interest rate on
<PAGE> 9
such borrowings is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of Lender to United
States residents). The LIBOR Rate shall be adjusted automatically on and as of
the effective date of any change in the percentage described in the foregoing
clause (y).
"Lien" shall mean any deed to secure debt, deed of trust, mortgage or
similar instrument, and any lien, security interest, preferential arrangement
which has the practical effect of constituting a security interest, security
title, pledge, charge, encumbrance or servitude of any kind, whether by
consensual agreement or by operation of statute or other law, and whether
voluntary or involuntary, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof.
"Line of Credit" shall refer to the line of credit in a maximum
principal amount equal to the amount of the Commitment opened by Lender in favor
of Borrower pursuant to the provisions of Section 2.1.
"Loan Documents" shall mean this Agreement, any Notes, and any and all
other documents, instruments, certificates and agreements executed and/or
delivered by Borrower in connection herewith, or any one, more, or all of the
foregoing, as the context shall require.
"Master Note" shall mean the master promissory note, dated of even date
herewith, as amended or supplemented from time to time, in a principal amount
equal to the maximum amount of the Line of Credit, evidencing Advances to be
obtained by Borrower under the Line of Credit, together with any renewals or
extensions thereof in whole or in part. The Master Note shall be substantially
in the form of Exhibit "C".
"Material Adverse Change" shall mean with respect to any event, act,
condition or occurrence of whatever nature (including any adverse determination
in any litigation, arbitration or governmental investigation or proceeding),
whether singly or in conjunction with any other event or events, act or acts,
condition or conditions, occurrence or occurrences, whether or not related, a
material adverse change in, or a material adverse effect upon, any of (a) the
financial condition, operations, business, properties or prospects of the
Borrower and its Consolidated Subsidiaries taken as a whole or any Guarantor,
(b) the rights and remedies of the Lender under any of the Loan Documents or any
documents, instruments or agreements executed and/or delivered by any Person
other than Borrower in conjunction with the Loan Documents, or the ability of
the Borrower to perform its obligations under any of the Loan Documents or of
any Guarantor to perform Guarantor's obligations under any Guaranty or any
documents, instruments or agreements executed by any Guarantor in conjunction
with such Guaranty, or (c) the legality, validity or enforceability of any of
the Loan Documents or any documents, instruments or agreements executed and/or
delivered by any Person other than Borrower in conjunction with the Loan
Documents. Without limitation of the foregoing, any significant negative change
in, or the cancellation of, the distribution contract of Borrower with HBO &
Company as in effect on the Closing Date shall, at Lender's option, constitute a
Material Adverse Change.
<PAGE> 10
"Note" shall mean any instrument at any time evidencing all or any
portion of any Obligations. The term "Note" shall include the Master Note.
"Obligations" shall mean any and all Debts of Borrower to Lender,
including without limiting the generality of the foregoing, any Debt of Borrower
to Lender under any loan made to Borrower by Lender prior to the date hereof and
any and all extensions or renewals thereof in whole or in part; any Debt of
Borrower to Lender arising hereunder or as a result hereof, whether evidenced by
any Note, or constituting Advances, Letter of Credit Obligations or otherwise,
and any and all extensions or renewals thereof in whole or in part; any Debt of
Borrower to Lender under any later or future advances or loans made by Lender to
Borrower, and any and all extensions or renewals thereof in whole or in part;
and any and all future or additional Debts of Borrower to Lender whatsoever and
in any event, whether existing as of the date hereof or hereafter arising,
whether arising under a loan, lease, credit card arrangement, line of credit,
letter of credit or other type of financing, and whether direct, indirect,
absolute or contingent, as maker, endorser, guarantor, surety or otherwise, and
whether evidenced by, arising out of, or relating to, a promissory note, bill of
exchange, check, draft, bond, letter of credit, guaranty agreement, bankers'
acceptance, foreign exchange contract, interest rate protection agreement,
commitment fee, service charge or otherwise.
"Permitted Encumbrances" shall mean: (i) Liens for taxes not yet due
and payable or being actively contested as permitted by this Agreement; (ii)
carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business, payment for which is not yet
due or which are being actively contested in good faith and by appropriate,
lawful proceedings, but only if such liens are and remain junior to liens
granted in favor of Lender; (iii) pledges or deposits in connection with
worker's compensation, unemployment insurance and other social security
legislation; (iv) deposits to secure the performance of utilities, leases,
statutory obligations and surety and appeal bonds and other obligations of a
like nature arising by statute or under customary terms regarding depository
relationships on deposits held by financial institutions with whom Borrower has
a banker-customer relationship; (vi) typical restrictions imposed by licenses
and leases of software (including location and transfer restrictions); (vii) any
Liens granted in favor of Lender; and (viii) any Liens granted by Borrower or
any Subsidiary to vendors or financiers of capital assets to secure the payment
of Purchase Money Debt so long as (A) such Debt is permitted to be incurred
hereunder, (B) such Liens extend only to the specific assets so purchased,
secure only such deferred payment obligation and related interest, fees and
charges and no other Debt, and (C) such Liens are promptly released upon the
payment in full of such Debt.
"Person" shall mean any individual, partnership, corporation, limited
liability company, joint venture, joint stock company, trust, governmental unit
or other entity.
"Prime Borrowings" shall mean those Borrowings which Borrower elects,
pursuant to Section 2.2.1, to bear interest at a rate per annum determined by
reference to the Prime Rate plus any applicable margin described therein.
<PAGE> 11
"Prime Rate" refers to that interest rate so denominated and set by
Lender from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by Lender. Lender extends
credit at interest rates equal to, above and below the Prime Rate.
"Purchase Money Debt" shall mean Debt incurred by Borrower or any
Subsidiary in connection with the acquisition of capital assets for the cost
thereof (including any for the deferred payment of any purchase price).
"Subordinated Debt" shall mean any unsecured Debt for borrowed funds or
for the deferred payment of any purchase price of Borrower or any Subsidiary to
any Person which, by written agreement in form and substance satisfactory to
Lender, has been subordinated in right of payment and claim, to the rights and
claims of Lender in respect of the Obligations, pursuant to a Subordination
Agreement.
"Subordination Agreement" shall mean an agreement made in favor of
Lender with respect to any Debt of Borrower by the holder(s) thereof, to be in
form and substance satisfactory to Lender, pursuant to which such Debt is made
Subordinated Debt.
"Subsidiary" shall mean any corporation, partnership, business
association or other entity (including any Subsidiary of any of the foregoing)
of which Borrower owns, directly or indirectly through one or more Subsidiaries,
fifty percent (50%) or more of the capital stock or other equity interest having
ordinary power for the election of directors or others performing similar
functions.
"Telephone Instructions Letter" shall mean a letter from Borrower to
Lender, dated as of the Closing Date, indicating to Lender the Person(s)
authorized to request Advances pursuant hereto, to be substantially in the form
of Exhibit "D" attached hereto (unless otherwise required or approved by
Lender).
"Termination Date" shall mean the earliest to occur of the following
dates: (i) that date on which, pursuant to Section 8, Lender terminates the Line
of Credit (or the Line of Credit is deemed automatically terminated) subsequent
to and as a result of the occurrence of an Event of Default; or (ii) that date
which is 364 days after the Closing Date (or any later date as to which Lender
may agree in writing from time to time hereafter).
1.2. USE OF DEFINED TERMS. All terms defined in this Agreement
and the Exhibits shall have the same defined meanings when used in any other
Loan Documents, unless the context shall require otherwise.
1.3. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall have the meanings generally attributed to such terms under
GAAP.
