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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26306
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IMNET SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1730068
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3015 Windward Plaza, Windward Fairways II, Alpharetta, GA 30005
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(Address of principal executive offices) (Zip code)
(770) 521-5600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 9,780,736 shares of Common Stock outstanding as of April 30, 1998.
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IMNET SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
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PAGE
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets - March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations - Three Months and Nine Months
Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 6-15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18-23
Computation of Per Share Earnings - Three and Nine Months
Ended March 31, 1998 and 1997.
Financial Data Schedule (for SEC use only).
Valuation and Qualifying Accounts
(1) Allowance for Doubtful Accounts
(2) Allowance for Inventory Obsolescence
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMNET SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 7,445,770 $ 9,132,631
Marketable securities ......................................... 2,320,172 11,606,287
Accounts receivable, net ...................................... 37,221,072 33,858,910
Inventories ................................................... 2,141,165 2,100,060
Prepaid expenses and other current assets ..................... 4,978,057 2,136,686
------------ ------------
Total current assets ....................................... 54,106,236 58,834,574
Noncurrent accounts receivable .................................. -- 233,949
Other noncurrent assets ......................................... 673,859 --
Property and equipment, net ..................................... 6,775,115 6,242,243
Computer software development costs, net ........................ 4,288,386 2,556,663
Advance royalties, net .......................................... 6,410,822 6,919,179
Other intangibles, net .......................................... 1,294,552 1,717,120
Goodwill, net ................................................... 9,132,759 9,349,174
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$ 82,681,729 $ 85,852,902
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 1,505,843 $ 3,026,276
Accrued expenses .............................................. 10,763,497 9,471,314
Income taxes payable .......................................... 1,498,000 2,379,220
Deferred revenue .............................................. 1,872,869 1,186,388
------------ ------------
Total current liabilities .................................. 15,640,209 16,063,198
Stockholders' equity:
Common stock, $.01 par value. Authorized 25,000,000 shares;
9,818,373 shares issued and 9,780,736 shares outstanding at
March 31, 1998 and 9,779,374 shares issued and 9,741,737
shares outstanding at June 30, 1997 ......................... 98,184 97,794
Additional paid-in capital ..................................... 83,936,673 83,378,585
Treasury stock, 37,637 shares, at cost ......................... (148,417) (148,417)
Accumulated deficit ............................................ (16,704,538) (13,538,258)
Cumulative foreign currency translation adjustment ............. (140,382) --
------------ ------------
Total stockholders' equity ................................. 67,041,520 69,789,704
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$ 82,681,729 $ 85,852,902
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</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED
MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
System sales .................................. $ 9,749,432 $ 11,525,391 $ 27,335,821 $ 28,182,349
Maintenance and professional services ......... 3,437,530 2,017,784 9,894,890 6,130,311
------------ ------------ ------------ ------------
Total revenue .............................. 13,186,962 13,543,175 37,230,711 34,312,660
------------ ------------ ------------ ------------
Operating expenses:
Cost of system sales .......................... 4,488,499 3,261,121 11,631,513 7,801,700
Cost of maintenance and professional services . 2,161,604 1,029,217 5,415,539 3,916,909
Sales and marketing ........................... 4,443,011 3,629,379 11,938,081 9,374,990
Research and development ...................... 2,330,966 1,245,913 6,510,538 3,666,303
General and administrative .................... 2,241,891 1,033,758 7,323,552 4,008,980
Non-recurring charges ......................... -- 1,836,513 -- 2,586,058
------------ ------------ ------------ ------------
Total operating expenses ................... 15,665,971 12,035,901 42,819,223 31,354,940
------------ ------------ ------------ ------------
Operating income (loss) ........................ (2,479,009) 1,507,274 (5,588,512) 2,957,720
Interest income, net ............................ 60,601 343,639 481,754 1,233,900
------------ ------------ ------------ ------------
Income (loss) before income taxes ............. $ (2,418,408) $ 1,850,913 $ (5,106,758) $ 4,191,620
Income tax expense (benefit) .................... (918,905) 474,929 (1,940,478) 474,929
------------ ------------ ------------ ------------
Net income (loss) ............................. $ (1,499,503) $ 1,375,984 $ (3,166,280) $ 3,716,691
============ ============ ============ ============
Net income (loss) per common share:
Basic ......................................... $ (0.15) $ 0.14 $ (0.32) $ 0.39
============ ============ ============ ============
Diluted ....................................... $ (0.15) $ 0.13 $ (0.32) $ 0.37
============ ============ ============ ============
Weighted average shares outstanding:
Basic ......................................... 9,774,572 9,619,378 9,763,967 9,604,202
============ ============ ============ ============
Diluted ....................................... 9,774,572 10,218,196 9,763,967 10,058,259
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (3,166,280) $ 3,716,691
Adjustments to net income:
Depreciation and amortization of property and equipment 1,419,382 797,209
Amortization of computer software development costs,
acquired technology, goodwill and other intangibles . 1,698,273 1,011,179
Provision for doubtful accounts receivable ............ 1,242,142 290,651
Provision for inventory obsolescence .................. 569,406 836,048
(Increase) decrease in:
Trade accounts receivable ............................. (4,370,355) (12,871,188)
Note receivable from related party .................... -- 2,678,249
Inventories ........................................... (610,511) (343,112)
