10-Q 1 form10-q_23032.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 Commission File Number 0-28840 IMRGLOBAL CORP. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) FLORIDA 59-2911475 ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 100 SOUTH MISSOURI AVENUE, CLEARWATER, FLORIDA 33756 ----------------------------------------------------- (Address of principal executive offices and zip code) 727-467-8000 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 [ ] As of April 27, 2001, there were 44,076,525 outstanding shares of the Registrant's Common Stock, par value $.10 per share. IMRGLOBAL CORP. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE ITEM 1. Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001.................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 2001....................................... 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 2001....................................... 5 Notes to Consolidated Financial Statements.................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................13 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....19 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings...........................................20 ITEM 2. Changes in Securities and Use of Proceeds...................20 ITEM 3. Defaults on Senior Securities...............................20 ITEM 4. Submission of Matters to a Vote of Securities Holders.......20 ITEM 5. Other Information...........................................20 ITEM 6. Exhibits and Reports on Form 8-K............................20 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMRGLOBAL CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, MARCH 31, 2000 2001 --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ........................................................ $ 19,689 $ 10,963 Accounts receivable, net of allowance ............................................ 41,738 47,395 Unbilled work in process ......................................................... 13,747 17,588 Deferred income taxes ............................................................ 14,095 14,319 Prepaid expenses and other current assets ........................................ 4,159 3,452 --------- --------- Total current assets ....................................................... 93,428 93,717 Property and equipment, net of accumulated depreciation ............................. 41,521 40,709 Capitalized software costs, net of accumulated amortization ......................... 5,664 5,664 Deposits and other assets ........................................................... 14,044 12,407 Intangible assets, net of accumulated amortization: Goodwill ......................................................................... 160,698 152,971 Acquired technology .............................................................. 3,480 3,206 --------- --------- Total assets ............................................................... $ 318,835 $ 308,674 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................. $ 5,151 $ 4,577 Accrued compensation ............................................................. 18,079 16,450 Deferred revenue ................................................................. 6,360 5,195 Other current liabilities ........................................................ 20,286 18,189 --------- --------- Total current liabilities .................................................. 49,876 44,411 Long-term debt ...................................................................... 30,894 31,050 Deferred income taxes ............................................................... 254 259 Accrued compensation and other ...................................................... 6,031 5,253 --------- --------- Total liabilities .......................................................... 87,055 80,973 --------- --------- Shareholders' equity: Common stock ..................................................................... 4,140 4,437 Additional paid-in capital ....................................................... 216,639 217,478 Retained earnings ................................................................ 21,779 22,454 Notes receivable from share sales ................................................ (469) (469) Treasury stock ................................................................... (2,661) (2,661) Accumulated other comprehensive loss ............................................. (7,648) (13,538) --------- --------- Total shareholders' equity ................................................. 231,780 227,701 --------- --------- Total liabilities and shareholders' equity ................................. $ 318,835 $ 308,674 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 IMRGLOBAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 2001 -------- -------- Revenue ......................................................................... $ 58,320 $ 61,604 Cost of revenue ................................................................. 