2. THE FINANCING.
<PAGE> 12
2.1. EXTENSIONS OF CREDIT.
2.1.1. LINE OF CREDIT. On the Closing Date, subject
to fulfillment of all conditions precedent set forth in Section 10, Lender
agrees to open the Line of Credit in favor of Borrower so that, during the
period from the Closing Date to, but not including, the Termination Date, so
long as there is not in existence any Default Condition or Event of Default and
the requested Borrowing, if made, will not cause a Default Condition or Event of
Default to exist, Borrower may borrow and repay and reborrow Advances in up to a
maximum aggregate principal amount outstanding at any one time equal to the
Commitment; subject, however, to the requirement that at no time shall the
aggregate principal amount of (i) outstanding Advances under the Line of Credit,
plus (ii) the aggregate amount of all Letter of Credit Obligations incurred
pursuant to Section 2.1.2, exceed the Commitment. All proceeds so obtained under
the Line of Credit may be used by Borrower for working capital and general
corporate purposes in such manner as Borrower may elect in the ordinary course
of its business operations in conformity with the terms of this Agreement,
including, particularly, Section 3.10. The Debts arising from Advances made to
or on behalf of Borrower under the Line of Credit shall be evidenced by the
Master Note, which shall be executed by Borrower and delivered to Lender on the
Closing Date. The outstanding principal amount of the Master Note may fluctuate
from time to time, but shall be due and payable in full on the Termination Date,
and shall bear interest from the date of each disbursement of principal until
paid in full at the Applicable Rate, payable in the manner described in Section
2.2.1. Subject to any contrary provisions of Section 2.2.1 in respect of LIBOR
Borrowings, Borrower shall have the option to request Advances under the Line of
Credit by telephone or in a writing delivered to Lender not later than 11:00
a.m. (Atlanta, Georgia time) on the date of the requested Advance; provided,
however, that any telephone requests shall be made in accordance with the
Telephone Instructions Letter and, unless otherwise approved by Lender,
confirmed in writing not later than the Business Day following the disbursement
of the requested Advance.
2.1.2. LETTERS OF CREDIT. In addition to the
foregoing, so long as the Line of Credit remains open, Borrower shall have the
further right to apply for, and obtain commercial or standby letters of credit
("Letters of Credit") to be issued by Lender for Borrower for use by Borrower in
the ordinary course of its business operations pursuant to a separate
application and agreement (one per each Letter of Credit) to be executed at time
of issuance between Lender and Borrower, which shall set forth, among other
things, the purpose, beneficiary, the expiry date and credit limit, together
with the fees and charges imposed by Lender for the issuance and administration
thereof. All outstanding Letter of Credit Obligations shall be reserved by
Lender against borrowing availability under the Line of Credit. Lender shall
have the continuing right to charge as Advances any outstanding Letter of Credit
Obligations, and any fees and charges associated therewith, which have become
due and payable. Lender shall have the further right from time to time to impose
sublimits on the aggregate amounts of Letters of Credit and Letter of Credit
Obligations which at any one time may be outstanding.
2.2. INTEREST AND OTHER CHARGES.
<PAGE> 13
2.2.1. INTEREST AT APPLICABLE RATE. Lender and
Borrower agree that the interest rate payable on the Borrowings (herein called
the "Applicable Rate") shall be determined as follows:
(1) LINE OF CREDIT. Outstanding Advances under
the Line of Credit shall bear interest at either (i) the Prime Rate, minus
one-fourth of one percent (-1/4%) per annum, in the case of Advances
constituting Prime Borrowings, or (ii) subject to the conditions and limitations
set forth in subsection (b) below, the LIBOR Rate plus one and one-fourth of one
percent (1 1/4%) per annum, in the case of Advances constituting LIBOR
Borrowings.
(2) SPECIAL CONDITIONS AND LIMITATIONS ON LIBOR
BORROWINGS. All Borrowings obtained on the Closing Date and for a period of
three (3) Business Days thereafter shall be Prime Borrowings. Thereafter,
Borrower shall have the continuing right, provided that no Event Default or
Default Condition exists, to obtain LIBOR Borrowings or to convert Prime
Borrowings to LIBOR Borrowings; subject, however, to the following conditions
and limitations: (i) Borrower must request a LIBOR Borrowing, specifying the
amount thereof and the applicable Interest Period, at least three (3) Business
Days in advance of the intended Borrowing date; (ii) no more than five (5) LIBOR
Borrowings under the Line of Credit may be obtained at any time; (iii) LIBOR
Borrowings must be in minimum amounts of One Million Dollars ($1,000,000), and
multiples of One Hundred Thousand Dollars ($100,000) in excess thereof; (iv) the
Interest Period for LIBOR Borrowings in respect of the Line of Credit shall not
exceed the Termination Date; (v) if on or prior to the first day of any Interest
Period, Lender determines that deposits in United States Dollars (in the
applicable amounts) are not being offered in the relevant market for such
Interest Period or that the LIBOR Rate will not adequately and fairly reflect
the cost to Lender of funding any relevant borrowings for such Interest Period,
then, Lender shall forthwith give notice thereof to Borrower, whereupon, until
Lender notifies Borrower that the circumstances giving rise to such suspension
no longer exist, the obligation of Lender to make LIBOR Borrowings available to
Borrower shall be suspended; (vi) if at any time, a change of law, or compliance
by Lender with any request or directive (whether or not having the force of law)
of any governmental authority shall make it unlawful or impracticable for Lender
to make available, maintain or fund any LIBOR Borrowings, Lender shall forthwith
give notice to such effect to Borrower, whereupon, until Lender notifies
Borrower that the circumstances giving rise to such suspension no longer exist,
the obligation of Lender to make such borrowings available to Borrower shall be
suspended and if Lender shall determine that it may not lawfully continue to
maintain and fund any then outstanding borrowings to maturity and shall so
specify in such notice, each Borrowing so affected shall be converted into a
Prime Borrowing, effective immediately; (vii) unless Borrower has timely given
Lender a notice of LIBOR Borrowing required hereinabove, a LIBOR Borrowing shall
automatically convert to a Prime Borrowing at the expiration of the Interest
Period corresponding thereto; (viii) no voluntary prepayment of any LIBOR
Borrowing shall be permitted unless Borrower complies with clause (ix) below;
and (ix) upon the request of Lender, delivered to Borrower, Borrower shall pay
to Lender such amount or amounts as shall be determined by Lender in connection
with the relevant Interest Period as a result of: (A) any payment or prepayment
of any LIBOR Borrowing by Borrower being made on a date other than the last day
of an Interest Period for such borrowing, whether as a result
<PAGE> 14
of voluntary prepayment, involuntary acceleration or otherwise; or (B) any
failure by the Borrower to undertake any such LIBOR Borrowing on the date for
which notice of such borrowing is specified by Borrower. In the case of clause
(ix) above, such amount shall include an amount determined by Lender, in its
good faith discretion, to be equal to the excess, if any, of the amount of
interest which would have accrued on the amount so paid or prepaid or not
prepaid or borrowed for the period from the date of such payment, prepayment or
failure to prepay or borrow to the last day of the then current Interest Period
for such borrowing (or, in the case of a failure to prepay or borrow, the
Interest Period for such borrowing which would have commenced on the date of
such failure to prepay or borrow) at the applicable rate of interest for such
borrowing provided for herein over the amount of interest (as determined by
Lender in the exercise of its good faith discretion) Lender would have paid on
deposits in Dollars of comparable amounts having terms comparable to such period
placed with it by leading banks in the London interbank market.
(3) PAYMENT OF INTEREST. Accrued interest on any
Prime Borrowings at the Applicable Rate shall be due and payable monthly in
arrears, on the first day of each calendar month, for the preceding calendar
month (or portion thereof), commencing on the first day of the first calendar
month following the Closing Date, and at maturity. Accrued interest on any LIBOR
Borrowings shall be due and payable at the Applicable Rate on the same dates as
are prescribed for the payment of accrued interest on Prime Borrowings and,
additionally, at the expiration of each Interest Period corresponding to such
Borrowings, and at maturity.