Prepaid expenses and other assets ..................... (3,515,230) (150,366)
Increase (decrease) in:
Accounts payable ...................................... (1,520,433) 6,051,239
Accrued expenses ...................................... 1,292,183 870,027
Income tax payable .................................... (881,220) --
Deferred revenue ...................................... 686,481 669,739
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Net cash (used in) provided by operating activities (7,156,162) 3,556,366
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ....................... (12,624,420) (16,839,892)
Maturities of marketable securities ...................... 21,910,535 27,537,827
Additions to property and equipment ...................... (1,952,254) (2,586,784)
Additions to computer software development costs ......... (1,999,468) (1,130,221)
Additions to intangible assets ........................... (283,188) (6,951,298)
Payments in connection with business alliance ............ -- (1,800,000)
Issuance of notes receivable from employees .............. -- (145,000)
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Net cash provided by (used in) investing activities 5,051,205 (1,915,368)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ..... 558,478 404,473
Dividends paid by acquired company ....................... -- (600,000)
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Net cash provided by (used in) financing activities 558,478 (195,527)
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Effect of exchange rate changes on cash .................. (140,382) --
------------ ------------
Net (decrease) increase in cash and cash equivalents ..... (1,686,861) 1,445,471
Cash and cash equivalents at beginning of period ......... 9,132,631 16,894,711
------------ ------------
Cash and cash equivalents at end of period ............... $ 7,445,770 $ 18,340,182
============ ============
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
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IMNET SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND NINE MONTH PERIODS
ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
represent the accounts of IMNET Systems, Inc. and its wholly owned subsidiaries
(the "Company" or "IMNET"). The consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are necessary to a fair
statement of financial position and results of operations for the periods
covered by this report, have been made. The accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and related notes appearing in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
IMNET develops, markets, installs and services electronic information and
document management systems to meet the needs of the healthcare industry and
other document-intensive businesses. IMNET's products include proprietary and
third party software and hardware components which are integrated to create
electronic information and document management systems. IMNET supports its
customers through a broad range of systems integration, installation, training
and maintenance services.
The Company's revenue is derived primarily from the sale, installation and
support of components of the IMNET Electronic Information Warehouse: the IMNET
Image Engine(R), the IMNET Workflow Engine(TM), IMNET MedVision(R), the IMNET
Electronic Patient Record System (EPRS)(TM), IMNET EPRS/Web(TM), IMNET
LaserArc(R), and the IMNET Application Programming Interfaces. Revenue from
system sales consist of software license fees and third party hardware sales.
Sources of maintenance and professional services revenue include services for
installation and training, as well as maintenance and service contracts for
software and certain hardware support. IMNET systems are sold directly to
end-users as well as through third party distribution partners.
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Revenue from sales to the healthcare industry decreased to 81% of total
revenue in both the three and nine month periods ended March 31, 1998 from 95%
and 92% of total revenue in the corresponding periods in fiscal 1997. Although
such sales may fluctuate from quarter to quarter, the Company anticipates that
sales to the healthcare industry will increase as a percentage of total annual
revenue over time. Revenue from sales outside of the United States was 9% and
13%, respectively, of total revenue in the three and nine month periods ended
March 31, 1998 compared to 0% and 4% for the corresponding periods in fiscal
1997. On June 25, 1997, the Company acquired Advisoft Consulting, S.A., a French
systems integration and consulting services company which had been its product
distribution partner in France since 1993. As a result of this acquisition, the
amount of revenue derived and the percentage of total revenue from sales outside
the United States have increased in fiscal 1998.
REVENUE RECOGNITION POLICIES
The Company's typical direct sale of a software license to an end-user
customer involves several milestones, beginning with the execution of the
agreement between the Company and the customer. The agreement describes the
software license terms, any hardware to be delivered, and services and
maintenance to be performed. The Company and the customer mutually agree upon
functional specifications as to the operating environment, number of terminals,
response times, etc. The Company then assembles the hardware components required
to demonstrate compliance with the functional specifications, at the Company's
offices, and loads the Company's and other third party proprietary software. The
configured system is then used to demonstrate that the system meets the
functional specifications. The Company and the customer participate in this
process. When all functional specifications have been demonstrated, the customer
signs a written acknowledgment signifying the completion of factory acceptance.
The Company repackages the software and those hardware components to be
delivered to the customer, which are picked up by common carrier and delivered
to the customer. At this point in the installation process, the Company
recognizes 100% of the hardware revenue and 90% of the software license revenue.
The Company assists the customer in installing the system and in loading the
customer's information at the customer's location. The Company and the customer
mutually review each of the functional specifications in the customer's
environment to confirm that the configured system meets the functional
specifications. When there is mutual agreement that all functional
specifications have been met at the customer's location, the customer signs a
written acknowledgment of the same and the Company then recognizes the remaining
10% of software license revenue which was deferred at the time of factory
acceptance and delivery.