34,742 37,115 -------- -------- Gross profit ........................................................... 23,578 24,489 Selling, general and administrative expenses .................................... 17,773 19,123 Research and development expenses ............................................... 678 74 Goodwill and intangible amortization ............................................ 2,445 2,585 -------- -------- Income from operations ................................................. 2,682 2,707 Other income (expense): Interest expense ....................................................... (349) (536) Interest income and other .............................................. 458 (59) -------- -------- Total other income (expense) ........................................... 109 (595) -------- -------- Income before provision for income taxes and cumulative effect of a change in accounting method ...................................... 2,791 2,112 Provision for income taxes ...................................................... 1,258 1,437 -------- -------- Income before cumulative effect of a change in accounting method .................................................. 1,533 675 Cumulative effect of a change in accounting method, net of income taxes ....................................... (2,707) -- -------- -------- Net income (loss) ...................................................... $ (1,174) $ 675 ========= ======== Earnings (loss) per share: Basic .................................................................. $ (0.03) $ 0.02 ======== ======== Diluted ................................................................ $ (0.03) $ 0.02 ======== ======== Diluted before cumulative effect of a change in accounting method ......................................... $ 0.04 $ 0.02 ======== ======== Shares outstanding: Basic .................................................................. 38,402 43,438 ======== ======== Diluted ................................................................ 38,402 44,435 ======== ======== Diluted before cumulative effect of a change in accounting method ......................................... 42,335 44,435 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 IMRGLOBAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 2001 -------- -------- Cash flows from operating activities: Net income (loss) ............................................................... $ (1,174) $ 675 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization ................................................ 3,830 4,074 Tax benefit of stock options ................................................. 164 41 Income taxes ................................................................. 35 (73) Cumulative effect of a change in accounting method ........................... 2,707 -- Changes in operating assets and liabilities: Accounts receivable, unbilled work-in-process and deferred revenue ........ (6,368) (10,662) Other assets .............................................................. (86) 1,894 Other liabilities ......................................................... (5,843) (4,737) -------- -------- Total adjustments ......................................................... (5,561) (9,463) -------- -------- Net cash used in operating activities ..................................... (6,735) (8,788) -------- -------- Cash flows from investing activities: Acquisition of consolidated subsidiaries, net of cash acquired ........................................................ (16,682) -- Marketable securities, net ...................................................... 1,962 -- Additions to capitalized software costs ......................................... (807) (220) Additions to property and equipment ............................................. (3,794) (748) Related party loan .............................................................. (4,902) (75) -------- -------- Net cash used in investing activities ..................................... (24,223) (1,043) -------- -------- Cash flows from financing activities: Net advances (repayments) from revolving credit line ............................ 275 -- Payments on long-term debt ...................................................... (200) (318) Increase in long-term debt ...................................................... 20,196 523 Proceeds from issuance of common stock .......................................... 586 1,095 Purchase of treasury shares ..................................................... (1,129) -- -------- -------- Net cash provided by financing activities ................................. 19,728 1,300 -------- -------- Effect of exchange rate changes .................................................... (608) (195) -------- -------- Net decrease in cash and cash equivalents .......................................... (11,838) (8,726) Cash and cash equivalents at beginning of period ................................... 