(4) CALCULATION OF INTEREST AND FEES. Interest
on Borrowings at the Applicable Rate (and any fees described in Section 2.2.2
computed on a per annum basis) shall be calculated on the basis of a 360-day
year and actual days elapsed. The Applicable Rate on Prime Borrowings shall
change with each change in the Prime Rate, effective as of the opening of
business on the Business Day of such change.
(5) CHARGING OF INTEREST AND FEES. Accrued and
unpaid interest on any Borrowings (and any outstanding fees described in Section
2.2.2) may, when due and payable, be paid, at Lender's option (without any
obligation to do so), either (i) by Lender's charging the Line of Credit for an
Advance in the amount thereof; or (ii) by Lender's debiting any deposit account
of Borrower for the amount thereof; but, notwithstanding the foregoing, Borrower
shall be and remain responsible for the payment of such sums.
(6) RATE ON OTHER OBLIGATIONS. To the extent
that, at any time, there are other Obligations besides Advances which are
outstanding and unpaid, such Obligations shall, unless and except to the extent
that this Agreement, any Note or any other Loan Document evidencing such
Obligations provides otherwise, bear interest at the same rate per annum as is
then and thereafter payable on Prime Borrowings under the Line of Credit.
2.2.2. FEES. In addition to the payment of interest
at the Applicable Rate, Borrower shall also be obligated to pay Lender the
following fees and charges:
<PAGE> 15
(1) FACILITY FEE. On the Closing Date, a fully
earned, non-refundable facility fee of Twenty-Five Thousand Dollars ($25,000).
(2) NON-USAGE FEE. Quarterly, on the first day
of each calendar quarter, commencing on July 1, 1998, Borrower shall pay to
Lender a fee equal to (x) one-fourth of one percent (1/4%) per annum, times (y)
the difference between (A) the Commitment, and (B) the sum, without duplication,
of the following, determined on a daily average basis for the immediately
preceding calendar quarter (or portion thereof, as the case may be): (i) all
Advances under the Line of Credit plus (ii) all outstanding Letter of Credit
Obligations. The first such payment shall cover the period from the Closing Date
to June 30, 1998.
2.2.3. CAPITAL ADEQUACY. If, after the Closing
Date, the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the administration thereof, or compliance by Lender with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, affects or
could reasonably be expected to affect the amount of capital required or
expected to be maintained by Lender or any corporation in control of Lender and
Lender determines that the amount of such capital is increased by or based upon
Lender's obligations hereunder, then from time to time, within thirty (30) days
after demand by Lender, Borrower shall pay to Lender such additional amount or
amounts as will compensate Lender in light of such circumstances, to the extent
that Lender reasonably determines such increase in capital is allocable to
Lender's obligations hereunder, and such payment, as and when received, shall be
applied by Lender in reimbursement of Lender's increased costs in regard to such
obligations.
2.2.4. USURY SAVINGS PROVISIONS. Lender and
Borrower hereby further agree that the only charge imposed by Lender upon
Borrower for the use of money in connection herewith is and shall be interest at
the Applicable Rate, and that all other charges imposed by Lender upon Borrower
in connection herewith, are and shall be deemed to be charges made to compensate
Lender for underwriting and administrative services and costs, and other
services and costs performed and incurred, and to be performed and incurred, by
Lender in connection with making credit available to Borrower hereunder, and
shall under no circumstances be deemed to be charges for the use of money. In no
contingency or event whatsoever shall the aggregate of all amounts deemed
interest hereunder or under the Notes and charged or collected pursuant to the
terms of this Agreement or pursuant to the Notes exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that Lender has charged or received interest hereunder in excess of
the highest applicable rate, the rate in effect hereunder shall automatically be
reduced to the maximum rate permitted by applicable law and Lender shall
promptly refund to Borrower any interest received by Lender in excess of the
maximum lawful rate or, if so requested by Borrower, shall apply such excess to
the principal balance of the Obligations. It is the intent hereof that Borrower
not pay or contract to pay, and that Lender not receive or contract to receive,
directly or indirectly in any manner whatsoever, interest in excess of that
which may be paid by Borrower under applicable law.
<PAGE> 16
2.3. GENERAL PROVISIONS AS TO PAYMENTS.
2.3.1. METHOD OF PAYMENT. All payments of interest,
fees and principal pursuant to this Agreement must be received by Lender no
later than 2:00 p.m. (Atlanta, Georgia time) on the date when due, in federal or
other funds immediately available to Lender in Atlanta, Georgia.
2.3.2. APPLICATION OF PAYMENT. Except as otherwise
expressly set forth herein, all payments received by Lender hereunder shall be
applied, in accordance with the then current billing statement applicable to the
Borrowing, first to accrued interest, then to fees, then to principal due and
then to late charges. Any remaining funds shall be applied to the further
reduction of principal. In the event more than one Borrowing shall be
outstanding hereunder, and no designation is made by Borrower, Lender, in its
discretion, may determine to which Borrowing(s) each payment shall be applied.
Notwithstanding the foregoing, upon the occurrence of a Default Condition or
Event of Default, payments shall be applied to the Obligations in such order as
Lender, in its sole discretion, may elect.
3. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce
Lender to enter into this Agreement, Borrower hereby represents and warrants to
Lender (which representations and warranties, together with any other
representations and warranties of Borrower contained elsewhere in this
Agreement, shall be deemed to be renewed as of the date of each Advance and the
issuance of each Letter of Credit), as set forth below:
3.1. EXISTENCE AND QUALIFICATION. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation, as designated on the Borrower Information
Schedule, with its principal place of business, chief executive office and
office where it keeps all of its books and records being located at the
Executive Office, and is duly qualified as a foreign corporation in good
standing in the State of Georgia and in each other State wherein the conduct of
its business or the ownership of its property requires such qualification and
the failure to be so qualified could reasonably be expected to result in a
Material Adverse Change. Borrower has as its corporate name, as registered with
the secretary of state of the state of its incorporation, the words first
inscribed hereinabove as its name, and, except as may be described on the
Borrower Information Schedule, has not done business under any other name for at
least the past seven (7) years.
3.2. AUTHORITY; AND VALIDITY AND BINDING EFFECT. Borrower
has the corporate power to make, deliver and perform under the Loan Documents,
and to borrow hereunder, and has taken all necessary and appropriate corporate
action to authorize the execution, delivery and performance of the Loan
Documents. This Agreement constitutes, and the remainder of the Loan Documents,
as and when executed and delivered for value received, will constitute, the
valid obligations of Borrower, legally binding upon it and enforceable against
it in accordance with their respective terms.
<PAGE> 17
3.3. INCUMBENCY AND AUTHORITY OF SIGNING OFFICERS. The
undersigned officers of Borrower hold the offices specified hereinbelow and, in
such capacities, are duly authorized and empowered to execute, attest and
deliver this Agreement and the remainder of the Loan Documents for and on behalf
of Borrower, and to bind Borrower accordingly thereby.
3.4. NO MATERIAL LITIGATION. Except as may be set forth on
the Borrower Information Schedule, there are no legal proceedings pending (or,
so far as Borrower or its officers know, threatened), before any court or
administrative agency which, if adversely determined, could reasonably be
expected to result in a Material Adverse Change.
3.5. TAXES. Borrower has filed or caused to be filed all
tax returns required to be filed by it and has paid all taxes shown to be due
and payable by it on said returns or on any assessments made against it.