On occasion, as for example when an existing end-user previously has
accepted a software product, an end-user may elect to waive the factory and site
acceptance procedures. In such instances, the end-user becomes obligated to pay
upon delivery of the software product and the Company recognizes 100% of the
revenue from the software license upon such delivery. Similarly, the Company
recognizes 100% of the revenue from enterprise-wide licenses of software to
end-users upon delivery of the software, assuming there are no further
significant vendor obligations. Revenue derived from system sales to
distribution partners is recognized 100% upon delivery to the distribution
partner, if the payment terms are fixed with all amounts due within twelve
months, there are no other significant obligations to be performed by the
Company and the distribution partner meets the Company's criteria with respect
to sell-through and credit risk.
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Revenue from professional services, which may include preparation of
functional specifications, systems integration, and training, among others, is
recognized as the services are performed. Revenue derived from maintenance and
support contracts is recognized ratably over the terms of the related contracts.
Deferred revenue represents either billings rendered to or payments
received from customers prior to (a) the achievement of the revenue recognition
milestones described above or (b) the actual delivery of services including
maintenance services.
At March 31, 1998, the Company had approximately $62.0 million of signed
sales contracts for systems and services which had not yet been delivered
("Backlog"), and accordingly, which has not yet been recognized as revenue.
Approximately $22.5 million of Backlog is expected to be recognized as revenue
in the next twelve months. Backlog includes contracts for software license fees,
hardware sales and maintenance and professional services that may include
cancellation provisions that do not pertain to IMNET's performance, and
contracts that are expected to result in revenue over periods of as much as five
years. Any significant or ongoing failure to achieve signed contracts and
subsequent customer acceptance after expending time, effort and funds could have
a material adverse effect on the Company's business. Because the Company adjusts
the timing of an installation to accommodate customers' needs and a typical
end-user installation requires from one to 12 months to complete, the Company is
unable to predict accurately the number of signed sales contracts it expects to
fill and consequently the amount of revenue it expects to achieve in any
particular period.
SOFTWARE CAPITALIZATION POLICY
The Company capitalizes a portion of its computer software development
costs. These costs relate primarily to the development of new products and
substantial enhancements to existing products to accommodate new markets,
changing technology platforms or changing customer needs. Amortization of
computer software development costs is provided by the Company on individual
products or enhancements and begins when the product or enhancement is available
for general use by customers. Amortization is recorded using the greater of: (1)
the amount computed using the ratio of current product revenue to the total of
current and anticipated product revenue or (2) the amount determined using the
straight-line method over the estimated useful life of the software, not to
exceed three years.
ADVISOFT ACQUISITION
On June 25, 1997, the Company completed the acquisition of Advisoft
Consulting, S.A. ("Advisoft"), a systems integration and consulting services
company which had been the Company's product distribution partner in France
since 1993. Prior to its acquisition of Advisoft, the Company recognized revenue
of $1,157,000 and $1,392,000 from Advisoft for the years ended June 30, 1997 and
1996, respectively. Aggregate consideration for the acquisition, which has been
accounted for by the purchase method, was $5.1 million in cash, 85,084 shares of
IMNET Common Stock having a market value of $2.0 million as of such date, plus
additional cash consideration over the five years subsequent to the transaction
depending on the achievement of specified operating results. The Company has
allocated $7.2 million of the original purchase price to goodwill and has
included the results of operations of Advisoft in the Company's consolidated
statement of operations effective July 1, 1997. Over time, the Company
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expects to work with Advisoft to adapt and market the Company's healthcare
application software products for use in France and other European countries.
VALUE ADDED RESELLER AGREEMENT WITH ISG TECHNOLOGIES, INC.
In March 1997, the Company signed a Value Added Reseller Agreement with ISG
Technologies, Inc., a Canadian corporation ("ISG"), whereby the Company will
distribute certain of ISG's medical image visualization software products and
certain of ISG's medical surgical visualization products under a seven year
distribution agreement. IMNET will pay $7.8 million to ISG, constituting both
advance royalties against future sales by IMNET of ISG products and the right to
sublicense certain of the ISG products without payment of any additional fees.