35,021 19,689 -------- -------- Cash and cash equivalents at end of period ......................................... $ 23,183 $ 10,963 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments necessary for a fair presentation. The results of operations for the three month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2000, which are contained in IMRglobal's Annual Report on Form 10-K ("Form 10-K") as filed with the Securities and Exchange Commission (the "Commission"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION --The consolidated financial statements include the accounts of IMRglobal Corp. ("IMRglobal") and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. REVENUE RECOGNITION --Fixed-price contract revenue and revenue from the sale of software that requires significant modification is recognized using the percentage of completion method of accounting, under which the sales value of performance, including earnings thereon, is recognized on the basis of the percentage that each contract's cost to date bears to the total estimated cost. Any anticipated losses upon contract completion are accrued currently. Revenue attributable to contracts for software licenses that do not require significant modification is recognized after the software has been delivered and all significant uncertainties regarding client acceptance have expired. Service revenue from time-and-materials services is recognized as the services are provided. Revenue attributable to maintenance is deferred and recognized ratably over the contract period. Unbilled work-in-progress represents revenue on contracts to be billed in subsequent periods in accordance with the terms of the contract. Deferred revenue represents amounts billed in excess of revenue earned in accordance with the terms of the contracts. Effective January 1, 2000, the Company changed its method of accounting for revenue recognition for contract related revenue from claims dollar recovery projects, in accordance with Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. These projects involve identifying overpaid or erroneously paid insurance claims to be recovered from healthcare providers by medical insurance companies. Previously, the Company recognized revenue, less an estimated percentage for claims not accepted, as identified claims were submitted to the client. Under the new accounting method adopted retroactive to January 1, 2000, the Company now recognizes revenue upon the earlier of collection of the findings based fee or notification of acceptance of submitted claims from the client. The cumulative effect of the change on prior years resulted in a charge to income of $2.7 million (net of income taxes of $1.7 million), which is included in results of operations for the quarter ended March 31, 2000. 6 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For the quarter ended March 31, 2000, the Company recognized $498,000 in revenue that was included in the cumulative effect adjustment as of January 1, 2000. COMPUTATION OF EARNINGS PER SHARE--Basic earnings per share is computed using the weighted average of common stock outstanding. Diluted earnings per share is computed using the treasury stock method which is summarized as follows (in thousands):
THREE MONTHS ENDED MARCH 31, --------------------- 2000 2001 ------- ------- Weighted average common stock outstanding ................ 38,402 43,438 Stock option plans Options assumed exercised ............................. 8,111 1,861 Treasury stock which could be purchased ............... (4,178) (864) ------- ------- Weighted average common stock equivalents ................ 3,933 997 ------- ------- Shares used in diluted earnings per share calculation .... 42,335 44,435 ======= =======
For the quarter ended March 31, 2000 the effect of incremental shares from common stock equivalents is not included in the calculation of diluted net loss per share as the inclusion of such equivalents would be anti- dilutive. CAPITALIZED SOFTWARE COSTS--Capitalized software costs are recorded at cost less accumulated amortization. Production costs for computer software that is to be utilized as an integral part of a product or process is capitalized when both (a) technological feasibility is established for the software and (b) all research and development activities have been completed. Amortization is charged to income based upon a revenue formula over the shorter of the remaining estimated economic life of the product or estimated lifetime revenue of the product. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS--Certain amounts in the 2000 financial statements have been reclassified to conform to 2001 presentation. 7 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 3. SHAREHOLDERS' EQUITY Changes in shareholders' equity for the three months ended March 31, 2001 are summarized as follows (in thousands):