3.6. CAPITAL. All capital stock, debentures, bonds, notes
and all other securities of Borrower presently issued and outstanding are
validly and properly issued in accordance with all applicable laws, including,
but not limited to, the "blue sky" laws of all applicable states and the federal
securities laws.
3.7. ORGANIZATION. The articles of incorporation of and
bylaws of Borrower are in full force and effect under the law of the state of
its incorporation and all amendments to said articles of incorporation and
bylaws have been duly and properly made under and in accordance with all
applicable laws.
3.8. INSOLVENCY. After giving effect to the execution and
delivery of the Loan Documents and the extension of any credit or other
financial accommodations hereunder, Borrower will not be "insolvent", within the
meaning of such term as used in O.C.G.A. ss. 18-2-22 or as defined in ss.
101(32) of the Bankruptcy Code; or be unable to pay its debts generally as such
debts become due; or have an unreasonably small capital.
3.9. TITLE. Borrower has good and marketable title to all
of its properties subject to no Lien of any kind except for Permitted
Encumbrances.
3.10. MARGIN STOCK. Borrower is not engaged principally, or
as one of its important activities, in the business of purchasing or carrying
any "margin stock", as that term is defined in Section 221.2(h) of Regulation U
of the Board of Governors of the Federal Reserve System, and no part of the
proceeds of any borrowing made pursuant hereto will be used to purchase or carry
any such margin stock or to extend credit to others for the purpose of
purchasing or carrying any such margin stock, or be used for any purpose which
violates, or which is inconsistent with, the provisions of Regulation X of said
Board of Governors. In connection herewith, if requested by Lender, Borrower
will furnish to Lender a statement in conformity with the requirements of
Federal Reserve Form U-1 referred to in said Regulation U to the foregoing
effect.
<PAGE> 18
3.11. NO VIOLATIONS. The execution, delivery and
performance by Borrower of this Agreement and the Notes have been duly
authorized by all necessary corporate action and do not and will not require any
consent or approval of the shareholders of Borrower, violate any provision of
any law, rule, regulation (including, without limitation, Regulation X of the
Board of Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to Borrower or of the charter or bylaws of Borrower, or result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which Borrower is a
party or by which it or its properties may be bound or affected; and Borrower is
not in default under any such law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, agreement,
lease or instrument.
3.12. FINANCIAL STATEMENTS. The financial statements of
Borrower and its Consolidated Subsidiaries (if any) for its most recently
completed Fiscal Year and for that portion of its current Fiscal Year ended with
that Fiscal Quarter ended closest to the Closing Date for which financial
statements have been prepared, including balance sheet, income statement and, if
available, statement of changes in cash flow, copies of which heretofore have
been furnished to Lender, are complete and accurately and fairly represent the
financial condition of Borrower and its Consolidated Subsidiaries (if any), the
results of its operations and the transactions in its equity accounts as of the
dates and for the periods referred to therein, and have been prepared in
accordance with GAAP. There are no material liabilities, direct or indirect,
fixed or contingent, of Borrower or any such Consolidated Subsidiaries as of the
date of such financial statements which are not reflected therein or in the
notes thereto. No Material Adverse Change has occurred since the date of the
balance sheet contained in the annual financial statement described hereinabove.
3.13. POSSESSION OF PERMITS. To their knowledge, after
reasonable investigation, Borrower and each Subsidiary (if any) possess all
franchises, certificates, licenses, permits and other authorizations from
governmental political subdivisions or regulatory authorities, and all patents,
trademarks, service marks, trade names, copyrights, licenses and other, similar
rights, free from burdensome restrictions, that are necessary for the ownership,
maintenance and operation of any of its properties and assets, and neither
Borrower nor any Subsidiary is in violation of any thereof. A complete and
accurate list of all such patents, trademarks, service marks, trade names,
copyrights, licenses and other, similar intellectual property rights owned by
Borrower in existence on the Closing Date is set forth on the Borrower
Information Schedule attached hereto.
3.14. SUBSIDIARIES. As of the Closing Date, Borrower has no
Subsidiaries except as may be described on the Borrower Information Schedule.
3.15. EMPLOYEE BENEFIT PLANS. As of the Closing Date,
Borrower has no Employee Benefit Plans except as may be described on the
Borrower Information Schedule.
<PAGE> 19
4. AFFIRMATIVE COVENANTS. Borrower covenants to Lender that from
and after the date hereof, and so long as any amounts remain unpaid on account
of any of the Obligations or this Agreement remains effective (whichever is the
last to occur), Borrower will comply (and cause each Subsidiary to comply) with
the affirmative covenants set forth below:
4.1. PERIODIC FINANCIAL STATEMENTS. Borrower shall, as
soon as practicable, and in any event within forty-five (45) days after the end
of each Fiscal Quarter, furnish to Lender unaudited financial statements of
Borrower and each Consolidated Subsidiary (if any), including balance sheets,
income statements and statements of cash flow, for the Fiscal Quarter ended, and
for the Fiscal Year to date, on a consolidated and, if requested by Lender,
consolidating basis. All such financial statements shall be certified by a duly
authorized officer of Borrower to present fairly the financial position and
results of operations of Borrower for the period involved in accordance with
GAAP (but for the omission of footnotes and subject to year-end audit
adjustments).
4.2. ANNUAL FINANCIAL STATEMENTS. Borrower shall, as soon
as practicable, and in any event within ninety (90) days after the end of each
Fiscal Year, furnish to Lender the annual audit report of Borrower and its
Consolidated Subsidiaries (if any), certified without material qualification by
independent certified public accountants selected by Borrower and acceptable to
Lender, and prepared in accordance with GAAP, together with relevant financial
statements of Borrower and such Subsidiaries for the Fiscal Year then ended, on
a consolidating and a consolidated basis, if applicable. Borrower shall cause
said accountants to furnish Lender with a statement that in making their
examination of such financial statements, they obtained no knowledge of any
Event of Default or Default Condition which pertains to accounting matters
relating to this Agreement or the Notes, or, in lieu thereof, a statement
specifying the nature and period of existence of any such Event of Default or
Default Condition disclosed by their examination.
4.3. PAYMENT OF TAXES. Borrower shall pay and discharge
all taxes, assessments and governmental charges upon it, its income and its
properties prior to the date on which penalties attach thereto, unless and to
the extent only that (x) such taxes, assessments and governmental charges are
being contested in good faith and by appropriate proceedings by Borrower, (y)
Borrower maintains reasonable reserves on its books therefor and (z) the payment
of such taxes does not result in a Lien other than a Permitted Encumbrance.
4.4. MAINTENANCE OF INSURANCE. In addition to and
cumulative with any other requirements herein imposed on Borrower with respect
to insurance, Borrower shall maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
but in any event to include loss, damage, flood, windstorm, fire, theft,
extended coverage, business interruption, freight insurance and product
liability insurance in amounts satisfactory to Lender, which such insurance
shall not be cancellable by Borrower, unless with the prior written consent of
Lender, or by Borrower's insurer, unless with at least ten (10) days advance
written notice to Lender thereof (or such lesser or greater time period as shall
be accepted or required by Lender from time to time). Borrower shall file with
Lender upon its request a detailed list of such insurance then in
<PAGE> 20
effect stating the names of the insurance companies, the amounts and rates of
insurance, the date of expiration thereof, the properties and risks covered
thereby and the insured with respect thereto, together with a copy of each such
policy and, within thirty (30) days after notice in writing from Lender, obtain
such additional insurance as Lender may reasonably request.
4.5. COMPLIANCE CERTIFICATE. Borrower shall, on a
quarterly basis not later than forty-five (45) days after the close of each of
its first three Fiscal Quarters and not later than ninety (90) days after the
close of its Fiscal Year, issue to Lender a Compliance Certificate (which shall
include computations demonstrating financial covenant compliance).