The first payment of $2.6 million to ISG was made in the third quarter of fiscal
1997 and the second payment of $2.6 million was made in the fourth quarter of
fiscal 1997. The Company anticipates that the final payment of $2.6 million will
be made on or before June 30, 1998. The Company has capitalized the $7.8 million
as advance royalties and amortizes these advance royalties in amounts equal to
the greater of (a) the straight-line amortization of the royalty over the seven
year royalty term, or (b) the amount of amortization based on a ratio of actual
ISG related product sales to total anticipated ISG related product sales over
the seven year royalty term. The remaining obligation of $2.6 million has been
classified in accrued expenses in the accompanying March 31, 1998 consolidated
balance sheet.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenue for each fiscal period indicated:
<TABLE>
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THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
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Revenue:
System sales .................................................. 73.9% 85.1% 73.4% 82.1%
Maintenance and professional services ......................... 26.1 14.9 26.6 17.9
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Total revenue .............................................. 100.0 100.0 100.0 100.0
------- ------- ------- ------
Operating expenses:
Cost of system sales .......................................... 34.0 24.1 31.2 22.7
Cost of maintenance and professional services ................. 16.4 7.6 14.5 11.4
Sales and marketing ........................................... 33.7 26.8 32.1 27.3
Research and development ...................................... 17.7 9.2 17.5 10.7
General and administrative .................................... 17.0 7.6 19.7 11.7
Non-recurring charges ......................................... -- 13.6 -- 7.6
------- ------- ------- ------
Total operating expenses ................................... 118.8 88.9 115.0 91.4
------- ------- ------- ------
Operating income (loss) .................................... (18.8) 11.1 (15.0) 8.6
Interest and other income, net .................................. .5 2.6 1.3 3.6
------- ------- ------- ------
Income (loss) before income taxes ............................. (18.3) 13.7 (13.7) 12.2
Income tax expense (benefit) .................................... (6.9) 3.5 (5.2) 1.4
------- ------- ------- ------
Net income (loss) ............................................. (11.4)% 10.2% (8.5)% 10.8%
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</TABLE>
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. The Company did not achieve its revenue expectation for the
quarter as a result of several contracts which were not executed as the Company
expected. The Company's total revenue was $13.2 million for the third quarter of
fiscal 1998 compared to revenue of $13.5 million for the third quarter of fiscal
1997, a decrease of $0.3 million or 2%. Revenue generated from direct sales and
distribution partners was $7.4 million and $5.8 million, respectively, for the
third quarter of fiscal 1998 compared with $5.7 million and $7.9 million for the
corresponding period in 1997. The Company's total revenue derived from sales to
healthcare customers was $10.7 million or 81% of total revenue for the third
quarter of fiscal 1998 compared to $12.9 million or 95% of total revenue for the
corresponding period in fiscal 1997. Revenue from sales to international
customers was $1.1 million in the third quarter of fiscal 1998 compared to
$56,000 in the corresponding quarter of fiscal 1997, an increase that
substantially reflects the inclusion of the Advisoft operations in the Company's
consolidated results. Revenue from maintenance and professional services was
$3.4 million in the third quarter of fiscal 1998 compared to $2.0 million in the
third quarter of fiscal 1997, an increase of $1.4 million, or 70%. The increase
in revenue from these services is primarily attributable to increased
installation and training activities, additional maintenance contracts, as well
as service-based revenue recognized by Advisoft.
Cost of Revenue. The cost of system sales in the third quarter of fiscal
1998 was $4.5 million compared to $3.3 million in the corresponding period of
fiscal 1997. As a percentage of system sales revenue, the cost of system sales
increased to 46% in the third quarter of fiscal 1998 compared to 28% in the
third quarter of fiscal 1997, primarily due to lower than anticipated software
sales in the quarter. The cost of maintenance and professional services in the
third quarter of fiscal 1998 was $2.2 million compared to $1.0 million in the
corresponding period of fiscal 1997. The cost of maintenance and professional
services as a percentage of maintenance and professional services revenue
increased to 63% in the third quarter of fiscal 1998 compared to 51% in the
corresponding period. The percentage increase was substantially due to an
increase in implementation personnel to support the Company's growth.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales commissions and related costs and expenses of the Company's sales and
marketing personnel. Sales and marketing expenses increased to $4.4 million in
the third quarter of fiscal 1998 from $3.6 million in the third quarter of
fiscal 1997, an increase of $0.8 million or 22%. The increase is primarily due
to continued expansion of the Company's sales and marketing staff. Sales and
marketing expenses as a percentage of total revenue increased to 33.7% in the
third quarter of fiscal 1998 compared to 26.8% in the third quarter of fiscal
1997, primarily due to lower than anticipated software sales in the quarter.
Research and Development. Research and development expenditures consist
primarily of personnel costs of research and development staff and the related
facilities, computing and other administrative costs allocated to such
personnel. Research and development expenses increased to $2.3 million in the
third quarter of fiscal 1998 from $1.2 million in the third quarter of fiscal
1997, an increase of $1.1 million, or 87%. The increase was primarily
attributable to an increase in the number of research and development personnel
and associated costs, partially offset by the capitalization of $0.7 million in
software development costs in the third quarter of fiscal 1998 related to new
products expected to be released over the next six months. These capitalized
costs represented 22% of the Company's total research and development
expenditures during this period
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compared to 30% in the corresponding quarter of fiscal 1997. As a percentage of
total revenue, research and development expenses increased to 17.7% from 9.2% in
the third quarter of fiscal 1998 as compared to the corresponding quarter of
fiscal 1997, primarily due to lower than anticipated software sales in the
quarter.
General and Administrative. General and administrative expenses include the
costs of corporate operations, finance and accounting, human resources and other
general operations of the Company. General and administrative expenses increased
to $2.2 million in the third quarter of fiscal 1998 compared to $1.0 million in
the third quarter of fiscal 1997, an increase of 117%. This increase is
partially attributable to increased staffing and related costs necessary to
support the Company's actual and anticipated growth as well as incremental
professional services costs. General and administrative expenses as a percentage
of total revenue increased to 17.0% in the third quarter of fiscal 1998 from
7.6% in the third quarter of fiscal 1997, primarily due to lower than
anticipated software sales in the quarter.