COMPRE- NOTES ACCUMULATED HENSIVE ADDITIONAL RECEIVABLE OTHER INCOME COMMON PAID-IN RETAINED FROM SHARE TREASURY COMPREHENSIVE (LOSS) STOCK CAPITAL EARNINGS SALES STOCK LOSS TOTAL ------- ------- -------- -------- ------- --------- --------- --------- Balance, December 31, 2000 ........ $ -- $ 4,140 $216,639 $ 21,779 $ (469) $ (2,661) $ (7,648) $ 231,780 Employee stock purchase plan ...... -- 4 239 -- -- -- -- 243 Stock options exercised ........... -- 293 559 -- -- -- -- 852 Tax benefit of stock options exercised ........ -- -- 41 -- -- -- -- 41 Net income ........................ 675 -- -- 675 -- -- -- 675 Translation adjustment ............ (5,890) -- -- -- -- -- (5,890) (5,890) ------- Comprehensive loss ................ $(5,215) -- -- -- -- -- -- -- ======= ------- -------- -------- ------- --------- --------- --------- Balance, March 31, 2001 ........... $ 4,437 $217,478 $ 22,454 $ (469) $(2,661) $ (13,538) $ 227,701 ======= ======== ======== ======== ======= ========= =========
Comprehensive loss is comprised entirely of foreign currency translation adjustments. Comprehensive loss for the three months ended March 31, 2000 was $2.0 million. 4. SEGMENT INFORMATION (IN THOUSANDS) IMRglobal operates several business units located in North America, Europe and Asia for which financial information is maintained and reported to the chief operating decision makers of the Company. In determining the reporting segments of the Company, management has aggregated the business units that have similar economic characteristics, products and services and types of customers. IMRglobal has three reporting segments. The Information Technology Solutions and Services ("IT") segment provides consulting and technology services to large companies in North America, Europe and Asia. The Health Care and Government Solutions segment provides business and consulting services to clients in the health care and governmental industries. Software Development Centers consist of two Indian facilities that provide software development services to the IT segment organizations. The chief operating decision makers evaluate performance and allocate resources based on revenue and net margin. Net margin is gross profit less selling, general and administrative expenses. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. IMRglobal does not allocate income taxes, other income or expense, research and development, intangible amortization and non-recurring charges to its reporting segments. In addition, IMRglobal accounts for services provided by the Software Development Centers to the IT segment at current market prices. 8 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 4. SEGMENT INFORMATION (IN THOUSANDS) (CONTINUED) Information regarding the reporting segments is as follows:
INFORMATION HEALTH TECHNOLOGY CARE AND SOFTWARE SOLUTIONS GOVERNMENT DELIVERY AND SERVICES SOLUTIONS CENTERS TOTAL -------- -------- -------- -------- THREE MONTHS ENDED MARCH 31, 2001 Revenue from external clients ........ $ 50,523 $ 11,081 $ -- $ 61,604 ======== ======== ======== ======== Intersegment revenue ................. $ 773 $ -- $ 7,189 $ 7,962 ======== ======== ======== ======== Depreciation expense ................. $ 1,243 $ 78 $ 168 $ 1,489 ======== ======== ======== ======== Segment net maragin .................. $ 3,175 $ 1,053 $ 1,138 $ 5,366 ======== ======== ======== ======== Segment assets ....................... $140,931 $ 16,124 $ 13,647 $170,702 THREE MONTHS ENDED MARCH 31, 2000 Revenue from external clients ........ $ 49,852 $ 8,270 $ 198 $ 58,320 ======== ======== ======== ======== Intersegment revenue ................. $ 3,161 $ -- $ 6,037 $ 9,198 ======== ======== ======== ======== Depreciation expense ................. $ 1,007 $ 50 $ 328 $ 1,385 ======== ======== ======== ======== Segment net margin ................... $ 3,100 $ 2,411 $ 294 $ 5,805 ======== ======== ======== ======== Segment net assets ................... $132,705 $ 17,479 $ 22,590 $172,774 ======== ======== ======== ========
9 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 4. SEGMENT INFORMATION (IN THOUSANDS) (CONTINUED) Following are reconciliations of reporting segment net margin and assets to the amounts included in the consolidated financial statements: THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 2001 --------- --------- Total net margin for reportable segments ...... $ 5,805 $ 5,366 Research and development ...................... (678) (74) Goodwill and intangible amortization .......... (2,445) (2,585) Other income (expense) ........................ 109 (595) --------- --------- Income before provision for income taxes and cumulative effect of a change in accounting method ....................... $ 2,791 $ 2,112 ========= ========= December 31, March 31, ------------ --------- 2000 2001 --------- --------- Total assets for reportable segments .......... $ 172,475 $ 170,702 Elimination of intersegment receivables ....... (31,913) (32,524) Deferred income taxes ......................... 14,095 14,319 Intangible assets ............................. 164,178 156,177 --------- --------- Total assets .................................. $ 318,835 $ 308,674 ========= ========= 10 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 5. RESTRUCTURING CHARGE In the fourth quarter of 1999, IMRglobal implemented a restructuring plan to redeploy resources to exploit its expanding e-business service offering and better align its organization with its corporate strategy. The restructuring plan included the closure of three European offices, the write-down of specific mainframe software and hardware and the reduction of its global workforce. During the third quarter of 2000, IMRglobal initiated a plan to consolidate Canadian operations by closing three western Canada offices. The restructuring charge is summarized as follows (in thousands):