4.6. CHANGE OF PRINCIPAL PLACE OF BUSINESS, ETC. Borrower
hereby understands and agrees that if, at time hereafter, Borrower elects to
move its Executive Office, or if Borrower elects to change its name, identity or
its organization structure to other than a corporate structure, Borrower will
notify Lender in writing at least thirty (30) days prior thereto.
4.7. PRESERVATION OF EXISTENCE. Borrower shall preserve
and maintain its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified as a foreign
corporation in each jurisdiction in which such qualification is necessary or
desirable in view of its business and operations or the ownership of its
properties.
4.8. COMPLIANCE WITH LAWS. Borrower and each of its
Subsidiaries shall comply with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority, noncompliance with which
would or could materially adversely affect their respective financial condition
or the ownership, maintenance or operation of any material portion of any of
their respective properties. Without limiting the foregoing, each of Borrower
and its Subsidiaries shall obtain and maintain all permits, licenses and other
authorizations which are required under, and otherwise comply with, all federal,
state, and local laws and regulations.
5. NEGATIVE COVENANTS. Borrower covenants to Lender that from and
after the date hereof and so long as any amount remains unpaid on account of any
of the Obligations or this Agreement remains effective (whichever is the last to
occur), Borrower will not do (and will not permit any Subsidiary to do), without
the prior written consent of Lender, any of the things or acts set forth below:
5.1. ENCUMBRANCES. Create, assume, or suffer to exist any
Lien, except for Permitted Encumbrances.
5.2. DEBT. Incur, assume, or suffer to exist any Debt,
except for: (i) Debt to Lender or any Affiliate of Lender; (ii) Debt to Persons
other than Lender existing on the date of this Agreement and disclosed either in
the financial statements described in Section 3.12 or on the Borrower
Information Schedule; (iii) Subordinated Debt; (iv) trade payables and
contractual obligations to suppliers and customers incurred in the ordinary
course of business; (v) accrued pension fund and other employee benefit plan
obligations and liabilities (provided, however, that
<PAGE> 21
such Debt does not result in the existence of any Event of Default or Default
Condition under any other provision of this Agreement); (vi) deferred taxes;
(vii) Debt to holders of payment items resulting from endorsements of such
instruments in the ordinary course of its business; and (viii) Purchase Money
Debt not to exceed One Million Dollars ($1,000,000) in the aggregate at any one
time outstanding,
5.3. CONTINGENT LIABILITIES. Guarantee, endorse, become
surety with respect to or otherwise become directly or contingently liable for
or in connection with the obligations of any other person, firm, or corporation,
except for endorsements of negotiable instruments for collection in the ordinary
course of business.
5.4. DIVIDENDS. Declare or pay any cash dividends on, or
make any cash distribution with respect to, its shares of any class of capital
stock if a Default Condition or Event of Default then exists or would result
therefrom.
5.5. REDEMPTION. Purchase, redeem, or otherwise acquire
for value any shares of any class of its capital stock if a Default Condition or
Event of Default then exists or would result therefrom.
5.6. INVESTMENTS. Make any investment in cash or by
delivery of property to any Person, whether by acquisition of stock,
indebtedness or other obligation or security, or by loan, advance or capital
contribution, or otherwise, in any Person or property of a Person, except for:
(i) fixed assets acquired from time to time in the ordinary course of business;
(ii) current assets arising from the sale of goods or the provision of services
in the ordinary course of business; (iii) loans or advances to employees for
salary, commissions, travel or the like, made in the ordinary course of
business, (iv) investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United States of
America, provided that such obligations mature within one (1) year from the date
of acquisition thereof; (v) investments in time deposits, demand deposits and
certificates of deposit maturing within one year from the date of acquisition
issued by a bank or trust company organized under the laws of the United States
or any state thereof having capital surplus and undivided profits aggregating at
least $500,000,000; and (vi) investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof; (vii) in the case of any
Subsidiary domiciled in the European Community, investments substantially
similar to the types described in clauses (iv), (v) and (vi) above, but relative
to such country; and (viii) investments in the nature of acquisitions of the
stock or assets of another Person in the same line of business as Borrower as
part of the acquisition of the business of such Person as a going concern, not
to exceed, in total consideration paid, Five Million Dollars ($5,000,000), in
the aggregate, subsequent to the Closing Date.
5.7. MERGERS. Dissolve or otherwise terminate its
corporate status; or enter into any merger, reorganization or consolidation
unless Borrower is the surviving corporation; or make
<PAGE> 22
any substantial change in the basic type of business conducted by Borrower and
its Subsidiaries, as of the Closing Date.
5.8. AFFILIATE TRANSACTIONS. Enter into, or be a party to,
or permit any Subsidiary to enter into or be a party to, any transaction with
any Affiliate, except in the ordinary course of and pursuant to the reasonable
requirements of Borrower's or such Subsidiary's business and upon fair and
reasonable terms which are fully disclosed to Lender and are no less favorable
to Borrower than would obtain in a comparable arm's length transaction with a
Person not an Affiliate.
5.9. DISPOSITION OF ASSETS. Sell, lease or otherwise
dispose of any of its properties, including any disposition of property as part
of a sale and leaseback transaction, to or in favor of any person, except for
sales or other dispositions occurring in the ordinary course of Borrower's
business.
5.10. EMPLOYEE BENEFIT PLANS. Permit an Employee Benefit
Plan to become materially underfunded or create any Employee Benefit Plan
without prior written notice to Lender and upon such notification this Agreement
shall be amended as determined necessary by Lender in its discretion as a result
of the creation of such Plan.
6. FINANCIAL COVENANTS. Borrower shall maintain a minimum
Tangible Net Worth of at least Forty-Five Million Dollars ($45,000,000),
measured quarterly, at the end of each Fiscal Quarter. "TANGIBLE NET WORTH"
shall mean Borrower's book net worth, determined on a consolidated basis for
Borrower and its Consolidated Subsidiaries in accordance with GAAP, minus all
assets of Borrower and such Subsidiaries constituting (i) goodwill, patents,
copyrights, trademarks, trade names and other intangible assets, (ii) write-ups
of assets, (iii) unamortized debt discount and expense, computer software
development costs, acquired technology costs or advance royalty costs, (iv)
deferred charges, and (v) any Debts owing to such Person from any shareholders,
officers or directors of such Person, or from any Affiliates or Subsidiaries of
such Person.
7. EVENTS OF DEFAULT. The occurrence of any events or conditions
set forth below shall constitute an Event of Default hereunder, provided that
any requirement for the giving of notice or the lapse of time, or both, has been
satisfied:
7.1. OBLIGATIONS. Borrower shall fail to make any payment
on any of its Obligations, when due, and the continuance of such default for a
period of three (3) Business Days after due date.
7.2. MISREPRESENTATIONS. Borrower, any Subsidiary or any
Guarantor shall make any representations or warranties in any of the Loan
Documents or in any Guaranty or in any certificate or statement furnished at any
time hereunder or in connection with any of the Loan Documents or any Guaranty
which proves to have been untrue or misleading in any material respect when made
or furnished.
<PAGE> 23
7.3. CERTAIN COVENANTS. Borrower shall default in the
observance or performance of any covenant or agreement contained in any Section
of Articles 5 or 6.
7.4. OTHER COVENANTS. Borrower, any Subsidiary or any
Guarantor shall default in the observance or performance of any covenant or
agreement contained herein, in any of the other Loan Documents or any Guaranty
(other than a default the performance or observance of which is dealt with
specifically elsewhere in this Article 7) unless (i) with respect to this
Agreement, such default is cured to Lender's satisfaction within twenty (20)
days after the sooner to occur of receipt of notice of such default from Lender
or the date on which such default first becomes known to Borrower and (ii) with
respect to any other Loan Document or Guaranty, such default is cured within any
applicable grace, cure or notice and cure period contained therein.