Non-recurring Charges. The Company recorded a non-recurring charge of $1.8
million in the three month period ended March 31,1997, comprised of: (i) $1.4
million related to the write-down of assets associated with its MedVision
product line, due to the Value Added Reseller Agreement entered into with ISG
Technologies, Inc. in March 1997 and (ii) $0.4 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.
Provision for Income Taxes. Because of operating losses experienced through
fiscal 1996, the Company had not incurred any current income tax liabilities or
provided for any income taxes through the second quarter of fiscal 1997.
Beginning in the third quarter of fiscal 1997, the Company began providing for
income tax expense due to the expected current income tax liabilities that
resulted from profitable operations in fiscal 1997 coupled with the impact of
the annual limitation on the Company's use of net operating loss and credit
carryforwards. The Company's effective income tax rate for fiscal 1998 is
expected to be approximately 38%. The Company recorded an income tax benefit of
$0.9 million in the third quarter of fiscal 1998 as a result of incurring
pre-tax operating losses for the period compared to an income tax expense of
$0.5 in the third quarter of fiscal 1997.
Net Income (Loss). The Company's net loss for the third quarter of fiscal
1998 was $1.5 million or $0.15 per share, compared to net income of $1.4
million, or $0.13 per share, in the third quarter of fiscal 1997.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. The Company's total revenue was $37.2 million for the first nine
months of fiscal 1998 compared to revenue of $34.3 million for the first nine
months of fiscal 1997, an increase of $2.9 million, or 9%. This revenue result
was below expectations as a result of a number of deferred purchasing decisions
made by prospective customers in the first and third quarters of fiscal 1998.
Revenue generated from direct sales and distribution partners was $18.8 million
and $18.4 million, respectively, for the first nine months of fiscal 1998
compared with $19.3 million and $15.0 million for the first nine months of
fiscal 1997. The Company's total revenue derived from sales to healthcare
customers was $30.3 million for the first nine months of fiscal 1998 compared to
$31.4 million for the corresponding period in fiscal 1997, a decrease of $1.2
million,
Page 11
<PAGE> 12
or 4%. Revenue from sales to international customers was $4.7 million in the
first nine months of fiscal 1998 compared to $1.3 million in the corresponding
nine months of fiscal 1997, an increase of $3.4 million, or 256%, principally
due to the inclusion of the operating results of Advisoft. Revenue from
maintenance and professional services was $9.9 million in the first nine months
of fiscal 1998 compared to $6.1 in the first nine months of fiscal 1997, an
increase of $3.8 million, or 61%. The increase in revenue from these services is
primarily attributable to increased installation and training activity,
additional maintenance contracts, as well as service-based revenue recognized by
Advisoft.
Cost of Revenue. The cost of system sales in the first nine months of
fiscal 1998 was $11.6 million compared to $7.8 million in the corresponding
period of fiscal 1997. As a percentage of system sales revenue, the cost of
system sales increased to 43% in the first nine months of fiscal 1998 compared
to 28% in the corresponding period of fiscal 1997, principally as a result of
lower than expected levels of revenue in fiscal 1998. The cost of maintenance
and professional services as a percentage of maintenance and professional
service revenue decreased to 55% from 64%, due primarily to the revenue increase
mentioned above. The Company's total gross margin decreased to 54% from 66%
during the prior year, primarily due to the unexpectedly low revenue results in
the Company's first and third fiscal quarters of fiscal 1998.
Sales and Marketing. Sales and marketing expenses consist primarily of
sales commissions and related costs and expenses allocated to the Company's
sales and marketing personnel. Sales and marketing expenses increased to $11.9
million in the first nine months of fiscal 1998 from $9.4 million in the same
period of fiscal 1997, an increase of 27%. The increase is primarily due to
higher sales commissions and higher sales salary expense associated with
increases in sales personnel. Sales and marketing expenses as a percentage of
total revenue increased to 32.1% in the first nine months of fiscal 1998
compared to 27.3% in the first nine months of fiscal 1997, primarily due to the
unexpectedly low revenue results in the Company's first and third fiscal
quarters of fiscal 1998.
Research and Development. Research and development expenditures consist
primarily of personnel costs of the Company's research and development staff and
the related facilities, computing and other administrative costs allocated to
such personnel. Research and development expenses increased to $6.5 million in
the first nine months of fiscal 1998 from $3.7 million in the first nine months
of fiscal 1997, an increase of $2.8 million, or 78%. The increase was primarily
attributable to an increase in the number of research and development personnel
and associated costs, partially offset by the capitalization of $2.0 million in
software development costs in the first nine months of fiscal 1998. These
capitalized costs represented 23% of the Company's total research and
development expenditures during this period. As a percentage of total revenue,
research and development expenses increased to 17.5% from 10.7% in the first
nine months of fiscal 1998, as compared to the corresponding period in fiscal
1997, primarily due to the unexpectedly low revenue results in the Company's
first and third fiscal quarters of fiscal 1998.