CASH PAID ACCRUED WRITE- THROUGH ADJUSTMENT CHARGE RESTRUCTURING DOWN MARCH 31, FOR CERTAIN MARCH 31, CHARGE OF ASSETS 2001 RESERVES 2001 -------- -------- -------- -------- -------- Closure of European facilities: Severance payments (80 employees) ............... $ 664 $ -- $ (1,386) $ 722 $ -- Long-term commitments ........... 4,626 -- (1,045) (2,032) 1,549 Goodwill ........................ 348 (348) -- -- -- Property and equipment .......... 1,089 (1,089) -- -- -- Closure of Canadian facilities: Severance payments (40 employees) ............... 298 -- (298) -- -- Long-term commitments ........... 271 -- (131) -- 140 Property and equipment .......... 339 (339) -- -- -- Other severance payments ........... -- (70 employees) .................. 1,809 -- (1,696) (113) -- Property and equipment ............. 3,691 (3,691) -- -- -- Other restructuring costs .......... 157 (126) (295) 343 79 -------- -------- -------- -------- -------- $ 13,292 $ (5,593) $ (4,851) $ (1,080) $ 1,768 ======== ======== ======== ======== ========
Long-term commitments relating to real estate leases are expected to be paid over the life of the underlying lease agreements which expire through 2013. The remaining accrued charge is expected to be paid by December 31, 2001. 11 IMRGLOBAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 6. CONTINGENCIES IMRglobal's French subsidiary, Lyon, has claimed a special tax exemption related to research and development (R&D) for the 1993 through 1995 fiscal years. The French taxing authorities have challenged this exemption and have made an assessment of $786,000. Lyon contested the decision and the tax authorities asked the French Ministry of Research to rule on the issue. The Ministry of Research ruled that the time spent developing the concept would be considered as R&D charges, but programming time would not. Accordingly, the estimate was revised downward and $100,000 has been accrued as a liability in the accompanying balance sheet related to this issue. 7. RELATED PARTY TRANSACTION Deposits and other assets include a note receivable from IMRglobal's Chief Executive Officer ("CEO") in accordance with his employment agreement. This note bears interest at prime plus 1% (currently 9 1/2%) and is repayable at the earlier of May, 2004 or 180 days after the CEO terminates employment with IMRglobal. At December 31, 2000 and March 31, 2001, the amount drawn on this facility was $4.8 million and $5.0 million, respectively. 12 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMRGLOBAL CORP. Except for historical information, some matters discussed in our report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We note that a variety of risk factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements including the following: o our expectation to complete our merger with CGI Group Inc. in June 2001; o our belief that we have adequate capital reserves to meet all working capital obligations. Reference is made in particular to the remaining discussion in this report and as set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000, as filed with the Commission. CURRENT DEVELOPMENTS MERGER--On February 21, 2001, we announced the execution of a Merger Agreement with CGI Group Inc., a major IT outsourcing company headquartered in Montreal, Quebec. The merger agreement has been approved by our Board of Directors and is subject to approval by our shareholders, certain regulatory approvals and satisfaction of other closing conditions. Upon completion of the merger, holders of IMRglobal common stock will receive, for each share of IMRglobal common stock, 1.5974 Class A Subordinate Shares of CGI Group Inc. Except as explicitly noted, the following discussion of business results, risk factors and forward- looking statements does not take into account business changes that may be made following the completion of the proposed merger. We currently expect the merger to be completed in June 2001. 13 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