7.5. OTHER DEBTS. Borrower, any Subsidiary or any
Guarantor shall default in connection with any agreement for Debt exceeding Five
Hundred Thousand Dollars ($500,000) in principal amount with any creditor,
including Lender, which entitles said creditor to accelerate the maturity
thereof.
7.6. VOLUNTARY BANKRUPTCY. Borrower, any Subsidiary or any
Guarantor shall file a voluntary petition in bankruptcy or a voluntary petition
or answer seeking liquidation, reorganization, arrangement, readjustment of its
debts, or for any other relief under the Bankruptcy Code, or under any other act
or law pertaining to insolvency or debtor relief, whether state, Federal, or
foreign, now or hereafter existing; Borrower, any Subsidiary or any Guarantor
shall enter into any agreement indicating its consent to, approval of, or
acquiescence in, any such petition or proceeding; Borrower, any Subsidiary or
any Guarantor shall apply for or permit the appointment by consent or
acquiescence of a receiver, custodian or trustee of Borrower, any Subsidiary or
any Guarantor for all or a substantial part of its property; Borrower, any
Subsidiary or any Guarantor shall make an assignment for the benefit of
creditors; or Borrower, any Subsidiary or any Guarantor shall be unable or shall
fail to pay its debts generally as such debts become due, or Borrower, any
Subsidiary or any Guarantor shall admit, in writing, its inability or failure to
pay its debts generally as such debts become due.
7.7. INVOLUNTARY BANKRUPTCY. There shall have been filed
against Borrower, any Subsidiary or any Guarantor an involuntary petition in
bankruptcy or seeking liquidation, reorganization, arrangement, readjustment of
its debts or for any other relief under the Bankruptcy Code, or under any other
act or law pertaining to insolvency or debtor relief, whether state, federal or
foreign, now or hereafter existing; Borrower, any Subsidiary or any Guarantor
shall suffer or permit the involuntary appointment of a receiver, custodian or
trustee of Borrower, any Subsidiary or any Guarantor or for all or a substantial
part of its property; or Borrower, any Subsidiary or any Guarantor shall suffer
or permit the issuance of a warrant of attachment, execution or similar process
against all or any substantial part of the property of Borrower, any Subsidiary
or any Guarantor; or any motion, complaint or other pleading is filed in any
bankruptcy case of any person or entity other than Borrower and such motion,
complaint or pleading seeks the consolidation of Borrower's assets and
liabilities with the assets and liabilities of such person or entity.
<PAGE> 24
7.8. JUDGMENTS. A final judgment or order for the payment
of money is rendered against Borrower, any Subsidiary or any Guarantor in the
amount of Five Hundred Thousand Dollars ($500,000) or more (exclusive of amounts
covered by insurance) and either (x) enforcement proceedings shall have been
commenced by any creditor upon such judgment or order, or (y) a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect for any period of thirty (30) consecutive
days.
7.9. DISAVOWAL OF CERTAIN OBLIGATIONS. Any Person (other
than Lender) party to a Guaranty or Subordination Agreement shall disavow its
obligations thereunder; or any such Guaranty or Subordination Agreement is
alleged to be, or determined by any governmental authority to be, invalid,
unenforceable or otherwise not binding on any Person party thereto (other than
Lender), in whole or in part.
7.10. MATERIAL ADVERSE CHANGE. There shall occur any
Material Adverse Change.
7.11. CHANGE OF CONTROL, ETC. If any Person, or group of
Persons acting in concert, which Person(s) were not shareholder(s) of record on
the Closing Date, shall control Borrower subsequent to the Closing Date.
8. REMEDIES. Upon the occurrence or existence of any Event of
Default, or at any time thereafter, without prejudice to the rights of Lender to
enforce its claims against Borrower for damages for failure by Borrower to
fulfill any of its obligations hereunder, subject only to prior receipt by
Lender of payment in full of all Obligations then outstanding in a form
acceptable to Lender, Lender shall have all of the rights and remedies set forth
below, and it may exercise any one, more, or all of such remedies, in its sole
discretion, without thereby waiving any of the others; provided, however, that,
in addition to the foregoing, if the Event of Default is in respect of Section
7.6 or 7.7, then, automatically, immediately upon such Event of Default
occurring, without necessity of any further action on Lender's part, all
commitments of Lender hereunder and under all other Loan Documents shall
terminate, and all Obligations shall be immediately due and payable.
8.1. ACCELERATION OF THE OBLIGATIONS. Lender, at its
option, may terminate all commitments of Lender hereunder and under all other
Loan Documents, and declare all of the Obligations to be immediately due and
payable, whereupon the same shall become immediately due and payable without
presentment, demand, protest, notice of nonpayment or any other notice required
by law relative thereto, all of which are hereby expressly waived by Borrower,
anything contained herein to the contrary notwithstanding. If any note of
Borrower to Lender constituting Obligations, including, without limitation, any
of the Notes, shall be a demand instrument, however, the recitation of the right
of Lender to declare any and all Obligations to be immediately due and payable,
whether such recitation is contained in such note or in this Agreement, as well
as the recitation of the above events permitting Lender to declare all
Obligations due and payable, shall not constitute an election by Lender to waive
its right to demand payment under a demand at any time and in any event, as
Lender in its discretion may deem appropriate. Thereafter, Lender, at its
option,
<PAGE> 25
may, but shall not be obligated to, accept less than the entire amount of
Obligations due, if tendered, provided, however, that unless then agreed to in
writing by Lender, no such acceptance shall or shall be deemed to constitute a
waiver of any Event of Default or a reinstatement of any commitments of Lender
hereunder or under all other Loan Documents.
8.2. DEFAULT. If Lender so elects, by further written
notice to Borrower, Lender may increase the rate of interest charged on the
Notes then outstanding for so long thereafter as Lender further shall elect by
an amount not to exceed the Default Rate.
8.3. OTHER REMEDIES. Unless and except to the extent
expressly provided for to the contrary herein, the rights of Lender specified
herein shall be in addition to, and not in limitation of, Lender's rights under
any statute or rule of law or equity, or under any other provision of any of the
Loan Documents, or under the provisions of any other document, instrument or
other writing executed by Borrower or any third party in favor of Lender, all of
which may be exercised successively or concurrently.
8.4. SET OFF. Lender may also set off any or all funds of
Borrower then on deposit with Lender against the Obligations.
9. MISCELLANEOUS.
9.1. WAIVER. Each and every right granted to Lender under
this Agreement, or any of the other Loan Documents, or any other document
delivered hereunder or in connection herewith or allowed it by law or in equity,
shall be cumulative and may be exercised from time to time. No failure on the
part of Lender to exercise, and no delay in exercising, any right shall operate
as a waiver thereof, nor shall any single or partial exercise by Lender of any
right preclude any other or future exercise thereof or the exercise of any other
right. No waiver by Lender of any Default Condition or Event of Default shall
constitute a waiver of any subsequent Default Condition or Event of Default.
9.2. GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF GEORGIA.
9.3. SURVIVAL. All representations, warranties and
covenants made herein and in the Loan Documents shall survive the execution and
delivery hereof and thereof. The terms and provisions of this Agreement shall
continue in full force and effect, notwithstanding the payment of one or more of
the Notes or the termination of the Line of Credit, until all of the Obligations
have been paid in full and Lender has terminated this Agreement in writing.
<PAGE> 26
9.4. ASSIGNMENTS. No assignment hereof or of any Loan
Document shall be made by Borrower without the prior written consent of Lender.