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 the first nine months of fiscal 1998 compared to $4.0 million
in the first nine months of fiscal 1997, an increase of $3.3 million or 83%.
This increase is partially attributable to increased staffing, space and related
costs necessary to support the Company's growth. General and administrative
expenses as a percentage
Page 12
<PAGE> 13
of total revenue increased to 20% in the first nine months of fiscal 1998 from
12% in the first nine months of fiscal 1997, primarily due to the unexpectedly
low revenue results in the Company's first and third fiscal quarters of fiscal
1998.
Non-recurring Charges. The Company incurred non-recurring charges of $2.6
million during the first nine months of fiscal 1997, comprised of (i) $0.8
million related to acquisition costs associated with the Hunter International,
Inc. acquisition, completed during the quarter ended September 30,1996; (ii)
$1.4 million related to the write-down of assets associated with its MedVision
product line, due to the Value Added Reseller Agreement entered into with ISG
Technologies, Inc. in March 1997; and (iii) $0.4 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.
Provision of Income Taxes. The Company had total net operating loss
carryforwards of approximately $6.0 million as of June 30, 1997 which offset
some of the taxable income in the nine months ended March 31, 1997. Due to the
increased profitability of the Company and certain limitations on the
utilization of net operating loss carryforwards, the Company recorded income tax
expense in the three month period ended March 31, 1997 of $0.5 million, which
represented estimated income tax payments made by the Company during the third
quarter of 1997. Although the Company expects to pay income taxes in fiscal
1998, due to certain limitations on the use of net operating loss carryforwards,
the Company assumptions as to the level of its valuation allowance for deferred
income tax assets will reduce its overall income tax expense.
Net Income (Loss). The Company's net loss for the first nine months of
fiscal 1998 was $3.2 million, or $0.32 per share, compared to net income of $3.7
million, or $0.37 per share, in the first nine months of fiscal 1997. Exclusive
of non-recurring charges recorded in the first nine months of fiscal 1997, net
income for the first nine months of fiscal 1997 would have been $6.3 million, or
$0.63 per share. Had income tax expense been recorded in the first nine months
of fiscal 1997 at the current anticipated 38% effective tax rate, net income for
the period, exclusive of non-recurring charges, would have been $4.2 million or
$0.42 per share.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1992 the Company has funded its operations, working
capital needs and capital expenditures primarily from revenue and sales of
equity securities. The Company was initially capitalized primarily by three
investment companies, and completed four subsequent private placements. In July
1995, the Company received approximately $37.5 million net of underwriter's
discounts and offering costs from its initial public offering. In February 1996,
the Company received an additional $18.5 million net of underwriters discounts
and offering costs from a subsequent offering of its Common Stock.
Cash, cash equivalents and marketable securities totaled $9.8 million at
March 31, 1998 compared to $20.7 million at June 30, 1997. The $10.9 million
decrease in cash and marketable securities was largely due to: (i) the net loss
of $3.2 million incurred during the nine months of fiscal 1998; (ii) a decrease
in accounts payable of $1.5 million; (iii) an increase in prepaid expenses of
$1.5 million, and (iv) a $4.6 million increase in gross accounts receivable. The
cash dividends paid on common stock disclosed in the consolidated statements of
stockholders' equity and cash flows for the period ended September 30, 1997 were
normal stockholder distributions
Page 13
<PAGE> 14
paid by Hunter, Inc. prior to the merger of Hunter, Inc. with the Company, which
was accounted for as a pooling of interests. IMNET has not paid any dividends on
its common stock.
The Company believes that its cash, cash equivalents, marketable
securities, net cash flows provided from operations and proceeds from its new
revolving credit facility, will be sufficient to finance expected cash
requirements for operating activities and anticipated growth for at least the
next 12 months. The Company's ability to meet its cash obligations on a
long-term basis will depend on its achieving and maintaining profitable
operations and on consistent and timely collection of its accounts receivable.
To date, inflation has not had a material impact on the Company's revenue or
expenses.
Revolving 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 facility has been put in place to provide financial
flexibility if cash needs arise in the future.
Product Financing Relationship. In April 1998, the Company announced that
it had entered into a product financing relationship with an independent
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 can 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. The Company
believes that this long-term financing program could have the dual benefit of
shortening certain sales cycles and reducing DSOs over time.
Days Sales Outstanding. The Company's accounts receivable days sales
outstanding ("DSOs") remain high and have increased in fiscal 1998. DSOs
(computed on the trailing 12 months revenue basis) as of March 31, 1998 were 252
days compared to 229 at March 31, 1997. Management believes that its willingness
to grant extended billing and payment terms, on a negotiated, case by case
basis, provides the customer or distributor with additional incentives to commit
to large purchases, because such terms (i) demonstrate that the Company is
comfortable with providing the purchaser the leverage inherent in deferred
payments (thereby demonstrating its confidence in its product), and (ii) permit
the purchaser (and the Company) to commit to a large order, while the payment
stream is tailored to a longer period of time (thereby providing the purchaser
with a means to finance the project over one or more internal cash budgeting
cycles). Because of this business strategy, management believes that DSOs will
remain high in fiscal 1998.