THREE MONTHS ENDED MARCH 31, -------------------------------------------------------------------------------- % OF % OF PERCENT 2000 REVENUE 2001 REVENUE CHANGE -------------- ----------- -------------- ----------- ----------- Revenue................................. $ 58,320 100% $ 61,604 100% 6% Cost of revenue......................... 34,742 60% 37,115 60% 7% -------------- ----------- -------------- ----------- ----------- Gross profit................... 23,578 40% 24,489 40% 4% Selling, general and administrative..... 17,773 30% 19,123 31% 8% Research and development................ 678 1% 74 -- (89)% Goodwill and intangible amortization.............. 2,445 4% 2,585 4% 6% -------------- ----------- -------------- ----------- ----------- Income from operations......... 2,682 5% 2,707 4% 1% Other income (expense): Interest expense..................... (349) (1)% (536) (1)% 54% Other income (expense)............... 458 1% (59) -- (113)% -------------- ----------- -------------- ----------- ----------- Total other income (expense)... 109 -- (595) (1)% (646)% -------------- ----------- -------------- ----------- ----------- Income before provision for income taxes and cumulative effect of a change in accounting method..... 2,791 5% 2,112 3% (24)% Provision for income taxes.............. 1,258 2% 1,437 2% 14% -------------- ----------- -------------- ----------- ----------- Income before cumulative effect of a change in accounting method.................... 1,533 3% 675 1% (56)% Cumulative effect of a change in accounting method, net of income taxes...................... (2,707) (5)% -- -- 100% -------------- ----------- -------------- ----------- ----------- Net income (loss)....................... $ (1,174) (2)% $ 675 1% 157% ============== =========== ============== =========== ===========
14 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 REVENUE. Revenue for the three months ended March 31, 2001 increased 6% over revenue for the three months ended March 31, 2000. This increase was driven by a 23% increase in US revenue to $41.9 million for the quarter ended March 31, 2001 compared to $34.1 million for the quarter ended March 31, 2000. This increase was partially offset by a 56% decrease in Asia Pacific revenue. The increase in US revenue was primarily due to the following: o increase in Financial Services revenue driven by Customer Relationship Management ("CRM") and Component Based Development ("CBD") solutions; and o continued growth in our Health Care and Government sectors. Revenue by vertical industry is as follows:
THREE MONTHS ENDED ------------------------------------------------------- PERCENT OF PERCENT OF 2000 REVENUE 2001 REVENUE ---------- ---------- ---------- ---------- Financial Services..................... $ 28,571 49% $ 31,309 51% Health Care and Governmental........... 8,270 14% 11,081 18% Commercial Services.................... 21,479 37% 19,214 31% ---------- ---------- ---------- ---------- $ 58,320 100% $ 61,604 100% ========== ========== ========== ==========
Our 5 largest clients accounted for 26% of our revenue for the three months ended March 31, 2001. COST OF REVENUE. Cost of revenue as a percentage of revenue remained flat at 60% for the three months ended March 31, 2001 compared to 60% for the three months ended March 31, 2000. GROSS PROFIT. Gross profit as a percentage of revenue remained flat at 40% for the three months ended March 31, 2001 compared to 40% for the three months ended March 31, 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). As a percentage of revenue, SG&A expenses for the three months ended March 31, 2001 increased to 31% from 30% for the same period in 2000. The increase was primarily due to additional investments to support our sales and marketing initiatives. RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). Research and development expenses decreased 89% compared to the same period in the prior year as we completed certain research initiatives during 2000. In addition, most of our 2001 R&D initiatives are being funded by projects with some of our clients. 15 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 GOODWILL AND INTANGIBLE AMORTIZATION. Goodwill and intangible amortization increased 6% for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. This increase primarily reflects the additional amortization of goodwill and intangibles generated by our acquisition of Intuitive Group Ltd. in 2000. INCOME FROM OPERATIONS. Income from operations increased 1% over the same period of the prior year. As a percentage of revenue, income from operations for the three months ended March 31, 2001 decreased to 4% from 5% in the three months ended March 31, 2000. Excluding amortization and depreciation, income from operations for the three months ended March 31, 2001 increased to $6.8 million from $6.5 million in the three months ended March 31, 2000. OTHER INCOME (EXPENSE). We realized $595,000 of other expense (net of other income) in the three months ended March 31, 2001 as compared to $109,000 of other income (net of other expense) in the three months ended March 31, 2000. This change reflects a $187,000 increase in interest expense and a $397,000 decrease in investment income. PROVISION FOR INCOME TAXES. Our effective tax rate was 68% for the three months ended March 31, 2001 compared to 45% for the three months ended March 31, 2000. Excluding nondeductible intangible asset amortization and non-taxable life insurance proceeds received in 2000, our effective tax rate for the three months ended March 31, 2001 was 34% compared to 36% for the three months ended March 31, 2000. We have not recorded deferred income taxes applicable to undistributed earnings of IMRglobal-India. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States federal and state income tax has been provided thereon. INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD. Income before cumulative effect of a change in accounting method decreased 56% for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. This decrease was primarily attributable to the provision for income taxes. Excluding amortization and depreciation (net of income taxes), pro forma income before cumulative effect of a change in accounting method was $4.0 million for the three months ended March 31, 2001 compared to $4.3 million for the three months ended March 31, 2000. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD. The cumulative effect of a change in accounting method reflects the adoption of Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. Effective January 1, 2000, IMRglobal changed its method of accounting for revenue recognition for certain contract related revenue from claims dollar recovery projects, in accordance with this pronouncement. These projects involve identifying overpaid or erroneously paid insurance claims to be recovered from healthcare 16 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 providers by medical insurance companies. Previously, IMRglobal recognized revenue, less an estimated percentage for claims not accepted, as identified claims were submitted to the clients. Under the new accounting method adopted retroactive to January 1, 2000, IMRglobal now recognizes revenue upon the earlier of collection of the findings based fee or notification of acceptance of submitted claims from the client. The cumulative effect of the change on prior years resulted in a charge to income of $2.7 million (net of income taxes of $1.7 million), which is included in results of operations for the quarter ended March 31, 2000. EARNINGS PER SHARE. Diluted earnings per share before cumulative effect of a change in accounting method decreased 50% for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. Excluding amortization and depreciation (net of income taxes), pro forma earnings per share was $0.09 for the three months ended March 31, 2001 compared to $0.10 for the three months ended March 31, 2000. SHARES OUTSTANDING - DILUTED. Shares outstanding - diluted increased approximately 2.1 million shares for the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000 primarily due to stock option exercises during 2000 and 2001. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, we had liquid assets including cash and cash equivalents of $11.0 million, as compared to $19.7 million at December 31, 2000. The decrease was primarily due to increased accounts receivable and work in process and payment of 2000 incentives in the first quarter of 2001. Additionally, we had working capital at March 31, 2001 of $49.3 million and available bank lines of credit approximating $16.6 million. Net cash used in operating activities was $8.8 million for the three months ended March 31, 2001. The negative cash flow from operations was primarily due to a 17% increase in accounts receivable and unbilled work-in-process balances which was driven by the 16% sequential revenue growth for the quarter ended March 31, 2001. In addition, current liabilities decreased as a result of the payment of fiscal year 2000 incentive compensation during the first quarter of 2001. Net cash used in investing activities was $1.0 million for the three months ended March 31, 2001. We invested $748,000 in property and equipment and $220,000 in capitalized software. Net cash provided by financing activities was $1.3 million for the three months ended March 31, 2001. The primary source of cash was proceeds from issuance of common stock upon the exercise of stock options. As of March 31, 2001, cash and cash equivalents totaled $11.0 million, of which $8.6 million was held outside of the U.S. Liquid assets in India were $410,000 and require governmental approval for repatriation outside of India. 