Lender may assign, or sell participations in, its right, title and interest
herein and in the Loan Documents at any time hereafter without notice to or
consent of Borrower.
9.5. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which when fully executed shall be an original,
and all of said counterparts taken together shall be deemed to constitute one
and the same agreement.
9.6. REIMBURSEMENT. Borrower shall pay to Lender on demand
all out-of-pocket costs and expenses that Lender pays or actually incurs in
connection with the negotiation, preparation, consummation, enforcement and
termination of this Agreement and the other Loan Documents, including, without
limitation: (a) attorneys' fees and paralegals' fees and disbursements of
outside counsel; (b) costs and expenses (including outside attorneys' and
paralegals' fees and disbursements) for any amendment, supplement, waiver,
consent or subsequent closing in connection with the Loan Documents and the
transactions contemplated thereby; (c) sums paid or incurred to pay for any
amount or to take any action required of Borrower under the Loan Documents that
Borrower fails to pay or take; and (d) after an Event of Default, costs and
expenses (including attorneys' and paralegals' fees and disbursements) paid or
incurred to obtain payment of the Obligations, enforce the provisions of the
Loan Documents or to defend any claim made or threatened against Lender arising
out of the transactions contemplated hereby (including, without limitation,
preparations for and consultations concerning any such matters). The foregoing
shall not be construed to limit any other provisions of the Loan Documents
regarding costs and expenses to be paid to Borrower. All of the foregoing costs
and expenses may, in the discretion of Lender, be charged to the Master Note.
Borrower will pay all expenses incurred by it in the transaction. In the event
Borrower becomes a debtor under the Bankruptcy Code, Lender's secured claim in
such case shall include interest on the Obligations and all fees, costs and
charges provided for herein (including, without limitation, reasonable
attorneys' fees actually incurred) all for the extent allowed by the Bankruptcy
Code.
9.7. SUCCESSORS AND ASSIGNS. This Agreement and Loan
Documents shall be binding upon and inure to the benefit of the successors and
permitted assigns of the parties hereto and thereto.
9.8. SEVERABILITY. If any provision this Agreement or of
any of the Loan Documents or the application thereof to any party thereto or
circumstances shall be invalid or unenforceable to any extent, the remainder of
such Loan Documents and the application of such provisions to any other party
thereto or circumstance shall not be affected thereby and shall be enforced to
the greatest extent permitted by law.
9.9. NOTICES. All notices, requests and demands to or upon
the respective parties hereto shall be deemed to have been given or made when
personally delivered or deposited in the mail, registered or certified mail,
postage prepaid, addressed as follows: (i) for Lender, care of the
<PAGE> 27
address of Lender inscribed beneath its signature hereinbelow and (ii) for
Borrower, care of the address set forth as its Executive Office on the Borrower
Information Schedule (or to such other address as may be designated hereafter in
writing by the respective parties hereto) except in cases where it is expressly
provided herein or by applicable law that such notice, demand or request is not
effective until received by the party to whom it is addressed.
9.10. ENTIRE AGREEMENT: AMENDMENTS. This Agreement,
together with the remaining Loan Documents, constitute the entire agreement
between the parties hereto with respect to the subject matter hereof. Neither
this Agreement nor any Loan Document may be changed, waived, discharged,
modified or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement is sought.
9.11. TIME OF ESSENCE. Time is of the essence in this
Agreement and the other Loan Documents.
9.12. INTERPRETATION. No provision of this Agreement or any
Loan Document shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
9.13. LENDER NOT A JOINT VENTURER. Neither this Agreement
nor any Loan Document shall in any respect be interpreted, deemed or construed
as making Lender a partner or joint venturer with Borrower or as creating any
similar relationship or entity, and Borrower agrees that it will not make any
contrary assertion, contention, claim or counterclaim in any action, suit or
other legal proceeding involving Lender and Borrower.
9.14. JURISDICTION. BORROWER AGREES THAT ANY LEGAL ACTION
OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY LOAN DOCUMENT MAY BE BROUGHT
IN THE COURTS OF THE STATE OF GEORGIA OR THE UNITED STATES OF AMERICA FOR THE
NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION, ALL AS LENDER MAY ELECT. BY
EXECUTION OF THIS AGREEMENT, BORROWER HEREBY SUBMITS TO EACH SUCH JURISDICTION,
HEREBY EXPRESSLY WAIVING WHATEVER RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS
PRESENT OR FUTURE DOMICILE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY OTHER
JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW.
9.15. ACCEPTANCE. This Agreement, together with the other
Loan Documents, shall not become effective unless and until delivered to Lender
at its principal office in Atlanta, Fulton County, Georgia and accepted in
writing by Lender at such office as evidenced by its execution hereof (notice of
which delivery and acceptance are hereby waived by Borrower).
<PAGE> 28
9.16. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to
be made hereunder or under the Notes shall be stated to be due on a Saturday,
Sunday or any other day in which national banks within the State of Georgia are
legally authorized to close, such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest hereunder or under the Notes.
9.17. CURE OF DEFAULTS BY LENDER. If, hereafter, Borrower
defaults in the performance of any duty or obligation to Lender hereunder or
under any Loan Document, Lender may, at its option, but without obligation, cure
such default and any costs, fees and expenses incurred by Lender in connection
therewith including, without limitation, for the purchase of insurance, the
payment of taxes and the removal or settlement of liens and claims, shall be
deemed to be advances against the Master Note, whether or not this creates an
overadvance thereunder, and shall be payable in accordance with its terms.
9.18. RECITALS. All recitals contained herein are hereby
incorporated by reference into this Agreement and made part thereof.
9.19. ATTORNEY-IN-FACT. Borrower hereby designates,
appoints and empowers Lender irrevocably as its attorney-in-fact, effective
during any time that an Event of Default exists, either in the name of Borrower
or the name of Lender, at Borrower's cost and expense, to do any and all actions
which Lender may deem necessary or advisable to carry out the terms of this
Agreement or any other Loan Document upon the failure, refusal or inability of
Borrower to do so after ten (10) days' advance written notice, and in connection
therewith, to take any and all actions as Lender may deem necessary or desirable
to realize upon any Obligations; and Borrower hereby agrees to indemnify and
hold Lender harmless from any costs, damages, expenses or liabilities arising
against or incurred by Lender in connection therewith.
9.20. SOLE BENEFIT. The rights and benefits set forth in
this Agreement and the other Loan Documents are for the sole and exclusive
benefit of the parties hereto and thereto and may be relied upon only by them.
9.21. INDEMNIFICATION. Borrower will hold Lender, its
respective directors, officers, employees, agents, Affiliates, successors and
assigns harmless from and indemnify Lender, its respective directors, officers,
employees, agents, Affiliates, successors and assigns against, all loss,
damages, costs and expenses (including, without limitation, reasonable
attorney's fees, costs and expenses) actually incurred by any of the foregoing,
whether direct, indirect or consequential, as a result of or arising from or
relating to any "Proceedings" (as defined below) by any Person, whether
threatened or initiated, asserting a claim for any legal or equitable remedy
against any Person under any statute, case or regulation, including, without
limitation, any federal or state securities laws or under any common law or
equitable case or otherwise, arising from or in connection with this Agreement,
and any other of the transactions contemplated by this Agreement, except to the
extent such losses, damages, costs or expenses are due to the wilful misconduct
or gross negligence of Lender. As used herein, "Proceedings" shall mean actions,
suits or proceedings before
<PAGE> 29
any court, governmental or regulatory authority and shall include, particularly,
but without limitation, any actions concerning Environmental Laws. At the
request of Lender, Borrower will indemnify any Person to whom Lender transfers
or sells all or any portion of its interest in the Obligations or participations
therein on terms substantially similar to the terms set forth above. Lender
shall not be responsible or liable to any Person for consequential damages which
may be alleged as a result of this Agreement or any of the transactions
contemplated hereby. The obligations of Borrower under this Section shall
survive the termination of this Agreement and payment in full of the
Obligations.