Space and Capital Expenditures. To accommodate its growth, the Company
signed an operating lease, effective January 1997, to increase its headquarters
space to 96,000 square feet. In October 1997, the Company signed an additional
operating lease increasing the leased square footage to 118,000. As a result,
the Company will incur increased rental expense. The Company has also forecast
capital expenditures of approximately $0.7 million for the remainder of fiscal
1998 for the purchase of computer equipment for employees and customer
demonstrations,
Page 14
<PAGE> 15
furniture and fixtures, and equipment associated with the new office facility.
Further, the Company currently expects that its capital expenditures in fiscal
year 1999 will be lower than that incurred in fiscal year 1998.
RISK FACTORS
The Company has experienced significant quarterly fluctuations in operating
results which may continue in future periods. The Company's revenue from system
sales has varied significantly from quarter to quarter as a result of the volume
and timing of system sales and customer acceptance and delivery. Professional
services revenue has also fluctuated from quarter to quarter as a result of the
timing of software and hardware installation. Revenue from maintenance services
has not fluctuated significantly from quarter to quarter and has been increasing
as the number of the Company's customers increases. Since a significant
percentage of the Company's expenses are relatively fixed, quarterly operating
results will vary with the timing and fluctuation of total revenue. Furthermore,
margins are affected by the mix of products sold.
In addition, certain risk factors, among others, should be considered
carefully in evaluating the Company and its business. These risk factors include
the following: (i) limited operating history and lack of consistent profitable
operations; (ii) variability in quarterly operating results; (iii) customer
concentrations; (iv) product acceptance and market development; (v) dependence
on distribution partners; (vi) long sales and delivery cycles; (vii) dependence
on future systems sales; (viii) ability to manage growth; (ix) risks associated
with acquisitions; (x) technological changes; (xi) competition; (xii)
uncertainty in healthcare industry; (xiii) government healthcare reform
proposals; (xiv) dependence on key personnel; (xv) dependence on proprietary
rights and patents; (xvi) product liability; and (xvii) foreign operations. As a
result, there can be no assurance that the Company will be profitable in the
future or that available funds, funds provided by operations, together with
funds, if any, under the revolving credit facility, 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.
Year 2000. 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. "Year 2000" compliance will be a critical selection
criterion for the replacement systems and the accounting for the procurement of
such systems by the Company will be in accordance with generally accepted
accounting principles. At this time, the Company does not anticipate any
significant incremental expense due to "Year 2000" compliance.
The Company has marketed "Year 2000" compliant versions of its software
products since June 1997. 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
Page 15
<PAGE> 16
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.
Revenue Recognition Under SOP 97-2. In October 1997, the American Institute
of Certified Public Accountants issued Statement of Position (SOP) 97-2,
Software Revenue Recognition which superceded the previous authoritative
guidance on this matter, SOP 91-1. The pronouncement is effective for the
Company not later than fiscal year 1999 and earlier application is encouraged.
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. The Company is in
the process of analyzing the potential impact of SOP 97-2 which could have the
effect of slowing the rate of revenue recognition currently in place under SOP
91-1. The Company has not concluded its analysis of SOP 97-2 and the overall
impact on the Company's financial statements is not ascertainable at this time.
Anonymous Letters. As previously disclosed, a series of anonymous letters
were written 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 supporting 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
matter.
Note regarding Private Securities Litigation Reform Act: Statements made by
IMNET which are not historical facts, including projections, statements of
plans, objectives, expectations, or future economic performance, are forward
looking statements that involve risks and uncertainties and are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995.
Words such as "believes", "anticipates", "expects", "intends", and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. IMNET's future financial
performance could differ significantly from that set forth herein, and from the
expectations of management. Important factors that could cause IMNET's financial
performance to differ materially from past results and from those expressed in
any forward looking statements include, without limitation, the factors
discussed in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations". For further information on these and other risk
factors, please refer to IMNET's Form 10-K for the year ended June 30, 1997,
including the "Business-Risk Factors" section thereof.
Page 16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of stockholders on January 15,
1998.
(b) On January 15, 1998, the stockholders of the Company elected the
following individuals as Directors:
<TABLE>
<CAPTION>
Shares
------
Nominee Voted For Authority Withheld
------- --------- ------------------
<S> <C> <C>
Kenneth D. Rardin 8,593,974 79,000
Daniel P. Howell 8,595,626 77,348
James A. Gordon 8,595,526 77,448
</TABLE>
(c) On January 15, 1998, the stockholders of the Company approved the
following matter:
<TABLE>
<CAPTION>
Broker
------
Proposal Voting For Voting Against Abstain Non-Vote
-------- ---------- -------------- ------- ---------
<S> <C> <C> <C> <C>
Approval of the 3,957,308 1,221,710 24,626 3,469,330
IMNET Systems,
Inc. 1997 Long-
Term Incentive
Plan
</TABLE>
(d) None.