17 IMRGLOBAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) We maintain $45.0 million of credit facilities expiring in 2003. These facilities bear interest at a spread over LIBOR of 0.6% to 2.0% and are collateralized by virtually all of our assets. The interest rate may be increased by up to an additional 1.15% based on certain financial ratios. At March 31, 2001, we had $16.0 million available under these facilities. Certain of our subsidiaries also maintain additional revolving credit line facilities totaling $600,000. At March 31, 2001, the amount available under these facilities was $600,000. The respective subsidiary's accounts receivable and property and equipment collateralize these facilities. We continuously review our future cash requirements, together with our available bank lines of credit and internally generated funds. We believe we have adequate capital resources to meet all working capital obligations and fund the development of our current business operations, including the following business objectives: o continued expansion of existing business; o continued funding of research and development initiatives; o anticipated levels of capital expenditures; and o any debt repayment requirements. ASSET MANAGEMENT Our accounts receivable balance was $47.4 million at March 31, 2001, an increase of $5.7 million from December 31, 2000. The increase was primarily due to revenue growth of 16% over the fourth quarter of 2000. A common financial measure is the calculation of days sales outstanding in accounts receivable ("DSO"). At March 31, 2001, our DSO was 70 days. In addition, accounts receivable in Canada, France, Japan and the U.K. include value added taxes that are not included in revenue. Without valued added taxes, DSO would be approximately 3 days less than the above levels. At March 31, 2001, unamortized goodwill was $153.0 million compared to $160.7 million at December 31, 2000. The decrease reflects amortization for the three months ended March 31, 2001 of $2.1 million and currency devaluations for goodwill of approximately $5.6 million primarily associated with IMRglobal's Japan subsidiary. 18 PART I. FINANCIAL INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS IMRGLOBAL CORP. MARKET RISKS We are exposed to market risk from changes in interest rates and foreign currency exchange rates. We occasionally enter into hedging transactions to manage the foreign currency risk. We do not hold or issue derivative financial instruments for trading purposes. INTEREST RATES IMRglobal has variable-rate long-term debt obligations, subject to market risk from changes in interest rates. Sensitivity analysis is one technique used to measure the impact of changes in interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on IMRglobal's future earnings or cash flows. FOREIGN CURRENCY We conduct business in the United States and around the world. Our most significant foreign currency transaction exposures relate to Canada, the United Kingdom, France (Euro currency), Australia and Japan. The primary purpose of our foreign currency hedging activities is to protect against foreign currency exchange risk from intercompany financing and trading transactions. We enter into foreign currency forward contracts with durations of generally less than 12 months to hedge such transactions. We have not entered into foreign currency forward contracts for speculative or trading purposes. All foreign currency forward contracts are marked-to-market, with gains and losses recognized in earnings, on a current basis. In addition, since we enter into forward contracts only as a hedge, any change in currency rates would not result in any material gain or loss, as any gain or loss on the underlying foreign denominated balance would be offset by the loss or gain on the forward contract. At March 31,2001, IMRglobal had no open foreign currency hedging contracts. During the ordinary course of business, IMRglobal enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. IMRglobal generally manages these transactions by ensuring that most costs to service contracts are incurred in the same currency in which revenue is received. By matching revenue and costs to the same currency, IMRglobal has been able to substantially mitigate foreign currency risk to earnings. Approximately 35% of IMRglobal's revenue is generated outside of the United States. Using sensitivity analysis, a hypothetical ten-percent increase in the value of the U.S. dollar against all currencies would decrease annual revenue by 3.5%, while a hypothetical ten-percent decrease in the value of the U.S. dollar against all currencies would increase revenue by 3.5%. In the opinion of management, expenses incurred in local currency would offset a substantial portion of this fluctuation. As a result, a hypothetical 10% movement of the value of the U.S. Dollar against all currencies in either direction would impact IMRglobal's earnings before interest and taxes by approximately $600,000 on an annual basis. This amount would be offset, in part, from the impact of local income taxes. 19 IMRGLOBAL CORP. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any pending material litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS ON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMRGLOBAL CORP. Date MAY 11, 2001 /s/ SATISH K. SANAN ---------------------------- --------------------------------------- Satish K. Sanan Chief Executive Officer Date MAY 11, 2001 /s/ MICHAEL J. DEAN ---------------------------- --------------------------------------- Michael J. Dean Chief Financial Officer 21