9.22. JURY TRIAL WAIVER. EACH OF BORROWER AND LENDER HEREBY
WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN
ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR
RELATED TO ANY OF THE LOAN DOCUMENTS, OBLIGATIONS OR THE COLLATERAL.
9.23. TERMINOLOGY. All personal pronouns used in this
Agreement, whether used in the masculine, feminine or neuter gender, shall
include all other genders; the singular shall include the plural, and the plural
shall include the singular. Titles of Articles and Sections in this Agreement
are for convenience only, and neither limit nor amplify the provisions of this
Agreement, and all references in this Agreement to Articles, Sections,
Subsections, paragraphs, clauses, subclauses or Exhibits shall refer to the
corresponding Article, Section, Subsection, paragraph, clause, subclause of, or
Exhibit attached to, this Agreement, unless specific reference is made to the
articles, sections or other subdivisions divisions of or Exhibit to, another
document or instrument. Wherever in this Agreement reference is made to any
instrument, agreement or other document, including, without limitation, any of
the Loan Documents, such reference shall be understood to mean and include any
and all amendments thereto or modifications, restatements, renewals or
extensions thereof. Wherever in this Agreement reference is made to any statute,
such reference shall be understood to mean and include any and all amendments
thereof and all regulations promulgated pursuant thereto. Whenever any matter
set forth herein or in any Loan Document is to be consented to or be
satisfactory to Lender, or is to be determined, calculated or approved by
Lender, then, unless otherwise expressly set forth herein or in any such Loan
Document, such consent, satisfaction, determination, calculation or approval
shall be in Lender's sole discretion, exercised in good faith and, where
required by law, in a commercially reasonable manner, and shall be conclusive
absent manifest error.
9.24. EXHIBITS. All Exhibits attached hereto are by
reference made a part hereof.
10. CONDITIONS PRECEDENT. Unless waived in writing by Lender at or
prior to the execution and delivery of this Agreement, the conditions set forth
below shall constitute express conditions precedent to any obligation of Lender
hereunder.
10.1. SECRETARY'S CERTIFICATE. Receipt by Lender of a
certificate from the Secretary (or Assistant Secretary) of Borrower, to be in
form and substance substantially similar to
<PAGE> 30
the secretary's certificate set forth on Exhibit "E", certifying to Lender (i)
that appropriate resolutions have been entered into by the Board of Directors of
Borrower incident hereto and that the officers of Borrower whose signatures
appear hereinbelow, on the other Loan Documents, and on any and all other
documents, instruments and agreements executed in connection herewith, are duly
authorized by the Board of Directors of Borrower for and on behalf of Borrower
to execute and deliver this Agreement, the other Loan Documents and such other
documents, instruments and agreements, and to bind Borrower accordingly thereby,
and (ii) as to the existence and status of Borrower's articles of incorporation
and by-laws (including thereon, as attachments, true, correct and complete
copies thereof).
10.2. GOOD STANDING CERTIFICATES. Receipt by Lender of
certificates of good standing with respect to Borrower from the Secretaries of
State identified in Section 3.1, dated within thirty (30) days of the Closing
Date.
10.3. LOAN DOCUMENTS. Receipt by Lender of all the other
Loan Documents, including any Notes, together with any Guaranty and any
Subordination Agreement, each duly executed in form and substance acceptable to
Lender.
10.4. INSURANCE. Receipt by Lender of a certificate
respecting all insurance required to be maintained hereunder, together with
appropriate loss payee and additional insured endorsements thereto, favoring
Lender, all in form acceptable to Lender.
10.5. OPINION OF COUNSEL. Receipt by Lender of an opinion
of counsel from independent legal counsel to Borrower in substantially the form
of Exhibit "F".
10.6. NO DEFAULT. No Default Condition or Event of Default
shall exist and Borrower shall in all respects be in compliance with all of the
terms of the Loan Documents, as evidenced by its delivery of a Compliance
Certificate to such effect.
10.7. TELEPHONE INSTRUCTION LETTER. Receipt by Lender of
the Telephone Instruction Letter.
10.8. NO MATERIAL ADVERSE CHANGE. Lender shall have
determined that no Material Adverse Change shall have occurred.
10.9. OTHER. Receipt by Lender of such other documents,
certificates, instruments and agreements as shall be required hereunder or
provided for herein or as Lender or Lender's counsel may require in connection
herewith.
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and Borrower has caused its seal to be affixed hereto, as of the day
and year first above written.
"LENDER"
WACHOVIA BANK, NATIONAL
ASSOCIATION
By: /s/ Katherine W. Glister
----------------------------------
Name: Katherine W. Glister
-----------------------------
Title: Vice President
----------------------------
Address for Notices:
Wachovia Bank, N.A.
Western Regional Corporate
333 Cumberland Circle - Suite 220
Atlanta, GA 30339
FAX: (770) 989-5885
"BORROWER"
IMNET SYSTEMS, INC. (SEAL)
/s/ Scott A. Remley
---------------------------------------
Signed and Attested
by Scott A. Remley
as Chief Financial
Officer and Secretary
<PAGE> 32
EXHIBITS
Exhibit A Borrower Information Schedule
Exhibit B Compliance Certificate
Exhibit C Master Note
Exhibit D Telephone Instructions Letter
Exhibit E Secretary's Certificate
Exhibit F Opinion of Counsel
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IMNET Systems, Inc.
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (No. 333-27289) and Form S-8 (No. 333-4014, No. 333-4016, No.
333-19395, No. 333-19397, No. 333-19429, and 333-49299) of IMNET Systems, Inc.
of our report dated July 31,1998, relating to the consolidated balance sheets of
IMNET Systems, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1998, and
the related schedule, which report appears in the June 30, 1998 annual report on
Form 10-K of IMNET Systems, Inc.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
August 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IMNET
SYSTEMS, INC.'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 15,666,109
<SECURITIES> 2,132,444
<RECEIVABLES> 34,753,666
<ALLOWANCES> 2,076,491
<INVENTORY> 2,070,524
<CURRENT-ASSETS> 54,989,991
<PP&E> 10,564,324
<DEPRECIATION> 3,849,740
<TOTAL-ASSETS> 82,595,401
<CURRENT-LIABILITIES> 13,400,180
<BONDS> 0
0
0
<COMMON> 98,188
<OTHER-SE> 68,313,438
<TOTAL-LIABILITY-AND-EQUITY> 82,595,401
<SALES> 54,644,931
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 58,043,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 960,851
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,866,098)
<INCOME-TAX> (991,173)
<INCOME-CONTINUING> (1,874,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,874,925)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IMNET FOR THE PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 9,132,631
<SECURITIES> 11,606,287
<RECEIVABLES> 34,974,550
<ALLOWANCES> 1,115,640
<INVENTORY> 2,100,060
<CURRENT-ASSETS> 58,834,574
<PP&E> 8,381,503
<DEPRECIATION> 2,139,260
<TOTAL-ASSETS> 85,852,902
<CURRENT-LIABILITIES> 16,063,198
<BONDS> 0
0
0
<COMMON> 97,794
<OTHER-SE> 69,691,910
<TOTAL-LIABILITY-AND-EQUITY> 85,852,902
<SALES> 0
<TOTAL-REVENUES> 50,183,662
<CGS> 0
<TOTAL-COSTS> 42,900,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 557,754
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,865,471
<INCOME-TAX> 1,883,065
<INCOME-CONTINUING> 6,982,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,982,406
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.69
</TABLE>