Page 17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER
- ------- ---------------------- -----------
<S> <C> <C>
10.41 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).
11 Computation of Per Share Earnings - Three and Nine Months
Ended March 31, 1998 and 1997. 20
27 Financial Data Schedule (for SEC use only). 21
99 Valuation and Qualifying Accounts
(1) Allowance for Doubtful Accounts 22
(2) Allowance for Inventory Obsolescence 23
</TABLE>
(b) REPORTS ON FORM 8-K:
The registrant filed no reports on Form 8-K during the quarter for
which this report is filed.
Page 18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
IMNET SYSTEMS, INC.
Dated: May 14, 1998 By: s/Kenneth D. Rardin
------------------------------------------
Kenneth D. Rardin
President and Chief Executive Officer
Dated: May 14, 1998 By: s/Scott A. Remley
------------------------------------------
Scott A. Remley
Senior Vice President and Chief Financial
Officer
Page 19
<PAGE> 1
EXHIBIT 11
IMNET SYSTEMS, INC.
COMPUTATION OF PER SHARE EARNINGS
The following computations set forth the calculations of basic and diluted
earnings per share for the three and nine month periods ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------------------------ ------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) .......................... $ (1,499,503) $ (1,499,503) $ 1,375,984 $ 1,375,984
============ ============ ============= =============
Weighted average outstanding common
shares ................................... 9,774,572 9,774,572 9,619,378 9,619,378
Increase due to assumed issuance of shares
related to outstanding stock options using
the treasury stock method ................ -- -- -- 598,818
------------ ------------ ------------- -------------
Adjusted weighted average outstanding
common shares and common share
equivalents .............................. 9,774,572 9,774,572 9,619,378 10,218,196
============ ============ ============= =============
Net income(loss) per common share and
common share equivalent .................... $ (0.15) $ (0.15) $ 0.14 $ 0.13
============ ============ ============= =============
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
------------------------------ ------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) .......................... $ (3,166,280) $ (3,166,280) $ 3,716,691 $ 3,716,691
============ ============ ============= =============
Weighted average outstanding common
shares ................................... 9,763,967 9,763,967 9,604,202 9,604,202
Increase due to assumed issuance of shares
related to outstanding stock options using
the treasury stock method ................ -- -- -- 454,057
------------ ------------ ------------- -------------
Adjusted weighted average outstanding
common shares and common share
equivalents .............................. 9,763,967 9,763,967 9,604,202 10,058,259
============ ============ ============= =============
Net income (loss) per common share and
common share equivalent .................... $ (0.32) $ (0.32) $ 0.39 $ 0.37
============ ============ ============= =============
</TABLE>
Page 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM IMNET
SYSTEMS, INC.'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,445,770
<SECURITIES> 2,320,172
<RECEIVABLES> 39,578,854
<ALLOWANCES> 2,357,782
<INVENTORY> 2,141,165
<CURRENT-ASSETS> 54,106,236
<PP&E> 10,274,325
<DEPRECIATION> 3,499,210
<TOTAL-ASSETS> 82,681,729
<CURRENT-LIABILITIES> 14,970,639
<BONDS> 0
0
0
<COMMON> 98,184
<OTHER-SE> 66,943,336
<TOTAL-LIABILITY-AND-EQUITY> 82,681,729
<SALES> 37,230,711
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 42,819,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,242,142
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,106,758)
<INCOME-TAX> (1,940,478)
<INCOME-CONTINUING> (3,166,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,166,280)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
<PAGE> 1
EXHIBIT 99
IMNET SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------ ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997 - allowance
for doubtful accounts .................... $ 333,290 557,754 237,208(2) 12,612(1) 1,115,640
Quarter ended September 30, 1997 -
Allowance for doubtful accounts .......... $1,115,640 326,457 -- -- 1,442,097
Quarter ended December 31, 1997 -
Allowance for doubtful accounts .......... $1,442,097 306,335 -- -- 1,748,432
Quarter ended March 31, 1998 -
Allowance for doubtful accounts .......... $1,748,432 609,350 -- -- 2,357,782
</TABLE>
(1) Accounts deemed to be uncollectible and written off during the period.
(2) Allowance for doubtful accounts of subsidiary at acquisition date.
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<PAGE> 1
EXHIBIT 99
IMNET SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR INVENTORY OBSOLESCENCE
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------ ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997 -
Allowance for inventory obsolescence ..... $ 92,026 1,273,537 31,890(1) 1,333,673
Quarter ended September 30, 1997 -
Allowance for inventory obsolescence ..... $1,333,673 156,000 -- 8,388(1) 1,481,285
Quarter ended December 31, 1997 -
Allowance for inventory obsolescence ..... $1,481,285 156,000 -- 4,865(1) 1,632,420
Quarter ended March 31, 1998 -
Allowance for inventory obsolescence ..... $1,632,420 287,722 -- 17,063(1) 1,903,079
</TABLE>
(1) Amount deemed to be obsolete and written off during the period.
Page 23
